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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


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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


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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


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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


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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.


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