Liberal activists have succeeded in transforming the basic issue of public finance—the appropriate allocation of resources between the public and private sectors—into an issue of economic stabilization. When the economy was expanding rapidly, they called for an increase in taxes. When the economy was sinking into recession, they called for an increase in expenditures. Whether the economy was heading up or down, the activists advocated policies that tended to expand the public sector.
The Reagan program separates these issues. It seeks to deal with the public finance issue by using tax cuts of the type proposed by Kemp-Roth, which would increase incentives to work, save, invest and produce, to expand the private sector and reduce the public sector. It would deal with the issue of economic stabilization by controlling money growth.
Supporting the Reagan program is a coalition that includes (1) the supply-siders, who favor reducing taxes to stimulate productivity and growth, (2) the monetarists, who contend that the only way to curb inflation is to restrain growth of the monetary aggregates and (3) the shrink-government group, who view cutting tax rates as an effective way to limit growth of the public sector.
Opposing the program is a coalition that includes (1) certain Wall Streeters concerned about the negative carry on their investment positions that results from inverted yield curves engendered by tight money, (2) those who prefer monetary ease to straining banking and thrift institutions, (3) those who favor tax cuts specifically tailored to promote investment rather than consumption and (4) liberals who oppose Reagan’s attempt to shrink government and reduce income redistribution.