Interest rates, deficits: the dilemmas persist
Congress returns to Washington shortly with the dominant question, ''Where's the money coming from?''
The first year of the Reagan administration involved the agreeable task of cutting taxes; now comes the less pleasant follow-up of dealing with the persistent deficits that many economists see as a major contributor to continued high interest rates.
Events are now moving in the direction of selective higher taxes in the excise field, it is believed here -- but these will not diminish the 10 percent income tax cut scheduled to take effect July 1. Treasury Secretary Donald T. Regan stated publicly Jan. 6 that the administration will likely seek to raise some $22 billion by additional alcohol, tobacco, gasoline, and other imposts.
Evident is a reluctant change of mood in the administration as it faces recession, a big deficit, and an increasingly critical Democratic opposition.
Mr. Regan's admission that new taxes may be in the works brings him into line with others in the administration who have long advocated seeking new sources of revenue to help lighten the deficit burden. These include Budget Director David A. Stockman, Council of Economic Advisers chairman Murray L. Weidenbaum, and White House Chief of Staff James A. Baker III.
President Reagan has let it be known that he does not want to raise taxes directly until the current fiscal year ends on Sept. 30, 1982.
Politicians, whatever their party, find it difficult to resist tax cuts when they are urged on by the chief executive, as Mr. Reagan did in 1981. The present situation has produced a kind of awe among some representatives of both parties: How are the bills going to be paid? A recession is in progress; the stock and bond markets did not leap upward as many had expected with the prospect of lower taxes; and the Treasury faces a deficit of $100 billion or more unless Reagan finds more revenues or cuts expenditures more. Up till now Reagan has held to his argument that higher taxes are not needed.
Republicans and Democrats are currently planning strategy for the return of Congress in a fortnight and the submission of President Reagan's 1983 budget. Reagan will ask Congress for further budget cuts. According to one figure, he will propose reductions of more than $30 billion. Unless cuts are made it is estimated the budget deficit might reach $110 billion.
Democrats, meanwhile, are trying to regroup in an effort to counter the Reagan gains. Specifically, the opposition party is trying to restore closer ties with organized labor -- a major element in the coalition that cemented Democratic electoral dominance over nearly 50 years. Leaders of 20 unions met here Jan. 5 with Charles Manatt, party chairman, to organize a new ''labor council.'' Cochairmen of the new group are Glenn Watts, president of the Communications Workers, and John Joyce, president of the Bricklayers Union.
Noticeably absent were representatives of the nation's largest union, the 1.8 million-member International Brotherhood of Teamsters. The Teamsters endorsed Reagan in 1980 in the campaign against Jimmy Carter.
Party loyalty was not sharp on either side in the 1980 election, and only 54 percent of those eligible voted. The turnout was the lowest since 1948, according to the Federal Election Commission. Relations between organized labor and the Democrats have fluctuated with the honeymoon beginning in the Roosevelt New Deal. Unlike Europe, there has been no powerful labor party in the United States, and unions have tended to follow the advice of labor leader Samuel Gompers, ''Reward your friends and punish your enemies.''
Democratic leader Manatt now wants a closer relationship. In the 1950s a labor leader was traditionally picked as vice-chairman of the Democrat's executive committee. After Lyndon Johnson's incumbency, however, the relationship declined.
Another phenomenon at this point in the normal presidential cycle is the emergence of foreign policy issues. This is likely to increase in the course of the next three years. Historically, presidents pinned down by obstruction of their domestic programs have turned to the greater freedom of international affairs. In the first year, President Reagan has chalked up an extraordinary record: he has got the largest tax cut in history, a big increase in defense expenditures, and he is trimming down welfare programs.
Both political parties are putting their houses in order for partisan battles ahead. A midterm election looms in November and President Reagan's reputation is at stake.