From the New York Review of Books. May 14, 1981. 3, 6, 8.

The recent discussion of President Reagan's budget has largely overlooked its most alarming feature, so far as the US economy is concerned. Reagan is proposing to increase defense expenditures by $142 billion, from $162 billion for the fiscal year 1981 in the current budget to $304 billion in fiscal year 1985, the last budget of his first term. If re-elected, he is planning a further $39 billion increase to $343 billion in fiscal 1986. . . .

As a result the military build-up that is currently being contemplated is three times as large as the one that took place during the Vietnam War. . . . Some defense experts and legislators are questioning whether many items in the new military budget are actually needed and whether some of them endanger national security more than they protect it. Such questions are certainly important and must be raised. But if such a build-up is necessary, then it is important that it be done in such a way that it does least possible damage to the economy. . . .

In addition to the increase in the military budget, civilian expenditures are scheduled to rise by $76 billion-from $493 billion to $569 billion. After correcting for inflation, we can see that civilian expenditures are down substantially by 16 percent, although they rise in money terms. As a result the total budget increases from $655 billion in fiscal 1981 to $912 billion in fiscal 1986. In addition, President Reagan is proposing a 16 percent reduction in federal tax collections--$196 billion in fiscal 1986--in order to stimulate savings and investment.

President Johnson's refusal to raise taxes to pay for the Vietnam War is legitimately remembered as one of the key factors leading us into our current economic mess. He wanted both the Great Society and the war. But if he was to have both and not wreck the economy, his only option was to raise taxes sharply. He chose not to do so, and he wrecked the economy.

President Reagan wants both dramatic tax cuts to encourage investment and an even more extensive military build-up. But he cannot have both without wrecking the economy further unless he is willing to raise taxes dramatically on private consumption. He has chosen not to do so. If his current program is carried out, he too will wreck the economy.

Military spending is a form of consumption. It does not increase our ability to produce more goods and services in the future. While it may be necessary, it is consumption nonetheless. And as in any private budget, if you allocate more to one form of consumption, you must allocate less to some other form of consumption.

This means equivalent cuts must be made in other forms of consumption. The proposed military increase is so large that it cannot be fully paid for with cuts in civilian expenditures unless the president is willing to abolish major social programs such as Social Security. If he is not willing to do this, taxes must be raised to cut private consumption. . . .

President Reagan talks as if his cuts in civilian government consumption are going to pay for the extra military spending. But he also talks as if those civilian budget cuts are going to pay for the loss in revenue from business tax cuts and from the 30 percent cut in personal income taxes called for by the Kemp-Roth plan. But the sums that will be spent and saved do not match. A $138 billion cut ($43 billion of which has not yet been announced) in civilian expenditures--not an absolute cut but one relative to the Carter budget--simply does not counterbalance a $196 billion tax cut and a $181 billion increase in military spending. . . .

If the administration is unwilling to raise taxes on private consumption, it will repeat the Vietnam experience. Initially output will rise and unemployment will fall. But eventually a sustained inflation will result from the economy's inability to produce both the civilian and military goods that are being demanded of it. . . .

These economic difficulties will also be magnified by the plans for the civilian budget. A 16 percent cut in taxes is supposed to stimulate savings and investment but it is directed at the wrong targets. Any across-the-board tax cut such as Kemp-Roth must confront the fact that the average American family saved only 5.6 percent of its income in 1980. Past experience strongly suggests that given a $100 tax cut, the average American will save and invest $5.60, but will also consume $94.40. In view of our needs for investment and of the military program the administration demands, we simply cannot afford to add private consumption of this magnitude to our economic system. We should be cutting consumption. . . .

The administration's cuts in the civilian budget have relatively little to do with economics. They are good or bad depending upon your view of what constitutes adequate provision for the needy in a good society. My ethics tell me that there is something wrong with cutting nutrition programs for poor pregnant women. Mr. Stockman's ethics tell him that they are precisely the group whose benefits should be cut. . . .

The Reagan administration assumes that a cut in the social welfare benefits for the working poor will force them to work more. It is more likely that it will encourage them to work less to regain eligibility for the program that they have just lost.

Suppose you are one of the working poor and have a sick child. One choice is to work harder--perhaps by taking a second job--in order to pay the necessary medical bills. Another is to quit working to make yourself eligible for Medicaid. To pose the choices is to give the likely answer. If the second choice prevails, the remaining social welfare programs will have to expand and will cost more than expected. The cuts in the civilian budget will therefore be smaller than the ones now projected. The result will be that the grave strain imposed on the economy by Reagan's military build-up will become graver still. The dangers of this budget are such that I can think of no priority higher for the nation's economic welfare than close and skeptical scrutiny of all new military expenditures to determine whether they are really needed.