To the Rose Garden

Before serious work began on creating a FY85 budget, the nominally bipartisan negotiations had to be disposed of. A Democratic aide recalls,

It was obviously a political way to get through the year…. [Senate Minority Leader] Byrd had no choice but to accept, of course … [he] was depressed because he was in a false position. He could see that by going along he would lose the issue of the deficit and hurt Mondale—though we might have been better off without that issue, since Mondale's solution was a tax hike!

The Democrats' first problem was who to send to the budget talks. On the Senate side, Long and Chiles were the obvious candidates, but those two, especially Chiles, might make a deal that got Reagan off the hook (any deal would) and would also be too conservative for most Democrats. On the House side, the logical negotiators, Jones and Rostenkowski, presented the same difficulty. What do you do when the president requests a budget conference and you don't trust your budget leaders?

The Democrats declared the negotiations a leadership issue. Senator Byrd decided to send Daniel Inouye (D-Hawaii), a member of the leadership known for his stubbornness and discretion. The Speaker thought that was a great idea, and he delegated Jim Wright.^[25] "The speaker," his spokesman declared, "is extremely suspicious" of the president's deficit-reduction proposals.^[26] A Democratic aide described the scene:

Every meeting would begin with [Jim] Baker chairing, and he would say, let's see what is doable here, about $30 billion per year. Wright would say, no way, let's do something that would really help, $200 billion total. Here's what we can do on taxes, what specifics can you do on defense? Inouye would keep saying, if this is so easy and so doable, why do we have to be here? I could be back at Appropriations, doing something real….

I watched Stockman and Domenici, who would talk to each other, and clearly they wanted to make a deal…. Stockman would say, we might consider something—and then Regan or Baker would shut him down and say, no way. I'm sure that is where the [Stockman] book came from in a way. It was clear he had become a functionary, not a policymaker.

By early March, Democrats Wright and Inouye had dropped out of the budget negotiations. Talks continued among various Republican factions, searching for some common ground on defense, taxes, and social spending.^[27]

On March 1 Ways and Means reported a $49.2 billion package (over

three years) attached to the FY84 reconciliation that had been hung up back in December (H.R. 4170). Finance worked through early March assembling a similar package.^[28] Though the two plans had many differences, each appropriated some small tax proposals found in Reagan's budget, conspicuously excepting taxation of employee health benefits. Each increased some excise taxes, restricted industrial development bonds, changed tax shelters, and included a few sweeteners for the tax increase pill. As in 1982, the committees received quiet help from Treasury and from professionals at the Joint Committee on Taxation. The real target was Wall Street.

Essentially the tax professionals, under cover of the deficit panic, proposed reforms involving "a lot of reporting, penalties, the time value of money, imputing interest"—highly technical matters "absolutely," as one participant put it, sold to the president as compliance. They were so technical that, as a Ways and Means aide put it, "no one viewed anything in there as particularly egregious, in part because no one understood it." The major interests affected, stockbrokers and other financial institutions, were narrow enough that most legislators could afford to oppose it in pursuit of what they deemed the greater good of deficit reduction.

By assembling detailed tax proposals, Finance and Ways and Means changed the overall budget picture. As the White House and congressional Republicans bargained, tax-hike proponents could point to menus of increases that protected the president's individual tax cut, sounded fair, and, most important, had some chance of passing. On the basis of a three-legged stool of defense restraint, domestic cuts, and tax hikes, the emerging tax proposals allowed a three-year $150 billion overall package.^[29] After the Senate Republicans' third meeting with Reagan on March 14, Domenici reported that agreement was coming closer. The holdup was spending; he, and particularly Hatfield, were pushing for defense reductions greater than Senate Armed Services Chairman John Tower and Cap Weinberger would accept.^[30]

The issue was how to make a three-year cut in discretionary spending (entitlements were out). No one was willing to repeat the 1981 reconciliation of discretionary-spending authorizations. Congress could try multiyear appropriations, but then what would future appropriations committees do? Rejecting these approaches, the Senate leadership proposed to legislate "caps" on discretionary spending for FY85 and the two subsequent years. Caps would allow discretion on details and an annual review, but they would also constrain total appropriations. A defense cap would allow an average 7 percent real growth over the three years. The nondefense cap would freeze spending in FY85 and then allow inflation adjustments in FY86–87.^[31]

Hatfield (never mind House appropriators) objected to both the principle

of caps and the particulars. Pete Domenici and Howard Baker, his personal friends, argued that the party had to agree on a program. Under intense pressure, Hatfield gave in on March 15, 1984, but, when the Senate leaders and the president announced their agreement in the Rose Garden that day, the chairman of Senate Appropriations was conspicuously absent. He kept a prior engagement at Harvard University, refusing Howard Baker's offer to get him back from Boston on an Air Force jet.^[32]

This Rose Garden agreement included $149.5 billion in savings from the highest possible base—that is, keeping current services on domestic spending and accepting the president's request on defense. From that base, defense and domestic would be reduced by $40 billion and $43 billion, respectively, taxes increased by the $48 billion planned by Senate Finance, and interest costs accordingly reduced by $18 billion. Given these baselines, the figures provided a rough equality of sacrifice. Except for the appropriations freeze, all the other spending savings in the plan were already moving through Congress on their own.

If the Rose Garden's tax and domestic spending changes were on the way, and if so-called defense reductions were being calculated from a base that no one believed, what was the point? Clearly the agreement had far more to do with uniting the Republican party than with reducing the deficit. Yet this plan was better than no plan—what had happened in 1983. As Dole put it, "It's not a $100 billion down payment. When you net it all out it's probably $30 billion. But if you don't do anything, it's zero."^[33] Hatfield could console himself that, because Congress cannot bind itself, the caps could be ignored later.

The Rose Garden agreement was fragile. Each faction might back out if the whole package did not stick together. In particular, the president might not accept the tax hike if he felt betrayed on domestic spending and defense, which under normal procedures could not be attached to the tax increase. "Normal procedure" would not do; it would draw attention to the (politically) wrong things. Budget resolutions would highlight the bad deficit result instead of the good, supposed, deficit reduction. Senate Republican leaders, therefore, decided to bypass the budget resolution by packaging the Rose Garden agreement in a separate bill.