Twenty-One
Budgeting with Gramm-Rudman-Hollings, or "Help Me Make It Through the Night"

The year 1986 began with three signs of hope. A sudden sharp break in oil prices meant lower inflation (and therefore lower COLAs), lower fuel costs for the military, and more dollars in the economy to buy other things. Many economists argued, therefore, that any harm to the economy from higher taxes or lower spending to reduce the deficit would be offset by the oil windfall. The second piece of good news, at least for budgeters, was the March sequester. Those spending reductions were real and, when incorporated into the baseline of current policy, would be replicated in the projections for each subsequent year. This contributed to the third bit of good news: CBO decided that because Congress had actually cut defense BA by 6 percent for FY86 (including the sequester and effect of inflation), the budget office would no longer incorporate defense increases in long-term, baseline projections. The difference between five years of 5 percent growth, compounded, and a year of 6 percent shrinkage followed by stability was huge: $96 billion by FY90.^[1] Combining all the good news, CBO's deficit estimate for FY90 fell to $120 billion; the target for FY90 was $36 billion. If Congress could get the extra savings of around $36 billion required by GRH for FY87, and if those compounded on themselves, it might be possible to come very close to the GRH targets in all years. Out of the mess a miracle might yet emerge.

CBO's projections, however, called for no real growth in defense, while the president was demanding (by CBO's estimate) real growth of about $13 billion. Because Reagan was likely to dig in his heels, there would be a struggle over keeping to the CBO baseline. The economic optimism of early 1986, furthermore, could well be as wrong as the optimism about other years.

The president's budget called for a "streamlined federal government"

with a deficit of $143.6 billion, just under the GRH ceiling.^[2] The administration had its usual (hopeless) list of domestic programs to be eliminated; only the proposed abolition of the Interstate Commerce Commission was new.^[3] "The White House," Business Week reported, "has accepted the sharp reduction in the growth of defense spending approved by Congress last year as a fact of life.^[4] True, but not the larger reduction Congress and CBO had in mind.^[5]

"I hope your numbers are accurate," Representative David Obey (DWis.) told the CEA chair, upon hearing his predictions of 4 percent economic growth rather than the 2.2 percent average of the previous five years, "because if they're not, all hell is going to break loose in August."^[6]

While the possibility of the sequester encouraged delay, the new system of points of order reduced demands. Lobbyists got the message that for anyone to gain, or even stay even, he had to convince Congress to slash someone else. Awkwardly and reluctantly, the lobbyists tried to play that game. "Gramm-Rudman-Hollings," said a lobbyist for public higher education, is "a new way of thinking, a new mentality.^[7] A chorus of senatorial voices affirmed Pete Domenici's observation: "I see less demand by special-interest groups for increases than I have ever seen in my five years of being Budget chairman and in fourteen years of serving as a senator."^[8] As Martin A. Corry, who lobbies Congress for the AARP noted, GRH means that "basically, if you want to change something, you have to come up with something else to make it neutral. It establishes a substantial amount of discipline."^[9] Unfortunately, this dream of budget reformers through the ages would not help get rid of the $200 billion deficits already present.

While the lobbyists were wondering how to play this new game that they could not win, both Congress and the White House kept hoping for a miracle. In April and May 1986 the authors of this book interviewed a number of participants all of whom told us that the "other" side would have to give in. "Our judgment is, they will flinch," proclaimed one administration stalwart. And "when the president has to look at sequestering defense as against an option of an omnibus appropriations bill with revenue enhancement [a euphemism for higher taxes]," said one Senate moderate, "I think he'll find a way to accept it. We'll help provide him a face-saving out. The Republican leaders will get up and say, 'Yes, we forced him to do it.' And Walter Mondale will have a party." His prediction of an inevitable tax increase would at last have come true.

Public statements matched private. Senator Slade Gorton, arguing that Reagan would have to accept tax hikes, mused that "I think he's got more at stake in this than we do."^[10] Representative Dan Rostenkowski declared, "The president must realize he will not get his way on defense

and military foreign aid without participating in a balanced approach, which includes revenues."^[11] Senator Bradley included Congress in his prognostications: "When Congress sees how many national parks will have to be closed and how much the cost of transportation will increase, everyone will be considering tax increases."^[12]

Administration hopes, however, were based on a fundamental misunderstanding of GRH. A group of people with very disparate preferences cannot be made to "flinch" into a complex, carefully balanced bargain. Moreover, since GRH protected the liberals' greatest priorities, how could the administration do better? A veteran civil servant at OMB commented acidly, "I don't get it. He's [Director Miller] saying to the Democrats, 'If you don't agree to eliminate 81 programs, we'll cut programs 8 percent. And, to really make you miserable, we'll slash defense heavily!' Huh?" We don't get it either.

But the idea that Reagan would flinch was just as shaky. Prevailing opinion, as usual, underestimated the president's aversion to higher taxes and assumed (as he did not) that the strategic situation would stay the same. The president did want both a more balanced budget and higher defense spending. But he did not trust Congress to give him those good things in return for higher taxes. Congress had been rejecting his defense requests for quite a while; why should he knock himself out for something Congress wouldn't give him anyway? At least GRH assured that comparable cuts would take place in domestic programs.

If Democrats and angry Republicans cared only about thwarting the president, they could go on demanding their way on the budget; but there was no such thing as "their way." There was no majority to support the grand compromise that would raise revenues and cut defense, social security, and domestic programs enough to greatly reduce the deficit. GRH (and only GRH) commanded support, which was why it had passed; an omnibus agreement is possible only by fudging the numbers, which makes future agreements that much more difficult. For the same reason—no mutually agreeable alternative—GRH is in a perpetual state of resurrection.

GRH left unchanged Congress's choices and difficulties. The Senate Budget Committee endorsed a resolution with higher taxes and less defense than Reagan wanted; he called it "totally unacceptable." Nevertheless the Senate on May 2 endorsed, 70 to 25, a resolution that raised more revenues ($10.7 billion) and slashed more money ($19 billion) from defense while doing less to cut domestic programs than the president wanted. Once the Senate moved, House leaders were more willing to admit their desire to gain revenues. House Democrats said they wanted to be known not as the party of "tax and spend" but as the party of "tax and save."^[13] But saving was hard. In the midst of House votes on the budget resolution, an amendment to take $111 million away from a

program for honey producers was passed—and then reversed. "I am ashamed to say this," George Miller (D-Calif.) stated, "but the honey program is stronger [than we are]."^[14]

Although severe cuts in defense loomed, Marvin Leath (D-Tex.) was able to persuade members of the Armed Services Committee that the GRH meat ax would be worse. Vic Fazio took the same line with the heads of Appropriations subcommittees: "They were very leery of voting for it. But I told them this is Gramm-Rudman. We've run out of running room."^[15] Gramm-Rudman perhaps encouraged compromises within each chamber. The resolution passed on May 15 (245 to 179) included protection of poor people's programs, substantial cuts in defense and in the remaining areas of domestic spending, and came up with the same revenues as had the Senate. But it was only a budget resolution.

"Not only will we not raise taxes before I leave office," the president responded, "but I plan to make sure we have a balanced budget amendment that puts a permanent lid on taxes and doesn't let the government grow any faster than the economy."^[16] Domenici's reaction was "nothing new, nothing different." He warned continuously about defense inevitably losing even more unless there was a tax increase.^[17] He and Senator Chiles suggested that a fund be set aside from new taxes that could go only to defense.^[18] Old wine in new bottles—this was George Miller's old "pay-as-you-go."

Splitting the differences between the two chambers on defense and domestic programs, on June 26, 1986, Congress approved (effortlessly in both houses) a budget resolution for FY87. Perhaps resolutions had become easier to pass because they now meant less.

The ides of August, when Gramm-Rudman might hit, were fast approaching. The political atmosphere was as humid and heavy as the Washington air. U.S. News and World Report published a chart on what Gramm-Rudman would mean if it actually happened. The numbers were frightening: What would happen if federal prisons had to be cut from $531 million to $311 million over three years; or the FAA from $2.9 billion to $1.7 billion? People in Washington joked that if you were planning on flying anywhere, you had better do it soon. But if you wanted to smuggle something, wait a while; GRH cuts would cripple the Customs Service. Even the Supreme Court was not immune—it would fall from $13 million to $7 million. But the justices had other ideas.

The Supreme Court and the Separation of Powers:
The Comptroller General's Role in Sequestration Ruled Unconstitutional

When President Reagan signed GRH he had expressed doubts about the constitutionality of GAO involvement. Because various people in the

White House were of different minds, sometimes on the same day, we cannot say whether Representative Michael Synar (D-Okla.) came entirely to the correct conclusion: "it was very obvious [the administration] wanted a constitutional test to have the whole thing chucked out. They want the courts to do the dirty work for them."^[19] In any event, Attorney General Edwin Meese would not defend the constitutionality of GRH. He had already been litigating the same kind of point, against GAO, in other cases.

A lawsuit brought by Representative Synar and other congressmen and joined by the Public Citizen Litigation Group (affiliated with activist Ralph Nader) argued that "Gramm-Rudman tried to insulate Congress from the hard choices our Founding Fathers gave us and expected us to make."^[20] This group joined the Justice Department (strange bedfellows!) in challenging GAO's role.

Instead of relying upon the concept of excessive delegation—that Congress could not delegate its powers to one of its chambers or officers,

a principle that might also have threatened the legality of independent regulatory commissions—the Supreme Court held that, although such delegation in itself might be proper, it was unconstitutional to give final authority for making cuts to the comptroller general who could conceivably be dismissed by joint resolution of Congress. Asserting that the Framers had provided not merely a separate but a "wholly independent executive branch" (a big surprise to scholars who follow Richard Neustadt's celebrated formulation of "separated institutions sharing powers") the Supreme Court, by a seven to two majority on July 7, "held that the powers vested in the Comptroller General … violate the command of the Constitution that the Congress play no direct role in the execution of the laws."^[21]

Most students of the political system, we suspect, would agree with Justice White who, dissenting, criticized the majority's "distressingly formalistic view of separation of powers." White argued that the Comptroller General was in fact "one of the most independent officers in the entire federal establishment." He saw no "genuine threat to the basic division between the lawmaking power and the power to execute the law" but a real loss in depriving the president and the Congress of their effort "to counteract ever-mounting deficits." Justice Blackmun dissented that the old provision for removing the comptroller general, "rarely if ever invoked, … pales in importance beside … an extraordinary, far-reaching response to a deficit problem of unprecedented proportions." Wise or foolish, Blackmun continued, GRH was among the most important laws of recent decades. "I cannot," he concluded, "see the sense of invalidating legislation of this magnitude in order to preserve a cumbersome, 65 year-old removal power that has never been exercised and appears to have been forgotten until this litigation."^[22] Whether or not the threat to separated powers was "wholly chimerical," as Justices White and Blackmun claimed,^[23] the politicians had to pick up the pieces.

Congress Copes with the Court Decision

To give Congress time to reconsider the $11.7 billion reductions in spending mandated by the March sequester (which would, by the recent decision, become unconstitutional), the Supreme Court stayed its order for sixty days. Although some doubted that Congress would do directly what had come about indirectly under the GRH proportional cuts, repeating cuts that had already happened proved not so hard: agencies had adjusted to having less money; barely two months remained in the fiscal year; and on July 17, without even waiting for formal inception of the fallback procedure, the House voted 339 to 72 to affirm the cuts.

The Senate immediately agreed by voice vote, and the president said he would sign.^[24]

The hard part was what to do about FY87, by which time the sequester would be bigger and more painful. The most plausible analysis was made by an administration leader (but Gramm-Rudman skeptic) in April: "Anyone who thinks they'll vote for cuts in September, two months before an election, is smoking dope."

In one way, budgeting has become highly predictable; as soon as Congress does its duty on the deficit, it must face even more insuperable problems. On August 6, almost exactly a month after the vote to reaffirm the March sequester, the OMB FY86 deficit estimate had risen from $203 to $230 billion. The reasons were explicable, albeit after the fact. Corporate profits and personal income had dipped below expectations, thus reducing revenues. Defense outlays had speeded up: either contractors had finally tooled up, or they feared cuts in spending would knock them out. And agricultural price supports had climbed out of sight.^[25] Bad news on FY86 meant FY87 would be more difficult.

Congress next had to decide whether to reinstate some constitutionally permissible form of the automatic sequester procedure. On July 23 Senators Gramm, Rudman, and Hollings introduced an amendment that would have given OMB final say in determining the sequester's procedure, but distrust of OMB was too great to permit its passage. Senator Moynihan claimed that an OMB director would be able to choose whether to hit defense or domestic harder and could distort the actual size of the deficit. Despite the sponsors' assurances that their bill hemmed in OMB so severely it had virtually no discretion left, the measure was postponed to seek other means for tying OMB's hands.^[26]

On July 30 the Senate, by a comfortable 63 to 36 margin, including 21 Democrats, voted to amend its annual debt-ceiling measure so as to reinstate the automatic sequester. The new version still required OMB and CBO to submit their versions to GAO, so that the Senate could see how far OMB deviated; but final authority for determining and implementing the sequester was left to the director of the budget. In addition, the whole thing was rendered null and void if defense did not take its full cuts.^[27]

But the House, more distrustful of the Republican administration, and this time not taken by surprise, would not go along. The lower chamber would agree only to raise the short-term ceiling on federal borrowing by $32.3 billion up to $2.111 trillion, enough, according to the Treasury, to last until September 30. Gramm and company tried to attach a one-year extension of sequestration to this short-run bill. The House stripped off sequestration, 175 to 133, and the Senate did not alter that action.^[28] As they got closer to sequester and it became more

obvious that the hostage game would not work, Senate leaders backed down. The forces of responsibility, after everything, had flinched.

Rigging the Numbers

The sequester was dead, but the rest of Gramm-Rudman remained. OMB and CBO submitted their required "snapshots" of the budget situation on August 15. With CBO estimating the 1987 fiscal year deficit at $170.6 billion and OMB at $156.2 billion, the two were averaged, according to the law, to come to a deficit of $163.4 billion. Because the GRH target deficit for FY87 was $144 billion, with the usual $10 billion leeway, Congress and the president would have to make at least a $9.4 billion reduction to cut the deficit below $154 billion.^[29] These estimates were $14 billion below the two organizations' previous baseline forecasts. Since no appropriations had been enacted by mid-August, both CBO and OMB, following the law, projected the deficit by assuming appropriations at the FY86 (1985) levels, after the March GRH cuts. These, of course, were below the inflation-adjusted baseline.^[30] Technically this was not cheating.

By now members had the bright idea of using an extra $11 billion in revenue estimated to come from the first year of tax reform to meet the targets, thereby avoiding such horror stories as reducing the armed forces by 400,000 men and women or crumbling air traffic control towers. Of course, the new revenues, if they materialized at all, would be a one-time thing, so the FY87 problem would be alleviated only by making FY88 much more difficult. "If Congress were covered by the criminal law," Senator Rudman summed up a chorus of objections, "it should be indicted."^[31] Nevertheless, in view of the alternatives, the feeling grew that any short-term fix was better than the dreaded sequester. Representative Tom Loeffler (R-Tex.) wanted to gain $6.5 billion dollars by selling federal assets.^[32] Democrats had their own grab-bag: hiking the cigarette tax, demanding state and local government employees join medicare, raising telephone excise taxes, introducing a gas tax, and the like, presumably adding up to $6.3 billion.^[33]

In mid-September, the budget committees agreed that Congress would have to raise revenue or reduce spending by about $15 billion; $5 billion each would come from sales of assets, from appropriation cuts, and from "user fees" (a euphemism, perhaps, for tax increases). If Congress would not do what Gray and Domenici wanted—namely, find substantial revenue increases and spending cuts for long-term budget balancing—temporary measures would have to do. If they could not fix the deficit, budget leaders at least wanted to establish principles of responsible procedure. Therefore, Bill Gray pressed to prevent spending

increases within the reconciliation package. He also wanted to delay the continuing resolution until after reconciliation (so Congress could not go home without passing reconciliation first).^[34]

The Continuing, Continuing Resolution

While the budgeters tried to salvage reconciliation, the real battle was on the CR. No appropriation had passed the Senate because no one knew what the sequester or its equivalent would look like. The drift of the 1980s then reached its logical conclusion—a CR for everything.

The skirmishing began with the usual "I'll not be moved so you will have to change your position" statements. The president "laid down a line in the sand," insisting that he had to have more for defense and foreign aid and less for domestic programs before he would sign the $520 billion omnibus bill reported by House Appropriations.^[35] A trial balloon launched by Rostenkowski on behalf of a new gas tax (presumably on the reconciliation) was quickly shot down as House Democrats decided not to mention a tax increase unless the Republican Senate first initiated it.^[36]

Still, any action on the reconciliation would take some pressure off the CR. House, Senate, and OMB negotiators tentatively agreed on a package of (over)estimated asset sales of around $7 billion, especially in rural housing and development loans; $4 billion plus in revenues, more than half supposedly from increased tax enforcement; a billion or so from a variety of user fees; and a third of a billion from increasing the charges on banks to obtain Federal Deposit Insurance. A final $1.5 billion would be raised by accelerating excise tax collections due in fiscal 1988 and moving back the last payment for general revenue sharing so that it applied to the FY86 budget, which was about over.^[37] Not much to be proud of in these accounting gimmicks. "Given the choices, which are none," Representative Mike Lowery, a Democratic member of the House Budget Committee, said plaintively, "it's better to do this, given the ridiculous situation we are in." Lowery's comments were kinder than most. Senator Armstrong called it "a package of golden gimmicks." Senator Exon (D-Neb.) described the measure as "perverted, phony, unrealistic." Marvin Leath, member of the House Budget Committee, declared that "we're about to pull the ultimate scam and everybody's included."^[38] Nevertheless, the House added a few new wrinkles,^[39] voting 309 to 106 on September 24 to approve an estimated $15.1 billion in deficit reduction.

The next day by the narrowest of margins (one vote) the House passed what conservative Republicans called its BOMB (Bloated Omnibus

Money Bill) of $562 billion, containing all thirteen regular appropriation acts. Among the reasons for negative votes were inclusion of aid to the Contras in Nicaragua and exclusion of money to revive revenue sharing. A presidential veto was threatened not only on the old grounds of too little for defense and too much for domestic programs but on a new one—that arms control provisions, including a moratorium on nuclear tests, did not belong there.^[40]

In Iceland for a meeting with Soviet party chief Gorbachev, President Reagan on October 11 had to sign the third stop-gap spending bill in ten days. Congressional leaders feared a mass exodus after October 14 when the election would be just three weeks away. With various bills still in conferences, including reconciliation-cum-debt reduction, debt ceiling, and omnibus appropriations, the last-minute jitters again were afflicting Washington.^[41] The budget shuffle gave way to the adjournment stagger.

A few hours after a conference agreement on October 15, the House voted a $576 billion omnibus appropriation continuing resolution. Despite reducing $28 billion from his defense request and reiterating veto threats, President Reagan—seeking to preserve a hard-won $ 100 million in Contra aid and compromises on many other issues—urged House Republicans to support the CR. Nevertheless, still talking veto, the president wanted the Senate to strip two provisions from the House bill.^[42]

Aside from the particular items in which they were most interested, few representatives or senators or their staff members claimed to grasp what was in the 1,200-page CR, let alone the language from other appropriations bills and unrelated legislation it incorporated.^[43] Nonetheless, the Senate preliminarily approved the omnibus appropriations bill on October 17. By a voice vote, the Senate stripped from the House version a construction trades amendment that would have given unions more leverage over employers. Still in dispute was a House effort to enforce at least a 50 percent "Buy American" provision regarding offshore oil rigs. Then the Senate got hung up in a classic pork-barrel maneuver by Alphonse D'Amato (R-N.Y.), who was up for reelection. An angry Senator Barry Goldwater (R-Ariz.) engineered a 69 to 21 vote against D'Amato's effort to add $151 million for continued production, on Long Island, of the T-46 jet trainer, which the Air Force did not want.

The Senate passed the CR, and Congress adjourned to campaign. On October 17, the minority staff of the Senate Budget Committee issued a "Fiscal Year 1987 Budget Wrap-up." It began by explaining that, while the deficit was "estimated at about $151 billion … more realistic budget estimates show the FY87 budget deficit is likely to end up at about $180–190 billion." Out of $31 billion in supposed deficit reductions, they

claimed, only $6 billion were real policy changes. "Ever hear that song, 'Help Me Make It Through the Night'?" Bill Gray asked. "That's what we're doing here."^[44]

What Hath Gramm-Rudman Wrought?

There were four main provisos to the Balanced Budget and Deficit Reduction Act of 1985: (1) statutory deficit limits starting at $172 billion in FY86 and hopefully ending at zero in FY91; (2) sequester orders that apply if Congress and the president cannot agree on an alternative budget; (3) an accelerated budget timetable; and (4) procedures, such as offsets, to keep Congress honest when it votes on tax and spending bills. Guess what? They missed the targets, did not sequester, did not follow the schedule, and, though the offsets had some effect, were less honest than ever. The reasons were predictable: all the incentives in GRH worked to make delay strategically advisable; too much was taken off the table; the reason the act was passed in the first place—inability to agree on the budget—caused participants to seek their own solutions rather than compromise; and, at the last moment, the only option was to obfuscate. Obviously, GRH did not force the major actors to come together; they merely found it easier to agree on palliatives and gimmicks that might prevent sequester. What is worse, combined factors—anticipating revenue losses from tax reform, meeting the 1987 requirement by pushing costs into the following year, using the $10 billion cushion, and initially deciding to eliminate a huge deficit in just five years—led to an estimated $65 billion to $75 billion deficit-reduction requirement for FY88, a target that no one believed could be met. And it wasn't.

Though GRH made only a modest dent in the deficit, that is not to say it was totally ineffectual. It reinforced norms of spending restraint. GRH's internal controls were generally supported in the House and Senate, except for the Senate's decision to exceed its budget resolution in order to fund the antidrug bill. Such constraint may not have been a great idea. David Rogers reported efforts to increase foreign aid for the Philippines, where the U.S. wanted to aid Corazon Aquino's new democracy, were impeded because of Gramm-Rudman. "Competing foreign policy interests," he wrote, "feared that any increased allocation to the Philippines would hurt their budgets."^[45]

Within the executive branch, Budget Director Miller observed:

One of the things that has been very useful to me in dealing with the agencies is to say look, Gramm-Rudman-Hollings requires offsets. So agency X comes up and says, "We need a supplemental [appropriation]—we

forgot that we're going to have more expenditures for this entitlement program." Someone's going to say, "OK—but you know you have to have offsets. Now where are you going to take it out?" So when we send up a supplement [request], we send up a rescission at the same time and try to tie the two together. Or we try to say, "OK, what you do is you go reprogram [funds]." That's been very useful to us.^[46]

But surely it has been less useful to the appropriations committees and agencies. Conflict raged over offset requirements particularly in the Senate as these were stronger than in the House. But the offset requirements remained, shaping budget battles in 1987 and 1988, and probably will continue to do so.

The targets, of course, were virtually impossible to hit. In spring 1987 only a few Republicans (such as Bill Gradison) were willing to admit that; thus, Senate Democrats had to resort to disingenuous movements to get a resolution with higher deficits past the three-fifths point of order in that body. They managed to pass a conference agreement that required "only" the original deficit reduction amount of $36 billion, rather than the much larger amount needed to get down to $108 billion. But to no one's suprise, "only" $36 billion was no easier in 1987 than in 1986. In September 1987, therefore, the Democrats put together a new version of Gramm-Rudman that the president, after much public protest, declared himself compelled to sign.

The new bill was another mixture of hostage taking and posturing. It provided a new deficit-reduction schedule that required a $23 billion cut in FY88 and then skipped FY89 (the 1988 election session) before resuming in FY90. It gave OMB sequester authority but under very restrictive rules. The Democrats thought the $23 billion sequester, over half from defense, would force Reagan to raise taxes. Republicans agreed, so the GRH revision had mostly Democratic support. But everything still depended on the base from which the sequester would occur, that is, the terms of the CR. If anything, the president still seemed better off with a sequester than with any negotiated settlement: the sequester did not threaten to undo the most important policies of his administration, the marginal tax cuts.

Thus, nothing much had changed: all roads still led to gridlock. The only difference between 1986 and 1987 was that constraints had become even tighter.^[47] The increasing squeeze did have one real victim in 1986. Jamie Whitten's efforts to extend revenue sharing for another year at $3.4 billion raised the question of whether Congress could ever rid itself of a program. Most members were reluctant to risk the ire of local government officials who, especially in oil-dependent regions, were finding it harder to make ends meet; and few wanted to challenge Whitten. But

what could be cut instead? Speaker O'Neill rode to the rescue ("I will always remain a man of the House," he said at his retirement farewell when Congress adjourned). The Speaker persuaded the Rules Committee to strip revenue sharing from the Omnibus Appropriation Act.^[48]

Deficit pressure could put some very bad ideas into the heads of agency chiefs. Worried about what a GRH sequester would do to his department, Deputy Secretary of Defense William Taft came up with the idea of delaying payments to contractors under the grace period offered up by the (apparently misnamed) Prompt Payment Act; this would "save" $2.8 billion in fiscal 1987 outlays that thereby would go into fiscal 1988—for somebody else to worry about. But the chair of House Government Operations, Jack Brooks (D-Tex.), and its ranking minority member, Frank Horton (R-N.J.), responded in outrage—private vendors already were refusing government business or charging more because of late payments; moreover, they threatened to legislate total removal of the grace period that had been originally intended to help agencies smooth out their payments.^[49]

In 1987, as the pressure increased, the appropriations committees finally ran out of room to maneuver. Even the smaller cuts required by the resolution were more than they could manage by their usual techniques of scrimping on administrative expenses, stretching out purchases, and the like. They left whole agencies out of bills in protest against what they considered impossible targets; the prospect of another sequester just made matters worse. The evil day when across-the-board cuts made programs unmanageable was approaching. Yet the deficit persisted.

Black Monday

On October 14, 1987, the Dow Jones average fell by 95 points. It fell 57 points the next day, and 108 points, a new record, the following day. For the week of October 12, Newsweek reported, all shares traded on U.S. exchanges dropped by a "staggering" $490 billion. "Is the Party Almost Over?" that magazine asked.^[50]

By the time that issue hit the newsstands, the answer seemed obvious. On Monday, October 19, the Dow fell by 508 points, losing in one day 22.6 percent of its value. To give that number perspective, compare it to "Black Tuesday," the market break of October 29, 1929, which to many minds signaled the Great Depression; on Black Tuesday, the Dow fell by only 11.7 percent.^[51]

The New York exchange then stabilized or, rather, gyrated wildly from moment to moment only to end up above the nadir of Black Monday. That good news beat the alternative, but hardly would erase fears of a

further rerun of 1929 and what followed. As The Economist pointed out, the markets recovered in early 1930 as well—"do not be too reassured by a bounce back over the next few weeks."^[52]

The panic was worldwide. Tokyo and London also endured record sell-offs. The market fall's possible causes, as is always the case, were far too numerous for anybody to be sure of their relative weights. They ranged from new technology—computer-generated program trading—to old-fashioned market psychology. Some blamed Dan Rostenkowski because he had sponsored a bill to limit corporate takeover actions. Some blamed Treasury Secretary Baker for criticizing the West Germans for not lowering their own interest rates enough. The most obvious explanation for the size of the slump, though not for its one-day occurrence, was that stocks were overpriced. "Two weeks ago," The Economist explained, "investors were buying shares at dividend yields averaging only 3% in London, 2.6% in New York, and 0.5% in Tokyo…. The gap between cost and yield was double its normal size in the three previous decades."^[53] Unless interest rates came down, stock prices would have to, eventually.

Amid all proposed causes, one had prominence: the federal budget deficit. The logic was:

Thus The Economist editorialized that

Either the budget deficit is slashed, or interest rates will have to rise a lot; the second path leads to recession, the first could just avoid it…. Some people have long argued that the White House and Congress would not tackle the deficit until they were faced with a crisis. This week the markets have been shrieking that crisis-time has arrived.^[55]

Newsweek added that "to avoid another disaster, the Reagan administration must show progress toward curing its budget deficits."^[56] The calls

for deficit reduction were very loud.^[57] Robert Samuelson pointed out that "blaming the U.S. budget deficit for all the world's economic problems is simplistic." Yet "blaming the stockmarket crash on the budget deficit," he added, "makes the crisis understandable and manageable." It made choices, although unpleasant, obvious. He thus identified the dynamic that directed more attention to the deficits than might be wise.^[58]

Donald Regan had been booted out as Chief of Staff due to the Iran-Contra mess. He was replaced by Howard Baker, who now joined with Treasury Secretary Jim Baker in advising the president to agree to negotiate a deficit-reduction package with congressional leaders. Ronald Reagan was dragged there, metaphorically, kicking and screaming, continually expressing doubt of the wisdom of any new taxes. The president was reviled for not taking the crash seriously enough; only a fool, even an inattentive fool, could fail to see the signs of imminent disaster. (Presumably, the doomsayers are still looking.) His Republican allies divided into two groups: those who did not want any new taxes (the Kemp faction) and those who would take new taxes as part of a really big deficit-reduction package (the Dole faction).^[59] Democrats, too, expressed skepticism. "You've got boxers that have been throwing punches at each other for ten rounds," Leon Panetta commented, "and now you expect them to get together?"^[60] Amid calls for much bigger deficit cuts than the $23 billion promised by the revised Gramm-Rudman, Tom Foley, chairman of the negotiations, worried that "the best is the enemy of the good"; $23 billion would be hard enough. The crash, after all, did not prove to any one side that it had been wrong. Rather, it showed that the other side's intransigence was just as stupid and dangerous as charged. The crash meant the other guy should give in.

After nearly four weeks of negotiations, the participants announced their agreement on November 23—promptly derided as, among other things, a "budget mouse"^[61] to be greeted with a "chorus of Bronx cheers."^[62] The "summit agreement between the president and the joint leadership of Congress" promised $30.2 billion in deficit reduction in FY88 and $45.85 billion in FY89, mainly as a result of the first installment. The FY88 figures included $11 billion in new revenues, $5 billion in defense cuts, $6.6 billion in domestic cuts, and $7.6 billion in other categories, mostly asset sales and lower debt service. It allowed repeal of the GRH sequester, which began on November 20.

The summit agreement kept the squeeze on both defense and domestic spending but avoided the more severe Gramm-Rudman cuts. Its "gimmickry," through asset sales, for example, was widely derided. The summit was not, however, a budget solution; it was a truce, and on those terms it may have been a success.

The 1987 summit provided targets for discretionary domestic, defense,

and international affairs spending for both FY88 and FY89. Going either above or below those numbers would violate the agreement. It was also assumed that compliance with the package would be shown by wrapping everything together in two big boxes, a CR and a reconciliation, at the end of the 1987 session. The appropriations committees adopted new procedures, redoing their 302(b)s so the House and Senate plans matched, and provided far more information to OMB than was their previous custom, attempting to document compliance with the terms of the agreement. The FY89 targets were enacted in the reconciliation bill, thereby settling the most contentious issue of the FY89 budget resolution process before it ever began.

There would, of course, be plenty of problems. The discretionary targets were too low to accommodate popular increases that the Reagan administration requested (for science research, space, and the war on drugs) without cutting programs Congress wished to protect. Congress resorted to some gimmicks, reclassifying some discretionary accounts as mandatory to make more room for what was left. As summer 1988 began, it was not clear whether the administration would go along. Yet appropriations bills were moving quickly; talk about the budget seemed to have died down; and the media was even consciously deemphasizing the issue. At the beginning of 1988, the New York Times chose to pay less attention to the budget.^[63]

Was the budget issue gone? No, it still constrained all other issues, and what Lawrence Hass called "The Deficit Culture" was deeply entrenched in Washington. But it was an election year; Ronald Reagan would be gone at its end. The battle could be resumed when there were new players. The presumptive nominees for president—Vice President Bush and Massachusetts Governor Dukakis—agreed that deficits should be reduced. Both were vague about how they would do so. Dukakis's main disagreement with Jackson appeared to be over not whether tax increases were necessary but whether the party platform should say so out loud. Rejecting all tax increases except user fees, desiring at least to maintain the current level of defense spending, and doing a bit more on social welfare, Bush was hardly a model of consistency. Why is the deficit too hard for the politicians?

Confronting Budget Reality

The budget deficit is a no-win issue. The presidential nominating process showed that any candidate who proposed a real solution would lose more votes than he would gain. On the Democratic side, former Arizona Governor Bruce Babbitt kept challenging his opponents to stand up for a tax hike. Journalists and commentators applauded, but opponents stayed

in their chairs as Babbitt was quickly eliminated from the race. Among the Republicans, Vice President Bush bounced back from his Iowa defeat by charging that he was more opposed to tax increases than Senator Dole. Bush claimed he would attack the deficit with vetoes and a "flexible freeze" (a nice self-canceling phrase). Democratic nominee Dukakis, meanwhile, emphasized his experience balancing budgets as a governor. Having increased revenues through stricter enforcement efforts in Massachusetts, he would try that before raising taxes. No pain, except for the bad guys. Because Congress had been throwing such provisions into its budget packages for years, while the IRS was having enough trouble devising forms for the new "simplified" tax code, Dukakis's claims for enforcement were dubious. But the approach beat being specific about program cuts and tax hikes.

Jesse Jackson was the exception who proved the rule: by substantially raising taxes on higher incomes and severely cutting defense, he would reduce the deficit by a sizeable amount. Aside from a little fudging on how far down the income ladder he would have to go—most of the people make most of the money—Jackson was on target.^[64] Nothing would satisfy a majority, however, so candidates who wished to win said nothing.

Perhaps the candidates were just hiding their budget plans until after the election. Perhaps, but after the election, members of Congress, having to pass a budget deficit fix, would represent the same public; why would it represent the public any differently than before?

Maybe a Democratic president and Congress would, in trying to show they could govern, put party over constituency by enacting a deficit-reducing tax increase and spending-cut package. Gypsy moths did something similar in 1981. Maybe a Republican president would sell out his own side to make a deal with a Democratic Congress. Maybe turmoil in the financial markets would finally force balance, though one would have to wonder what it would take if Black Monday were not enough. Maybe a fairy godmother would appear, empowering the politicians to solve their problems.

This fairy godmother even had a name—the National Economic Commission, established as part of the budget summit agreement, a bipartisan group modeled on the Greenspan Commission that fixed social security. The Commission, consisting of twelve members, six Democrats and six Republicans, was expected to work through the summer and fall. The president-elect would then appoint two final members. This group of (politically) wise men would, sometime between December and March, propose a budget solution.

Republican members were former Transportation Secretary Drew Lewis, Senator Domenici, Casper Weinberger, former Secretary of Defense

and White House Chief of Staff Donald Rumsfeld, Representative Bill Frenzel, and the president of the American Farm Bureau Federation, Dean Kleckner. Democrats were Robert Strauss, former party chairman and U.S. Trade Representative, Representative Gray, Senator Moynihan, investment banker Felix Rohatyn, Chrysler chairman Lee Iacocca, and AFL-CIO president Lane Kirkland. Members chose Strauss and Lewis, experienced negotiators with good ties across parties, as co-chairmen. They selected as staff director the top civil servant in OMB, one of Washington's most respected budget professionals, David Matthiasen, whose appointment, as much as the Commission's membership, showed that the NEC would be where the action was in 1988.

Could twelve wise men do for the federal budget what had been done for social security? Could they devise a plan and give politicians political cover to push it through? In Chapter 14 on social security, we argued that the shortfall, proportionately so much smaller, was far easier to correct than the federal deficit. As members of the NEC quietly met through the summer—in informal, small groups so they could exclude the press—and reviewed budget difficulties, they would face, as the rhetoric goes, a hard reality.

At the beginning of 1988, CBO's baseline budget projected a deficit of $157 billion in FY88, followed by $176 billion in FY89 and, successively, $167 billion, $158 billion, $151 billion until $134 billion in FY93. The Balanced Budget Reaffirmation Act, otherwise known as the new Gramm-Rudman, required a $136 billion deficit in FY89, dwindling to zero in FY93. Let us review the conditions and requirements of balance under CBO and GRH.

How bad are those numbers? That depends, first, on the year we choose for comparison: $157 billion in FY88 was expected to be 3.4 percent of GNP; $134 billion in FY93 would be 2.1 percent.^[65] Assuming the baseline was accurate, time would reduce the problem.

The baseline might not be accurate. CBO projected moderate economic growth, around 2.6 percent per year, throughout its forecast period. That projection fit historical trends over five-year periods, but it could easily be wrong. CBO estimated there was a two-thirds chance that growth would average between 1.6 percent and 3.6 percent; that is, the deficit in FY93 would be within $125 billion of the estimated $134 billion. The good news was that the error might be virtuous—higher growth and lower deficits. The bad news was a one-sixth chance that the deficit would be $259 billion or higher.

There were two obvious reasons for pessimism. First, if the deficit were such a bad thing, then something bad eventually had to happen to the economy. Otherwise, why reduce it at all? CBO had essentially adopted former Director Rudy Penner's recommendation that budgeters

admit they could not predict the economy's swings, escaping the pressures for optimistic or pessimistic forecast manipulation by predicting that the future would look like an average of the past. However, the deficit was uncharted territory where unpleasant surprises seemed more likely than not.

Meeting that baseline, alone, never mind cutting below it, moreover, would require substantial policy sacrifices. The baseline's definition as current policy was deceptive. In a number of policy areas—control of the AIDS epidemic and drug traffic, NASA's space station, modernized air traffic control system—contemplated expenses in future years would rise well above the baseline, the existing level, because projects were in their early stages. The space station was already under fire within House Appropriations because, if it went above the baseline, other projects might have to be reduced. But that meant a battle just to stick to the baseline.

The domestic spending baseline was tough enough; defense figures posed brutal problems. There was no way to maintain the existing military force structure over the next five years if there were no real growth in military spending. That force structure might, some argued, be reduced without diminishing military capability. A 600-ship navy might not be necessary; some hardware, like the Bradley armored vehicle, might work so poorly it should be abandoned; the country's nuclear deterrent might not require either a rail-mobile MX missile or the single-warhead Midgetman missile. Disagreements abounded. Tough choices were required just to keep spending down to the baseline.

Let us be optimistic, however, and say that the baseline is reasonable. How much deficit reduction would be necessary to attain the new Gramm-Rudman target balance in FY93?

We could assume that the extra couple of billion dollars required by the summit agreement, but not included in the baseline, would be saved in the FY89 appropriations. Beyond that, earlier savings are better because they yield greater long-term savings in interest costs. Using moderate assumptions about interest rates, an average of CBO's projected rates for three-month T-bills and ten-year bonds, reducing the deficit by $100 billion in FY90 would eliminate the deficit in FY93.

It's not that simple, of course. A $100 billion deficit reduction in one year would be a nasty, recessionary swing in fiscal policy. Few economists would approve. We also have the old budget authority versus outlays problem: a $100 billion reduction in BA will not provide so much immediately in outlays. That's actually convenient, phasing in any spending cuts and moderating the fiscal contraction. Any slower, more phased deficit reduction, however, would yield lower interest savings and require more policy change. The $100 billion figure for FY90, therefore, is a

minimum estimate of the amount of policy change needed to meet Gramm-Rudman targets.

Having made our task a little easier at every step, we are left with a figure roughly equal to the U.S. Navy. Or, for those more concerned with domestic spending, a figure larger than medicaid, Department of Education, National Institutes of Health (including cancer and AIDS research), Department of Justice, Department of State, and Federal Highway Administration combined. Would you rather have no deficit and no navy? Or both? A deficit, or do without those domestic programs? Or mix and match: eliminate the deficit but have no medicaid, no NIH, no State Department, and half a navy? The choices may seem extreme; they are extreme, but there they are. People sometimes assume that a series of marginal cuts across programs can do the job, thus various freeze formulas. Yet, if across-the-board cuts à la Gramm-Rudman are as dumb as claimed, their policy consequences would be greater than those we are suggesting.

We might get our $100 billion from taxes. Individual income taxes would only have to be raised by 22 percent, an ironic number, virtually reversing the 1981 tax cut. Or we could raise individual income taxes by 10 percent, corporate taxes by 20 percent, and excise taxes by 50 percent. Whether these options are worse or better than spending cuts depends entirely on one's ideology. Even the most dedicated fan of the public sector can imagine the political difficulty of such tax hikes.

There are, of course, many more narrow options for deficit reduction. Each year CBO produces a volume, "Reducing the Deficit: Spending and Revenue Options." The March 1988 edition included twenty-six suggestions for defense savings, twenty-six for entitlements, seven for agriculture, thirty-eight in nondefense discretionary, eight changes in federal personnel policies, and twenty-five revenue increases. They ranged from canceling procurement of the F-15 fighter plane to creating a national value-added tax. Many, as the examples suggest, are controversial. Others, more obscure, may sound less troublesome. The navy has thirty-seven SSN-688 nuclear attack submarines—twenty-two on order and seven more they would like to order. Why not cancel the last seven, waiting for the new, improved SSN-21, on which delivery should begin in 1995? The navy could still maintain its force objectives, assuming the SSN-21 was not significantly delayed. But if it were, as is common for new weapons, Congress and the navy would be stuck. Should we put all our submarine eggs in one basket?^[66] Take another CBO option: counting, as part of income, payments under the Low-Income Home Energy Assistance Program (LIHEAP) in determining eligibility or benefit levels for AFDC and food stamps would save $255 million in FY90; it would also eliminate duplication where some recipients of LIHEAP

are better off than nonrecipients who actually earn more. But the change "would particularly penalize families facing large energy bills." Higher bills mean a higher offset against other payments, but what are the recipients to do, shower in the dark? Move south? Even the more harmless sounding proposals turn out to have thorns.^[67]

A value-added tax (VAT), one of CBO's alternatives, is the nuclear option of deficit reduction. Even with exemptions for food, housing, and medical care, a 5 percent VAT yields nearly $80 billion in FY93. Economists love a VAT because it taxes only consumption without inhibiting investment as the income tax can. (Except that people might save less if prices are higher.) States, however, do not like a VAT; sales taxes are their territory. Liberals object to a VAT because sales taxes are regressive (encouraging savings and favoring savers who have more money). And conservatives with any knowledge of comparative politics fear the device that largely finances European welfare states. Conservatives fought a minimal VAT in the 1985–1986 dispute over superfund financing because they feared the principle. In short, compared to other deficit reduction options, a VAT looks quite attractive. As a policy in its own right, the VAT's implications for our federal system are more revolutionary than tax reform, potentially as revolutionary as the invention of the income tax.^[68] We do not say it cannot happen; we do say that fundamental change in domestic and defense policy is required to achieve balance.

Even Rudolph Penner and Joseph Minarik, self-described as "two economists not far from the center of the ideological spectrum," in the most informed and careful budget reduction proposal we have seen, in their own words, "can arrive at a balanced budget only with some fairly radical—and many people would say politically implausible—changes in tax and spending policy."^[69] They suggested taxing social security benefits, deemphasizing naval "forward deployment" in the European theater, cutting medicare providers by $10 billion and raising recipients' premiums by $5 billion, somehow (they're not sure how) chopping price supports, and a "draconian approach" to intergovernmental grants "and other dubious federal government activities." They would double the cigarette and hard liquor taxes, raise beer and wine taxes, raise the motor fuels tax by 12 cents a gallon but not give the revenues to the trust fund. They would adopt a large menu of "base-broadening" measures on the income tax, such as cutting business deductions for entertainment and meals in half, taxing accrued capital gains, and capping the mortgage interest deduction. We can only agree with their own assessment; their figures add up, but it probably can't be done.

Citizens should realize how hard it is to balance the budget; even if they disagree, they should also be aware that others have good reasons for believing balance is unwise. They should also realize how much the

politicians have achieved. In 1986 John Palmer of the Urban Institute estimated the effects on the deficit of all budget decisions since the beginning of 1982. Those actions ranged from TEFRA to the February 1986 sequester.

Starting from a baseline that had defense growing by 7 percent per year—the policy Reagan proposed and Congress seemingly endorsed in 1981—Palmer found the politicians had reduced the FY86 deficit by $162 billion, or 3.9 percent of GNP. Unfortunately, nobody could see that they had done so much because a deficit of $208 billion remained.

The politicians seemed to have done little because the problem each year was much, much bigger than it seemed. Yet, if they actually had done nothing, the FY86 deficit would have been $370 billion, 8.8 percent of GNP. Each year they had acted; in most years their efforts were canceled out by revisions in the economic and technical assumptions. Thus, five-year savings of $184 billion from the February 1982 estimates were overwhelmed by $235 billion in larger deficits from changes beyond their control. Only in 1985 did the surprises go the politicians' way.^[70]

After 1986, by Palmer's estimates, the decisions to that point would save even more money. Congress more than shut down the defense buildup, saved some in the 1985–1986 reconciliation, raised taxes, and introduced some domestic cuts (mostly medicare) as part of the budget summit. Without a doubt deficit savings have increased in 1987–1988.^[71]

Most deficit reductions after 1981 came from winding down the defense buildup and raising taxes. From 1982 to 1986, domestic spending was cut by roughly 5 percent.^[72] As background, domestic spending had taken a big hit in 1981, and the 1983 package took social security off the table. CBO estimated outlays for nondefense discretionary spending would be the same in FY88 as in FY85 about $175 billion. In those years it was squeezed by inflation.^[73] Between FY81 and FY88, we see substantial effort, for nondefense discretionary spending fell from 5.7 percent of GNP to 3.7 percent. All these numbers add up to one result: politicians have done a great deal about the deficit, but each step is harder than the previous.

The best arguments against deficit panic, in our opinion, are those of experience. Nothing terrible happened. Yet. But "yet" is a long time coming. All the bad things prophesied from the deficit, from depression to inflation to decline in productivity, historically have happened during periods of balance as well. Why, then, go through tremendous trouble to balance the budget?

By 1987 mainstream economists emphasized that deficits should be cut because they reduced national savings and, thus, investment:

If continued over the long run, large budget deficits would either drive down domestic investment or be financed by increasingly uncertain, and

potentially reversible, capital inflow from abroad. In either case, living standards of U.S. citizens would fall: a reduced level of domestic investment would retard the growth of the economy, and continued heavy foreign investment would send a larger share of U.S. output abroad in payment of debt service or other returns to foreign investors.^[74]

They worried about demand management mainly in terms of how fast to move toward balance, that is, "Will Rapid Deficit Reduction Cause Recession?"^[75]

By 1988 this concern with savings was causing many economists to argue that the budget should move into surplus. They wanted social security surpluses invested in the economy, not in financing other federal programs. Minarik and Penner argued that for the social security "accumulation to have any economic meaning, the rest of the federal government must not run a deficit." They emphasized that "the main reason for deficit reduction is to increase long-term growth."^[76]

The economists' focus on growth returns us to the "productivity crisis" of the 1970s. It is a legitimate concern. We just have a few questions:

Lower deficits, even surpluses, might, under some conditions, be a good idea. But the kind of drastic budget action required to use the social security surpluses for savings is impossible. We fear that, as in the

famous story of the man who looked for an item not where he lost it but where the light is brightest, the government's budget is being asked to solve a problem because the budget is the nearest instrument at hand, even though not entirely appropriate.

There is only one reason to treat the deficit as a crisis: the markets. They remain the great unknown, at the end as at the beginning of our story. With one big difference: then concern focused mainly on American bondholders. Now we worry about foreign investors and foreign central bankers. Might they refuse to invest? Demand higher interest rates? Keep going because there was no other place to take their money? Invest, even more, just as Americans were investing more in Europe, because of continued prosperity? There is every reason to treat foreign investment as a good thing (if foreigners did not want to invest, wouldn't that be a sign of American decay?) signifying that opportunity and stability are found in the United States. Yet any borrower loses some independence; depending on foreign capital is worse than being the lender; nervousness is understandable.

The wolf, sighted so many times during the 1980s, could finally beat on the door. There is no way to tell. Nor could anybody know what would satisfy its appetite: $20 billion a year? $40 billion? $60 billion? If the markets posed the question, politicians could only guess at the answer.

When continued prosperity intersects with talk of economic Armageddon, do you wait and see, as the American public would like, or do you take drastic measures to ward off the worst, as the political stratum demands? That depends on at least two considerations: whether you think there is a better alternative (we present ours in the final chapter) and whether you believe balancing the budget in the short term is more important than maintaining majority rule.

Strange as it may seem, democracy and deficits now go together. The only way to sever that connection is to vote into office majorities dedicated to budget balance. The public interest and the state, as we shall argue in the next chapter, only coincide when public opinion joins together what political life normally keeps apart.