Five
The President's Program

On inauguration day, the prime interest rate stood at 20 percent. The dominant economic issue remained inflation, not unemployment; thus, both media and politicians still emphasized reducing spending to balance the budget. The air of panic remained from 1980. "When Ronald Reagan steps into the White House next week," Newsweek wrote, "he will inherit the most dangerous economic crisis since Franklin D. Roosevelt took office 48 years ago."^[1] Lack of support for social spending was revealed, in another way, by President Carter's valedictory budget; it was as tight as his FY81 plan and closed with a call for further reductions in entitlements.

Reagan's Attack Takes Shape

The new president had to nurture this mood to "do something." Reagan thought that he could lead the public against the politicians; when he was governor, as he said, "on the major things I took the case to the people…. Sometimes it is necessary to make the legislature see the light, you make them feel the heat."^[2] His strategists agreed that only massive public pressure would overcome resistance in Congress. "To win this fight," declared Stockman with a bit of hyperbole, "the president is going to have to generate a million cards and letters a month to Congress."^[3]

While the administration was still working out the details of the plan, Reagan took to the airwaves on February 5 to gather public support. He began with a litany of economic woes, dramatizing inflation by displaying first a dollar bill and then a quarter, dime, and penny to show the how the dollar had shrunk to 36 cents since 1960. Then, in a gentle, unaccusing tone, he described how it had happened; the rhetoric is worth repeating:

We forgot or just overlooked the fact that Government—any Government—has a built-in tendency to grow. Now we all had a hand in looking to Government for benefits as if Government had some source of revenue other than our earnings…. Some Government programs seemed so worthwhile that borrowing to fund them didn't bother us…. We know now that inflation results from all that deficit spending.^[4]

The president sought to create the impression that his plan was nonpartisan—but opposing it would be partisan. He was setting up the presidency as the pubic interest and his opponents as the special interests.

To an aide surprised at the speech's tone, Reagan explained, "Listen, if I were making this speech from the outside, I'd kick their balls off."^[5] In a tactic from Greek drama that was to be repeated, the bringing of bad news was left to Stockman, the messenger.

Who's on First? Taxing or Spending?

The February 5 speech earned rave reviews; the Democrats saw that the president was putting his position in appealing terms that would be difficult to oppose at the same level of generality. But once matters got down to specifics, the president faced trouble within his own coalition. One issue was: Which came first, tax cuts or spending cuts? Traditional wisdom had it that spending cuts, if any, had to precede tax reductions—pain before pleasure—because only the prospect of pleasure would persuade congressmen to accept the pain. Senate Republicans agreed and pushed spending to the forefront in both counsels and procedures. Donald Regan responded that business needed to plan for the future, so the tax cuts should be pushed without regard to the spending schedule.^[6]

In the Senate Budget Committee, the new leadership—Senator Pete Domenici (R-N.M.) and his chief aide, Steve Bell—was, to say the least, skeptical of Kemp-Roth. Stockman refers to Bell as "an avowed opponent of supply-side economics."^[7] Bell could be scathing against what he considered the inflated claims of some supply-siders. When told at one dinner that the Reagan revolution would increase savings to 12 percent of income, Bell replied that "savings have never varied from a 4 to 8 percent range. After 100 years, if you're a slow learner, you can figure out that there is something in the system that keeps savings from going to 12 percent." He did not think it was 1980's tax rates. Bell believed that cutting taxes had always been easier than cutting spending, and there was no reason to see that pattern as any more mutable than the savings rate. Stockman scorned such reasoning, but Bell's concern was shared by GOP senators such as Domenici, Dole, and Majority Leader Howard Baker. Although resolved to keep his party together and govern the Senate in support of the new Republican president, Baker wanted independent

advice and hired his own economist, Dan Crippen, to provide it. Though quieter and more academic in style than Bell, Crippen was not much more of a supply-sider. Senate leaders and their staffs wanted to follow the president, but they were not about to be sold on the tax-cut-first strategy.

In fact, Senate leaders favored an extreme version of a spending-cut-first strategy. They adopted procedures to make cuts happen fast and be final: reconciliation was slated not only before the tax cut but even before the budget resolution. Senate Republican leaders chose also to extend the reach of reconciliation past entitlements to authorizations for annually appropriated programs. If those authorizations were cut below prevailing appropriation levels, the appropriations committees would have to follow along, for they are not allowed to appropriate more than is authorized. Such cuts would stick in future years (over the term of the authorizations), rather than just in the one year of an appropriation; but the key advantage of reconciling authorizations was speed. If appropriations reductions were delayed until their bills were passed in (at best) September, the drive for spending reduction might have dissipated.

Domenici, Baker, and their staffs had to convince Senate Parliamentarian Robert Dove that such a sequence was allowed under the rules. Convincing Dove was made easier by the actions in 1980 of Senator Lawton Chiles (D-Fla.), a leader of Democratic budget balancers. Chiles shared Republican Domenici's budgetary preferences and his desire to increase the Budget Committee's power, so the 1980 resolution was drafted to establish precedents that gave the committee a lot of running room. It was not the last time Chiles and Domenici would find themselves on the same side. While Stockman got credit for using reconciliation, it was hardly his idea.

As the resistance to tax cuts became obvious, the children's allowance theory took on some unspoken amendments. Spending cuts would be made to ease the worries of skeptics about the deficit picture in the immediate future. Such cuts would be a down payment, in the sense of a token of intent and ability to pay. If tax cuts did threaten deficits, the fact that Congress had cut spending once would soothe worriers, who might believe it would happen again.

Who was to be convinced? Both Republican and conservative Democratic politicians and, as usual, the financial markets. Politicians were easier to convince than markets. Soon after being sworn in, Reagan showed that business had a friend in the White House. He abolished the Council on Wage and Price Stability, decontrolled domestic oil prices, and placed a sixty-day freeze on pending regulations. But confidence in the White House did not translate into optimism about the economy. A mid-February, Forbes article was subtitled, "Reagan's team won't engineer

a crisis to cure inflation—but there may be one anyway." Bond market guru Albert Wojnilower was quoted: "Today, only extraordinary and unacceptable increases in interest rates are able to slow credit expansion—usually by precipitating bankruptcy crises."^[8] With respected conservative voices doomsaying, the markets were going to be a tough sell.

The Rosy Scenario

In this context of market skepticism advisers battled over the assumptions that would accompany the economic plan. They could not use the September 9 inflation assumptions, but any forecast within the bounds of experience would make it difficult to project a balanced budget with the big tax cut. Neither the Senate leaders nor, naturally, House budgeters thought the two fit together. House opposition could be dismissed as partisan, but, if the forecast were denounced by Senate leaders as well, the administration's game would be up. Luckily for Stockman and Reagan, Senate leaders wanted to support their new president and at least the basic outlines of the new policy: real domestic spending cuts and some tax relief. Stockman therefore needed an economic forecast that was optimistic but not totally off the wall, one that could be criticized but not simply dismissed out of hand. He got what he needed, not from calculation but from last-minute compromise.

The original drafting team for the economic forecast—Stockman with his chief economist at OMB, Lawrence Kudlow, and Beryl Sprinkel, Norman Ture, and Paul Craig Roberts from Treasury—were a mix of supply-siders and monetarists. They wanted economic growth of 5 percent to 6 percent, twice the historical norm. "Otherwise," Stockman writes, "what was the point of the whole miracle cure we were peddling?"^[9] But they also wanted low growth of money supply. There were two ways to get there; the most obvious was to assume a quick collapse of inflation, falling to 2 percent by 1984. Accordingly, in late January, Stockman's draft forecast was predicting a quick rebound in the second half of 1981, followed by GNP growth of 4.5 percent for each following year, all with low inflation. Conceding that conventional economic models predicted nothing of the sort, the budget director declared those models "can't even predict the next quarter, let alone the next year."^[10] That was too true, but wishful thinking was not necessarily a better guide.

Stockman could not sell the forecast to any but his supply-side colleagues. Alan Greenspan was particularly critical (internally), and he was hardly alone. CBO estimated that under realistic assumptions the Reagan package as roughly outlined would lead to $70 to $80 billion deficits.^[11] More important, Senate Republicans balked at the developing forecast; Domenici told Stockman that he could not accept it.

Into this mess strode Murray Weidenbaum, the new CEA chairman. He knew that no one would believe the combination of fast growth and 2 percent inflation. His protests were interpreted as a threat to resign, which would be very damaging. There they were in early February with no economic forecast, and, as part of the overall strategy of moving quickly, the administration had already announced that it would reveal the full package in a speech to Congress on February 18. Estimates in the budget documents depend on the economic forecast, so the matter had to be settled fast. "You're going to be sending the President of the United States up that Hill with a blank piece of paper," Dale McComber, chief career official at OMB, warned his new director. "The prospect," Stockman notes, "lacked charm."^[12]

Stockman, Weidenbaum, and the rest, therefore, bargained out a forecast. Weidenbaum won agreement to predicting slower long-term growth (4.2 percent annually after 1983) and acknowledging the need for a very small ration of recessionary pain in 1981. The final forecast assumed slightly higher (7.7 percent) unemployment in the fourth quarter of 1981 than had prevailed in the first quarter (7.4 percent). It also assumed a much more gradual fall-off in inflation (to 6.0 percent on the CPI in 1983; 5.1 percent in 1984).^[13] The CEA chairman described the result:

A forced marriage. Supply-side people insisted on the possibility of rapid growth in real terms, and monetarists demanded rapid progress in bringing down inflation. Each of them would go along with a set of numbers as long as their own concern was satisfied. The monetarists weren't that concerned about growth and supply-siders weren't that worked up about inflation.^[14]

The result, Herbert Stein wrote, "strained credulity."^[15] Weidenbaum later claimed that the final result was "extremely optimistic," but not "off the wall…. Was it technically feasible? I think so. But everything had to work well."^[16]

The numbers about which there was such controversy appear in Table 3, with comparisons to figures in Carter's budget.The forecast's optimism was not so unusual as presidential forecasts go, though it would prove far less justified than normal. The problem was in the internal logic: this was all supposed to happen with slow monetary growth. The monetary squeeze could wipe out the forecast by creating a recession—the usual concomitant of slowing the flow of financial blood to the economic system. But even without recession there was a mathematical inconsistency.

The revenues to balance the budget, at the lower rates from the tax cut, called for a large growth in the nominal (current dollar) economy and therefore in both real and inflationary growth. Growth in the nominal size of the economy means that more money is changing hands. Either there is more money (i.e., the money supply increases), or current

money is moving faster (i.e., "velocity" increases). If the money supply were squeezed, then money for the projected growth in nominal terms would have to come from unprecedented increases in velocity. People would have to turn over their money much faster than ever before. Unless velocity increased then, as Paul Craig Roberts later wrote, by "jacking up the inflation assumption" above what the supply-siders wanted—so as both to seem reasonable to those who believed that inflation could only fall slowly and to give an appearance of budget balance that might reduce inflation expectations in the long term—"Stockman showed higher nominal GNP than was consistent with the assumption of monetary restraint."^[17] To wring more money from lower taxes demanded a higher nominal GNP; that in turn required high growth and inflation. But, because the money supply was not supposed to grow nearly enough for this, something had to give.

Inconsistency at this level of analysis was not something that economists could explain very well to themselves, let alone to the American public or to politicians. But it suggested that the administration package would be less than convincing to those skeptical bond markets; when they did not react with glee, Stockman, rather guiltily, concluded "they don't think it adds up."^[18]

Economically it didn't add; politically it did—barely. No one knew either if the Federal Reserve would hit its monetary targets or what target was really consistent with what rate of inflation. The uncertainty of 1980, plus the difficulty of appearing partisan, inhibited CBO from taking a strong stance against the estimates.^[19] Republican economists—Greenspan, for instance—who wanted the administration to look as good as possible withheld public criticism.

The rosy scenario fooled neither budget experts nor leaders of House Democrats and Senate Republicans. But because the administration had avoided totally implausible economic or budget deficit forecasts and was

only technically inconsistent, Senate Republican budgeters would have trouble explaining a break with the president. They would seem to be siding with the Democrats, and that the Republicans could not do. The issue could still be posed as "us" versus "them"; anyone who questioned the figures was opposing the president. Democrats, of course, could say anything they wanted about the Reagan plan, and it would be dismissed as partisan.

Contemplating Cuts

Even under the optimistic economic assumptions, to detail domestic spending cuts that would balance the budget yet pass the Congress was a daunting task. From his previous work with Phil Gramm on a FY81 budget alternative, the Dunkirk memo, the transition (Weinberger/Taft) team work, Senate Budget Committee lists, and so on, the new budget director had collected a large bag of cuts before he walked in the door of OMB. Some were big and obviously politically difficult (the "A" list); others were small and more technical (the "B" list). Once inside that door, Stockman suddenly had a large, highly professional organization to price out all his suggested changes, draft justifications, suggest further cuts (many from hoary OMB lists passed from director to director), and warn him of hidden difficulties (why cuts had continually been passed on). The OMB staff generated additional big and small proposals (the "C" and "D" lists). Among all his new resources, one, however, was scarce: time—Stockman's and particularly the president's and that of his colleagues.

Stockman needed his colleagues' time to make OMB's position the administration's policy. Stockman, for example, wanted to slash nonmilitary foreign aid. New Secretary of State General Alexander Haig thought that budgetary restraint did not justify OMB's changing foreign policy over his head, so he resisted with all the power that a personally forceful bureaucratic veteran could muster.^[20] Few other cabinet members had either the facts or the savvy to protest as effectively, but all at least had to sign off on cuts before they were sent to the Hill.

After trying to consider cuts in cabinet meetings, which wasted the time of anyone not immediately on the chopping block, Stockman resorted to a tried-and-true measure of budget cutters worldwide, a separate review board stacked with high officials whose bent was toward cutting. To review contested OMB proposals, his Budget Working Group included Bill Brock, Don Regan, his deputy Tim McNamar, Martin Anderson, and Murray Weidenbaum. Jim Baker and Ed Meese were members but rarely had time to attend. Anderson excelled at doing Stockman's work for him, overawing cabinet secretaries and their bureaucrats

with his expertise. Because it was so early in the administration, not many department heads knew much; because few new lower-level appointments had yet been made, department heads were forced to rely on the word of suspect (by definition) career bureaucrats against a group of their administration colleagues. Not a good position for the cabinet members.

Stockman thereby won acquiescience, if not support, to cuts that were then presented to the president for final approval as the product of a group of his cabinet officers. Stockman believes the process made cuts seem more consensual than they were.

If the President learned any lessons from [the process] … they were undoubtedly the wrong ones. When he later found himself being challenged by congressmen and senators, I would hear him say again and again, "The fellas in the cabinet round-tabled all this and are in one hundred percent agreement that these cuts should be made."

In fact, they hadn't and they weren't. We had brow-beaten the cabinet, one by one, into accepting the cuts. It was divide-and-conquer, not roundtabling. In my haste to expedite the revolution, I had inadvertently convinced the chief executive that budget cutting was an antiseptic process, a matter of compiling innocuous-sounding "half-pagers" and putting them in a neatly tabbed black book.^[21]

It is fairer to say that Reagan, who on his own upped the estimate of "waste, fraud, and abuse" to 10 percent of all spending, was not educated to the contrary by the process.

There was no point in bashing cabinet officers over the head to back something that congressional Republicans were going to nix. Opposition had to be gauged and then overcome. And so as "black books" of proposals flew around the executive branch, a similar blizzard of paper was carried to the Hill. An OMB source explained that "to get the most politically saleable, $40 billion lowest common denominator, you need to start with $70–$80 billion … [but] it's not a smooth glide path from 70 to 40; more like 70 to 30 and then back up to 40." Many cuts failed to pass political muster. Because Stockman had to win support one by one for individual cuts, which were controversial enough, there was no way to assess the totals.

"Fairness"

This process of politically setting cuts, within both administration and Congress, raised the issue that Representative Corman and Democratic budgeters had debated in 1980: Would budget cutting go where the money was or where the power was not? Stockman wanted to defuse

liberal criticism by cutting business and middle-class subsidies as well as programs concentrated on poor people. As he told William Greider, "We are interested in curtailing weak claims rather than weak clients…. We have to show that we are willing to attack powerful clients with weak claims. I think that's critical to our success—political and economic."^[22]

Over in the Senate, Budget Committee Chairman Domenici agreed: "You never heard Pete Domenici make the argument that you could balance the budget, have significant defense increases and multiyear tax cuts simply by eliminating waste and fraud." He told David Broder, "You have to restructure the entitlement programs, either by adjusting the inflation indexes or redrawing the eligibility rules."^[23] To Domenici that meant not just rule changes for the means-tested programs such as Aid to Families with Dependent Children (AFDC) and medicaid—weak clients—but reductions in the COLAs for the big middle-class programs, particularly social security.

The social security COLA in 1980 had far exceeded comparable wage increases, thus transferring money from current workers to the retired; that is, when prices rise faster than wages, as during 1979's inflation, and benefits are indexed to prices, beneficiaries do better than people who pay taxes. If cutting the COLA were ever to seem fair, now would be the time; and, because the inflation adjustment would be large, there was a lot of money in it. SBC leaders estimated that a one-year COLA freeze in 1981 would save $88 billion over five years.^[24]

In the House, one Ways and Means aide recalled, "I and other staff had assumed, because there were huge increases then, that there would be some deal on the COLAs. Jones was looking at it, and I and the other staffers in the back room expected it." In the Senate, a source recalls, the sense was that "we had to get the social security COLA now. Our first notion was a crude suppression of the COLA. Hollings was on board. We knew that here we've got the old man, elected by a big electoral margin, the SOB could sell ice cubes in Alaska, it was time to do it." In short, the budgeters of the center wanted to go after social security.

As his later actions and his own report make clear, Stockman was quite interested in reducing federal commitments on the middle-class entitlements. If anything, he wanted not just to restrain the COLA but to reform the "capricious hybrid of out-and-out welfare benefits and earned pension annuities"^[25] that social security had become. Inside OMB, Stockman and his staff considered a very big cut: eliminating "early retirement" at age sixty-two and forcing people to wait for (supposedly normal) retirement at age sixty-five. People who retired early did receive reduced benefits, but the reduction fell far short of the system's cost of paying benefits for an extra three years. The early-retirement provision was a

classic example of Stockman's plaint: a provision unjustified in both actuarial terms and the welfare notion of need. Anybody who qualified and wanted could take the benefit.

But retirement at age sixty-two is the clearest case of budgets as commitments. People plan, save, and make life-choices assuming they can retire and receive social security at age sixty-two. To suddenly break that promise to millions of people would be extremely controversial—too big a thing to try to slip through as part of some other package. "We didn't want to take it on in that context," an OMB source recalls. "There would be too much disruption of the system." So early-retirement changes went back on the shelf, never making it into the black books for Congress to see.

That left COLAs. There existed a technical problem for the Social Security Administration, a political problem for Reagan, and a strategic problem for Stockman. A change to the July 1 COLA had to be adopted very quickly so social security computers could be programmed, certainly by late April. For that technical reason alone, OMB publicly urged SBC to forego any change; it could not be passed on time. Because technical expedients can always be found, the political problem was more important; under campaign pressure, Reagan had promised not to touch social security. Both the perceived and real lack of commitment to that program was his, and perhaps his party's, biggest weakness. Neither James Baker nor Howard Baker wanted anything to do with reopening the social security issue. Finally, from Stockman's point of view, going after the COLAs had all the risks of fundamental reform without all the benefit. Knowing he would face massive protest, he wanted to get more than the COLAs for his trouble. An OMB aide explained:

Stockman thought that if we did the COLAs we wouldn't be able to come back to it again…. If you look at social security as a fiscal problem, the COLAs five years out are maybe 8 percent of programs costs. It's a small part of social security…. If you want to make progress, you have to take some checks out of the mail.

The budget director convinced himself that he could get what he needed for 1981 from small tag-alongs to social security, like the student and minimum benefits ($1.7 billion worth), without rousing the core constituency.^[26] No one in the administration was likely to urge the budget director to go any further.

With social security off the table, Stockman's cut lists emphasized the means-tested entitlements, intergovernmental assistance, economic development or subsidy programs, and a few special targets (particularly the regulatory agencies, where reductions, by making it harder for them to operate, would kill two birds with one stone).^[27] One cut with large

symbolic value for equity (accordingly, prominently leaked^[28] ) was a reduction in the lending authority of the Export-Import Bank, which subsidizes exports for large companies. Stockman proudly reported to Greider how he had beaten back its defenders within the administration with "a demagogic tirade about how in the world can I cut food stamps and social services and CETA jobs and EDA jobs and you're going to tell me you can't give up one penny for Boeing?"^[29] It was not so easy. Secretary of Commerce Malcolm Baldrige lost the first round of intra-administration sparring but, in his first meeting with some top business lobbyists, had warned that Export-Import was on the block and had begun rallying them to save it. In the end, Stockman would do less well than he hoped on Export-Import. But he did manage to clear the way for substantial cuts in economic and technological development programs favored by some Republicans.

One cannot estimate precisely who benefits from many federal programs. Does the Urban Mass Transit program benefit needy riders or middle-class bus drivers? Who gets what part of the subsidy for school lunches? No one knows. We can say that between one-third and one-half of the OMB package took from people who already were not doing very well. Some people on the border of poverty did very badly.^[30] Our estimate fits common reactions at the time. When the final package was announced, its reverse redistribution drew extensive criticism.^[31]

The brunt of the burden fell on the "working poor," those employed Americans who earn little and therefore live near the poverty line. Benefits for that group had risen during the 1970s for two reasons. First, the poverty line was set at a rather low standard of living, and people who were not below it could still use help. Second, making that line a cutoff would drastically reduce the incentive to work, especially for low paying jobs that might nonetheless provide training useful for a later career. Benefits for the working poor were thus expected to make it easier for them to escape from poverty.

The Reagan administration was eliminating or trimming a wide variety of programs focused at those margins of eligibility. Small individual cuts added to large effects.^[32]The Economist, hardly a left-wing rag, concluded that the benefit cuts "will reduce to virtually nil any incentive for these poor mothers to keep on working." The distributional tilt was well-publicized: in an April CBS/New York Times poll 82 percent felt that some groups, particularly the poor, would be hurt more than others.^[33]

Part of the package's distributional tilt was a residue of other decisions. If you leave out the military, social security, and interest, the amount of cuts to programs that helped the poor was not quite so out of line as a proportion of the remainder. Yet Stockman also intentionally zeroed in on low-income programs. He wanted to change the "welfare state premise"

in favor of the state helping people who might otherwise help themselves. His changes were at the high end of eligibility because that was where the recipients who were not lame or blind or otherwise disabled, who conceivably could make their own way, were to be found. Those cuts also met less internal administration resistance. An OMB civil servant explained, "I've never met a Republican at a community health center."

The administration included no advocates for the poor, but many members feared that, if the program seemed to beat too much on the poor and give to the rich, the media and centrist politicians would condemn it as unfair.^[34] When the cabinet met on February 10, a number of members "complained that the administration was getting a 'black eye' because of the proposed social cuts."^[35] In order to defuse such criticism, the administration announced that it would not propose cuts in a "social safety net" of programs: social security, medicare, veterans' benefits, Head Start, and Supplemental Security Income (SSI) were the main ones.^[36]

At an Urban Institute conference in 1984, Martin Anderson objected to the idea that the safety net was a serious policy commitment. He told the conference that

Providing a safety net for those who cannot or are not expected to work was not really a social policy objective. The term safety net was used in the 1980 Republican platform and then adopted by the Office of Management and Budget to describe a set of social welfare programs that would not be closely examined in the first round of budget changes because of the fierce political pressures that made it impossible to even discuss these programs without invoking a torrent of passionate, often irrational, criticism…. The term safety net was political shorthand that only made sense for a limited period of time.^[37]

Perhaps, but the safety net was emphasized in strong language in the documents announcing Reagan's budget package.^[38] Most participants, and certainly the president, would agree with Anderson. But what they wanted is not as important as what they felt forced to do. The language of safety net expressed what most Americans accept about government social policy: People's lives should not be damaged through no fault of their own, due to hard luck or hard times. In fact, many key programs for the needy, like AFDC, were not in the net. Rather, it included those whose recipients were hardest to stigmatize—the elderly, the elderly sick, veterans, the handicapped—or had most political power. The safety net device did not increase the program's "fairness." Yet it was a major concession. One member of the administration saw the safety net as "a very important concept to have a hyper-conservative government commit

to. Bear in mind that Reagan and his supporters feel that social security should be voluntary and medicare should not exist."

The overall package was biased against the working poor also because Stockman was blocked from attacking tax expenditures. Many things government does for the better-off people form exceptions to the tax code. The mortgage interest deduction, for example, is only useful to people who buy houses, and its value increases with the recipient's tax bracket. A number of other government programs provide services that only better-off citizens can use, for example, improvements of airports and traffic control serve people who own their own airplanes. In theory, government could charge a "user fee" for some of those services. Eliminating such tax preferences and increasing user fees were difficult because they involved Republican constituencies. Late in the game, however, Stockman made a run at them. Pressure from Martin Anderson, Pete Domenici, and others to increase the prospect of budget balance gave him his chance.^[39] Stockman believed that, if accepted, the "Chapter Two" proposals would have "dramatized the underlying fairness and justice" of his program.^[40]

Stockman boasted about Chapter Two to Greider, claiming budget pressure was allowing him to be more fair, to "force acquiescence in the last minute into a lot of things you would never see a Republican Administration propose." It was the same political theory the Democratic reconcilers had propounded in 1980. Greider was skeptical. Stockman reminded him that he had pledged secrecy. "If you tell your guys about this shit, I'll have 160 people calling the White House." The Washington Post reporter replied, "You will anyway."^[41]

Phone calls were not necessary. On February 11 Stockman brought up the Chapter Two tax preference proposals for approval, beginning with reducing the oil depletion allowance. To Stockman, as for most liberals, there is hardly a better example in the federal government of a program justified only by the naked power of black gold. He was shocked and demoralized, therefore, by what transpired:

All of a sudden, the President became animated. Our proposal unleashed a pent-up catechism on the virtues of the oil depletion allowance, followed by a lecture on how the whole idea of "tax expenditures" was a liberal myth.

"The idea implies that the government owns all your income and has the right to decide what you can keep," said the President. "Well, we're not going to have any of that kind of thinking round here."^[42]

Stockman retreated.

The tax side was at the heart of the fairness issue. For business interests and the better-off people, the benefits from tax reduction far outweighed

any losses from spending cuts. The poor, who pay little or no taxes, got little from all the tax changes, even as they lost the benefits of government spending. Later analyses of the effect of Reagan's program continually showed both the poor losing and benefits increasing with income; an across-the-board rate reduction in a progressive tax system had to give the most to people with the highest incomes. And the tax cut was bigger than the spending cut. Ultimately, the "unfairness" of the Reagan program emerged, above all, from the original policy choice to reduce tax rates across-the-board.

The Defense Buildup

Another choice, essentially the president's preference, was his commitment to a huge defense buildup, no matter what the budgetary consequences. OMB never had much influence on defense matters in Republican administrations; all had relied on the office of the secretary to provide most review of the services' requests. Having so much else to worry about, Stockman told himself that Cap Weinberger, once established in office, would take his famous budget-cutting knife to the DOD: "I think Cap's going to be a pretty good mark over there," Stockman told Greider. "He's not a tool of the military-industrial complex."^[43] Stockman misjudged both Weinberger and the president.

An exchange with Elizabeth Drew reveals Reagan's attitude in early 1980:

Drew: I ask Reagan if he thinks we can regain military superiority over the Soviet Union. "Yes," Reagan replies . "I think the Soviet Union is probably at the very limit of its military output. It has already had to keep its people from having so many consumer goods. Instead, they're devoting it all to this military buildup. I think it's the greatest military buildup the world has ever seen. I think it tops what Hitler did. And therefore, when people talk about an arms race, this doesn't mean that the Soviet Union escalate to twice what they're doing now. We're the ones who have actually played along with the treaties and, if anything, actually reduced our weapons." He continues, "Now, what I think Russians would fear more than anything else is a United States that all of a sudden would hitch up our belt and say, 'OK, Buster, we've tried this other way. We are now going to build what is necessary to surpass you.' And this is the last thing they want from us, an arms race, because they are already running as fast as they can and we haven't started running."

Drew: "Where are you going to get the money to pay for this military buildup?" Ronald Reagan: "Out of the economy."^[44]

Unlike Carter, Reagan refused to subordinate the defense budget to fiscal policy.

Jimmy Carter's FY82 budget called for 5 percent real growth per year

for five years. He also proposed a $6.3 billion supplemental for new (mainly inflation-related and pay) expenses for FY81. Many observers felt that Carter's request would be hard for Reagan to top. They were wrong. Reagan felt obliged to do significantly more. If Jimmy Carter wanted 5 percent, then that must not be enough.

Unfortunately "need" cannot be defined concretely. The formal DOD Planning, Programming and Budgeting System (PPBS) only encouraged the services to estimate need as broadly as possible in the planning and programming steps, leaving hard choices to the budget process. "No one knew in the Carter years what the real number would be," one DOD budgeter recalled, "but the general assumption was that the [planning figures] were never-never land."

Carter's final budget, even with 5 percent real growth, therefore proposed far less spending than his own administration's 1980 estimates of "need." The navy would get 121 new planes instead of 217; 80 ships over five years instead of 97. Some of these differences came from the military's special talent for inflation. An extreme example was the Phoenix missile: Carter's 1982 budget estimated that 72 could be purchased at almost the same cost projected for 210 a year before.^[45] Moreover, there are large economies of scale in defense purchases.^[46] Reagan's men argued that a much bigger buildup was more efficient and met a "need" already defined by the professional military.^[47]

Weinberger relied on the services to define need, downgrading his central DOD staff. He entered office with a "fix-up" package designed during the transition largely by a cadre of people working for Senator John Tower, new chairman of Armed Services, including appointees Richard Allen (national security adviser), Fred Ikle (undersecretary of policy in the DOD), Edward Rowney (chief arms control negotiator), John Lehman (secretary of the Navy), and a few others. "When Weinberger took over," a participant recalled, "the report was complete, the services had it, and their submissions reflected those priorities." Stockman accepted not only the package but also, as his associate director for national defense, Dr. Bill Schneider, a former aide to Jack Kemp who was "totally plugged into" the Tower group. The package was mainly procurement increases on existing weapons, with a 3 percent supplemental increase for FY81; on that new base, it represented not a 5 but a 15 percent real increase in budget authority for FY82.

Instead of Jimmy Carter's $200.4 billion, DOD wanted $226.8 billion. And it was almost all in procurement, raised from $49.1 billion to $68.8 billion.^[48] Newsweek described the result as "a gusher of cash that stunned even conservatives in Congress and quickly erased Secretary of Defense Weinberger's reputation as a ruthless enemy of fiscal excess." "Marveling at the display of largesse," a Pentagon official "joked that 'Cap the Knife' should be known henceforth as 'Cap the Shovel.'"^[49]

The "get well" package was nice, but for its planning the Pentagon needed some sense of what to expect in later years. Stockman also needed long-term defense numbers because he needed to project budget balance in the future. On January 30, he, his defense deputy Bill Schneider, Weinberger, and Undersecretary Frank Carlucci met to work out some ballpark figures. The discussion assumed the get well package for FY82. Because the economic forecast was not ready, they bargained in terms of real growth; they would translate that into concrete dollar amounts when the forecast was done. Frank Carlucci said 8 or 9 percent was the minimum necessary. Stockman, who knew enough to want more than Carter's 5 percent and expected Martin Anderson, "a flinty anti-spender on everything," to "go off the deep end" if they took Carlucci's number, suggested they split the difference—7 percent. Weinberger shed a few crocodile tears. "In light of the disgraceful mess we're inheriting," he replied, "seven percent will be a pretty lean ration." Then he agreed, swallowing Stockman whole in the process.^[50]

By his own account, Stockman missed the fact that 7 percent for the years after FY82, compounded upon the FY81 and FY82 increases, resulted in a 10 percent real growth rate per year from 1980 to 1986. Essentially, Stockman forgot to figure the first year into his calculations. The budget director not only didn't know he had been skinned, but he didn't realize that he and Weinberger were on opposite sides. Stockman thought he had agreed on "plug" numbers, but he anticipated that "Cap the Knife," once entrenched in the Pentagon, would find all sorts of fat to cut so those totals would never be met. Weinberger, however, saw a commitment to dollar figures that he could use ever after to justify requests. Not that he was opposed to finding "fat," but, if they found any, he and Carlucci figured they should be rewarded, allowing the savings to turn into more muscle.

Stockman Proposes and Reagan Disposes: The President's Program

With all the compromises, defense, and the forecast, Stockman knew and could tell his colleagues by February 7 that the package was coming up "short" by at least $30 or $40 billion. The budget director told himself that the shortfall was not so great a problem. Some more "cats and dogs" cuts could be found after February 18 (planned for release March 10). Beyond that point—well, the children's allowance theory might work: "I knew that the remaining $44 billion gap was huge. I remembered it was probably going to end up even larger, due to our cockeyed economic forecast. But I saw in this only the potential leverage it provided

to … force Congress to shrink the welfare state."^[51] For the moment he needed some way to downplay the gap. Stockman resorted to what Howard Baker was to call "the magic asterisk"^[52] —"additional savings to be proposed later" of $29.8 billion in FY83 and about $44 billion in each following year.^[53]

Anderson raised a red flag; he argued that, if the future-savings numbers were too big, they could "undermine the whole credibility of the program from day one."^[54] His objections were not enough to cause much internal hesitation. The president expected his cabinet to find more "waste, fraud, and abuse." Stockman writes that no one asked the "essential political feasibility question: How many congressional horses do you need to cut $40 billion more—on top of the black book full of cuts already proposed? How many horses do we actually have?"^[55] Feasibility, however, is not a radical's question. Reagan considered the status quo a full-fledged disaster. Not to try to enact his full package was, to Reagan, the same as abandoning the country to a terrible fate. If he didn't get it all, he would try again later. The less radical advisers suspected they would not get the whole tax cut anyway, so they did not believe the deficits would come true. Both the revolutionaries and the pragmatists therefore were willing to push the president's program as far as possible, seeing where they would came out.

Reagan announced his Economic Recovery Program on February 18. The administration was ready to announce savings of $34.8 billion. A further $6.7 billion was promised.^[56] Foreign policy and defense were barely mentioned; the point was to rally support for solving the nation's economic problems.

Reagan tried to minimize the pain. Referring to "exaggerated and inaccurate stories" that social security was threatened, he declared:

Those who through no fault of their own must depend on the rest of us, the poverty-stricken, the disabled, the elderly, all those with true need, can rest assured that the social safety net of programs they depend on are exempt from any cuts.

The full retirement benefits of the more than 31 million social security Recipients will be continued along with an annual cost of living increase…. All in all, nearly $216 billion worth of programs providing help for tens of millions of Americans will be fully funded.

Here was the commitment to social security that would come back to haunt the administration. "But Government," Reagan went on, "will not continue to subsidize individuals or particular business interests where real need cannot be demonstrated."

He proceeded to announce what would be cut. His list, from food stamps to NASA to the post office, must have impressed listeners with

its scope. The documents released at the time of his speech listed eighty-three "major" program reductions. Some programs would be consolidated into block grants, with reduced funding; the added flexibility and reduced administrative costs to state and local governments would supposedly make up for the funding losses. Subsidies to business, justified as aids to development, would be reduced because business would develop better if it followed market incentives. Synfuels would be axed $3.2 billion, the Economic Development Administration would be shut down, and subsidized lending would be slimmed down in many agencies from the Export-Import Bank to the Farmers' Home Administration. Reagan highlighted the cuts to "profitable corporations" funded by the Export-Import Bank. Nutrition programs would be better targeted, he said, removing from eligibility "those who are not in real need or are abusing the program." Medicaid federal contributions would be "capped," and states encouraged to save costs in the program's management and provisions.

Having described his spending proposals, the president moved on to his tax program. He called for Kemp-Roth, with an effective starting date ("I had hoped we could be retroactive on this") of July 1. While it would "leave the taxpayers with $500 billion more in their pockets over the next five years," it was "actually only a reduction in the tax increases already built into the system." These increases included social security, bracket creep from inflation, and "windfall" taxes on oil.

The other part of the tax-cutting program would directly stimulate productivity through increasing depreciation allowances. Many other desirable and needed tax changes—indexing, the marriage penalty, tuition tax credits, estate taxes—would be requested at "the earliest date possible" after enacting the Kemp-Roth "10-10-10" of 10 percent individual cuts and the Jones-Conable "10-5-3" accelerated depreciation plan. That Reagan later matched Rostenkowski bid for bid should not have been a surprise.

In the balance of the speech, Reagan announced regulatory policy initiatives and the administration's full support for the Federal Reserve policy of monetary restraint. He concluded by invoking once more the urgency of the situation and the bankruptcy of the opposition: "Have they an alternative which offers a greater chance of balancing the budget, reducing and eliminating inflation, stimulating the creation of jobs and reducing the tax burden? And if they haven't, are they suggesting that we can continue on the present course without coming to a day of reckoning?" If the Democrats had such a plan, they would have a hard time articulating it without the "bully pulpit" of the presidency. In fact, they had no plan as yet; they had been waiting to see what the president would propose.