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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


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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


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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.


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