The Deficit and the Public Interest "d0e18376"

Getting There

The budgeting events of 1989, described well in Lawrence J. Haas's aptly titled Running on Empty,^[12] bred only bitterness and mistrust. The president's FY91 budget offered no new prospects for a solution.

In early April, however, OMB Director Darman began to dribble out bad news on the estimates. At first he said they were off by only $6 billion

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to $15 billion, but the numbers grew steadily.^[13] Now, nothing had really happened, yet, in the economy. The final quarter of 1989 had been bad, but no worse than already estimated when the FY91 budget was made.^[14] Bad news was coming on the thrifts, but the administration had all sorts of scorekeeping options, like spending the money in FY90 instead of FY91. No economic reestimate was required until June. It seems clear that Darman chose to begin releasing bad news in order to influence other players—perhaps including the president or perhaps with his approval. He worried publicly about a capital shortage as the Japanese and Germans turned inward, and supporters of a deal within the administration began to argue that it was in the president's interest to fix the deficit immediately rather than face a recession closer to the 1992 election.^[15] By May 8 the president was telling legislators, "What's at stake here is the overall economy."^[16] George Bush had decided it was time to confront the deficit.

House Democrats on May 1 passed a Budget Resolution that presumed big defense cuts and some domestic increases, while ducking the question on taxes. Amid a great deal of mutual suspicion, leaders of the administration and Congress began a desultory summit on May 9. The administration backed and filled on the meaning of the president's claim that "everything is on the table." Even conservative Democrats suggested the different sides communicate in writing. The administration and Republicans emphasized their need for new enforcement provisions, which in their strong form were anathema to Democrats and especially appropriators. A great deal of time was spent trying to agree on a target for the package. At one point, "Mr. Darman outlined 11 different ways to measure the deficit and projected the gap six years into the future under each definition. The summit negotiators reached no agreement on how to measure the deficit."^[17] There was a quiet agreement among the economic officials to say that any more than about $50 billion, or 1 percent of GNP, would hurt the economy. The big issue was the size of deficit reduction over five years. Some Republicans wanted to keep it to $400 billion because then there would be some chance of doing the job without taxes. Democrats pushed for $600 billion in order to ensure $500 billion—which they were sure could not be done without taxes!^[18]

The talks broke down. Finally, to get them moving again, the president agreed on June 26 to issue a statement explicitly accepting "tax revenue increases." The statement had a lot of conditions, and the language might even be strictly interpreted as endorsing not rate increases but the capital gains cut that the administration kept insisting would increase revenues. The president may have hoped to have his cake and eat it too, getting the Democrats more seriously involved yet convincing his allies that he had not really given in. He clearly hoped to play his

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concession down, by issuing it as a written statement, avoiding oral comment, and doing it on a day when much else was going on, including South African black leader Nelson Mandela's address to a joint session of Congress. Instead he got banner headlines. The Democrats said they would not gloat but did claim victory, his allies screamed, and the press took the free shot at him for abandoning his campaign pledge.^[19]

Negotiations resumed, but were stymied by a wide range of disagreements. Even in May it had been obvious, as David Wessel of the Wall Street Journal wrote, that they would get no money from the domestic discretionary category because "that includes everything that Congress and President Bush want to increase. Whatever cuts negotiators find in this category are likely to be offset by increases elsewhere."^[20] On defense, the administration's best hope was to ally with Chairman Sam Nunn of the Senate Armed Services Committee on a package that still cut more than the Pentagon wished. The president's insistence on a capital gains cut allowed the Democrats to use populist rhetoric, including attacks on the "bubble," which all wings of the party approved. The House Republican Conference endorsed, by a wide margin, a resolution that no taxes should be increased. And Senator Byrd made clear that he would accept no enforcement procedures which he felt infringed on the appropriators', and Congress's, institutional role. As a Republican aide paraphrased Byrd's line, "You will get an agreement with my support; you may not get an agreement without me."

When the administration came up with a tax proposal, leaks of its contents showed that it would lower taxes for the rich and raise them on Joe Sixpack. The Democrats avoided criticism by being too divided to come up with a package that could be leaked.^[21] Talks were suspended, amid much harsh rhetoric, as Congress went home for August.

Negotiations resumed on September 7, at Andrews Air Force Base outside of Washington. Some, but not all, of the gap on defense had closed when the administration settled its internal disagreements and announced plans for a cut in military personnel by half a million over five years.^[22] The Iraqi invasion of Kuwait, by putting the country closer to recession, encouraged a less ambitious first year target.^[23] Our sources report that Darman told the appropriators that he would get them a domestic increase, but he would have to hide it in the baseline so Congressional Republicans wouldn't object. Sin taxes would obviously be included. But arguments about the other taxes, entitlements, and the distributional effects prevented further agreement. Hoping the talks would be easier with fewer participants, the negotiators terminated the Andrews phase on September 17, and resumed, with only the party and administration leaders, at the Capitol on September 19.

The end of the fiscal year, and then Gramm-Rudman, loomed. With

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deposit insurance costs now acknowledged, a $230 billion sequester threatened. Domestic accounts faced 32.5 percent cuts; defense 34.5 percent. OMB ordered agencies to begin planning extensive furloughs of their staff, and the president talked tough about allowing no CR without a deal.^[24] As the pressure built, alternative proposals were circulated as if in a game of musical chairs. When the music stopped, what would be left?

The administration wanted a capital gains cut, the Democrats wanted higher marginal income tax rates, and neither side was quite willing to make a trade. The Democrats suggested various surcharges on very high incomes; Republicans suggested various capital gains options; both sides looked for ways to minimize deductions, with the administration emphasizing state and local taxes and the Democrats objecting strenuously. The true budget controllers, like Senator Dole, began to get fed up; on September 19 he suggested that everybody's giveaways, to rich and poor, be put in a separate bill, with offsets. On September 20 he went public: "We'd have one pure deficit-reduction package and one pay-as-you-go package," he explained.^[25] On September 25 Bob Michel joined him. But House Republicans like Bill Frenzel of Minnesota still insisted on the need for "growth incentives."^[26]

There was still a major spending problem, too. Up until the very last, negotiators leaned, because they thought it was a good idea, toward taking some money from the better-off elderly by increasing the taxation of social security benefits.^[27] The trouble was, as one Democratic pollster put it, "The two things the voters still give us credit for are standing up for the middle class and protecting Social Security."^[28] If the elderly pay, the bargainers on both sides in the end decided, it would have to be in some other way.

The music stopped, but only for the first time, on Sunday morning, September 30. The White House and Congressional leadership announced a "Budget Summit Agreement," providing $40.1 billion in deficit reduction in FY91 and $500 billion through FY95. For our purposes, the following provisions of the 47-page document are primary:

1.	It was not quite an agreement. Especially on the enforcement provisions, Director Darman dotted a few i 's and crossed a few t 's that the Democrats didn't feel they'd accepted.
2.	It raised $56.8 billion from a ten-cent increase in the gasoline tax and a two-cent tax on all refined petroleum products;^[29] $10.0 billion from liquor taxes; and $5.9 billion from cigarettes, for a total of $72.7 billion in regressive taxes.
3.	The Democrats gave up on all tax-the-rich provisions except a $1.9 billion luxury excise and an $18.0 billion provision to limit deductions for those with incomes over $100,000 per year.

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4.	Sixty billion dollars would be raised from Medicare, half from reduced payments to providers and half from a combination of higher deductibles and higher premiums for beneficiaries. In essence, the latter replaced potential revenues from social security taxation. It turned out to be no more politically plausible.
5.	The package contained $25 billion in revenue losers. Some were for the poor, but $18.3 billion were tax breaks for business, supposedly tailored to the small, the innovative, or the energy-oriented.
6.	And in a minor provision that infuriated many Democrats, unemployment checks would have a two-week waiting period. The idea was to keep construction workers, say, from drawing benefits during a short time between jobs; but it looked like $3.2 billion from the people Democrats were supposed to help.^[30]

The deal made sense in the Washington policy community, where its most politically egregious provisions, like the gas tax, could be defended as good for us. "It's a consumer package," Alice Rivlin of the Brookings Institution explained. "It's a very special kind of consumer package, a series of taxes on things we would like to discourage the consumption of: gasoline, alcohol, cigarettes."^[31] But it was not a package any Democrat could love. The "growth incentives" were swiftly tagged by many analysts as potentially easily abused tax shelters.^[32] Analyses by Democratic tax staffs showed that the package would hit hardest at people with incomes between $30,000 and $50,000, who would pay an average of 3.3 percent more in taxes, while those with incomes between $100,000 and $200,000 paid only 1.5 percent more, and those with incomes above $200,000 paid only 0.3 percent more. Senator Wyche Fowler (D-Ga.) reported that his party colleagues reacted to those numbers with "something between a deep swallow and a gag"; Dan Rostenkowski said the growth incentives would "just muck up the [tax] code again." Pete Stark (D-Calif.), whose subcommittee of Ways and Means would-have to mark up the Medicare provisions, said he would oppose them.^[33] Yet Republicans didn't like it either. The right objected because there were too many taxes, and moderate Republicans, as they had been back in 1982 on the "Oakar Amendment," were especially leery of Medicare. Marge Roukema of New Jersey expressed their reaction: "If they're savaging Medicare, it's going nowhere. Deficit reduction on the back of the elderly sick? This is madness." Charles Schumer (D-N.Y.) summed up the reactions of, it turned out, a majority of the House when he observed, "Democrats think it's a Republican budget and Republicans think it's a Democratic budget."^[34]

Most of all, it was a politically unpopular budget. Polling data for decades had shown gas taxes were less popular than almost any alternative. 1990 was no exception.^[35] Efforts to cut Medicare by hitting the

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elderly, not the providers, had failed for years, crisis or no crisis. Therefore, in spite of grudging endorsements in major newspapers, a defense by Federal Reserve chairman Alan Greenspan, national television appeals by the president and Senator Mitchell, and what some people felt were heavy-handed tactics by the president's men, the House on October 4 handily defeated the package, 254 to 179. Minority Whip Newt Gingrich led the revolt within the Republican caucus, rallying colleagues who objected either on principle or as a matter of political tactics to the tax figures. The Democrats could not have such a public defection, because it would look like they were breaking an agreement. But the leadership backpedaled, and soft-pedaled, and reminded everyone that if the Republicans didn't vote for the deal, the Democrats didn't have to, either. Had a majority of Republicans supported the budget deal, it is likely that Democrats would have swallowed hard and voted for it. When word got out about its conservative character, however, the Democratic leadership might have been in big trouble with its troops. The leaders were fortunate, and both parties voted no.^[36]

Three more weeks of musical chairs followed, with continual maneuvers and permutations. For our purposes, what mattered was:

1.	The deal had to move in the Democrats' direction, since the House Republicans had taken themselves out of the game. "We just sort of threw in the cards," Minority Leader Michel later explained. "We weren't even up to being players…. When we're divided as a minority party we ain't got no strength at all."^[37]
2.	In moving in the Democrats' direction, the package also moved closer to public preferences, for the gas tax and Medicare premium and deductible increases would be shaved, and replaced by more progressive taxes.
3.	Once again the administration suffered terrible publicity for favoring the rich, and once again the Democrats gave up their most easily explained and administered proposals, like the surtax on higher incomes, at the end, figuring they had already made lots of political points and needed some agreement.
4.	When the music stopped, therefore, one chair went to a proposal, the phase-out of personal exemptions, which got a seat because it was new enough not to have been shot yet. "When you're looking for the piece that puts the deal together," its sponsor, Senator Packwood (R-Oreg.) explained, "you don't want to come too early."^[38]
5.	Unable to replace all of the savings lost on Medicare and the gas tax, the negotiators eventually accepted a slightly smaller package than before.

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The enforcement provisions were an elite game, which received little attention and was less understood by the masses in the House and Senate. There was a rough understanding that everything was being changed and the sequester process would be made more sensible; but participants doubt strongly that majorities of their party caucuses really understood the new process. The leaders had to respond to the pressure, demonstrated throughout the year, to "protect" social security by taking it out of the budget calculations. Yet, in the end, the leaders, especially Senator Byrd, led; and that part of the agreement reflected their decision, to put the budget battles behind them for a while.

Thus on October 27, 1990, the budget deficit truce of 1990 was signed.