The Party of Responsibility
As 1981 ended, the governing Republicans in the administration and Congress were deep into maneuvers over a budget plan for FY83. A year earlier the president had clearly set the tone and direction. Now the issue was not how or even how far to pursue his radical agenda; rather than a basic position altered at the margins to win crucial votes, with most votes taken for granted, the very nature of the entire package now had to be negotiated.
Over the course of many months, Senate Republicans would craft a package and convince the rest of the political system to support it. With the economy at its worst in more than forty years and with an election imminent, GOP senators managed a tax increase, called the Tax Equity and Fiscal Responsibility Act (TEFRA, or the 1982 act, to be distinguished from the 1981 Economic Recovery Tax Act, ERTA; the names say much). Passage of a tax increase under such circumstances was surprising enough; perhaps equally interesting were the bill's provisions.
Straw-bossed by a mainstream Republican senator, Finance Chairman Dole, aided by quiet advice from Treasury, Senate Finance produced a package including many tax reforms long coveted by the Senate's dying breed of liberals. In other legislation, social spending was reduced, but not so much as the president might have hoped at the time he agreed to the deal. All in all, the 1982 budget battles were bravura performances by Senate Republicans, particularly Howard Baker and Robert Dole.
Baker was the consummate insider, a self-described "congressional brat," son of a House member, son-in-law of longtime Senate Minority Leader Everett Dirksen (R-Ill.), himself minority leader from 1976 to 1980. Baker was best known to the public for his performance on the Senate Watergate committee. He appeared earnest and diligent, continually asking, "What did the president know, and when did he know it?" (He could not then have imagined trying to protect another president against similar questions.) It is probably a sign of Baker's talent that Nixon's men thought he was aiding them, while as informed an analyst as Michael Barone of The Almanac of American Politics was convinced that Baker was trying to discover the truth. With his colleagues, Baker's greatest skill seemed to be the ability to make them feel good about going along with him. His personal skills, along with a fine sense of timing and maneuver, made him, by general acclamation, the most effective majority leader since (the very different) Lyndon Johnson.
Baker combined basically conservative policy preferences with an emphasis on doing the work of government. He deviated from conservative positions on matters that could be construed as questions of responsibility; for example, he supported the Panama Canal treaty and rejected ideological crusades on emotional issues like abortion.[28] Balance was Baker's policy, compromise his forte.
Robert Dole, who became chairman of Finance in 1981, was known mainly for his acerbic wit and partisanship. As chairman of the Republican National Committee in 1971 and 1972 and vice presidential nominee in 1976, Dole had seemed more a hatchet man than a creative politician. But Bob Dole was complicated. Badly wounded in World War II—after months of recovery, left without the use of his right hand—he was both an advocate for the handicapped and an architect of the food-stamp program.
In the United States it is especially important to know where a person comes from because the meaning of left and right, liberal and conservative, varies from one place to another. In The Almanac of American Politics, Michael Barone described Dole as a man
whose values and beliefs remain very deeply rooted in Kansas, but who is also a Washington insider, a politician who knows the Senate, the lobbyists,
the media—and has been around long enough to see the individual senators, lobbyists and reporters come and go.
To understand Dole's politics, you have to understand that he … comes from a state where Republicanism is the natural affiliation of the majority and where the Republican Party's base is broad…. Kansas Republicanism believes in free enterprise, but it also understands that the untrammeled operation of the free market is going to hurt a lot of people. Kansas' populist past, and its frequent farm revolts, reinforce that lesson: Republicans as well as Democrats here believe in some sort of safety net. And, living in small towns where everyone knows, or knows something about, everyone else, they see the problems of the poor, not as theoretical, but as practical and personal.[29]
Unlike David Stockman, Robert Dole could not cut social programs merely on the basis of a theory about the causes of poverty. Like Stockman, Dole abhorred deficits and high interest rates, as do most Kansas Republicans and all farmers. It was easy for him to believe that irresponsible government borrowing could ruin decent productive farmers who needed loans for their businesses. That attitude had been common outside the financial centers since the days of Jefferson and Hamilton. Dole therefore was willing to cut social programs so as to reduce the deficit, but he also wanted bondholders and the military to bear some burden.
In part because no one else wanted it, an interesting trio seized the budget initiative: Howard Baker continually fostered a spirit of unity among Senate Republicans; Robert Dole carefully crafted TEFRA and then defended it skillfully; and Pete Domenici stubbornly insisted that the deficit problem be faced, by draconian measures if necessary. Reagan had no desire to attack his own tax cuts, little more in looking as if he wanted to cut social security benefits. Liberal Democrats were quite willing to oppose the defense buildup or the third-year tax cut, but they wanted Republicans to take the blame for any assault on universal entitlements, such as medicare and social security. House Republicans were looking for someone to follow who would not lead the country further into the depression or push the party off a cliff in November.
When Baker, Dole, Domenici, Hatfield, and Laxalt met with the president on December 18, after Congress had wrapped up the budget for FY82, their confrontation revealed real differences in substance. Dole said that he would not help cut food stamps unless something were done about defense. Laxalt held that unless the FY83 budget pointed credibly toward balance in 1984, Congress would see little reason to endure the pain of further spending cuts. Domenici argued that increased economic activity could in no way make up the revenue lost from the tax cut.[30] The president still wanted to slash social spending, not raise taxes. Senators
and their allies in the administration wanted a big package, including a tax increase.
Thus, senators and their allies turned their efforts toward making the tax increase medicine as palatable as possible for their recalcitrant president. First, they had to demonstrate that the patient was sick. If the FY83 economic forecast showed fast growth, there would be no need to close the deficit. But preliminary projections by monetarists—led by Jerry Jordan, CEA member with primary forecasting responsibility, and leaked on December 7—showed a considerable slowdown in real economic growth. The forecast was resisted by supply-siders. After the leak, Donald Regan insisted that "we don't have an economic forecast we've agreed on yet. I'm the who isn't agreeing. I'm a little more bullish than my conferees."[31] CEA Chairman Weidenbaum, however, won that battle. Responding to his critics, he called the forecast "very optimistic, though not quite as optimistic as the supply-siders would like. If our forecast is dismal, the prevailing private-sector forecasts are the end of the world."[32]
The administration's projections were not too terribly out of line with historical experience.[33] Other forecasts were less optimistic because the Fed's monetary restraint would provide a level of downward pressure on the economy that had not existed in previous recoveries from a recession.[34] Supply-siders, such as Paul Craig Roberts and Norman Ture at the Treasury, argued that if any economic mistake had been made it was not the large deficits but rather the tax cut postponement. When the president asked Weidenbaum what would have happened if the original plan's 10 percent cut in July had been implemented, the CEA chairman replied that it would have boosted output in the third quarter, though with only small, "measurable but not significant," effects overall. Roberts then denounced Weidenbaum for a conclusion "inconsistent with the reasoning upon which Reaganomics is constructed"—a fair enough claim, but relevant only if Reaganomics did not include the monetary freeze. Roberts, who viewed himself as keeper of the flame, soon resigned in frustration.[35] Supply-side influence was steadily diminishing. Donald Regan lessened his own objections to new taxes, so long as they were fairly small and on consumption.
The next step for Reagan's aides was to find nice wrapping paper for the tax package. They found it in "federalism." Reagan had long advocated devolution of federal responsibilities to the states, so that decisions would be made by people at the grassroots. Analysts with very different ideologies than the administration's might be attracted by a plan that made some activities wholly federal and others entirely state activities. The difficulties were in determining which programs might be shifted and financing the resulting transfers. White House policy development
staff had already been working on these issues when the political staff began to search for something positive that the president could say in his State of the Union message—preferably something to divert attention from the deficit.
The transfer of programs—called, say, a "New Federalism" or "New Partnership"—looked as if it might work. "We've got numbers showing the idea favored by margins of 8 or 9 to 1," Newsweek quoted "a Reagan strategist."[36] The senior staff decided to make federalism the centerpiece of the State of the Union address, so Stockman became involved in turning that policy into something that could be put into the budget. There was the opportunity for the deficit cutters.
The package being developed in late December began with a swap in which the states would take full responsibility for AFDC (the main "welfare" program) and food stamps, while the federal government would take over medicaid. In addition, more than forty other programs (sixty-one in the final package) would be transferred to the states. In order to finance these programs, a trust fund would be set up to receive revenues from various federal excise taxes. The trust fund would expire (in the final package, begin to phase out) in four years, by which time the states, presumably, would have decided which transferred obligations they wished to maintain and at what cost.
The whole package was definitely in tune with the president's predilections. He proposed such a transfer in his 1976 campaign, only to get in trouble when President Ford's campaign told New Hampshire voters their state would need an income tax to pay for it. In March 1981 Reagan declared that "I have a dream of my own. I think block grants are only the intermediate step. I dream of the day when the federal government can substitute for those the turning back to local and state governments of the tax sources we ourselves have preempted."[37]
On the budget front, the federalism plan provided two opportunities Stockman could hardly resist. If programs were being transferred to states, then, just as with block grants, Stockman could claim administrative savings that would justify expenditure cuts.
Better yet, the trust fund had to include revenues from taxes that the states could themselves impose, if they wished. Income tax revenues would not do because some states, as Reagan had learned to his chagrin in 1976, do not want an income tax. The fund instead would have to be built from various excises. But the available excises in no way added up to the cost of programs being transferred. Therefore, new excises—temporary, of course—would be needed to finance the fund. The fund and the spending would go off budget because they were "really" state activity. What remained in the budget would be reduced on the revenue side by the lost (smaller) old excises and on the spending side by the
(larger amount of) transferred programs. Then the budget would be both smaller and closer to balance. It was all remarkably neat: a tax increase needed to accomplish the Reagan dream of smaller federal government.[38]
On December 22 and 23 Reagan met with his top aides to discuss the budget and the State of the Union. At the first meeting, he commented, "Well—I understand you're here to talk me into a tax increase." After hearing some details, he remarked, "Well, they're right, you are trying to talk me into a tax increase."[39] Don Regan made the main presentation of the proposal. Normally the leader of antitax forces, Regan disliked taxes on consumption (excises) far less than taxes on income or capital. The president gave a tentative go-ahead to the plan but wanted to see more details. He told reporters, "I don't think that consumption taxes are in direct opposition to the tax program we have instituted."[40]
Most excise taxes involved, such as those on beer, liquor, and cigarettes, had gone many years without change. Increases could be justified, though House Republicans, including Bob Michel, worried about taxing Joe Sixpack to give Daddy Warbucks defense contracts.[41] Senate leaders, however, joined to urge Reagan to support about $45 billion in tax increases over two years.[42]
At a meeting on January 20, Reagan rejected a number of tax increases listed in a decision memo drafted by Richard Darman, but said others were acceptable. Aides leaked the decision to the New York Times, no doubt to commit their troubled leader to his decision. As Washington and Wall Street were learning of the president's support for a package yielding $30 billion in FY84 and half that or less in FY83, however, an uneasy Reagan was meeting with Chamber of Commerce leaders. The Chamber lobbied hard for defense restraint rather than tax increases. In fact, they said, they would sit out the budget fight in Congress if Reagan proposed new taxes. Reagan heard the tax argument more clearly than the defense part. The Chamber's reaction made all of Reagan's own doubts seem politically more reasonable; he had begun to feel isolated as all of his aides ganged up on him. "I just want you to know that I've taken everything you've said into my heart, deep into my heart," he is reported to have replied. Then he told his aides that he had reconsidered. Even with federalism sweeteners, Ronald Reagan simply could not swallow the tax pill. "I haven't been able to sleep because of this. I just can't do it," Reagan told Michael Deaver the next (Friday) morning. "He stood up and was bouncing again," Deaver reported. "He felt better down to his toes. He was comfortable again. You shouldn't try to change him on basic things and it was a mistake for us to try."[43] (Here, as we say in California, was a man in touch with his feelings.)
Thus ended the cleverest of all Stockman's maneuvers. Reagan kept
the federalism initiative in his State of the Union where it got much publicity. The New York Times's headline read, "Reagan Vows to Keep Tax Cuts; Proposes $47 Billion Transfer of Social Programs to States." The revenue hole was plugged by using the windfall-profit tax to earmark revenues for the trust fund for transferred programs. Because only the oil states would be able to replace the windfall tax, the device was of no help to most states or their senators and representatives.
Although it remained a major news story for a number of weeks, the federalism proposal had no obvious constituency. State and local officials, buffeted by recession and unhappy with 1981's block-grant legislation, quickly endorsed the idea of the transfer but remained skeptical about its costs. Rich Williamson of the president's staff, Governor Snelling of Vermont, and others negotiated extensively in attempts to create a plan that the locals could support, but their efforts were doomed to fail. More power and responsibility with less money was a lousy deal, and local politicians rejected it.
National politicians might have liked to dump their fiscal problems on the locals, but, because each of them came from somewhere, they would catch the grief, too. New Federalism seemed irrelevant. "My enthusiasm has to be muted a bit because it doesn't create one new job now," observed minority leader Robert Michel. "The President didn't discuss 1982 or 1983 at all," said Vermont's Senator Stafford. "We've got to live through them first." Senator Hollings, as usual, was the most biting commentator; Reagan, said that senator, had "just shifted around the deck chairs on the Titanic."[44]
If state and federal responsibilities were to be realigned, the process was going to be much slower and less direct. As the federal government was hamstrung by the deficit and while states that raised taxes to balance their budgets in 1982 got extra revenues during the subsequent recovery, states picked up a portion of the programs the feds were unwilling to finance. Indirectly, perhaps inadvertently, Reagan got a small part of what he wanted.[45]
In his State of the Union address, the president reiterated his faith:
Higher taxes would not mean lower deficits. If they did, how would we explain that tax revenues more than doubled just since 1976, yet in that same six-year period we ran the largest series of deficits in our history? …
Raising taxes won't balance the budget. It will encourage more Government spending and less private investment. Raising taxes will slow economic growth, reduce production and destroy future jobs, making it more difficult for those without jobs to find them and more likely that those who now have jobs could lose them.
So I will not ask you to try to balance the budget on the backs of the American taxpayers…. I will stand by my word. Tonight I'm urging the
American people: seize these new opportunities to produce, to save, to invest, and together we'll make this economy a mighty engine of freedom, hope and prosperity again.
Whatever was happening conveniently could be made to justify the president's preferred policies. That this was pure rationalization, albeit heartfelt, is evident. We should be less sure that it is an unusual way to govern. Among other things, to govern means to lead, and to lead means to get others to follow. A leader works to (retrospectively) rationalize what is happening in terms that can support present and future policies. In this way the leader tries to give followers a coherent picture of the world so they will not only feel better but also understand their part in the scheme of things. Coherent, however, does not mean true by definition. Ultimately there must be contact with the world of events, which may prove the president wrong.[46]
Reagan's leadership style made more sense in dealing with the public than with the Congress with whom he shared authority in the divided U.S. political system. Reagan's rationalizations came from a world that Congress did not recognize; thus, he could not lead it. His definition of "uncontrollable" spending illustrated the problem. As he explained it in the State of the Union, "uncontrollability" was not, as understood by the budget community, a prior obligation through contract or law to spend. To Reagan "uncontrollable" meant wasteful.
Contrary to some of the wild charges you may have heard, this Administration has not and will not turn its back on America's elderly or America's poor. Under the new budget, funding for social insurance programs will be more than double the amount spent only six years ago….
But it would be foolish to pretend that these or any programs cannot be made more efficient and economical…. There's only one way to see to it that these programs really help those whom they were designed to help, and that is to bring their spiralling costs under control…. [People are] cheating the system…. Not only the taxpayers are defrauded—the people with real dependency on these programs are deprived of what they need because available resources are going not to the needy but to the greedy. The time has come to control the uncontrollable.
The president used statistics in ways that would sound better to the public than to the pros. Few budget experts in Congress would pay heed to his comparison in current dollars to those of six inflation-prone years before. Other comparisons Reagan made—such as a 16,000 percent growth in food stamps, from the time when it was a small pilot program—were equally flawed. Congress could as well have said that the increase was infinite because once there had been no program at all. Congressional leaders continually fumed about Reagan's reliance on anecdotes
about food-stamp recipients who used the stamps to buy vodka, and similar stories, when he argued for his program in private meetings. Anecdotes serve more to reinforce a believer than to convince a skeptic.
The mutual misunderstanding was inevitable. Only our congressional opposers could understand because they agreed with the president. Reagan saw government as a child to be disciplined—remember the children's allowance theory; uncontrollability was sort of like not being toilet trained. Most members of Congress, by contrast, saw government as themselves. They saw uncontrollable spending not as waste but as their obligations, and they disliked the thought of going back on past promises.
Reagan's plan to gain control by limiting waste had nothing to do with the problem of being locked in by past commitments—save the possibility that, if a majority could agree that some provision of law was undesirable, Congress might remove any legal entitlement under that law. Barring such easily identifiable policy error, Reagan and many of his listeners were talking about very different things even if they used the same words.[47]
Reagan and Senate leaders perceived a budget crisis, but, where Reagan saw the problem as insufficient control of the government, the senators saw insufficient agreement within it. Reagan tried to use the deficit as evidence of the evil of social programs. To those who did not share his premises, however, there was another, more compelling, interpretation of the crisis: spending could be out of control because Reaganomics was not working.
The case against Reaganomics was made just hours before the president gave his State of the Union address, when Federal Reserve Chairman Paul Volcker, testifying before the Joint Economic Committee, gave his own version:
I am very concerned about the deficit in the out years because we do obviously want to look forward to recovery and growth in those years…. If the Government is going to stand out there and pre-empt a very large share of the savings flow, you call into question what financial market conditions will look like out there in 1983 and 1984. Anticipation of that situation tends to block the markets today.[48]
The president urged the American people to seize opportunities; Volcker warned against wishful optimism.
Pushed to the wall by events, President Reagan preferred to downplay the deficit. He was reported to have asked why the pessimistic projections had to be calculated at all. Told that the law required these forecasts, the president appealed to Stockman, who confirmed that it was so.[49]
Among the many tensions in Reagan's program, receiving most attention was the one between tight money and promised economic recovery.
Politically, however, the most important tension was between the promise of economic recovery—necessary to maintain political support—and the desire for a general sense of urgency required to make people willing to cut social programs that were, individually at least, popular. Reagan seemingly wanted the politicians to believe both him and Volcker.
The goals of these two powerful officials differed: Where the president wanted to legitimate a reduction in the size of domestic spending, the chairman wanted price stability, at whatever level of spending existed. The center in Congress—Senate Republican leaders such as Dole and Baker and moderate Democrats and Republicans like Leon Panetta and Silvio Conte in the House—believed Volcker's version of the state of the union. But Ronald Reagan, as he reminded Senator Baker, was still president.[50]