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.