Reagan Loses Control

The defense decision was announced on September 12. As Stockman expected, it infuriated the gypsy moths and those who considered themselves responsible budgeters. On September 15 Howard Baker and Domenici urged Reagan to reconsider, but he refused. Senate Budget staff drafted an alternate proposal for much greater defense savings, though it still would have left a 7 percent increase. They also wanted to limit medicaid costs and change the formula for entitlement COLAs. But they

would be stymied by House Republicans, never mind Democrats, and the president.

In a leadership meeting, one by one Republican leaders vetoed alternatives. Silvio Conte (R-Mass.), Republican leader on House Appropriations, declared that "we've got those domestic appropriations bills so tight they squeak." Bob Dole protected the means-tested entitlements: "Somebody else is going to have to start taking a hit besides welfare recipients." Bob Michel exclaimed, "Judas Priest! There's got to be more than $2 billion of fat [in defense]. We've got to have some more give on defense, or we might not get anything at all up there in the House." John Tower replied that defense cuts would redound "to no one's benefit except the Kremlin."^[27] As for social security, the Democratic Congressional Campaign Committee was all geared up to blast any Republican move, and the Republicans knew it. An aide to Howard Baker recalls that staff and Domenici had convinced his Senate majority leader that shaving entitlements "was necessary and appropriate," but House Republicans, especially Kemp, wouldn't touch it; Baker saw no point in a losing battle. This aide neatly paraphrased Kemp's position: "I'm the heir to Reaganism, but that's nothing if the entitlements get cut." Stockman quotes House Minority Whip Trent Lott on the same subject: "There ain't a corporal's guard," Lott said, for touching social security.^[28]

Hemmed in on all sides, Stockman and Darman finally decided to try to delay the second- and third-year tax cuts. They agreed on September 18 to try to convince first Baker, then Meese, then Regan, and finally the president. On Sunday, September 20, Meese agreed that Reagan should at least see the option. On Monday Regan objected, and his opposition only buttressed the president's. Reagan asked the obvious political question: "What would the people think?" He added, "We shouldn't even be discussing that idea. If our critics ever heard about it, they'd jump for joy."^[29] A salesman who condemns his own product doesn't make many more sales. A leader cannot suddenly go back on his major promise to followers. But what, then, was the fast disappearing September offensive to include?

Meese immediately backed down, while providing the formula that would be used to justify tax hikes in future years: "If we do anything in the revenue category, it should be strictly under the heading of loopholes."^[30] Loophole closings could be justified as matters of fairness, without going back on the general promise of lower rates. With only three days to go before the president's September 24 speech, however, Meese's suggestion was little help to Stockman.

At Monday afternoon's leadership meeting, House Minority Leader Michel told his president that support for a new package "just ain't there." The defense number was too small; he couldn't get the votes for cutting

other things and leaving the military virtually unscathed. Reagan insisted the whole administration agreed on defense need; anyone who read the papers knew better.

The next day the president slammed the door on tax cuts, saying "damn it, Dave, we came here to attack deficit spending, not put more taxes on the people."^[31]

On September 24 Reagan went on television to announce the new, improved deficit-reduction plan, which was supposed to win the confidence of the markets. He proposed to reduce the deficit by $35.8 billion in FY84. Donald Regan at the last minute had offered $22 billion over three years in what were euphemistically called "revenue enhancements." Examples included eliminating some energy tax credits and restricting the use of tax-exempt industrial development bonds. Federal civilian employment would be cut by 75,000 people by 1984 (reducing "waste," of course), though no one knew where or how reductions might be made. Defense would be pared by $13 billion over three years; entitlements, except for social security, would be cut by $2.6 billion in FY82 and a total of $25 billion in the following two years. Here, as with revenue enhancements, Reagan did not have the details, promising only to provide them within a few weeks.

The president did speak about social security, but not to argue for reduced benefits. His allies had convinced him not to fight a battle he could not win and in which they might get killed. Reagan bowed to public pressure and announced support for restoring the minimum benefit. He also proposed a fifteen-member commission—with Reagan, Tip O'Neill, and Howard Baker each appointing five members—to prepare a proposal (in early 1983, safely after the midterm election) to solve the system's financing crisis. Until then, the pension trust fund could borrow from the medicare trust fund, which still had a surplus.^[32]

There was, in short, no proposal, another magic asterisk, as Stockman says, save for a 12 percent across-the-board cut in domestic appropriations. Even there OMB was forced to announce exceptions, such as the Immigration and Naturalization Service and VA hospitals. Across-the-board cuts always sound good until someone points out what is actually getting cut. One also always has to ask, cut from what base? Here the administration disturbed a hornet's nest. They decided to cut from neither assumptions in Congress's budget resolution nor the reconciliation act but from proposals in the March budget revisions. The cuts therefore would undo all the bargains and adjustments of priorities that had been made over the previous six months. Table 5, prepared by the rather irritated Northeast-Midwest Congressional Coalition, provides some striking examples of the result.

Given February and March revisions, May and June deals, and September

changes, the media and politicians greeted Reagan's third and maybe fourth annual budget of 1981 with derision. The administration, Newsweek headlined, was "Running to Stay in Place."^[33] The National Journal 's summary was "Reagan's budget plans generate tepid support, plenty of confusion."^[34] Time commented that the president was "backpedaling furiously" on social security.^[35] The attitudes of politicians and chief aides in Congress were no more encouraging. On the Republican side of House Appropriations, "They didn't really take it very seriously. That

was their private perception. Publicly there was some outrage." Over in Senate Budget, a source reports, "We thought they had been smoking dope. There was no way you could cut those things again."

The Economist summed up the reaction of the financial community while pointing out what was puzzling about the whole business:

At present the Reagan administration is surprising informed people mainly by its implausibility. The president's latest spending minicuts did not persuade investors that interest rates will come down, except investors who trust to Murphy's law that everything which can conceivably go right will from this moment be deemed to do so. Every private analyst who is not called Murphy is now forecasting a bigger American budget deficit in 1982 through 1985 than the White House does, especially as the fastest increasing spending program, which is defence, is the one most prone to overruns on costs. The difference of opinion is whether it is logical or rather nuts to suppose that a budget deficit of around 2 percent of gnp could send American inflation and interest rates soaring.^[36]

Whether or not it was "rather nuts" to be so worried about the deficit, the worry, as The Economist noted, could be a "self-fulfilling expectation." In spite of his great victories, in September 1981 Ronald Reagan had placed himself in a situation similar to Jimmy Carter's in January 1980. Reagan's budget proposals were being mocked as too little to help and too big to be believed. Had he brazened it out, claiming that the deficit was part of putting the country on a new course, the president would only have had to deal with its size, not with his own credibility on insubstantial reductions. But then he would have needed a staff, especially a budget director, who shared his priorities. Like Carter before him, Reagan was now in the grip of a budget deficit panic that seemed more a matter of faith and group-think than a coherent model of the economy.