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Five The President's Program
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"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


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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


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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


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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"


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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


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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


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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.


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Five The President's Program
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