Reagan Legacy of Deficits Seen Curbing Bush Action

What lies behind the political panic at the White House this week, senior officials say, is a painful recognition that--when it comes to the economy--the policies of Ronald Reagan have caught up with George Bush.

Where Reagan’s tax cuts and increased defense spending opened an escape route from the last serious U.S. recession, the towering deficits that resulted now prevent Bush from taking the same way out. The President, boxed in by the Reagan legacy and by his own free-market, anti-government stance, has found his choices of action limited.

“We may have spent the Soviet Union into oblivion and fueled an ‘80s boom,” a White House official said, “but now the economy isn’t rolling along, and we’re paying the Reagan price.”

Reflecting the bind he is in, President Bush has decided to scrap until next February a plan to spur new economic growth, after concluding that it would be futile and unwise to try to push a broad package in the face of the record budget deficit Reagan left behind, officials said.

In any case, the plan would do no more than repackage calls for capital gains tax cuts and other narrow measures Bush has endorsed before.

As a result, even as the President begins a monthlong mission to assure voters of his concern for the stalled economy, his message will focus more on cheerleading and finger-pointing than on proposals for substantive remedies.

“It’s been chaos time on the economy,” one source close to the White House said. “But the only thing everyone can agree on is that we ought to blame the other side.”

Indeed, the sources conceded that the Administration has spent more time in recent weeks debating how to put the best face on White House inaction than on the merits of particular economic policies.

The one concrete element in the White House response to continuing economic troubles--its repeated demands for the Federal Reserve Board to reduce interest rates--no longer is germane because the Fed has now slashed key lending rates to historically low levels. Moreover, the banking problems resulting from deregulation in the 1980s mean that those low rates are less likely than before to jolt the economy into vigor.

Even outside the inner circle, the signs of White House distress have been apparent.

Yet Bush’s decision to place a new focus on domestic issues, Administration officials agree, is running into the “wall” of budget deficits accumulated during the Reagan era. Reagan and his supporters argued that tax cuts would generate more, rather than less, federal revenues--but, in the end, the opposite happened. The Reagan-era tax cuts, coupled with the massive growth in defense spending in the 1980s, have left Washington facing budgetary gridlock.

Bush told political audiences last week that he is willing to “take the heat” by standing behind a controversial capital gains tax cut. But, wary of breaking the existing deficit-reduction rules in last year’s budget agreement with Congress, Bush has not re-introduced a capital gains proposal.

Instead, he has resorted mostly to cheerleading as he seeks to restore consumer confidence.

“I’m not trying to say everything is rosy,” he said Wednesday, then launched into a discussion of low interest rates and the opportunities they opened for American consumers.

The decision to put off any broad-based economic plan was reached after a heated debate within the Administration. Bush and his senior advisers concluded that they must keep their proposals modest in order to live within the strict spending limits now imposed on Washington by the deficit.

“Certainly, you could do a big tax cut, but you would have to bust the budget to do it,” one senior official said Thursday.

Instead of the contemplated growth proposal, advisers say, Bush now plans to push his own plans to extend unemployment benefits and authorize new transportation spending, arguing that both are important to the nation’s economic health.

But, with Congress determined to spend more than the President has proposed--and its members announcing growth packages of their own--these officials say that the Bush game plan for November will mostly be defensive.

Bush himself signaled such intentions when, in postponing a trip to Asia, he vowed to spend the month keeping a close eye on Congress. “All kinds of crazy things can happen with this crowd that controls the Senate and the House,” he told reporters Wednesday. “And I’d like to be there to protect the American taxpayer and to help the American worker.”

With at least some powerful Democrats also uneasy about opening up the budget agreement, the stalemate over what to do already shows signs of deteriorating into endless rounds of blamesmanship.

Bush aides concede that the White House cannot entirely escape the taint of a bad economy. But they point to new polls of voter attitudes as evidence that Americans may be receptive to a Bush campaign message that seeks to blame their woes on Congress.

In a Washington Post poll cited by several Bush advisers, when pollsters asked whose fault it was when the government failed to act on major problems facing the country, those surveyed blamed congressional Democrats over Bush by a 49%-29% margin.

But the officials say that they remain uneasy about how little room to maneuver Bush may have.

The mounting frustration over the economy has already generated a round of blame-placing within the Administration itself. Some officials complain that Bush should have done more earlier to talk up the economy before it took another nose-dive.

“Why didn’t he do it last spring?” one Republican official said. “The consensus is that he should have done more.”

The Administration is hoping that the latest cut in interest rates may eventually overcome Americans’ reluctance to spend. But, whether such a breakthrough will occur is uncertain, based in part on doubts about whether troubled banks will pass on lower rates to their customers.

Throughout the yearlong recession, the nation’s ailing commercial banks have been reluctant to lower their rates despite the Fed’s actions. They have tried to keep their rates high in order to replenish their cash reserves and avoid failure.

What’s worse, Federal Reserve officials, who on Wednesday cut the benchmark discount rate to its lowest level in 18 years, now say they don’t believe they have much room for additional interest rate cuts.

Sources who attended the central bank’s policy-making session on Tuesday said that many senior Fed officials are still worried by the sluggish pace of the economy this fall but believe they have done all that they can--or should--with interest rates to get the economy moving.

Fed officials said any continued effort by Bush to jawbone the Fed into action would be unlikely to pay off.

Yet even these officials sympathize with the dilemma Bush now faces on economic policy. “The President has got to stop with the glittering generalities,” said one senior Fed policy maker. “But, given the size of the deficit, the options they have on fiscal policy are pretty limited.”

TAX-CUT PROPOSAL: House Democratic leaders back a plan to cut income taxes by up to $200 annually. A22