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The traditional economists gradually began to shift Reagan's program away from the original supply-side doctrine. Laffer assumed that large tax cuts would not be inflationary because they would stimulate enough business to compensate for the lost revenues by significantly increasing the Government's total tax take. But Reagan's more conservative advisers convinced him that tax cuts—and the inevitable, initially huge budget deficits—would fuel inflation unless accompanied by measures to restrain demand. Thus Reaganomics now includes not only a supply-side tax reduction but also calls for less Government spending and strict control over the growth of money.
Although the Democrats had no alternative economic program to offer—and have yet to produce one—they immediately pounced on the problems that they saw as inherent in Reaganomics. They charged that the Administration was papering over the fundamental conflict between the President's main goals—stimulating the economy by cutting taxes and slowing down inflation through tight money—resulting in high interest rates and sluggish growth. Compounding the difficulty was Reagan's proposal for a large and simultaneous increase in defense spending.
As the critics pointed out, Reagan's big tax reductions were bound to swell the size of the deficit, at least in the short run. But the Federal Reserve, which controls the growth of money, has not let credit grow faster to pay for those deficits, so the Government's borrowing demands are pushing up interest rates. The result is the current staggering levels, which threaten to choke off the private investment boom that the tax cut is supposed to bring about. Says Oklahoma Democrat Jim Jones, chairman of the House Budget Committee: "My fear is that the program now put in place by the Administration is the equivalent of stepping hard on the gas at the same time as you slam on the brakes. The result will sound spectacular—until either the brakes fail or the engine blows. It is a gamble of titanic proportions."
Traditional Keynesian economists were the sharpest critics. Said John Kenneth Galbraith, a professor emeritus at Harvard: "The Administration has promised vigorous expansion through supply-side incentives in combination with monetary policy that works through high interest rates and a powerful contraction of the economy. This contradiction can only be resolved by divine intervention—a task for the Moral Majority." Adds Walter Heller, who was President Kennedy's chief economist: "Only an ostrich could have missed the contradictions in Reaganomics."
Yet even some leading conservative economists predicted that the Reagan program would soon run into trouble. Said Robert Lucas, professor of economics at the University of Chicago: "This Administration has committed itself to a whole series of tax cuts, and it's going to be hard as hell for them to reverse course. They have locked themselves into some very tough arithmetic, especially since they have been overoptimistic about the benefits of the tax cuts."
TIME's Board of