Three
"The Worst of All Worlds"

As the economy sank into a worse slump than the administration had been trying to engineer, all reasonable expectation of a balanced budget went out the window. More unemployment than planned would mean lower revenues (less income to tax) and higher spending (for unemployment insurance). Yet the increasing implausibility of budget balance would change nobody's behavior. The president and Democratic budget leaders in the House and the Senate acted as if, once they had set a target of budget balance to meet inflationary expectations, any retreat would only create further panic. At the least, the government would have to deliver the deficit reduction it had promised.

This was not exactly traditional Democratic economics, which called for spending to counter recessions. The entire enterprise was unpopular with a large segment of the Democrats' interest group constituency. Lane Kirkland, head of the AFL-CIO, led labor in continual blasts at the administration's "Hooverist" economic policies. Within Congress, the Black Caucus was particularly vocal in opposing the budget balancing craze. While the rest of the leadership was committed to budget balance, Speaker Thomas P. (Tip) O'Neill, Jr., remained ambivalent. A good party man, he wanted to follow his president and his colleagues, but his heart wasn't in it. The budget cuts attacked programs in which he, a self-styled New Deal liberal, believed strongly. In March O'Neill held aloof from budget negotiations and publicly aired his reservations.^[1]

In line with neoclassicist and some Keynesian concerns about business investment, another faction of Democrats was most interested in "productivity-increasing" tax cuts; this group was led by Representative James Jones (Okla.) and Senator Lloyd Bentsen (Tex.). Jones, a member of the Budget and the Ways and Means committees, cosponsored with Republican Barber Conable (N. Y.) a very large business tax cut (to be discussed

later) known as the "10-5-3" accelerated depreciation plan. In late February, Bentsen, chairman of the Joint Economic Committee, led that group as it endorsed a $25 billion tax cut designed to increase long-term productivity. Sentiment for such business tax cuts was particularly strong in the Senate.^[2] Many of Jones's group were also budget balancers who wanted to cut more spending to pay for the tax cut. The budget chairmen would have a hard time getting the business-incentive group in the same coalition as liberals.

The first step would be a balanced First Budget Resolution. That would be hard enough given the discontented liberals and eager proponents of business tax cuts. The greatest difficulty, however, was not fiscal policy but priorities. How much would be spent on the military? The defense buildup associated with Ronald Reagan actually began in 1980, driven not by Reagan's ideology but by events (Afghanistan and Iran) and the mood within Congress. If defense exceeded Carter's plan, then social programs had to be cut further, taxes had to be raised (extremely unlikely), or the deficit had to go up. Pressure for more defense spending therefore put the budget committees in a bind.

Defense Spending

A guide to the politics of defense spending requires a guide to defense numbers; that is not easy to assemble. Edwin Dale, associate director of OMB for Public Affairs in the Reagan administration, comments that at one point the New York Times ran four stories in ten days, each with different figures—"and all were correct!"

Budget resolutions provide totals for the national defense budget function. Within that function most activities are funded through the Defense Department appropriation. Yet spending also shows up in other bills: a few billions for research and construction of some nuclear weapons are included in the Energy and Water appropriation because the Department of Energy does the work; another few billions go into the separate military construction appropriation; and a few more billions, the amount of the annual pay increase, is included each year in a supplemental appropriation. Because the budget resolutions' target for defense budget authority includes all these appropriations, "defense" authority amounts in the resolution will exceed funding as shown in the annual defense appropriation act.

The budget resolution, however—to further confuse—includes separate figures for outlays and authority. Outlays are the focus of attempts to cut this year's deficit. Authority, the legal right to buy things over time, is the amount appropriated; it matters most to the military. The relationship between outlays and budget authority (BA) is particularly

tenuous in defense because contracts for development and purchase of large weapons systems spend very slowly.

The difference between BA and outlays encourages a game that favors slow-spending forms of defense: Congress and the president can vote for both a "strong defense" and "fiscal responsibility" by spending less for personnel and maintenance, which outlay immediately, while they increase weapons purchases. This game has the added dividend of delighting defense contractors. Unfortunately, buying new equipment without training people to run it is not the best defense policy; budgetary games can have perverse operational consequences.

Some defense budget disputes focused on actual operations. Raises for military personnel, creation of a system of MX nuclear missiles, or a "Rapid Deployment Force" to be used in third world crises—all could be discussed in terms of specific applications. But much of the dispute concerned the symbolism of defense spending totals as indicative of either the nation's will to resist the Soviets or the misplaced emphasis on military rather than social spending. Thus, comparisons were made between American and Soviet defense spending, between present and past American defense spending, and between defense and domestic spending, apart from what the money would actually buy.

The Vietnam war destroyed the policy consensus of the late 1950s and early 1960s, in which the two parties competed to show their dedication to the vision of the United States as deterring communist aggression. Much of the Democratic party came to see Vietnam as a hopeless effort, brutal in execution and brutalizing in effect (a description that fit the dispatches on the nightly news). Citizens protested in the streets, and issues about protest itself and national authority became tangled with controversy over foreign policy. The war was not only a bad idea, many felt, but also expensive, soaking up funds needed for Great Society social programs. Therefore controversy spilled over into budgeting. Ultimately, through ceasing appropriations Congress ended America's vestigial military assistance to South Vietnam.

The Republican right, and some segments of Democrats, insisted that intervention in Vietnam was proper. The lesson, they insisted, was only that we did not try hard enough—for which liberals were to blame.

At least temporarily, Vietnam increased congressional skepticism of both military involvements and expenditures. This antimilitary mood meant that military spending, as a proportion of federal spending or GNP, dropped steadily. Meanwhile, basic expenses increased. A volunteer army, requiring higher pay, replaced the draft. The Army had left much equipment in the jungles of Southeast Asia. Military equipment became steadily more expensive (we will return to this later). Restraint on defense spending meant a real decrease in military capacity. In the

1980s, when sentiment turned around, there was a long list of unmet defense needs.

Part of the change was due to a continuing Soviet military expansion, the size of which was widely disputed. It was not something the USSR was about to divulge, and American estimates heavily depended on the point the analyst wanted to support. But there was no doubt that the Soviets had deployed a new generation of nuclear missiles; these, it was argued, had the power and accuracy necessary to destroy the American Minuteman force. Whether such capability was important, even if true, was a matter of heated contention. But NATO allies' opinions mattered most. A new version of Soviet missiles aimed at Europe left NATO governments particularly nervous about whether Americans were willing to defend them against conventional attack and thus risk nuclear attack on the United States itself.

These (possible) changes in the nuclear balance ironically increased pressure for spending on conventional (nonnuclear, for example, tanks) weapons. No longer might we defend Europe cheaply by threatening to escalate to nuclear weapons; instead a conventional attack might require conventional response. But the Warsaw Pact had more of that stuff than did NATO. Therefore, the Carter administration in May 1978 joined with the other NATO nations in pledging a 3 percent annual increase in real (that is, inflation adjusted) defense spending. The administration also planned deployment within Europe of weapons, the Pershing II and Cruise missiles, that might balance the midrange Soviet missiles aimed at Europe. U.S. defense hawks thought 3 percent pitiably little.

Both the United States and the NATO nations had reasons beyond European defense for worrying about conventional forces; the main reason was oil. Europeans depended far more than Americans on oil supplies from the Persian Gulf. But Americans also—as we had discovered to our surprise during OPEC's 1973 embargo—could suffer from an interruption of Persian Gulf supplies. Fears about the Persian Gulf were, of course, greatly heightened by the 1978 revolution in Iran. Imprisonment of fifty-three hostages in the American embassy in Tehran (October 1979) further dramatized America's inability to intervene. Nobody knew what the United States could do if it had greater force available, but the dominant concern was defending Saudi Arabia against some sort of Iranian invasion. Carter, therefore, proposed creating a Rapid Deployment Force (RDF) of 100,000 men, with the airlift and sealift capability to move them into action quickly anywhere in the world. Although mostly a reorganization, it required more money for equipment and readiness.

Iran, and a preference for conventional over nuclear strategies of deterrence, led many fairly liberal Democrats, personified by Senator

Gary Hart (D-Colo.), to advocate stronger conventional forces. Throughout the 1970s, meanwhile, Republican and Democratic proponents of greater preparedness, including Ronald Reagan, Senator Daniel Patrick Moynihan (D-N.Y.), and Senator Henry Jackson (D-Wash.), and a group of intellectuals calling themselves the Committee on the Present Danger had lobbied for greater attempts to counter Soviet "expansionism." Many of these hawks opposed the SALT II treaty with the Soviet Union; other senators were particularly worried about the details of the treaty. Led by Sam Nunn (D-Ga.), these senators bargained with the administration throughout 1979, insisting they would support SALT II only if concerns about American military strength outside SALT's purview were met. At last that added pressure pushed the administration by October 1979 into committing itself to a buildup greater than the 3 percent agreed with the NATO allies. Thus, when the Soviets moved into Afghanistan, Congress was already moving toward a big defense buildup, most likely emphasizing conventional capabilities. But how much was enough? One approach was looking at totals.

Defense advocates emphasized that between 1960 and 1980 national defense expenditures had shrunk from nearly 50 percent to less than 25 percent of federal spending and from 9.1 percent to 5.3 percent of GNP. The new buildup, they argued, would not come close to restoring even the defense share that existed in the mid-1960s. Therefore, it was really quite modest. Table 1 gives the data.

Percentages are misleading because they depend on the denominator,

the size of the economy. The percentage fell quickly in the early 1960s because the economy grew quickly and the Kennedy administration, despite expansions of both strategic and conventional capability, felt the actual need for defense spending was expanding less quickly than the economy. There is no particular reason an expanding population should require larger armed forces, but domestic spending will inevitably increase absolutely (though not necessarily relatively) with a greater number to be served. Because economic growth was used to finance a large increase in nondefense spending, the defense share of government fell along with its share of the economy.

Argument from proportions was impressive but misleading. Constant-dollar expenditure would have made a better measure of effort. Adjusted for inflation, defense expenditure—the numerator—held fairly steady (in 1960, $72.9 billion in 1972 dollars; and in 1980, $72.7 billion). Expenditures rose during the Vietnam War and fell to a low of $67.1 billion in 1976. But for many reasons—particularly ending the draft and incorporating more advanced technology into weapons—the same amount of dollars bought less defense in 1980 than in 1960. The military budget had been squeezed but not so much as the GNP arguments suggested.

Trying to keep up on weapons, Congress and the military skimped on quick-spending readiness: for example, ammunition for practice, maintenance of existing airplanes, and training of personnel (which, if it involves flying advanced airplanes, can get very expensive). Liberals like Senator Hart and one-time Carter speech-writer James Fallows—not ordinarily supportive of higher military spending—therefore argued that the military neglected readiness in favor of expensive, hightech weapons. The arguments, possibly true, allowed them to merge Vietnam era distrust of the military with a concern for national security. Yet publicity about readiness problems (soon heightened by a failed mission to rescue the hostages) added to the normal demands for new equipment, increasing the claim for more total spending.

There were further pressures for more pay. Jimmy Carter had held all spending down somewhat by giving federal employees—both civilian and military—smaller raises than those won by comparable workers in the private sector. When these elements were added to a comparatively tight private labor market, the military had problems getting and keeping soldiers.^[3]

Senators Nunn and John Warner (R-Va.) sponsored a package of special benefits (in addition to Carter's budget) that garnered heavy support in the Senate. The Joint Chiefs were lobbying hard for a compensation increase. In early March, the commandant of the Marine Corps dramatized this argument by sending all Marines a bulletin advising them of their potential eligibility for food stamps. Neither the military nor its

supporters, however, were willing to give up equipment in return for compensation.

The budget resolution had to give a total for defense; in no way could pressures for more equipment, maintenance, and personnel compensation be accommodated within the total the president had proposed. Republicans would demand more. So would southern Democrats, for the South is far more promilitary than other regions of the country. House Budget Committee Chairman Robert Giaimo (D-Conn.) knew he could get beaten on the floor by a coalition of Republicans and southerners if his resolution had too little for the military. Even if he won, he then would have to secure an agreement with the Senate, which, due to both bias created by equal state representation and happenstance, was substantially more prodefense than the House.

The House Divided

The left wing of the Democratic party wanted to cut defense if the budget were to be balanced. Yet such a plan would go nowhere in the full House, never mind in the Senate. Giaimo therefore chose to write off some portion of the liberals, for example, the Black Caucus, and rely, if necessary, on Republican support to pass the first resolution.^[4] Republicans had never delivered as many as twenty votes for a resolution; it took quite a leap of faith to imagine that, with the Democrats reeling in a presidential election year, the GOP was going to help them pass a budget.^[5] Yet he had no safe alternatives.

Giaimo first worked to get as much agreement as possible among the rest of the Democrats. Two days of private caucusing by HBC Democrats yielded some agreement.^[6] On March 20 HBC approved, in principle, a package of $16.4 billion in cuts (as adjusted for new estimates of inflation) from Carter's January spending levels. They were not about to cut big entitlements like social security. The major areas available for cuts were therefore the federal bureaucracy itself—its pay, benefits, and staffing—and aid to state and local governments^[7] (which, after all, were running surpluses).

The cutbacks included the state share of General Revenue Sharing, a proposed antirecession package for local governments, half a billion dollars from the CETA program (which unofficially funded local governments), a billion from a 2 percent reduction in agency operation and administrative costs, and another billion from federal civilian and military retirement benefits. Cutting the Postal Service subsidy would save $836 million.

In order to keep some liberal support, Giaimo shaved defense slightly. He positioned himself as resisting spending of any type, a stance that

might elicit support from budget balancers. Democratic votes were used to beat attempts to raise defense. Giaimo maneuvered enough votes among Democrats to join with Republicans and beat an amendment, sponsored by David Obey and endorsed by Carter, to raise revenue sharing for local governments by $500 million. Giaimo's plan also allowed a $10 billion business tax cut—on the condition that the budget still be balanced.

Giaimo's tactics worked within the committee. He recognized that "it isn't the kind of budget that liberals and city people can vote for."^[8] Ranking HBC Republican Delbert Latta (Ohio), however, proclaimed, "You ended up in the same place where we wanted to end up—and that's with a balanced budget and a tax cut."^[9] As a result, in final committee vote on March 26, the budget survived the defection of six committee liberals, passing 18 to 6.^[10]

Committee passage did not say much about the House floor. All sorts of factions wanted changes. At the end of March the administration finally released its budget. Carter's plan looked much like Giaimo's, with two conspicuous exceptions: the $500 million in aid to cities and funding for Saturday mail delivery. The differences foreshadowed a liberal challenge. Republicans meanwhile worked on their own substitute. Giaimo's plan might be acceptable, but they would try to do better.

The House leadership wanted to pass a meaningful budget that united Democrats. Reacting to extended brawls in previous years, the majority leadership brought the budget resolution to the floor in early May under a complex rule that allowed eight amendments (and several amendments to those amendments) ranging from a Black Caucus substitute that would raise social spending by $5.3 billion to a Republican plan that would cut spending by another $15 billion, allowing a larger tax cut. The GOP plan, developed by the Republican House leadership, foreshadowed future Reagan/Stockman cuts. It

Tightened eligibility requirements for entitlement programs, especially in the nutrition area, for savings of $7.9 billion.

Consolidated categorical into block grant programs for health, education and social services, accompanied by cuts of $7.1 billion in the program totals.

Repealed antirecession aid to cities and public service jobs programs, while creating new rules for revenue sharing that would effect a further cut in categorical grants. These proposals totaled $8.8 billion.

Cut a variety of government domestic activities, for example, the third class mail subsidies and regional development, totaling $6.5 billion.

Froze federal hiring and cut budgets of federal regulatory agencies, for savings of $5.4 billion.^[11]

The differences between Republican and Democratic proposals in 1980 resembled those in 1981. Neither party wished to take on the giant universal entitlements of social security and medicare. Both parties were willing to cut intergovernmental assistance. But Democrats wanted to maintain national control of policy, allowing for later program increases; Republicans wanted to reduce programs and federal control permanently by consolidating categorical grants into block grants, which give recipient states more choice about using the money. Some Democrats were willing to cut poverty programs by reducing program eligibility, on the grounds that the pain of cuts could be limited by better targeting benefits for the needy. Other Democrats, however, worried more about missing somebody who needed benefits, and they were reluctant to go as far as the Republicans along these lines. Both parties viewed the federal employee payroll as a relatively painless place to find cuts. Republicans, however, saw these cuts as an opportunity to reduce the activity of federal regulatory agencies.

Democrats saw budget cutting as something they were forced to do by the needs of economic management; they could clean out a few rather moldy programs. But, for Republicans, the deficit fight was an opportunity to redirect the course of American government. They would use greater social spending cuts to finance greater defense spending, as well as tax cuts; Democrats understandably were unenthusiastic about these objectives.

Giaimo won the first round of the struggle. He beat off a $5.1 billion shift from domestic spending, sponsored by Marjorie Holt (R-Md.) and Phil Gramm (D-Tex.), by telling conservative Democrats that defense was sure to go up after conference with the Senate.^[12] He also beat a proposal by David Obey, who was supported by the president and Speaker, for a $1.2 billion increase in social spending. Most Democrats followed Obey, but Giaimo had all but 36 (urban) Republicans, many southern Democrats, and a group of budget-balancing moderates, enough to win by twelve votes. On May 7 Giaimo's plan passed, 225 to 193.^[13] Unfortunately for Giaimo, the Senate had a different plan.^[14]

The Senate United Means the Congress Divided

Following requests by the Armed Services Committee and Joint Chiefs of Staff, Republicans and conservative Democrats led by Senator Ernest "Fritz" Hollings raised Muskie's defense outlay target by $7.5 billion. To make room for this increase, they had to cut other spending. After a week of tough bargaining, SBC emerged on April 3 with a package significantly higher than HBC's on defense, lower on domestic spending, and equal on revenues. Foreshadowing its choices in 1981, the Senate committee protected veterans, agriculture, and defense programs. It

thus showed its natural bias, compared to the House, for the interests of smaller southern and western states and against the industrial Northeast and Midwest.^[15]

Agreement between House, Senate, and president became less likely when, on April 28, Secretary of State Cyrus Vance resigned in protest of the April 25 aborted attempt to rescue the hostages in Iran. Needing support in Congress, Carter convinced Senator Muskie to replace Vance. Muskie's departure made Hollings, leader of the Democratic hawks, the new chairman of Senate Budget.

The Senate's plan, passed 68 to 28 on May 12, promised a balanced budget.^[16] Barely. The next step was the House-Senate conference on the resolution.

Giaimo was willing to come up some on defense, but Hollings would hardly come down at all. Late on May 21, Giaimo agreed to $5.8 billion more in defense outlays and $10.5 billion more in budget authority than the House had allotted. He thereby lost support not only from Obey but also from a group of moderate Democratic budgeters (Representatives Timothy Wirth of Colorado, Leon Panetta and Norm Mineta of California, Richard Gephardt of Missouri, and William Brodhead of Michigan) who had supported him to that point. They joined Carter and O'Neill in urging the party to reject the agreement. Republicans could not resist the urge to torpedo a Democratic resolution. On May 29 the conference agreement was overwhelmingly defeated. Ignoring the arguments of Majority Leader Wright (and the Washington Post that the size of social program cuts had been overstated, most Democrats also voted nay, 146 to 97.

The budget resolution "was defeated last year," said Obey, "and there was no great harm done. The Senate simply learned it had to listen more closely."^[17] But this time the message was immediately scrambled. On a motion by Delbert Latta, the House followed its rejection of the agreement by instructing the conferees to accept the resolution's high defense figure. In his thinking, Giaimo had been right that the House wanted more defense, but wrong that a majority would support more defense and a budget resolution. Flummoxed, he called the combination of votes "ridiculous." "When you vote down one resolution because it's too high on defense and turn around and instruct the conferees to accept the Senate defense numbers, it's questionable," he understated. "Now I've got two mandates."^[18] It was May 29, and the first resolution had been due May 15.

Back to work went the conferees. If it had been a normal year, they could have added some more social spending, increased the deficit slightly, and made a deal. That was what they had done in 1979, changing the social/defense balance at the expense of the deficit. In 1980, however, the conferees could not "budget by addition" because they were supposed

to be "budgeting by subtraction" in order to balance the budget. The fact, obvious to all by early June, that they were not going to balance the budget anyway, did not make things better.

The participants had begun to discover they cared for other things besides the deficit. Yet they could not—partly believing in balance, partly believing in the value of public belief in balance—give up that idea. Instead, they added deficit and balance together, arguing that following their policy preferences would balance the budget. How could two "rights" make a "wrong"?

A Procedural Revolution

Though the House and Senate could not agree on the contents of the budget, they had agreed on a potentially much more significant matter: a procedure to enforce the first resolution's targets. The procedure was reconciling the first resolution; in 1981 it would provide the means by which Ronald Reagan would win his spending cuts.

The leadership of both houses concurred that the spending cuts and tax hikes in the resolution had to be enforced. Even Speaker O'Neill, no fan of budget cuts, was convinced to accept new procedures so as to make the budget resolution stick. Now, if you can't agree on what you want to do, making agreements binding does seem premature. But, as they argued endlessly over defense spending, legislators might find some cuts on which they could agree. Majorities certainly favored reducing the deficit while making budget resolutions that would bear some relation to government's fiscal policy.

Under the Budget Act, reconciliation—a strange name for a very conflictual process—was supposed to occur on the second, binding, resolution. If the law existing at the time of the Second Resolution did not jibe with that resolution's targets, Congress could instruct committees to report out legislation to reconcile spending and revenue law to the targets. Although the committees would decide on the details of their savings, reconciliation clearly infringed on their formal authority (a committee's choice of whether to act at all is the heart of its power) and informal relationships (if the budget process could force changes in agriculture policy, then interest groups had to cultivate the budgeters). The committees had a legitimate complaint; ten days was far too short a time for drafting legislation.

During debate on the FY80 Second Resolution in 1979, the Senate could see that supplemental appropriations to cover the annual federal pay raise and costs of "appropriated entitlements," such as food stamps and the Commodity Credit Corporation, would force spending over the totals. Therefore, the SBC draft resolution instructed seven different

committees to cut projected spending by more than $4 billion. The two biggest targets, Appropriations and Finance committees, resisted. In a caucus, Senate Democrats negotiated a compromise, scaled-down reconciliation plan, but House Democrats, in their own caucus, rejected reconciliation.

In conference on the second resolution, HBC Chairman Giaimo led the fight against reconciliation, arguing that he couldn't "take on seven committees in the House" over it. In a separate vote on the conference agreement, reconciliation was beaten 205 to 190. Giaimo had argued that it was too late to make reconciliation work. Committees should be given a chance to comply voluntarily, but they did not.

Preparing for the FY81 budget battles, some Senate staffers had a brainstorm: Why not try reconciliation during the First Resolution? That would solve the scheduling problem, a big advantage for the budget committees, whose staffers, of course, wanted their own process to control subsequent action. By reconciling on the First Resolution, the budget committee might get at entitlements directly. In fact, as Allen Schick notes, that would shift the focus from legislation enacted during the current session (mostly appropriations) to that taken in previous years—thus plugging a big hole in the Budget Act.^[19]

Reconciling to the First Resolution implicitly meant turning the resolution's figures from provisional targets into binding totals, thus changing the whole nature of the budget process. Although reconciling wasn't part of the Budget Act, the omission was resolved by referring to the act's "elastic clause," allowing a resolution to add to the act's enforcement mechanisms "any other procedure which is considered appropriate to carry out the purposes of this Act."^[20] Where members of Congress so eager to show that they could cope with the deficit, the real issue, that they would willingly abandon old ways of doing business?

In general, leaders of authorizing, subject matter committees had the most to lose. And Republicans (who usually lost in authorizing committees anyway) had most to gain because reconciliation would force Republican spending-reduction proposals onto the committee agendas. Thus, in 1979 House Minority Leader John Rhodes (R-Ariz.) said that he considered "reconciliation so important" that he "would be willing to vote for this budget, even though the spending figures are way out of line."^[21]

Most important, however, was the attitude of the Democratic leadership in the House. Normally attentive to committee chairmen, Speaker O'Neill had to worry also about his party's image. When Giaimo and other budget balancers like Jim Jones demanded that he support reconciliation, O'Neill agreed. A powerful group of sixteen committee and subcommittee chairmen, led by Morris Udall (D-Ariz.) of Interior, protested

reconciliation in a "dear colleague" letter. Significantly missing from the list were Chairman of Ways and Means Al Ullman (D-Oreg.), Chairman Richard Bolling (D-Mo.) of Rules, and Thomas Foley (D-Wash.) of Agriculture. Bolling, a close confidante of Speaker O'Neill, might have been able to swing him against reconciliation. Yet Bolling was a reformer who believed, as did the Speaker, that budgets should be party documents. He thought it was a close call, making the legislative process messier than ever, but decided it would be an observable instance of majority choice. With Bolling and Ullman, House Budget's first chairman, supporting reconciliation, Speaker O'Neill gave the complaining chairmen no help, and they prepared for a floor fight.

Both House and Senate budget committees included in their draft resolutions reconciliation instructions to authorizing committees requiring about $9 billion in spending cuts. There was little debate in the Senate about this new reform. Debate in the House on the budget resolution included a watershed vote on the Udall amendment to remove reconciliation instructions. Chairman Udall lost badly, 127 to 289. The institutional significance of the vote and the attitudes revealed in debate justify more discussion than the lopsided margin suggests. Many events in the Reagan years were foreshadowed by arguments made there.

Conservative Republican Delbert Latta provided the basic rationale for reconciliation:

When we are presenting a budget to the American people supposedly in balance, and there is about $9 billion worth of revisions which must be made in present law in order to obtain that balanced budget, can we truthfully say that we have passed a budget resolution which is in balance, without providing the mechanism, namely reconciliation, to bring about those $9 billion in savings? You know the answer as well as I do. You cannot do it with a straight face.^[22]

Representatives Udall and Neal Smith (D-Iowa) provided the most fundamental objection: in making reconciliation instructions, the Budget Committee was in the business of deciding which programs could best be cut, without possessing the substantive knowledge of the authorizing and appropriations committees.

Liberal John Seiberling (D-Ohio) stated one dilemma: "If we do not have reconciliation in the first budget resolution … we have gone through a charade…. On the other hand, … the committee on the budget cannot possibly develop the knowledge and expertise to substitute for the authorizing committees and the appropriations subcommittees."^[23]

Chairman Giaimo continually emphasized that "you, the Members of this great House of Representatives"—not the Budget Committee—

would be the ones to impose any instructions on the committees.^[24] In other words, Budget was not grabbing power. He was right in that members could vote for different instructions if they wished. If Budget drafted instructions, however, it inevitably decided on substance; otherwise, how could it decide to which committees the cuts should be assigned?

The choice was really what kind of error to make: bad decisions on programs or an unacceptable total. Jim Jones called reconciliation "the litmus test" of how much the House cared about budget balance.^[25] The budget totals, Richard Ottinger (D-N.Y.) argued, were nonsense.

The entire assumptions on which this budget was formed have evaporated…. [Yet] the Budget Committee says … the only important thing before the Congress … is to see to it that those ceilings are maintained…. Why bother? People who cannot afford an adequate diet should not have adequate diets. But we have got to keep that budget ceiling.^[26]

The strongest statement of the traditional liberal's distrust of spending constraints was made by Representative James C. Corman (D-Calif.), chairman of the Subcommittee on Public Assistance and Unemployment Compensation of the Committee on Ways and Means. He raised a basic question: How would budget constraint change the conduct of politics?

The draft reconciliation instructions assumed that Ways and Means would find $4.2 billion in revenues or spending savings, mainly by extending income tax withholding to interest income. Administrations and the Treasury had wanted that change for years; Corman had no quarrel with the idea. But, he argued, everybody knew that, politically, withholding was a nonstarter. Ways and Means would never do it. (He was right and wrong simultaneously, as we shall see!) Ways and Means certainly would not cut social security, Corman continued. Because the committee had to get the money somewhere, it would come from the weakest group, the constituents of Corman's subcommittee: "It will come from a very narrow base of people, the poorest of us, and they will be seriously affected. That is my problem."^[27]

Having served in the House for twenty years, Jim Corman knew how hard it was to win liberal victories. He saw a politics of interests against interests; if times were tough, then the weakest would be shouldered aside in the scramble for what was left. How, indeed, could it be otherwise? His younger Democratic colleagues, however, were far more confident. In reply to Corman, they argued in terms that will look familiar when we meet a man who was otherwise their nemesis: David Stockman.

Richard Gephardt, a member of the Ways and Means Committee. argued that if withholding were impossible there were other choices:

cuts previously staved off by powerful special interests would, when the issue was clear, suddenly become possible:

Do we want to cut off orphan children, do we want to hurt people who really have need or do we want to pass higher user fees on people who have private aircraft?… I would like to have that debate go on in the House…. We can bring these things out of our committee and pass them on the floor if people see that as the stark choice they have to make.^[28]

Echoing Gephardt, Tim Wirth mentioned aviation and tobacco tax breaks. In short, if an open argument about justice, not clandestine politics, was at issue, then the good guys would win.

These mostly younger members saw reconciliation as a matter of procedural honesty; they believed it would favor their side because they were right. George Miller of California, a very liberal member of the Watergate class of legislators, declared that he would support reconciliation because for years Republicans had voted for more defense spending, then castigated Democrats as spenders, while themselves voting against budget resolutions. With reconciliation making the budget meaningful,

Nobody again will be able to run off with the entire store…. Those people who are interested in the defense of this country and interested in it in the sense of any contract that will go to their district must be good, will no longer be able to create a deficit at my expense, and no longer will many of us have to pay for their sins.

He described reconciliation as a way to prevent a "deficit that is there for no other purpose than to protect the special interests in this country, many of whom tell you at the end of the letter, 'By the way, I believe in a balanced budget.'"^[29]

Seiberling added, "We are never going to reassert priorities, we are never going to get tax reform, we are never going to get that kind of liberal democratic program that I think this Congress is, to some extent, deserting" without reconciliation! Only a process that forced the hard choice would force the right choice.^[30]

Thus, a faction of liberals—frustrated by years of being blamed for deficits, convinced enough of Keynesian theory to believe deficits had something (if not a lot) to do with inflation, and dedicated to government as a way to redress economic injustices—saw a tough budget process as a means toward better policy. Gephardt, Wirth, Miller, and Seiberling were arguing that, as David Stockman would put it later, in a budget crunch "weak claims," not "weak clients," would lose.

Probably most supporters of reconciliation saw it mainly as a way to reduce the deficit. Certainly that was most Republicans' stated reason. Liberal support for reconciliation nevertheless was crucial: it kept the

Udall vote from being close, and it divided Democrats. Consequently, the principle of reconciliation was established in a nonpartisan manner, making it a stronger precedent in 1981.

The liberal political theory for reconciliation turned out to have some holes. Corman was at least as right as Miller, for the notion that the right side can be determined by clearly posing choices is questionable. Even some conservative calculations may have been a bit off: reconciliation would become the vehicle for a series of tax hikes after 1981. Some authorizing committees would find that reconciliation had advantages; a lot can be tucked away in a large package. Whatever its consequences, reconciliation was established when the Udall amendment lost on May 7, 1980.

More Economic Pressures

A major procedural change, reconciliation would not have seemed necessary without the drive to balance the budget. Nor would the politics of budget priorities have been so serious. Thus, Majority Leader Jim Wright and Giaimo both argued that Congress had to reconcile to show its seriousness about inflation.^[31]

Events in the economy during spring 1980 made budget balance less likely, yet they increased both the sense of panic and the desire to calm the markets, feelings that fed the pressure to balance the budget. The March 15 economic package had failed to reduce interest rates—far from it. By early April the prime rate had risen almost five points, to a record 20 percent. Newsweek reported:

There had never been anything like it in modern American history, and even veteran moneymen stood in awe. "It's just unbelievable that this is happening to us," exclaimed a governor of the Federal Reserve Board last week, after he heard that the nation's commercial banks had raised the prime lending rate to their best corporate customers to an astronomical 20 percent. "We are in a South American inflationary environment now, and I'm surprised the banks haven't started quoting their interest on a monthly basis as they do there."^[32]

Bankers and moneymen devoutly prayed for a recession but still believed that Carter did not. Time, in late March, quoted "one Zurich banker last week in a rueful sentiment that was almost universally shared among business leaders and economists everywhere: 'I'm afraid that at the first sign of a sharp recession, there will be a change in course.'"^[33] They were wrong. The recession was well under way, and the administration was staying on course.

Interest rates headed up because the Fed's moves were pushing them

higher. Housing starts had already slowed drastically, even before the March 15 credit control actions. Secretary of the Treasury William Miller told a delegation of housing lobbyists that they could expect no help. Two hundred thousand autoworkers were already on layoff, yet the administration took no action to help that gasping industry whose union is one of the most powerful forces of American liberalism.^[34] In April unemployment jumped to 7 percent.^[35]

Economic activity dropped more sharply than at any time since the depression. In May, the recession began to have some of its intended effects; interest rates fell, and bond prices rose. Yet short-term rates were extremely volatile, falling too quickly for comfort, while rates on long-term bonds fell by only a couple of percentage points, suggesting investors were skeptical that inflation would disappear. As OMB's chief economist said, "We have been forecasting a recession's development since last July, and it's rather nice to be finally getting it. A mild recession is unavoidable if we're to do anything with inflation."^[36] But it was not clear that this was the "nice," "mild" recession they had been looking for.^[37]

From the left, Senator Kennedy called for wage-price controls, combined with jobs spending. From the right, Republicans increased their calls for tax cuts. Carter's image as a waverer caused his aides to favor steadfastness for its own sake. Noting the high interest rates on long-term bonds, administration economists feared granting the markets further excuses to believe that inflation would accelerate. Its judgments of both politics and policy led the administration to stick to belt-tightening.

Due to lower tax revenues and higher entitlement benefits caused by the recession, the budget could not be balanced. As early as May 5, congressional budget experts knew there would be a deficit.^[38] Yet, like the Holy Grail, the mythical balance was still pursued. Comments from politicians and media suggested the point was in the quest itself. The Washington Post editorialized that a balanced budget as such was less important than the government display of restraint it symbolized.^[39] Senator Byrd acknowledged on May 3 that economic changes might make balance impossible, cautioning that "the worst thing we can do is jump ship too soon."^[40] "As long as inflation remains so high," the Wall Street Journal quoted a treasury official on May 2, "the financial markets will be watching our moves very carefully. Right now there is very little anyone can do to break out of the balanced budget mode."^[41] Promise had become more important than performance.

Economic policy attempted to manipulate the financial markets through symbolic action that everyone could see through, but it didn't work any better with the voters than with the markets. By late March the political advantages Carter had gained from the Iranian hostage crisis

were wearing off. The public became impatient with the president's failure to bring the hostages home. In the polls Carter's lead over Reagan dropped sharply. More voters expected the economic package to increase rather than to decrease inflation, and by large margins they expected the package to increase unemployment.^[42] Carter's show of resolve was losing the Democratic party's advantage on the unemployment issue, without winning compensating gains on inflation.

Ted Kennedy's weaknesses allowed Carter to move toward clinching renomination, but the blue-collar base of the Democratic party was considering defecting to Reagan. According to Gallup, members of labor union families were more skeptical than their fellow citizens about Carter's economic policies. In six major primary states, nearly half the voters in hourly paid jobs had voted for Reagan in Republican primaries. In Wisconsin, for the first time since Eisenhower had been a candidate, the Republican primary drew far more voters than did the Democratic contest. In West Allis, Wisconsin, a housewife and long-time Democrat expressed the sentiments that haunted Democratic officeholders in their fitful sleep: "Inflation is eating us up, welfare is a mess, we don't have any power in this country—why shouldn't we switch? Kennedy has a moral problem and Carter can't decide anything. Reagan would return us to this country's true meaning."^[43]

June 1980 brought even worse economic news. In April the Commerce Department's leading indicators had fallen 4.8 percent—the largest drop in the thirty-two years that the index had been calculated. The Labor Department in May announced that unemployment had soared to 7.8 percent.^[44]Time summarized the consequences neatly: "Business tumbles, the political fallout hits, and tax cut talk begins.^[45] Because desire for a balanced budget did not fade, budgeting became even more difficult.^[46]

After all the publicity about balancing the budget to fight inflation, politicians feared both the public and "the markets" might panic if they admitted defeat. "The problem," Leon Panetta (D-Calif.) explained in mid-June, "is that we're in a kind of transition where we're still hurting from inflation while we're beginning to hurt from a recession. We can't afford to bounce either way until we see what's going to happen."^[47]

However we characterize their psychology, many Democrats were more scared to change course again than to stick to the present path. Republicans, not (yet) responsible for blazing the trail, gleefully criticized the guides.

But merely watching while people lost their jobs made them all uncomfortable. Congressional Democrats and Republicans therefore joined to inter Carter's barely breathing oil-import fee. Then a president's veto was overturned by a Congress of his own party for the first

time since Harry Truman held office.^[48] In an era of rampant inflation, Congress was reluctant to add another price increase. At a time of increasing unemployment, Democrats refused to increase the burdens of poorer people while, as they saw it, oil company profits swelled. Neither budget balance nor energy concerns could convince Congress to impose immediate pain in a way that would affect almost everybody.

Traditional liberals, represented by Senator Kennedy, thought the recession justified turning from deficit worries to antirecessionary public jobs spending. The limits of their appeal were shown by a victory: at the Democratic National Convention in August, delegates endorsed Kennedy's $12-billion package of "job-creating" spending. Kennedy won because Democratic convention delegates are more liberal than members of Congress^[49] and because only Democrats go to their convention. Rosalynn Carter identified the problem: "I don't know how [Congress] will vote $12 billion, when we tried so hard to get $2 billion for new employment, and both houses of Congress went home without doing it."^[50]

Activists, oriented toward winning benefits for their deserving groups, did not have to deal with the conflicting pressures that caused many Democratic politicians to doubt the value of further spending. They were less influenced by the growing literature of policy criticism created by social scientists and more influenced by their responsibility for managing the economy; Democratic reaction caused politicians like Budget Committee Chairman Muskie to question their faith.^[51]

Liberals were at a huge disadvantage because in the late 1970s the undesirability of direct government spending to create jobs had become conventional wisdom, stated as fact, not opinion. Like other major media, Time reported:

It would be costly and dangerous for the Government to become an uncle with a job for everyone. Says one Administration economist: "We calculate that to employ a single person in a public-works job, such as building a school, a road, or a bridge, costs about $69,320 per year in taxpayer money."

Moreover, such programs are almost always started too late to have any immediate impact on unemployment…. The major impact of the federal spending is to feed inflation later.^[52]

Kennedy may have spoken for the heart and soul of the party; but his view of that heart and soul seemed outdated.

Within Congress, tax cuts were far more fashionable than jobs spending. Republicans liked virtually any kind of tax cut while Democrats were attracted to "productivity-enhancing" plans such as the Bentsen and Jones-Conable schemes. Even the left had conceded the need for greater productivity, believing that the social goals of the welfare state could not

be financed without it. Liberal Democrats did not reject capitalism, but they did not entirely trust capitalists. Instead, they endorsed government intervention, as a New Republic article emphasized, to "save capitalism from its friends." Liberal intellectuals, such as economist Lester Thurow and the New Republic's editors, had their own menus of tax changes, designed to encourage business to invest in ways that increased jobs.

In spite of all the tax-cutting arguments, however, the Democrats remained hesitant, for the two parties also disagreed on the kind of tax cuts desired. Factions in both parties wanted incentives for business investment: liberals wanted cuts at the low end of the income tax so the scheduled 1981 social security tax increase would not make the overall tax system more regressive, but Ronald Reagan and the supply-siders favored sweeping personal tax cuts that would give more back to those who already paid most.

President Carter's aides knew that the Midyear Budget Review, due in July, would show the economy in a parlous state. They began drafting a tax-cut plan.

Back in budget land, nobody was willing to be the first to admit that the FY81 budget would not balance. Urgent 1980 supplementals awaited passage of the FY80 third resolution, which was attached to the FY81 first.

From Bad to Worse

Delay in passing the FY81 First Resolution meant that a third resolution, revising targets for FY80 because the economic projections had been far off, was also delayed. That in turn delayed $16.9 billion in urgent supplemental appropriations for programs such as food stamps and medicaid. As the Senate and House negotiators battled over defense and domestic budget authority figures (outlays had been set by Latta's motion to instruct), each side was holding the supplemental appropriations hostage. Neither would give in. Finally on June 11, a day after a smashing victory in his primary campaign, Hollings agreed to transfer $800 million from defense to domestic budget authority. He also accepted a $300-million increase in transportation and low-income energy assistance at the expense of the mythical budget surplus.

Giaimo's vision of a bipartisan budget disappeared as the budget became clearly partisan. The House leadership backed the compromise in the strongest terms. O'Neill, Wright, and Brademas (D-Ind.) wrote to their colleagues:

Today you will be asked to decide the future of the Congressional budget process and at the same time to resolve a fiscal crisis of dramatic proportions….

At stake is the ability of the Democratic party to govern the House. The danger crosses philosophical lines. Failure to adopt the first resolution would demonstrate clearly that the Democratic Congress cannot deal with the budget. It would discredit the party and the Congress…. This may be the most important vote you will cast both as a member of the 96th Congress and as a Democrat.^[53]

On June 12 the House finally passed the first resolution (Democrats 195 to 55, Republicans 10 to 140); the Senate followed.

Because few analysts believed the resolution's economic projections, both legislators and commentators widely remarked that it was a dead letter. But that was true only if one cared for nothing beyond budget balance. The budget resolution indicated a change in government's priorities, from domestic to defense spending. In that sense, June 12, 1980, foretold the Reagan revolution.

On Wednesday, June 25, Senate Republicans tried for another installment. They announced agreement with Ronald Reagan to support a 10 percent across-the-board tax cut and faster depreciation write-offs, effective January 1, 1981. They would offer the package as an amendment to all pending finance legislation, beginning with the next day's debate on raising the debt ceiling. The 10 percent individual cut could be viewed as either the first year of the Kemp-Roth plan (for three consecutive such reductions) or as reasonable compensation for recent bracket creep. It therefore united supply-siders with the more neoclassically oriented Republicans. "All agreed to take the first year of the Kemp-Roth bill," Senator Robert Dole (R-Kan.) explained, "but we carefully didn't call it that because we were looking for broad support."^[54]

Reagan's maneuver was designed by business lobbyist extraordinaire Charls Walker, who had helped design the Jones-Conable and the 1978 Jones-Steiger depreciation changes. Because the Republicans were united, Majority Leader Robert Byrd feared the proposal might pass. In an about-face that shocked both Carter and the House leadership, Byrd called a caucus meeting for June 26, at which Senate Democrats formally asked the Finance Committee to draft tax-cut legislation by September 3. Senator Bentsen was made head of a twenty-one-member task force to hammer out recommendations.^[55]

Byrd's maneuver allowed Democrats to justify voting against the Republican plan. They could say that they wanted a better tax cut rather than no reduction. Reagan reacted with mockery:

Yesterday I urged the Congress to enact an immediate tax cut … to come to grips with the country's desperate economic decline. Today the Democrats in the Senate answered. Their pitiful response: "We need a study, a task force." What are they waiting for? And where have they been all these

months? What do the Democratic leaders expect to learn … that millions of American families don't already know?^[56]

Explaining the Senate's quick move, Richard Bolling said it proved "how desperately upset the Democrats are. This looks like one of those elections when the Democrats are terrified and the Republicans sense the kill.^[57]

As the recession grew, major Democratic economists joined the tax cut chorus. Otto Eckstein said that "it would be the extreme of irresponsibility and the worst economic policy since the 1930s Depression to let taxes increase at the rate planned."^[58] Walter Heller argued for a $30-billion cut, proclaiming that "that $30 billion isn't going to begin to be inflationary."^[59] These Keynesians had begun to regain their bearings. Yet other opinion leaders went on opposing tax cuts. The Washington Post called them "a subject for next year…. Most people would welcome lower taxes, but for a great many Americans this summer a drop in interest rates is far more urgent."^[60] Bankers, including New York Federal Reserve President Anthony Solomon, agreed. "Good politics," Time "commented of Reagan's plan, "does not necessarily make good economics."^[61]

At a June 28 meeting of his economic team, Carter reaffirmed his hard line against tax cuts. He reports in his diary that "lenders of the key financial institutions on Wall Street … had liked the budget and had not recommended any income tax reductions for 1980. They had expressed a preference for a moderate tax cut in 1981 of $20 or $30 billion at most—provided our anti-inflation program continued to work."^[62] He wanted to maintain "public confidence in our commitment to maintain discipline and fiscal restraint."^[63] When their Midyear Economic Review came out, it predicted 9 percent unemployment by the end of 1980. Yet Carter rejected his own economists' proposals for a $25-billion tax cut in 1980.^[64]

Speaker Tip O'Neill heard no "hue and cry for a tax cut" in the House. He and Giaimo opposed any action before the election; Congress would Christmas-tree the bill (cover it with a variety of benefits), and members probably could not resolve disagreements among House, Senate, and administration in the short time remaining before recess anyway. In spite of their skepticism, Senate Finance Committee Chairman Russell Long (D-La.) (who had his own doubts) accepted his caucus's instruction to report out a cut. The Democrats were not only terrified but divided.^[65]

Through a combination of bad luck and bad timing, the president and his colleagues were heading for an election with disaster looming on all economic fronts: unemployment, inflation, and the budget deficit. "That's not a very inviting picture they paint for us," commented Representative Jones. He felt his constituents would willingly forego a tax

cut in order to balance the budget. Now they would have neither. "This," he said, "is the worst of all worlds."^[66]

Voters generally agreed with Jones. Carter's approval rating in the polls had turned mildly negative by early March, then drifted lower, and in mid-July bottomed out at 21 percent—even lower than Richard Nixon's in the darkest days of Watergate. The following list shows the demise of Carter in opinion polls.

By early August, 52 percent of Democrats wanted the party to select somebody other than Carter at its convention. "Never before," said Gallup, "in the almost fifty years of Gallup polls has an incumbent president entered a convention with less grassroots support from his own party."^[67] Democratic officeholders, unhappy about campaigning with Carter around their necks, began an "Anybody but Carter" movement. Out of sixty marginal House districts, Carter, who had carried twenty-two of them in 1976, was leading the polls in only four in 1980. The difficulty, said David Obey, was that "we'd be in as bad shape or worse shape" with Kennedy at the head of the ticket.^[68] In Gallup's polls Kennedy was even less popular than Carter, and Reagan had big leads over Muskie and Mondale. There was nobody but Carter, and Carter looked like a loser.

The Election, the Economy, and a Fragmented Budget

The Democrats still controlled the government, so they still had to govern. Budget deadlines required that they unite to pass the reconciliation and appropriations bills. Having disposed of the First Resolution, they still had to deal with the Second Resolution. Because the second set required binding targets, they would have to admit they would fail to balance the budget, cut spending further, ignore the resolution, lie, or all of the above. In the meantime, the economy would continue to gyrate so wildly as to confuse everyone about what good policy might be.

Carter had to find an economic plank on which to campaign. Because he did not wish to change his policy, he repackaged it as an emphasis on the "future"—including future tax cuts. One aide described Carter's strategy as "the past is behind us—may it rest in peace."^[69] His tax plan

emphasized business tax cuts (55 percent), and personal cuts took the form of a social security tax offset. Some observers remarked on the irony of Republicans emphasizing personal and Democrats emphasizing business tax cuts, but the Wall Street Journal correctly argued that the "basic concept" for Democrats remained "that the government must play the central role in managing economic change."^[70]

Carter tried to exploit fears of the Republican platform's "Kemp-Roth" tax cut, which called for 10 percent cuts in income tax rates over three successive years. Kemp-Roth seemed to many a dangerous experiment that risked inflationary budget deficits. The Reagan campaign tried to blunt fears of such deficits by issuing projections that showed budget balance largely by assuming that inflation continued.^[71] (If that sounds strange, you're right. It was strange but important; see Chapter 4). Skepticism remained.

Senate Democrats were torn between the commonsense notion that voters were hurting and would like a tax cut and the contrasting considerations: it would help nobody to get into a fight with their own president; the public was worried about deficits; House leaders would side with Carter; and the Senate's budget-balancers, led by Hollings, still opposed a tax cut. At a meeting of the party caucus, Byrd reversed course again, siding with Hollings and the president rather than fighting Carter just before the election. The party decided to have no votes on either tax cuts or a second budget resolution until after the election. The House had already decided not to admit the unbalanced budget until then.

Senator Moynihan swore that his party had just blown five or six Senate seats; and Senator Long never forgave Byrd for preventing the vote for a tax cut.^[72] Yet the opponents of tax cuts could argue that they were being responsible, for the economy seemed to have zigged again.^[73] The leading indicators began to rise sharply in June, as did retail sales.^[74] Arguments could be made (and were) for any economic prediction.^[75]

But economists, as Alfred Malabre of the Wall Street Journal reported on October 1, could not even say if the recession was over. "Some say yes. Some say no. And some, a cheerful few indeed, say there hasn't been a recession at all this year." And the politicians were supposed to know what the economy would do next.

Having contracted at an annual rate of 10 percent in the second quarter of 1980, the economy, we can see now, turned around and expanded at a rate of 2.4 percent in the third quarter. Although no one can say for sure what happened, the most plausible story centers on the Federal Reserve's monetary policy.

The economy collapsed so suddenly at the end of March that all but the most hardened inflation-fighters at the Fed were concerned. They had been trying to slow the growth of the money supply in order to (a)

seem to be following monetarist prescriptions to control inflation, thereby making monetarists in the markets happy; and (b) raise interest rates enough to provoke recession. Interest rates had gone through the roof, then the money supply had begun to shrink. It shrank by 4 percent in six weeks. Maybe people were paying off debts or maybe they were putting their money in long-term accounts. But whatever they were doing, money was disappearing from the checking accounts where it serves as the medium of exchange.

"The Federal Reserve," William Greider writes, "had not intended anything like this."^[76] The question was, was it a blip or real? If the Fed ignored the monetary numbers, saying they were a blip, it would (a) lose the support of monetarists; (b) lose the political cover Volcker gained by claiming to be monetarist, which had allowed him to drive up interest rates while disclaiming that as his goal; and (c) risk what Board Governor Charles Partee called "the Big Mistake."^[77] If the numbers were real, ignoring them could mean a depression.

Unwilling to take all those risks, Volcker convinced his divided colleagues to step on the monetary accelerator. The aggregates responded sluggishly. Within ten weeks after the Fed put the pedal to the floor, the short-term price of money was cut roughly in half. For good measure the Fed, with Carter's approval, dismantled its consumer credit controls, which no longer seemed necessary to bring on a recession. Suddenly the economy leaped back on its feet; the inflation and money-supply numbers soon followed. The Fed, it seemed, had lost control.^[78]

There was a lesson and a consequence. The lesson was that nobody knew what was going on. An October survey of business executives showed they had no better vision than the economists.^[79] Even the governors of the Federal Reserve were confused. The consequence was that the Fed's governors determined not to repeat their "mistake." They decided to squeeze hard, damning both the election or any puzzling numbers.^[80] Interest rates returned to 13 to 14 percent by late September, confounding analysts.^[81] They would go much higher.

In Congress, members had to decide on specific policies. Budget resolutions don't spend money; appropriations do. Budget resolutions don't cut programs; reconciliation might. Congressional action on spending and taxing while rushing toward a preelection recess revealed three patterns that would recur continually in later years.

The First Resolution didn't determine the balance of defense and domestic spending. Warren Magnuson (D-Wash.), chairman of Senate Appropriations, tried to move $4 billion from defense to social within his committee. He failed only because he didn't have the votes. The prodefense mood controlled action while House Appropriations and

then Senate Appropriations raised previous bids on the military. "The only debate on the committee's overall funding recommendation," the Congressional Quarterly reported about the House vote on September 16, "was on whether the increase was large enough."^[82]

By then Congress was running short on time; the fiscal year would begin on October 1, Congress would recess on October 4. Only two of thirteen appropriations had passed, so Congress needed a massive continuing resolution (CR). Traditionally, continuing resolutions bridged the gap between expiration of one year's appropriation and enactment of a new one by allowing agencies to continue activities at the previous fiscal year's levels. On September 16, however, Norman Dicks (D-Wash.) proposed breaking with the tradition. Because both policy and inflation meant the FY81 defense figures would be much higher than FY80 figures, the Senate would not act before recess, and the election would delay action for another two months. Therefore, Dicks proposed including the House's FY81 defense numbers in the CR. Thus, the resolution was not at all a stopgap but a new grant of authority. House leadership demanded equal treatment for domestic programs, but the Senate disagreed. The CR, once a housekeeping device, became a battleground over policy and priorities.^[83]

The confrontation was made more serious because, earlier in the year, the attorney general had ruled that most agencies would be unable to operate if their appropriations authority lapsed. If the CR did not pass, agencies would have to shut down.^[84] The prospect of a government shutdown could encourage either settlement or hostage taking. Bogged down over a rider restricting federal funding of abortions, conferees did not settle until late on October 1. Only defense was funded at FY81 levels,^[85] revealing again Congress's tilt toward military, against social, spending.

The battle over policy on the formula for the CR prefigured developments under Reagan. The CR would become one of two vehicles for omnibus action on the budget; the other was reconciliation.

Senate committees quickly complied with their reconciliation instructions. On July 23 a package of spending cuts passed, hitting the targets though cheating a few: some cuts were temporary; others involved changing the dates of payments; Senate Finance and assorted other committees added some sweeteners to the package of revenue increases.

Reconciliation meant cutting people, which was politically difficult. Members hoped that by packaging lots of cuts no group could claim to be singled out; thus, the total would make enough of a dent in the deficit that members could say they had to support the bill. House leaders wanted a closed rule on the package, forbidding amendments, so that

cuts would not be subjected to individual votes. The closed rule, by allowing the sweeteners Republicans wanted a chance to cut, also gave Democrats on the committees some stake in an unpleasant process.

The rule therefore was crucial. Unfortunately the leadership nearly lost control of the Rules Committee, which by 8 to 7 (all five Republicans united with three Democrats) allowed a separate vote on one of the biggest cuts, a reduction in civil service pensions.^[86] The leaders held the rule to that one amendment, however, and then made the floor vote on the rule a party matter. They won, with only fourteen Democrats defecting. They then lost on civil service pensions (seemingly proving the point that members were more likely to vote for cuts if they were not singled out) before the whole package passed easily. All representatives wanted to appear thrifty.

The bill then had to go to conference, where its unprecedented breadth required more than a hundred conferees. Disputes had to be settled over (to name only the most important) civil service pension COLAs, medicare and medicaid provisions, child nutrition, mortgage subsidy bonds, and the windfall profits tax.

October was spent campaigning. The public hesitated, torn between the devil whose performance it knew and disliked and the devil whose words were vaguely disquieting. Exploiting the uncertainty about Reagan's foreign policy and tax cuts, Carter drew close in the polls. But in the climax of the campaign—the debate just before the election—Reagan managed to quell many doubts. An expected close election turned into a landslide. Most dramatically, Republicans captured the Senate, as a covey of liberals in fairly conservative states fell to defeat. Democratic senators had had good reason to be jittery.

Lame Ducks

The Democrats returned to Washington licking their wounds and joking about being an endangered species. The prospect of a Republican president and a Republican Senate changed everybody's judgment about the value of delay: suddenly Republicans saw no reason to hurry, and Democrats saw delay as irresponsible.^[87] Yet, because everybody was looking forward to January, both sides indulged in political maneuvers to inconvenience the other in the coming battles. The second resolution, which had the least direct effect on policy, was occasion for the greatest level of posturing.

House Democrats produced a resolution that admitted a deficit of $25 billion, but they managed that low figure only by reducing estimated spending by 2 percent across the board. Chairman Giaimo explained

that the incoming president had claimed he could find so much in cuts from "waste, fraud, and abuse"; the Democrats were just taking him at his words.^[88] In a very rushed conference, Senate negotiators accepted the House revenue figure and agreed on spending numbers even though their reasons differed.^[89]

The Post called the second resolution a fake. Senator Henry Bellmon (R-Okla.) noted that appropriations already in the pipeline were likely to exceed the "binding" resolution's totals by about $10 billion.^[90] Senator William Armstrong (R-Colo.), in the spirit of the holiday season, called it a "turkey." Hollings claimed that the budget would have been balanced save for vitally necessary increases in defense spending. "Now that he has landed as Pilgrim Armstrong on the shores of leadership, and he gets this turkey," Hollings added, "I want to see how he carves it."^[91]

Reconciliation conferees projected a deficit reduction of $8.2 billion. They also added reauthorizations of two child nutrition programs to the package. "I am deeply disturbed," Barber Conable commented, "that [reconciliation] seems to have become a new mechanism for holding the government hostage, agglomerating a lot of very important substantive issues … and being accepted only because we are under great fiscal pressure at this point in our budget process."^[92] He and the Republicans, of course, would not think of doing such a thing—unless they could control it. Whatever their objections, members of both parties agreed with Delbert Latta that a vote against the reconciliation report was a "vote for $8.2 billion more deficit for fiscal 1981.^[93] The conference agreement passed overwhelmingly on December 3.

Without the 1980 reconciliation as precedent, committing Democrats to the procedure, that of 1981 might not have occurred. The experience of 1980 also foreshadowed the rules battles, scorekeeping problems, and rider vulnerability that would make reconciliation a mixed blessing for budgeters.

Only the appropriations—most of the government—remained. Defense was settled fairly easily. Liberals knew they would do even worse in the next Congress, so they did not fight too hard. Conservatives wanted to get the money out to the military as soon as possible, returning for more in supplemental appropriations.^[94] On December 5 Congress passed a $159.7 billion Department of Defense (DOD) appropriation, the major part of a 9 percent real increase in budget authority for the military,^[95] the biggest peacetime increase in history to that point.

Congress faced two obstacles to passing the other appropriations: conflict over various riders, especially busing, and the Second Resolution's binding spending limits, which included a 2 percent cut Reagan was supposed to find. Congress was not about to redo all bargaining and

decisions that had led to the appropriations bills passed and pending. Either the last one or two bills considered would be out of order, or Congress would have to waive the resolution that it had just passed.

Congress avoided all these choices by wrapping the last few bills in a continuing resolution that expired on June 5. Lopping off the last four months of the year meant that total authority was under the budget limits, but that everybody could spend at the desired rate until June 5, at which point they would think of something. Clever as this solution was, it had a problem. The CR became an immensely tempting target for nonbudgetary riders. Once again, the government nearly ground to a halt as the House and Senate battled over the CR's provisions.

On December 1, House Appropriations reported out a simple bill by voice vote. Chairman Jamie Whitten (D-Miss.) managed to keep all but a few amendments off the draft, which provided for funding levels at the rates mandated in the most recent congressional action, expiring June 5. This bill, H.J.Res. 637, passed the House on December 3. Senate Appropriations then tacked on dozens of amendments. On the floor, the Senate removed two of the Christmas tree's ornaments: senators excluded the offending busing rider (that forbade using Justice Department resources for lawsuits that might lead to court-ordered school busing for desegregation^[96] because conservatives, led by Senator Jesse Helms (D-N.C.), were convinced that in January the new president would be on their side;^[97] the second exclusion was the senators' own pay raise.

Congressmen, comparing themselves to other high-powered lawyers and assuming extraordinary expenses (like two homes), feel underpaid. Voters, almost all of whom make much less, disagree. Therefore, members who want more compensation go through exceedingly complex maneuvers to get it, while other members, wishing to curry favor with voters, keep challenging such maneuvers. The issue affects the entire top level of the civil service because members keep bureaucrats' salaries at a level ("cap") below their own. As lower levels receive raises, they bump into the cap; thus civil servants holding different positions in the hierarchy end up with the same salaries.

Senate Appropriations took the opportunity of CR debate to raise the cap on a voice vote, allowing a $10,000 raise for members of Congress and raises for more than 30,000 federal executives. Given the public's intense distaste for congressional pay increases, on the Senate floor, in a recorded vote, senators reimposed the pay cap, 69 to 21.^[98] Having pleased the public (they hoped) by attacking themselves, the senators turned around and hung many more baubles on the holiday tree (beetle eradication, a Baltimore Harbor, hurricane disaster relief, etc.). Thus decorated, the CR was passed on December 11 and sent to conference.^[99]

The pay raise returned in the conference agreement, which slipped

through the House on a voice vote. But the Senate removed the raise, sending the CR back to conference. The House in turn passed a new CR (H.J.Res. 644) that included neither the pay raise nor the dozens of Senate amendments to the original CR (H.J.Res. 637). Chairman Whitten told the senators to take their pick: a bountiful Christmas tree including the pay raise or a scrawny, sparsely-decorated one.^[100] The Senate amended H.J.Res. 644, removing the House's limited decorations and giving the House a choice between the Senate's bountiful tree, without a pay raise, or a totally bare tree.

Now there were two CRs in conference along with many irritated legislators. "There ain't gonna be no pay raise," said Senate Minority (soon to be Majority) Leader Howard Baker (R-Tenn.).^[101] At the last moment, in the early morning of December 16, conferees agreed to a CR with only a very few, noncontroversial amendments. That was roughly where Chairman Whitten had begun on December 1. The final battle was a fitting conclusion to 1980: neither side felt the result was worth the struggle to get it.

There They Go Again

Congress had more or less completed its work. Democrats prepared to abandon power.^[102] President Carter devised a budget that, like its predecessor, tried to lower deficits with higher taxes. This plan was ignored, however, rather than scorned, as Democrats and Republicans awaited the new administration's budget revisions.

Reagan's administration was slowly taking shape, choosing its members and debating political strategy.^[103] Believing in crisis and/or seeing crisis as opportunity, the incoming government began planning a quick effort to cut taxes and domestic spending. Speed was required to exploit the new president's normally short honeymoon period with Congress. The financial markets had to be reassured. "The main thing is to start and to start drastically and dramatically," explained Caspar Weinberger, who headed the transition team on the budget. "I think it's absolutely essential to send a signal, not only to the U.S. but to the world, that the new U.S. government is firmly committed to fighting inflation and to restoring the strength of the American economy."^[104]

Preparing signals of resolve and of public faith in order to meet the nation's (and now the world's) expectations, Reagan's group, like Carter's, set itself up for judgment by a standard, market behavior, only dubiously related to anything it did. Unlike the outgoing administration, Reagan could hope for emotional support from business interests. "Reagan is a businessman's populist," commented Democratic banker Felix Rohatyn. "Under the Carter Administration they considered themselves

the whipping boys, over regulated and over-Naderized. Now they all see a better climate coming." Business reacted to the election with a burst of optimism that sent stocks up forty-nine points in eight trading days while setting a record for volume.^[105] The question was, would such happiness counter the effects of real variables, especially interest rates, which the Federal Reserve was driving to new heights in its war against inflation? At the end of 1980, the prime rate hit 21.5 percent. A better climate might be coming, but only rain, wind, and lightning were to be seen.

As Ronald Reagan's presidency came to an end in 1988, common rhetoric about the budget sounded like the story that began with Reagan's election: Reagan's military buildup created a struggle over priorities; Reagan's tax cuts produced deficits that gave financial markets the jitters; David Stockman dreamed up a new procedure, reconciliation, to package cuts in domestic spending. Reagan certainly would take the military buildup and deficits to extremes. Although some tax cut was inevitable, the massive cut in 1981 would not have happened without him. Yet the whole story of Reagan's presidency makes no sense if we forget what came before.

It matters that the military buildup and reconciliation preceded Reagan because otherwise one could not explain why, in 1981, the Speaker allowed reconciliation to happen with so little fight over defense. Attitudes within Congress, shaped by events (like Afghanistan) and beliefs (liberals' idea of how government should run) that were entirely separate from Reagan's beliefs and strategies, allowed his victories. Events were already moving his way.

The 1980 panic over deficits puts much of our story into perspective. It should make us realize that no one knew what the economy was doing; uncertainty would dampen skepticism about Reagan's implausible sounding theories. It helps explain why Democrats basically went along with the goal, though not the programmatic details, of spending reduction in 1981. It should tell us that, while Democrats were trapped partly by their own opportunism into a position of attacking deficits after Reagan's ballooned, they had already been pushed in that direction by a large segment of their party, including the economists who once had rationalized a prospending bias.

Most important, the near-unanimity among organs of respectable opinion that the budget had to be balanced to stop inflation should give us pause. This was the first of many wrong arguments about expectations; the new administration had its own fantasies. Being wrong is not so bad. Being wrong and scornful of those who don't conform to a false standard is. Being wrong and ashamed of yourself for not living up to the false standard is even worse. The Democrats' failures to "control" the budget began the cycle of politicians losing self-confidence because

of the deficit. They began one unique aspect of budget politics in the 1980s: the political center, the voices of "responsibility," would be most upset with the status quo.

This crisis of confidence was an opportunity for the new president, a man whose vision of political economy was very different from respectable opinion.