Stockman versus Weinberger

But one thing hadn't been tried before—the military. Although the magic asterisk in the Economic Recovery Plan referred to domestic spending savings, Stockman and other presidential advisers had long assumed defense could take a hit if necessary. They had assured Domenici, Bill Green, and other doubters that defense could be cut if the deficit headed out of control. When the Legislative Strategy Group met on August 4, Stockman convinced his colleagues that the administration should launch a "September offensive" to fix the deficit. They agreed that, while the president was in California, a series of meetings would be held to work out a new deficit-reduction package.

Baker and Meese agreed that Stockman should prepare a new package, including defense scale-backs, to present to the president in Los Angeles on August 17 and 18. The Senate was asked to delay action on appropriations until late September so the administration could devise this new package. As Reagan prepared to head west, he held a thank-you ceremony for his tax-cut allies. "The fight to control the Federal budget," Reagan told them, "is just beginning."^[13]

Before the long budget battle in Congress, Stockman and his deputy, Bill Schneider, were agreeing with Weinberger and Frank Carlucci on 7 percent real growth for the Department of Defense from FY83 on, after 15 percent in FY82 and 12 percent in FY81. Weinberger treated that as a commitment, and the Pentagon began working out a five-year plan to spend its $1.46 trillion.^[14] He was following a logical strategy for an agency in a competitive environment where support could fluctuate quickly: get it while you can, a big commitment, and as much up front as possible. His job was to fight for his department; plenty of other people could worry about the deficit.

Pursuing his responsibility to control spending, the OMB director disagreed with the secretary of Defense. Stockman saw no hope of support for much more in domestic cuts unless the military also chipped in; he believed there were plenty of items that the military desired but, for good budgetary reasons (they didn't work, something else would do the same job, the contractor was having trouble producing), could be dismissed. OMB produced a $130 billion reduction (7 percent) out of Weinberger's $1.46 trillion, five-year plan. Their cuts included the usual suspects in such exercises: aircraft carrier groups, the Bradley armored fighting vehicle, the DIVAD antiaircraft gun.^[15] The first two were still on the list during the 1988 campaign for president; DIVAD had been cancelled.

The big showdown was set for August 18 at the Century Plaza Hotel in Los Angeles. Trying to build a sense of public urgency in support of their position, OMB staff did a lot of "public handwringing" over the extent of the deficit.^[16] The national media picked up the message that defense must be reconsidered.

While Stockman built pressure on the outside, resistance had developed inside the administration. Prepped by supply-side advisers who were not so worried about the deficit and having a salesman's sensitivity to his client's moods, Donald Regan came to oppose arguments that hinted at any retreat on the tax cut. When Stockman began his case by predicting a $75 billion deficit in FY84, Regan objected that, because the administration's program would not take effect until October 1, projections were premature.

Regan's objection stretched the boundaries of reasonable inference. The economic forecast was quite optimistic; fiscal policy beginning in October would not be much of a change from before October;^[17] if expectations were to rescue the economy, they should have already begun to work. However, President Reagan didn't believe in macroeconomics anyway; thus, he did not attend to such details. He always wanted a more optimistic forecast. His secretary of the Treasury's objections would help the president conclude that he did not have to accept prescriptions he preferred to avoid.

The secretary of Defense was even less helpful to Stockman. Objecting even to the form of Stockman's numbers (constant 1984 dollars instead of 1982), Weinberger argued that any reduction in the defense buildup would be dangerous. He stonewalled by refusing to discuss where cuts might be made. Secretary of State Alexander Haig added that to flinch would send the wrong message to the Soviets. Weinberger echoed that argument, which appealed strongly to his chief's sense of what the buildup was all about. Reagan would make the argument himself continually whenever his aides or congressional allies pressed him for defense

scale-backs. Reagan also emphasized that defense had represented a much larger share of the federal budget under President Kennedy, which was true; but, if entitlements had grown, and you could not get rid of them, did that mean defense had to grow to match? Amidst all this resistance, Stockman did have some support from the more legislatively oriented Baker and Meese, who argued that it would be political folly to make new proposals for soaking the needy while sparing the Pentagon. Said one participant, "It can't be done. We'd never win that fight." The president told Weinberger and Stockman to work out a compromise, but that was most unlikely.^[18]

On August 26 Reagan's top advisers, led by Meese, met once more to discuss the defense budget. Cap Weinberger again adamantly opposed reductions. Meese asked Weinberger and his deputy, Frank Carlucci, to produce an analysis of defense-budget options. On September 3 they complied, providing charts that showed tanks and airplanes sawed in half and consequences such as deactivation of the division to which Meese's son was assigned. Reagan took the charts for study. He understood the political arguments of his advisers, but he also believed that "if it comes down to balancing the budget or defense, the balanced budget will have to give way."^[19]

Having announced they would be remaking the budget, the administration, as in January and February, was continually consulting with its supporters in Congress. A big segment of the latter wouldn't touch further domestic cuts without a defense cut to show fairness and, with defense heading from one-quarter to over one-third of the budget, to give the fiscal program a chance of adding up. Throughout the internal deliberations, interest rates stayed high, stock prices fell, and members of Congress visiting their districts were met not by praise for passing tax cuts but by screams of pain over high interest rates amidst the first signs of recession.

The politicians instinctively and correctly blamed the Federal Reserve's tight money. Back in Kansas, Bob Dole called Paul Volcker and then handed the phone to an agitated constituent so that the Federal Reserve chairman could share the heat. "We can't live with a 20 percent prime," worried Robert Michel, back from his district in Peoria, Illinois. "Something has got to give in the next ninety days." Howard Baker summarized the mood: "I have not witnessed the sort of anger and indignation I'm seeing today in a long time. On the floor, people are talking about credit controls, reorganizing the Federal Reserve, a 'windfall profits' tax on interest income, and wage and price controls. Some of this is coming from Republicans."^[20]

Reagan himself joined in bemoaning the Fed as if he wasn't a part of it. At a GOP fundraiser in Santa Barbara, he declared, "The Fed is

independent, and they're hurting us in what we're trying to do as much as they're hurting anyone else."^[21] This, however, was Reagan the politician trying to soothe the supply-siders, who saw their doctrine being unfairly discredited, by telling them he was sharing their pain. Reagan the policy maker was a hard-line anti-inflationist, a believer in the monetarist doctrine that inflation should be reined in by a tight hand on the money supply. For most of the spring, the monetarists in the administration, particularly Under Secretary of the Treasury Beryl Sprinkel, had been taking shots at Volcker for being too loose. These critics in the administration, along with extreme nervousness in the bond markets (based on remarkably dubious judgments about monetary policy and thus, apparently, equally wrong fears of coming inflation), had helped push the Fed into its tightening in May. Now the bulk of the administration's economic policy makers—Weidenbaum, Stockman, Jordan, Kudlow, Sprinkel—opposed pressure for looser money. Neither did the establishment press approve the politicians' laments. After all, so the common wisdom went, if the Fed loosened, inflation might accelerate.

Most members of the Reserve Board itself, including the chairman, were so concerned about inflation and worried about establishing their credibility as inflation-fighters that the Board was determined, if it erred at all, to err by being too tight. Furthermore, the logic of expectations said that high long-term interest rates, despite quickly falling inflation, must mean the markets were expecting further inflation. Volcker and his colleagues, in turn, blamed that on the deficit projections. If fiscal policy didn't credibly offer relief for bondholders, the Fed had to work even harder to show its dedication to reducing inflation by crunching the economy. From the beginning of 1981, Volcker had maintained and would continue to insist that future deficits forced him to tighten money immediately. Never again would he allow other people's pain to deflect him from his duty or (recall 1979–1980) lead to the Fed being discredited.

William Greider's history of monetary policy during this period tells this unhappy tale well and in great detail.^[22] He places a bit too much emphasis on the secrecy and undemocratic aspects of the Fed as cause of a policy that, as he sees it, sacrificed the economic fates of millions to the irrational fears of bondholders. He is right that the policy favored bondholders in the first instance, but his own story makes it obvious that the responsibility for policy extended far beyond the Fed. Panic about inflation, willingness to err toward severity rather than ease, and insistence on leaving the Fed alone came not from the Fed itself but from the establishment (particularly non-Keynesian) economists, the press, and the administration. Reagan believed in hard money; he was willing to use new worries about deficits to demand a new round of spending

cuts. Those Republican and moderate Democratic budgeters, who, unlike Reagan, were willing to raise taxes or restrain defense to reduce deficits, still believed that inflation and high interest rates were due to fiscal irresponsibility. Howard Baker would privately urge Volcker to loosen up, but Stockman, Weidenbaum, Jim Baker, Domenici, Dole, Hollings, and Chiles all directed most of their attention to the deficit.

Congress essentially had no answer when Volcker demanded that it put its own house in order. The economic logic may or may not have made sense; the political logic was overwhelming. As in 1980, if the government could not control its budget, how could the politicians criticize anyone else?

Thus, the administration was committed to "doing something" about the deficit, and its mainline Republican allies were demanding as much when its leaders gathered on September 9 for one more round of Stockman versus Weinberger. The president's speech about his new package had already been postponed from September 14 to September 24; his staff still had to figure out what he would say.

Weinberger again made the general case for the defense buildup. He talked about Soviet advantages in tanks and bombers, even though OMB had accepted DOD numbers on those items. DOD graphics dramatized the Russian threat but said little about real differences between plans. The best of these graphics was a cartoon showing three characters: one, a pygmy with no rifle, was Carter's budget; a second, "a four-eyed wimp who looked like Woody Alien, carrying a tiny rifle," was OMB's budget; DOD's plan was "G.I. Joe himself, 190 pounds of fighting man."^[23] Stockman did not know what to say against this hour-long blast of what he considered irrelevance. There was too much to say and too little time; he couldn't be sure of agreement on anything, from the numerical bases to the need for any deficit package at all. As in a number of previous instances—most strikingly the meeting on "Chapter 2" business subsidies back in February—Stockman was too discouraged to take the issue right to his adversary, but he "could tell the President wasn't listening."^[24]

Ronald Reagan did not enjoy working with details, and this disagreement, though Weinberger kept trying to obscure the issue, was essentially one of facts and particulars. He organized his presidency by setting clear policy directives and finding people who would run that way. He did not want to confront, never mind resolve, conflicts created when people working out parts of his agenda collided. He preferred they work it out among themselves so he could say his troops all agreed on a policy. Put differently, the president had given general policy direction; whether it leaned a bit this way or that need not, he felt, concern him, nor would he decide better had he considered it. Once more, therefore,

the president told his secretary of Defense and budget director to work out a compromise.

Because Cap didn't want to compromise and Stockman was furious at Weinberger's "intellectually disreputable … demeaning" presentation, that was none too likely. Meese and Baker, therefore, ganged up on the president to force him to make the choice—any choice. He did, but the three nonexperts in the room confused budget authority with outlays; what they thought was "splitting the difference" turned out to be the whole loaf for Weinberger. On Friday, September 11, Reagan had to go over it all again with Stockman and Weinberger. The president was fed up; the staff stayed away. Cap still refused to budge. Finally, Stockman, exhausted and discouraged, agreed to a $13 billion outlay reduction: $2 billion in FY82, $5 billion in FY83, and $6 billion in FY84.^[25] Even then they disagreed about the base from which cuts would be made, but Reagan finally imposed a truce with a signed presidential directive.

"If I had to pinpoint the moment when I ceased to believe that the Reagan Revolution was possible," Stockman recalls, "Sept. 11, 1981, the day Cap Weinberger sat Sphinx-like in the Oval Office, would be it."^[26] How could this be when even Stockman had no real desire to restrain defense? The answer lies in power over process. Until the defense dust-up, Stockman believed that he always had some arrows left in his quiver. Some solution or maneuver would be found. The events of September 1981 showed that the budget director was not making policy. They showed as well that Stockman's vision of policy making—clear debate on the merits—would not be attained. Stockman had been rolled by a Defense secretary who, in Stockman's mind, had not played fair. Whether the Reagan revolution ended on September 11 is open to doubt. By some calculations it still continues; by others, it ended on August 13 when Reagan signed the tax bill. But Stockman's revolution, his confidence, and his power did end on September 11, 1981, though his responsibility for budget numbers remained.