A Down Payment
By January 1984, Republican senators were beginning to define their goal not as immediate budget balance but as controlling the debt situation.[13] Stockman testified to the Senate Budget Committee: "I don't think there's anyone here who can think of enough taxes or enough spending cuts to offset [the] explosion of debt service. We are in the same position of many companies on the eve of Chapter 11."[14] The budgetary effects of compound debt interest were indeed impressive. Interest costs for 1984 were projected at $108 billion. Every extra $200 billion of borrowing would increase subsequent interest costs by $15 billion or more per year forever (optimistically assuming 7.5 percent interest)—and that did not account for possibly higher interest rates created by federal borrowing needs. Thus, though Feldstein's economic report assumed deficit reductions that would reduce interest rates, and Stockman used those
interest rate assumptions to get his debt service estimates down, deficit reductions were not in the budget. In essence, the economic report assumed some other budget. When Reagan, in his State of the Union on January 25, announced he had arranged negotiations with representatives of Speaker O'Neill and Majority Leader Baker about a $100 billion three-year "down payment" on deficit reduction, he in fact announced that the administration had not been able to make a budget of its own.
In his speech the president reiterated his disinterest in making the down payment with taxes. "Whether government borrows or increases taxes," he declared, "it will be taking the same amount of money from the private sector, and either way it's too much." Besides, he added, in a portent of things to come,
There is a better way. Let us go forward with a historic reform for fairness, simplicity and incentives for growth. I am asking Secretary Don Regan for a plan for action to simplify the entire tax code, so all taxpayers, big and small, are treated more fairly…. I have asked that specific recommendations, consistent with these objectives, be presented to me by December, 1984.[15]
The December (that is, postelection) target for tax reform proposals drew sarcastic laughter[16] because the president appeared to be shifting off some hair-brained scheme until after the election. The last laugh, however (see Chapter 20 on tax reform), would belong to him.
Changing the subject to tax reform did not save a budget that even Reagan did not want to defend. The budget and CBO analyses differed vastly: FY89 interest was estimated at $126 billion by OMB and $207 billion by CBO. Virtually no one, including OMB, believed OMB. The call for negotiations on a "down payment"—finally inserted into the speech the morning it was given[17] —was meant to bridge the gap between economic and budget reports, providing a functional equivalent of the magic asterisk: we'll make it add up later. Feldstein drew the conclusion merited by Reagan's call for negotiations: "This budget is not what we want to see happen," he testified. "My sense is that these negotiations supersede completely the budget that has been sent up."[18]
Tired and testy, Stockman tried to resign before the budget was released. "I can't make a fool of myself any longer, Jim," he told Baker. "This budget is so bad, it's beyond the pale." "You do that and you'll stab the president right in the back," the Chief of Staff replied. "The Democrats will have a field day in the 1984 campaign. Let me remind you of something, my friend. He stuck by you. Now you stick by him." "Because I knew Jim was right," a chastened Stockman reports, he agreed to stay on—even if that meant, as he puts it, giving "dutiful loyalty to nonsense."[19] Stockman was always, however, at least as loyal to his personal
version of the truth as to any individual. He therefore strove to get out the truth about the budget situation as he saw it.
Trying to understand what had happened to his dreams, the budget director had initiated a major historical analysis of budget trends. Stockman concluded that his spending history showed broad support for many programs he wished to cut. Surprise! Not Johnson's Great Society but older (social security) and younger (food stamp) programs made up the bulk of the new spending. The budget's analysis was elaborated in the April release of "Major Themes and Additional Budget Details"—an advocacy document that took on a reflective cast. Stockman wanted a wider audience. Therefore, in January he went on record, summarizing his view in an interview for Fortune:
Philosophically I have a large roster of cuts…. You could find several tens of billions to throw overboard.
But the point is that we have knocked on all those doors for three years and three budget rounds. And the result is people want to have mass transit subsidies and middle-class subsidies for education. And the agricultural sector wants all those benefits. I can't foresee that anytime in this decade we will have the kind of people in Congress who will abolish those things—even if it is philosophically correct to do so.
We have gone through a great testing process for three years, and that defines the financing requirements of the government. Now we have to figure out how to pay our bills. Some [read Reagan, Meese] still think there are vast pockets of fraud, waste, and abuse out there. In fact, nearly every stone has been turned over.[20]
In background interviews, Stockman's associates continued to press the point: tax increases were essential.[21]
Feldstein's warnings about deficit-by-default sent the same message: a tax hike would be needed. In reply, Donald Regan blasted the CEA chairman. "I have 35 years of experience in the market," he declared. "The CEA has none…. Experience in the marketplace is a lot more valuable than time spent in the library."[22] On February 3 ranking Democratic Senator Lawton Chiles told Regan, at a Senate Budget Committee hearing, that the annual CEA report made a strong case for the evils of deficits. The Treasury secretary replied that the president had only written the first eight pages of the report; "as far as I'm concerned," his punch line went, "you can throw the rest away."[23] The White House staff felt that Feldstein's attacks on the deficit were making the president look bad. They forced the CEA chair to cancel a scheduled February 5 television appearance. Rumors flew that Feldstein would resign; but the CEA chairman, who had long planned to resign that summer when his leave from Harvard expired, saw no reason to hurry. George Bush had the
hopeless job of denying that the administration was split over the deficit issue.[24]