ON CAPITOL HILL, IDEOLOGICAL CONSISTENCY IS not a highly ranked virtue but its absence is useful grounds for scolding the opposition. David Stockman endured considerable needling when his budget appeared, revealing that many programs that he had opposed as a congressman had survived. The most glaring was the fast-breeder nuclear reactor at Clinch River, Tennessee. Why hadn't Stockman cut the nuclear subsidy that he had so long criticized? The answer was Senator Howard Baker, of Tennessee, majority leader. "I didn't have to get rolled," Stockman said, "I just got out of the way. It just wasn't worth fighting. This package will go nowhere without Baker, and Clinch River is just life or death to Baker. A very poor reason, I know."
Consistency, he knew, was an important asset in the new environment. The package of budget cuts would be swiftly picked apart if members of Congress perceived that they could save their pet programs, one by one, from the general reductions. "All those guys are looking for ways out," he said. "If they can detect an alleged pattern of preferential treatment for somebody else or discriminatory treatment between rural and urban interests or between farm interests and industrial interests, they can concoct a case for theirs. "
Even by Washington standards, where overachieving young people with excessive adrenalin are commonplace, Stockman was busy. Back and forth, back and forth he went, from his vast office at the Old Executive Office Building, with its classic high ceilings and its fireplace, to the cloakrooms and hideaway offices and hearing chambers of the Capitol, to the west Wing of the white House. Usually, he carried an impossible stack of books and papers under his arm, like a harried high school student who has not been giver a locker. He promised friends he would relax take a day off, or at least sleep later than 5 A.M., when he usually arose to read policy papers before breakfast. But he did not relax easily. What was social life compared with the thrill of reshaping the federal establishment?
In the early skirmishing on Capitol Hill, Stockman actually proposed a tight control system: Senator Baker and the House Republican leader, Robert Michel, of Illinois, would be empowered to clear all budget trades on particular programs and no one else, not even the highest White House advisers, could negotiate any deals. "If you have multiple channels for deals to be cut and retreats to be made," Stockman explained, "then it will be possible for everybody to start side-dooring me, going in to see Meese, who doesn't understand the policy background, and making the case, or [James] Baker making a deal with a sub-committee chairman." Neither the White House nor the congressional leadership liked his idea, and it was soon buried.
By March, however, Stockman could see the status quo yielding to the shock of the Reagan agenda. In dozens of meetings and hearings, public and private, Stockman perceived that it was now inappropriate for a senator or a congressman to plead for his special interests at least in front of other members with other interests. At one caucus, a Tennessee Republican began to lecture him on the reduced financing for TVA; other Republicans scolded him. Stockman cut public-works funding for the Red River project in Louisiana, which he knew would arouse Russell Long, former chairman of the Senate Finance Committee. Long appealed personally at the White House, and Reagan stood firm.
One by one, small signals such as these began to change Stockman's estimate of the political struggle. He began to believe that the Reagan budget package despite its scale, perhaps because of its scale, could survive in Congress. With skillful tactics by political managers, with appropriate public drama provided by the President, the relentless growth rate of the federal budget, a permanent reality of Washington for twenty years, could actually be contained.
Stockman's analysis was borne out a few weeks later, in early April, when the Senate adopted its first budget-cutting measures, 88-10, a package close enough to the administration's proposals to convince Stockman of the vulnerability--constituency-based--politics. "That could well be a turning point in this whole process," Stockman said afterward.
Still, Stockman was even more impressed by the performance of the new Republican majority in the Senate. After a week of voting down amendments to restore funds for various programs"voting against every motherhood title," as Stockman put it--moderate Republicans from the northeast and midwest needed some sort of political solace. Led by Senator John Chaffee, of Rhode Isiand the moderates proposed an amendment spreading about $1 billion over an array of social programs, from education to home-heating assistance for the poor. Stockman had no objection. The amendment wouldn't cost much overall, and it would "take care of those people who have been good soldiers." Senator Pete Domenici, of New Mexico, the Senate budget chairman, decided, however, that the accommodation wasn't necessary, and he was right. The Chaffee amendment lost.
"It was the kind of amendment that should have passed," Stockman reflected afterward. "The fact that it didn't win tells me that the political logic has changed."
Not entirely, however. While the Senate majority was rejecting additional money for the coalition of social programs, it was also tinkering with an important item in Stockman's balance of equitable cuts--the Export-Import Bank. The great multinational industrial firms that received the trade subsidies from [Export-Import Bank] were already at work, arguing that U.S. sales abroad and jobs at home would suffer without the[Export-Import Bank] loans and guarantees. The Republicans, led by Senator Nancy Kassebaum, of Kansas, where Boeing is a major employer, voted to restore $250 million to the Ex-Im budget. Later, the House raised the figure even higher, with little resistance from the White House.
"We weren't really closely in control," Stockman explained. "The mark-up went so fast, and those amendments came out of the woodwork, and we weren't prepared to deal w ith it." Stockman seemed nonchalant about his defeat. The principle of cutting the [Export-Import Bank's] corporate subsidies, which had seemed so important to him in January, was non regarded as a minor blemish on the Senate victory. "It did open a little breach that is troublesome," he conceded.
The vulnerability of Stockman's ideology was always that the politics of winning would overwhelm the philosophical premises. But after the Senate victory, Stockman devoted his energy to the tactical questions--winning again in the House of Representatives, which was controlled by the Democrats. "This is pure politics," he said. "lt s a question of whether the President can prevail on the floor of the House, because if he can't, then the committee chairmen know they have license to do anything they want. "
Stockman watched with admiration as his principal intellectual rival, Jim Jones, the Democratic chairman of the House Budget Committee, attempted to fashion a budget resolution that would hold the Democratic majority together. The budget director calculated that Jones had an impossible task but he could see that the Oklahoma congressman was going to come closer than he had expected. The Democrats, by Stockman's analysis were really three groups: the old-line liberal faithful. who would follow the party leadership and defend against any or all budget cuts; a middle group, including Jones anti other younger members, who recognized that federal deficits were out of control, and were filling to confront the problem (Stockman referred to them as The progressives"); and, finally, the boll weevils," the thirty-eight southerners who were pulled toward Reagan both in conservative philosophy and by the politics of their home districts, which had voted overwhelmingly for the President. Jones was drawing up a resolution that would restore some funds to social programs, to keep the liberals happy; that projected a smaller deficit than Stockman's, to appear more responsible in fiscal terms; and that did not touch the defense budget, which would offend the southerners.
Artful as it was, the Jones resolution was, according to Stockman, a series of gimmicks: economic estimates and accounting tricks. "Political numbers," he called them. But Stockman was not critical of Jones for these budget ploys, because he cheerfully conceded that the administration's own budget numbers were constructed on similar shaky premises, mixing cuts from the original 1981 budget left by Jimmy Carter with new baseline projections from the Congressional Budget Office in a way that, fundamentally, did not add up. The budget politics of 1981, which produced such clear and dramatic rhetoric from both sides, was, in fact, based upon a bewildering set of numbers that confused even those, like Stockman, who produced them.
"None of us really understands what's going on with all these numbers," Stockman confessed at one point. "You've got so many different budgets out and so many different baselines and such complexity now in the interactive parts of the budget between policy action and the economic environment and all the internal mysteries of the budget, and there are a lot of them. People are getting from A to B and it's not clear how they are getting there. It's not clear how we got there, and it's not clear how Jones is going to get there. "
These "internal mysteries" of the budget process were not dwelt upon by either side, for there was no point in confusing the clear lines of political debate with a much deeper and unanswerable question: Does anyone truly understand, much less control, the dynamics of the federal budget intertwined with the mysteries of the national economy? Stockman pondered this question occasionally but since there u as no obvious remedy, no intellectual construct available that would make sense of this anarchical universe, he was compelled to shrug at the mystery and move ahead. firm beginning to believe that history is a lot shakier than I ever thought it was," he said in a reflective moment. "In other words, l think there are more random elements, less determinism and more discretion, in the course of history than I ever believed before. Because I can see it."
The "random elements' were working in Stockman s behalf in the House of Representatives. He had a good fix on what Jones would produce as the Democratic alternative in part because he had a spy in the Democratic meetings--Phil Gramm, of Texas. a like-minded conservative and friend who agreed to co-sponsor the administration's substitute resolution. Did Jones know that one of his Democratic committee members was really on the other side? "No," said Stockman. "That's how I know what's in Jones's budget."
Stockman was also dealing with the recognized leaders of the "boll
weevils." He thought that the southerners could be won to the President's
side with a minimum of trading, but he was prepared to trade. He agreed
w ith G. "Sonny" Montgomery, chairman of the House Veterans'
Affairs Committee and a genuine leader among the southern Democrats, to
acquiesce in the restoration of $350 to $400 million for staffing at veterans'
hospitals. Once Montgomery announced he was with the President, it would
be a respectable position, which other southerners could embrace, Stockman
felt. Still, he was confident that he could defend the agenda against general
trading for votes.
IN POLITICAL TERMS, STOCKMAN'S ANALYSIS WAS sound. The Reagan program was moving toward a series of dramatic victories in Congress. Beyond the brilliant tactical maneuvering, how ever, and concealed by the public victories, Stockman was privately staring at another reality--a gloomy portent that the economic theory behind the President's program wasn't working. While it was winning in the political arena, the plan was losing on Wall Street. The financial markets, which Stockman had thought would be reassured by the new President's bold actions, and which were supposed to launch a historic "bull market" in April, failed to respond in accordance with Stockman's script. The markets not only failed to rally, they went into a new decline. Interest rates started up again; the bond market slumped. The annual inflation rate, it was true, was declining, dropping below double digits, but even Stockman acknowledged that this was owing to "good luck" with grain harvests and world oil supplies, not to Reaganomics. Investment analysts, however, were looking closely at the Stockman budget figures, looking beyond the storm of political debate and the President's winning style, and what they saw were enormous deficits ahead--the same numbers that had shocked David Stockman when he came into office in January. Henry Kaufman, of Salomon Brothers, one of the preeminent prophets of Wall Street, delivered a sobering speech that, in the cautious language of financiers, said the same thing that John Anderson had said in 1980: cutting taxes and pumping up the defense budget would produce not balanced budgets but inflationary deficits.
Was Kaufman right? Stockman agreed that he was, and conceded that
his own original conceptionÄthat dramatic political action would somehow
alter the market-place expectations of continuing inflationÄhad been
wrong. "They're concerned about the out-year budget posture, not about
the near-term economic situation. The Kaufmans don't dispute our diagnosis
at all. They dispute our remedy. They don't think it adds up. I take the
performance of the bond market deadly seriously. I think it's the best
measure there is. The bond markets represent world-wide psychology, worldwide
perception and evaluation of what, on balance, relevant people think about
what we're doing . . . It means we're going to have to make changes . .
. I wouldn't say we are losing. We're not winning."
THE UNDERLYING PROBLEMS OF THE DEFICITS FIRST surfaced, to Stockman's embarrassment, in the Senate Budget Committee in mid-April, when committee Republicans choked on the three-year projections supplied by the nonpartisan Congressional Budget Office. Three Republican senators refused to vote for a long-term budget measure that predicted continuing deficits of $60 billion, instead of a balanced budget by 1984.
Stockman thought he had taken care of embarrassing questions about future deficits with a device he referred to as the "magic asterisks (Senator Howard Baker had dubbed it that in strategy sessions, Stockman said.) The magic asterisk" would blithely denote all of the future deficit problems that were to be taken care of with additional budget reductions, to be announced by the President at a latter date. Thus everyone could finesse the hard questions, for now.
But, somehow or other, the Senate Budget Committee staff insisted upon putting the honest numbers in its resolution--the projected deficits of $60 billion-plus running through 1984. That left the Republican senators staring directly at the same scary numbers that Stockman and the Wall Street analysts had already seen. The budget director blamed this brief flare-up on the frantic nature of his schedule. When he should have been holding hands with the Senate Budget Committee, he was at the other end of the Capitol, soothing Representative Delbert Latta, of Ohio, the ranking Republican in budget matters, who was pouting. Latta thought that since he was a Republican, his name should go ahead of that of Phil Gramm, a Democrat, on the budget resolution: that it should be Latta-Gramm instead of Gramm-Latta.
After a few days of reassurances, Stockman persuaded the Republican senators to relax about the future and two weeks later they passed the resolutionÄwithout being given any concrete answers as to where he would find future cuts of such magnitude. In effect. the "magic asterisk" sufficed.
But the real problem, as Stockman conceded. was still unsolved. Indeed, pondering the reactions of financial markets, the budget director made an extraordinary confession in private: the original agenda of budget reductions, which had seemed so radical in February, was exposed by May as inadequate. The "magic asterisk" might suffice for the political debate in Congress. but it would not answer the fundamental question asked by Wall Street: How, in fact, did Ronald Reagan expect to balance the federal budget? "It's a tentative judgment on the part of the markets and of spokesmen like Kaufman that is reversible because they haven't seen all our cards. From the cards they've seen, I suppose that you can see how they draw that conclusion."
"It means." Stockman said, "that you have to have some recalibration in the policy. The thing was put together so fast that it probably should have been put together differently." With mild regret, Stockman looked back at what had gone wrong.
"The defense numbers got out of control and we were doing that whole budget-cutting exercise so frenetically In other words, you were juggling details, pushing people, and going from one session to another, trying to cut housing programs here and rural electric there, and we were doing it so fast, we didn't know where we were ending up for sure . . . In other words, we should have designed those pieces to be more compatible. But the pieces were moving on independent tracks--the tax program, where we were going on spending, and the defense program, which was just a bunch of numbers written on a piece of paper. And it didn't quite mesh. That's what happened. But, you see, for about a month and a half we got away with that because of the novelty of all these budget reductions."
Reagan's policy-makers knew that their plan was wrong, or at least inadequate to its promised effects, but the President went ahead and conveyed the opposite impression to the American public. With the cool sincerity of an experienced television actor, Reagan appeared on network television to rally the nation in support of the Gramm-Latta resolution, promising a new era of fiscal control and balanced budgets, when Stockman knew they still had not found the solution. This practice of offering the public eloquent reassurances despite privately held doubts was not new, of course. Every contemporary President--starting with Lyndon Johnson in his attempt to cover up the true cost of the war in Vietnam--had been caught, sooner or later, in contaditions between promises and economic realities. The legacy was a deep popular skepticism about anything a President promised about the economy. Barely four months in office, Ronald Reagan was already adding to the legacy.
Indeed, Stockman began in May to plot what he called the "recalibration" of Reagan policy, which he hoped could be executed discreetly over the coming months to eliminate the out-year deficits for 1983 and 1984 that alarmed Wall Street--without alarming political Washington and losing control in the congressional arena. "It's very tough. because you don't want to enci up like Carter, where you put a plan out there and then a month into it, you visibly and unmistakably change postures. So that you have to do is solve this problem incrementally, without the appearance of reversal, and there are some ways to do that." [ . . . ] And ther was a fourth: the Reagan tax cut; if it could be modified in the course of the congressional negotiations already under way. This would make for additional savings on the revenue side. The public alarm over the deficits was, to some extent, "fortuitous," from Stockman's viewpoint, because the Wall Street message supported the sermon that he was delivering to his fellow policy-makers at the White House: the agonies of budget reduction were only beginning, and, more to the point. the Reagan Administration could not keep its promise of balanced budgets unless it was willing to back away from its promised defense spending, its 10- 10-10 tax-cut plan, and the President's pledge to exempt from cutbacks the so-called "safety-net" programs. Stockman would deliver this speech, in different forms, all through the summer ahead, trying to create the leverage for action on those fronts, particularly on defense. He later explained his strategy:
"I put together a list of twenty social programs that have to be zeroed out completely, like Job Corps, Head Start, women and children's feeding programs, on and on. And another twenty-five that have to be cut by o0 percent: general revenue sharing, CETA manpower training, etcetera, etcetera. And then huge bites that would have to be taken out of Social Security. I mean really fierce, blood- and-guts stuff--widows' benefits and orphans' benefits, things like that. And still it didn't add up to $40 billion. So that sort of created a new awareness of the defense budget . . .
"Once you set aside defense and Social Security, the Medicare complex, and a few other sacred cows of minor dimension, like the VA and the FBI, you have less than $200 billion worth of discretionary room--only $144 billion after you cut all the easy discretionary programs this year.
In short, the fundamental arithmetic of the federal budget. which Stockman and others had brushed aside in the heady days of January, was now back to haunt them. If the new admirlistl ation would not cut defense or Social Security or major "safety-net" programs that Reagan had put off limits, then it must savage the smaller slice remaining. Otherwise, balancing the budget in 1984 became an empty promise. The political pain of taking virtually all of the budget savings from government grants and operations would be too great, Stockman believed; Congress would never stand for it. Therefore. he had to begin educating "the West Wing guys" on the necessity for major revisions in their basic plan. He was surprisingly optimistic. "They are now understanding all those things." Stockman said. "A month ago. they didn't. They really thought you could find $144 billion worth of waste, fraud, and abuse. So at least I've made a lot of headway internally."
Social Security was much more volatile, but Stockman noted that the Senate had already expressed a willingness in test votes to reconsider such basic components as annual cost-of-living increases for retirees. In the House, the Democrats, led by J. J. Pickle, of Texas, were preparing their own set of reforms to keep the system from bankruptcy, so Stockman thought it would be possible to develop a consensus for real changes. He didn't much care for Pickle's proposals, because the impact of the reforms stretched out over some years, whereas Stockman was looking for immediate relief. "I'm just not going to spend a lot of political capital solving some other guy's problem in 2010." But he felt sure a compromise could be worked out. "If you don't do this in 1981, this system is going to land on the rocks," he predicted, "because you won't do it in 82 [a congressional election year] and by '83, you will have solvency problems coming out of your ears. You know, sometimes sheer reality has a sobering effect."
Finally, there was defense. Stockman thought the sobering effects of reality were working in his favor there, too, but he recognized that the political tactics were much: trickier. In order to get the first round of budget cuts through Congress, particularly in order to lure the southern Democrats to the`President's side, there must be no unt of retreat from Reagan's promises for the Pentagon. Thati would Mobilize the "defense lobby against him and help the Democrats hold control of the House. Still, when the timing was right, Stockman thought he would prevail.
"They got a blank check," Stockman admitted. "We didn't have time during that February-March period to do anything with defense. Where are we going to cut? Domestic? Or struggle all day and night with defense? So I let it go. But it worked perfectly, because they got so god-damned greedy that they got themselves strung way out there on a limb."
As policy-makers and politicians faced up to the additional cuts required in programs, the pressure would lead them back, inevitably, to a tough-minded re-examination of the defense side. Or so Stockman believed. That combination of events, he suggested, would complete the circle for Wall Street.
The markets will respond to that. Unless they are absolutely perverse."