Part I. How the World Works

The farm has changed since Stockman's boyhood; it is more specialized. The bright-red outbuildings behind the house include a wooden barn where livestock was once kept, a chicken coop also no longer in use, a garage, and a large metal-sided building, where the heavy equipment, in particular, a mechanical grape picker is stored. Grapes are now the principle crop that Allen Stockman, David's father, produces. He earns additional income by leasing out the grape picker. The farm is a small but authentic example of the entrepreneurial capitalism that David Stockman so admires.

As the car approached the house, Stockman's attention was diverted by a minor anomaly in the idyllic rural landscape: two tennis courts. They seemed out of place, alone, amidst the snow-covered fields at an intersection next to the Stockman farm. Stockman hastened to explain that, despite appearances, these were not his family's private tennis courts. They belonged to the township. Royalton Township (of which Al Stockman was treasurer) had received, like all other local units of government, its portion of the federal revenue-sharing funds, and this was how the trustees had decided to spend part of the money from Washington. "It's all right, I suppose," Stockman said amiably, "but these people would never have taxed themselves to build that. Not these tight-fisted taxpayers! As long as-someone is giving them the money, sure, they are willing to spend it. But they would never have used their own money."

Stockman's contempt was directed not at the local citizens who had spent the money but at the people in Washington who had sent it. And soon he would be in a position to do something about them. This winter weekend was a final brief holiday with his parents; in a few weeks he would become director of the Office of Management and Budget [OMB] in the new administration in Washington. Technically, Stockman was still the U.S. Congressman from Michigan's Fourth District, but his mind and exceptional energy were already concentrated on running OMB, a small but awesomely complicated power center in the federal government, through which a President attempts to monitor all of the other federal bureaucracies.

Stockman carried with him a big black binder enclosing a "Current Services Budget," which listed every federal program and its current cost projections. He hoped to memorize the names of 500 to 1,000 program titles and major accounts by the time he was sworn in, an objective that seemed reasonable to him, since he already knew many of the budget details. During four years in Congress, Stockman had made himself a leading conservative gadfly, attacking Democratic budgets and proposing leaner alternatives. Now the President-elect was inviting him to do the same thing from within. Stockman had lobbied for the OMB job and was probably better prepared for it, despite his youthfulness, than most of his predecessors.

He was thirty-four years old and looked younger. His shaggy hair was streaked with gray, and yet he seemed like a gauky collegian, with unstylish glasses and a prominent Adam's apple. In the corridors of the Capitol, where all ambitious staff aides scurried about in serious blue suits, Representative Stockman wore the same uniform, and was frequently mistaken for one of them.

Inside the farmhouse, the family greetings were casual and restrained. His parents and his brothers and in-laws did not seem overly impressed by the prospect that the eldest son would soon'occupy one of the most powerful positions of government. Opening presents in the cluttered living room, watching the holiday football games on televi- sion, the Stockmans seemed a friendly, restrained, classic Protestant farm family of the Middle West, conservative and striving. As sometimes happens in those families, however, the energy and ambition seemed to have been concentrated disproportionately in one child, David, perhaps at the expense of the others. His mother, Carol, a big boned woman with metallic blond hair, was the family organizer, an active committee member in local Republican politics, and the one who made David work for A's in school. In political debate, David Stockman was capable of dazzling opponents with words; his brothers seemed shy and taciturn in his presence. One brother worked as a county corrections officer in Michigan. Another, after look- ing on Capitol Hill, found a job in an employment agency. A third, who had that distant look of a sixties child grown older, did day labor, and did odd jobs. His sister was trained as "'an educator and worked as a consultant to manpower-training programs in Missouri that were financed by the federal government. "She believes in what she's doing and I don't quarrel with it," Stockman said. "Basicaliy, there are gobs of this money out there. CETA grants have to do evaluation and career planning and so forth. What does it amount to? Somebody rents a room in a Marriott Hotel somewhere and my sister comes in and talks to them. I think Marriott may get more out of it than anyone else. That's part of what we're trying to get at, and it's layered all over the government."

While David Stockman would speak passionately against the government in Washington and its self-aggrandizing habits, there was this small irony about his siblings and himself: most of them worked for government in one way or another, protected from the dynamic risk-taking of the private economy. Stockman himself had never had any employer other than the federal government, but the adventure in his career lay in challenging it. Or, more precisely, in challenging the "permanent government" that modern liberalism had spawned.

By that phrase, Stockman and other conservatives meant not only the layers and lavers of federal bureaucrats and liberal politicians who sustained open-ended growth of the central government, but also the less visible infrastructure of private interests that fed off of it and prospered--the law firms and lobbyists and trade associations in rows of shining office buildings along K Street in Washington; the consulting firms and contractors; the constituencies of special interests, from schoolteachers to construction workers to failing businesses and multi-national giants, all of whom came to Washington for money and for legal protection against the perils of free competition.

While ideology would guide Stockman in his new job, he would be confronted With a large and tangible political problem: how to resolve the three-sided dilemma created by Ronald Reagan's contradictory campaign promises. In private, Stockman agreed that his former congressional mentor, John Anderson, running as an independent candidate for President in 1980, had asked the right question: How is it possible to raise defense spending, cut income taxes, and balance the budget, all at the same time? Anderson had taunted Reagan with that question, again and again, and most conventional political thinkers, from orthodox Republican to Keynesian liberal, agreed With Anderson that it could not be done.

But Stockman was confident, even cocky, that he and some of his fellow conservatives had the answer. It was a theory of economics--the supply-side theory--that promised an end to the twin aggravations of the 1970s: high inflation and stagnant growth in America's productivity. "We've got to figure out a way to make John Anderson's question fit into a plausible policy path over the next three years," Stockman said. "Actually, it isn't all that hard to do "

The supply-side approach, which Stockman had only lately embraced, assumed, first of all, that dramatic action by the new President, especially the commitment to a three-year reduction of the income tax, coupled with tight monetary control, would signal investors that a new era was dawning, that the growth of government would be displaced by the robust growth of the private sector. If economic behavior in a climate of high inflation is primarily based on expectations about the future value of money, then shift and dramatic action by the President could reverse the gloomy assumptions in the disordered financial markets. As inflation abated, interest rates dropped, and productive employment grew; those marketplace developments would, in turn, help Stoekman balance the federal budget.

"The whole thing is premised on faith," Stockman explained. "On a belief about how the world works." As he prepared the script in his mind, his natural optimism led to bullish forecasts, which were even more robust than the Reagan Administration's public promises. "The inflation premium melts away like the morning mist," Stockman predicted. It could be cut in half in a very short period of time if the policy is credible. That sets off adjustments and changes in perception that cascade through the economy. You have a bull market in '81, after April, of historic proportions."

How the world works.It was a favorite phrase of Stockman's, frequently invoked in conversation to indicate a coherent view of things, an ideology that was whole and consistent. Stockman took ideology seriously, and this distinguished him from other bright, ambitious politicans who were content to deal with public questions one at a time, without imposing a consistent philosophical framework upon them.

In 1964, when he went off to Michigan State, having played quarterback; in high school and participated in Future Farmers of America, Stockman assumed that he would be a farmer, like his father. His political views were orthodox Republiean, derived from his mother, and from his reading ofThe Conscience of a Conservative, by Senator Barry Goldwater. "In my first three months, I went through an absolute clash of cultures," Stockman recalls. "My first professor was an atheist and socialist from Brooklyn, and within three months I think he destroyed everything I believed in, from God to the flag." When the Vietnam War became the focus of campus radicalism, Stockman became a leader, and read Herbert Marcuse, C. Wright Mills, and Paul Goodman's critiques of American society. "I became a radical, not in the hardcore sense but in the more casual sense that nearly evervbody was on campus in those days. Naturally, as a good Methodist, I looked for the Methodist youth center, which became the antiwar center, because that was the socially conscious thing to do. I was still enough of a farm boy to believe that revolution was God's work."

After graduation, he enrolled at Harvard Divinity School, thinking he might become a great moral philosopher in the tradition of Christian social activists. (He was perhaps also thinking, like so many other students of the time, that divinity school would extend his deferment from the draft.) At Miehigan State, he had dropped the study of agriculture and moved into the humanities. At Harvard, he dropped theology and moved into the social sciences (though he never received training as an economist). "I guess I had always had a strong intellectual bent, so I needed a strong theory of how the world worked."

When he found the divinity courses uninspiring, he began taking political science and history--studying under neo-conservatives such as James Q. Wilson, Nathan Glazer, and Daniel Patrick Moynihan--and discovered, he said, That it was possible to have a sophisticated view of the world without being a Marxist." In a Harvard seminar, he made a connection with John Anderson, who was looking for a bright young idea man to help prepare issues for the House Republican Conference, which Anderson chaired. The Illinois congressman was moving gradually leftward in his views; Stockman was continuing his intellectual search in the opposite direction.

Stockman's congressional district was composed of small towns and countryside, a world that worked quite well without Washingrton, in his view. After dinner at the farm that day, we took a driving tour of the area. The government's good works were everywhere--a new sewer system in Bridgman, a modern municipal building in Stevensville--but Stockman belittled them as "pork barrel." Stockman's district was overwhelmingly rural and Republican, but he saw it as a fair representation of America.

Indeed, as a congressman, Stockman himself had worked hard to make certain that his Fourth District constituents exploited the system. His office maintained a computerized alert system for grants and loans from the myriad agencies, to make certain that no opportunities were missed. "I went around and cut all the ribbons and they never knew I voted against the damn programs," he said.

Still, more than most other politicians, Stockman was known for standing by his ideological principles, not undermining them. When Congress voted its bail-out financing to rescue Chrysler from bankruptcy, Stockman was the only Michigan representative to oppose it, even though a large town in his district, St. Joseph, would be hurt. The town's largest employer, St. Joe's Auto Specialties, was a Chrysler supplier, and its factory was laying off workers. Its owners here among Stockman's earliest and largest contributors when he first ran for Congress, in 1976. Still, he opposed the bail-out. "Some of them were a little miffed at me and others applauded. I only had one or two argue strenuously With me. They were probably more derogatory behind my back."

Stockman felt protected from local pressures, in a way that most members of Congress do not--partly by the Republicanism of the district but also by the consistency of his ideology. Since he had a clear, strong view of what government ought and ought not to do, he found it easier to resist claims that seemed illegitimate, no matter who their sponsors might be. "Too many politicians are intimidated by the squeaking wheel, in my judgment. Regardless of their ideological view point, they're able to incorporate the squeaking wheel into their general position. If the proposal is pro-business, they call it conservative. If they're from Nebraska it's pro-farrner: It's whatever serves the constituencies. "

This was the core of his complaint against the modern liberalism launched by Franklin Roosevelt's New Deal. He did not quarrel With the need for basic social-welfare programs, such as unemployment insurance or Social Security; he agreed that the government must regulate private enterprise to protect general health and safety. But liberal politics in its Iater stages had lost the ability to judge claims, and so yielded to all of them, Stockman thought, creating what he describes as''constituency-based choicemaking", which could no longer address larger national interests, including fiscal control. As Stockman saw it, this process did not ameliorate social inequities; it created new ones by yielding to powerful interest groups at the exense of everyone else. " A what happens is the politicization of the society. All decisions flow to the center. Once we decide to allocate credit to certain activitiesÄand we're doing that on a massive scaleÄor to allocate the capital for energy development, the levels of competency and morality fall. Then the outcomes in society begin to look more and more like the w ork of brute muscle. The other thing it does is to destroy ideas. Once things are allocated by political muscle, by regional claims, there are no longer idea-based agendas."

Across the river from St. Joe's, Stockman drove through the deserted Main Street of Benton Harbor, his favorite example of failed liberalism. Once it had been a prosperous commercial center, but now most of its stores and buildings were boarded up and vacant except for an occasional storefront church or social-service agency. As highways and suburban shopping centers pulled away commerce, the downtown collapsed, whites moved, and the city became predominantly black and overwhelmingly poor. The federal government's various efforts to revive Benton Harbor had quite visibly failed.

"When you have powerful underlying demographic and economic forces at work, federal intervention efforts designed to reverse the tide turn out to have rather anemic effects," Stockman said, surveying the dilapidated store-fronts. "I wouldn't be surprised if $100 million had been spent here in the last twenty years. Urban renewal, CETA, model cities, they've had everything. And the re- sults? No impact whatever."

The drastic failure seemed to please him, for it confirmed his view of how the world works. As budget director, he intended to proceed against many of the progrrams that fed money to the poor blacks of Benton Harbor, morally confident because he knew from personal observation that the federal revitalization money did not deliver what such programs promised. But he would also go after the Economic Development Administration (EDA) grants for the comfortable towns and the Farmers Home Administration loans for communities that could pay for their own sewers and the subsidized credit for farmers and business--the federal guarantees for economic interests--that ought to take their own risks. He was confident of his theory, because, in terms of the Michigan countyside where he grew up, he saw it as equitable and fundamentally moral.

"We are interested in curtailing" weak claims rather than weak clients," he promised "The fear of the liberal remnant is that we will only attack weak clients. We have to show that we are willing to attack powerful clients with weak claims. I think thats critical to our successÄboth political and economic success."

PART II. A RADICAL IN POWER

THREE WEEKS BEFORE THE INAUGURATION Stockman and his transition team of a dozen or so people were already established at the OMB in the Old Executive Office Building. When his appointment as budget director first seemed likely, he had agreed to meet with me from time to time and relate, off the record, his private account of the great political struggle ahead.The particulars of these conversations. were not to be reported until later, after the season's battles were over, but a cynic familiar with how Washingrton works would understand that the arrangement had obvious symbiotic value. As an assistant managing editor at The Washington Post, I benefited from an informed view of policy discussions of the new administration; Stockman, a student of history, was contributing to history's record and perhaps influencing its conclusions. For him, our meetings were another channel--among many he used--to the press. The older generation of orthodox Republicans distrusted the press; Stockman as one of the younger "new" conservatives who cultivated contacts with columnists and reporters, who saw the news media as another useful tool in political combat. "We believe our ideas have intellectual respectability, and we think the press will recognize that," he said. "The traditional Republicans probably sensed, even if they didn't know it, that their ideas lacked intellectual respectability."

In any case for the eight months that followed, Stockman kept the agreement, and our regular conversations, over breakfast at the Hay-Adams, provided the basis of the account that follows.

In early January, Stockman and his staff were assembling dozens of position papers on program reductions and studying the internal forecasts for the federal budget and the national economy. The initial figures were flightening--"absolutely shocking," he confided--yet he seemed oddly exhilarated by the bad news, and was bubbling with new plans for coping with these horrendous numbers. An OMB computer, programmed as a model of the nation's economic behavior, was instructed to estimate the impact of Reagan's program on the federal budget. It predicted that if the new Presiclent went ahead with his promised three-year tax reduction and his increase in defense spending, the Reagan Aclministration would be faced with a series of federal deficits without precedent in peacetime--ranging from $82 billion in 1982 to $116 billion in 1984. Even Stockrnan blinked. If those were the numbers included in Presiclent Reagan's first budget message, the following month, the financial markets that Stockman sought to reassure would instead be panicked. Interest rates, already high, would go higher; the expectation of long-term inflation would be confirmed.

Stockman saw opportunity in these shocking projections. "All the conventional estimates just wind up as mud " he said. "As absurdities. What they basically say, to boil it down, is that the world doesn't work."

Stockman set about doing two things. First, he changed the 0MB computer. Assisted by like-minded supply-side economists, the new team discarded orthodox premises of how the economy would behave. Instead of a continuing double-digit inflation, the new computer model assumed a swift decline in prices and interest rates. Instead of the continuing pattern of slow economic growth, the new model was based on a dramatic surge in the nation's productivity. New investment, new jobs, and growing profits--and Stockman's historic bull market

. "It's based on valid ecnomic analysis," he said, " but it's the inverse of the last four years. When we go public, this is going to set off a wide-open debate on how the economy works, a great battle over the conventional theories of economic performance. "

The original apostles of supply-side, particularly Representative Jack Kemp, of New York, and the economist Arthur B. Laffer, dismissed budget-cutting as inconsequential to the economic problems, but Stockman was trying to fuse new theory and old. "Laffer sold us a bill of goods," he said, then corrected his words: "Laffer wasn't wrong--he didn't go far enough."

The great debate never quite took hold in the dimensions that Stockman had anticipated, but the Reagan Administration's economic projections did become the source of continuing controversy. In defense of their counter-theories, Stockman and his associates would argue, correctly, that conventional forecasts, particularly by the Council of Economic Advisers in the preceding administration, had been consistently wrong in the past. His critics would contend that the supply-side premises were based upon wishful thinking, not sound economic analysis.

But, second, now, as Stockman put it, "the idea is to try to get beyond the waste, fraud, and mismanagement modality and begin to confront the real dimensions of budget reduction." On the first Wednesclay in January Stockman had two hours on the President-elect's schedule to describe the "dire shape" of the federal budget; for starters, the new administration would have to go for a budget reduction in the neighborhood of $40 billion. "Do you have any idea what ,$40 billion means?" he said. "It means I've got to cut the highway program. It means I've got to cut milk-price supports. And Social Security student benefits. And education and student loans. And manpower training and housing. It means I've got to shut down the synfuels [synthetic fuels] program and a lot of other programs. The idea is to show the magnitude of the budget deficit and some suggestion of the political problems."

How much pain was the new President willing to impose? How many sacred cows would he challenge at once? Stockman was still feeling out the commitment at the White House, aware that Reagan's philosophical commitment to shrinking the federal government would be weighed against political risks.

Stockman was impressed by the ease with which the President-elect accepted the broad objective: find $40 billion in cuits in a federal budget running well beyond $700 billion. But, despite the multitude of expenditurws the proliferation of programs and grants, Stockman knew the exercise was not as easy as it might sound.

Consider the budget in simple terms, as a federal dollar representing the entire $700 billion. The most important function of the federal government is mailing checks to citizens--Social Security checks to the elderly, pension checks to retired soldiers and civil servants, reimbursement checks for hospitals and doctors who provide medicare for the aged and the poor, welfare checks for the dependent, veterans checks to pensioners. Such disbursements consume forty-eight cents of the dollar.

Another twenty-five cents goes to the Pentagon, for national defense. Stockman knew that this share would be rising in the next four years, not shrinking, perhaps becoming as high as thirty cents. Another ten cents was consumed by interest payments on the national debt, which was fast approching a trillion dollars.

That left seventeen cents for everything else that Washington does. The FBI and the national parks, the county agents and the Foreign Service and the Weather Bureau--all the traditional operations of government--consumed only nine cents of the dollar. The remaining eight cents provided all of the grants to state and local governments, for aiding handicapped children or building highways or installing tennis courts next to Al Stockman's farm. One might denounce particular programs as wasteful, as unnecessary and ineffective, even crazy, but David Stockman knew that he could not escape these basic dimensions of federal spending.

As he and his staff went looking for the $40 billion, they found that most of it would have to be taken from the seventeen cents that covered government operations and grants-in-aid. Defense was already off-limits. Next Ronald Reagan laid down another condition for the budget-cutting: the main benefit programs of Social Security, Medicare, veteran's checks, railroad retirement pensions, welfare for the disabled--the so-called "social safety nets"--that Reagan had promised not to touch--were to be exempt from the budget cuts. In effect, he was declaring that Stockman could not tamper with three fourths of the forty-eight cents devoted to transfer payments.

No President had balanced the budget in the past twelve years. Still, Stockman thought it could be done, by l984, if the Reagan Administration adhered to the principle of equity, cutting weak claims, not merely weak clients, and if it shocked the system sufficiently to create a new political climate. He still believed that it was not a question of numbers. "It boils down to a political question, not of budget policy or economic policy, but whether we can change the habits of the political system."

Stockman proposed to White House counselor Edwin Meese an alternative approach--a budget working group, in which each Cabinet secretary could review the proposed cuts and argue against them. As the group evolved, however, with Meese, chief of staff James Baker, Treasury Secretary Donald Regan, and policy director Martin Anderson, among others, it was stacked in Stockman's favor. "Each meeting will involve only the relevant Cabinet member and his aides with four or five strong keepers of the central agenda," Stockman explained at one point. "So on Monday, when we go into the decision on [synthetic fuels] programs, it will be [Energy Secretary] James B. Edwards defending them against six guys saying that, by God, we've got to cut these back or we're not going to have a savings program that will add up."

The check marks were given to changes in twelve major budget entitlements and scores of smaller ones. Eliminate Social Security minimum benefits. Cap the runaway costs of Medicaid. Tighten eligibility for food stamps. Merge the trade adjustment assistance for unemployed industrial workers with standard unemployment compensation and shrink it. Cut education aid by a quarter. Cut grants for the arts and humanities in half. "Zero out" CETA and the Community Services Administration and National Consumer Cooperative Bank. And so forth. "Zero out" became a favorite phrase of Stockman's; it meant closing down a program 'cold turkey," in one budget year. Stockman believed that any compromise on a program that ought to be eliminated--funding that would phase it out over several years--was merely a political ruse to keep it alive, so it might still be in existence a ten years hence, when a new political climate could allow its restoration to full funding.

IN THE PRIVATE DELIBERATIONS, STOCKMAN BEGAN to encounter more resistance from Cabinet members. He was proposing to cut $752 million from the Export-lmport Bank, which provides subsidized financing for international trade--a cut of crucial symbolic importance because of Stockman's desire for equity. Two-thirds of the [Export-Import Bank's] direct loans benefit some of America's major manufacturers--Boeing, Lockheed, General Electric, Westinghouse, McDonald Douglas, Western Electric, Combustion Engineering--and. not surprisingly the program had a strong Republican constituency on Capitol Hill. Stockman thought the trade subsidies offended the free-market principles that all conservatives espouse--in particular, President Reagan's objective of withdrawing Washington from business decision-making. Supporters of the subsidies made a practical argument: the U.S. companies big as they were, needed the financial subsidies to stay even against government-subsidiized competition from Europe and Japan.

The counter-offensive against the cut was led by Commerce Secretary, Malcolm Baldrige and U.S. Trade Representative William Brock, who argued eloquently before the budget working group for a partial restoration of [Export-Import Bank] funds. By Stockman's account. the two "fought, argued, pounded the table," and the meeting seemed headed for deadlock. "I sort of innocently asked, well, isn't there a terrible political spin on this? It's my impression that most of the money goes to a handful of big corporations, and if we are ever caught not cutting this while we're biting deeply into the social progrrams. we're going to have big problems." Stockman asked if anyone at the table had any relevant data. Deputy Secretary of the Treasury Tim McNamar there upon produced a of {the Import-Export Bank's] major beneficiaries (a list that Stockman had given him before the meeting). "So then I went into this demoagogic tirade about how in the world can I cut food stamps and social services and CETA jobs and EDA jobs and you're going to tell me you can't give up one penny for Boeing?"

Stockman won that argument, for the moment. But, as with all the other issues in the budget debate, the argument was only beginning. "I've got to take something out ot Boeing's hide to make this look right . . . You can measure me on this, because I'll probably lose but I'll give it a hellova fight."

Stockman also began what was to become a continuing struggle, occasionally nasty, with the new Secretary of Energy Edwards, a dentist from South Carolina, was ostensibly appointed to dismantle the Department of Energy, as Reagan had promised, but when Stockman proposed cuting the department in half, virtually eliminating the vast synthetic-fuels program launched by the Carter Administration, Edwards argued in defense. In the midst of the battle, Stockman said contemptuously, "I went over to [Department of Energy] the other day and here's a whole roomful of the sameold bureaucrats I've been kicking around for the last five years--advising Edwards on why we couldn't do certain things on oil decontrol that I wanted to do." The relationship did not improve as the two men got to know each other better.

But Stockman felt only sympathy for Secretary of Agriculture John Block, an Illinois farmer. The budget cuts were hitting some of Agriculture's principal subsidy programs. A billion dollars would be cut from dairy-price supports. The Farmers Home Administration loans and grants were to be sharply curtailed. The low-interest financing for rural electric cooperatives and the Tennessee Valley Authority would be modified. In the early weeks of the new administration, the peanut growers and their congressional lobby had campaigned, as they did every year, to have the new secretary of agriculture raise the price-support level for peanuts. Stockman told Block he would have to refuse--for Stockman wanted to abolish the program. He sympathize with Jack Block," Stockman said. "I forced him into a position that makes his life miserable over there. He's on the central team, he's not a departmental player, but the parochial politics of that department are fierce. "Victories over farm lobbies could be won, Stockman believed, if he kept the issues separate--attacking each commodity program in turn, and undermining urban support by cutting, the food and nutrition programs. "My strategy is to come in with a farm bill that's unacceptable to the farm guys so that the whole thing begins to splinter." An early test vote on milk-price supports seemed to confirm the strategy--the dairy farmers lobbied and lost.

THE ONLY CABINET OFFICER STOCKMAN DID NOT challenge was, of course, the Secretary of Defense. In the frantic prepration of the Reagan budget message, delivered in broad outline to Congress on February 18, the OMB review officers did not give even their usual scrutiny to the new budget projections from Defense. Reagan had promised to increase military spending by 7 percent a year, adjusted for inflation, and this pledge translated into the biggest peacetime arms buildup in the history of the republic--$31.6 trillion over the next five years, which would more than double the Pentagon's annual budget while domestic spending was shrinking. Stockman acknowledged that OMB had taken only a cursory glance at the new defense budget, but he was confident that later on, when things settled down a bit, he could go back and analyze it more carefully.

In late February, months before the defense budget became a subject of Cabinet debate, Stockman privately predicted that Defense Secretary Caspar Weinberger, himself a budget director during the Nixon years, would be an ally when he got around to cutting back military spending. "As soon as we get past this first phase in the process, I'm really going to go after the Pentagon. The whole question is blatant inefficiency, poor deployment of manpower, contracting idiocy, and, hell, I think that Cap's going to be a pretty good mark over there. He's not a tool of the military-industrial complex. I mean, he hasn't been steeped in its excuses and rationalizations and ideology for twenty years, and I think that he'll back off a lot of this stuff, but you just can't challenge him head-on without your facts in-line. And we're going to get our case in line and just force it through the presses."

Stockman shared the general view of the Reagan Administration that the United States needed a major build-up of its armed forces. But he also recognized that the Pengon, as sole customer for weapons systems, subsidized the arms manufacturers in many direct ways and violated many free-market principles. "The defense budgets in the out-years won't be nearly as high as we are showing now, in my judgment. Hell, I think there's a kind of swamp of $10 to $20 to $30 billion worth of waste that can be ferreted out if you really push hard."

Long before President Reagan's speech to Congress, most of the painful details of the $11.4 billion in proposed reductions were already known to Capitol Hill and the public. In early February, preparing the political ground, Stockman started delivering his "black book" to Republican leaders and committee chairmen. He knew that once the information was circulating on the Hill, it would soon be available to the news media, and he was not at all upset by the daily storm of headlines revealing the dimensions of what lay ahead. The news conveyed, in its drama and quantity of detail, the appropriate political message: President Reagan would not be proposing business as usual. The President had in mind what Stockman saw as "fiscal revolution."

But it was not generally understood that the new budget director had already lost a major component of his revolution--another set of proposals which he called "Chapter Two," that was not sent to Capitoi Hill because the President had vetoed its most controversial elements.

Stockman had thought Chapter Two would help him on two fronts: it would provide substantially increased revenues and thus help reduce the huge deficits of the next three years; but it would also mollify liberal critics complaining about the cuts in social welfare, because it was aimed primarily at tax expenditures (popularly known as "loopholes") benefiting oil and other business interests. We have a gap which we couldn't fill even with all these budget cuts, too big a deficit," Stockman explained. "Chapter Two comes out totally on the opposite of the equity question. That was part of my strategy to force acquiescence at the last minute into a lot of things you'd never see a Republican administration propose. I had a meeting this morning at the White House. The President wasn't involved, but all the other key senior people were. We brought a program of additional tax savings that don't touch any social programs. But they touch tax expenditures." Stockman hesitated to discuss details, for the package was politically sensitive, but it included elimination of the oil-depletion allowance; an attack on tax-exempt industrial-development bonds; user fees for owners of private airplanes and barges; a potential ceiling on home-mortgage deductions (which Stockman called a "mansion cap," since it would affect only the wealthy); some defense reductions; and other items, ten in all. Total additional savings: somewhere in the neighborhood of $20 billion. Stockman was proud of "Chapter Two" and also very nervous about it, because, while liberal Democrats might applaud the closing of"loopholes" that they had attacked for years, powerful lobbies--in Congress and business--would mobilize against it.

Did President Reagan approve? "If there's a consensus on it, he's not going to buck it, probably."

Two weeks later, Stockman cheerfully explained that the President had rejected his "tax-expenditures" savings. The "Chapter Two" issues had seemed crucial to Stockman when he was preparing them, but he dismissed them as inconsequential now that he had lost. "Those were more like ornaments I was thinking of on the tax side," he insisted. "I call them equity ornaments. They're not really too good. They're not essential to the economics of the thing."

The President was willing to propose user fees for aircraft, private boats, and barges, but turned down the proposal to eliminate the oil-depletion allowance. "The President has a very clear philosophy," Stockman explained. "A lot of people criticize him for being short on the details, but he knows when something's wrong. He just jumped all over my tax proposals."

Stockman dropped other proposals. Nevertheless, he was buoyant. The reactions from Capital Hill were clamorous, as expected, but the budget director was more impressed by the silences. the stutter and hesitation of the myriad interest groups. Stockman was becoming a favorite caricature for newspaper cartoonists--the grim reaper of the Reagan Administration, the Republican Robespierre--but in his many sessions on the Hill he sensed confusion and caution on the other side.

"There are more and more guys coming around to our side," he reported. What's happening is that the plan is so sweeping and it covers all the bases sufficiently, so that it's like a magnifying glass that reveals everybody's pores . . . In the past, people could easily get votes for their projects or their interests by saying, well, if they would cut food stamps and CETA jobs and two or three other things, then maybe we would go along with it, but they are just picking on my program. But, now, everybody perceives that everybody's sacred cows are being cut. If that's what it takes, so be it. The parochial player will not be the norm, I think. For a while."