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The Gang of 17

On February 23, 1982, Domenici announced his own budget proposal: hold defense to a 5 percent real increase for each of the next three years; freeze discretionary spending at FY82 levels for three years, thus allowing erosion through inflation; deny federal pay raises for FY83; and freeze COLAs for benefit programs. In addition, $122 billion in new revenues would be raised, preferably by reducing tax preferences but if necessary by delaying the third-year tax cut. The administration criticized the defense and tax provisions. But the Senate Budget chairman emphasized that "the 1983 budget, like the 1982 budget, fails to respond to the perception that it is inequitable. Congress must redress that perception."[18] Democratic budget leaders Hollings and Jones expressed interest in Domenici's proposal.

The president's staff, particularly Stockman, Darman, and James Baker, tried to get him to cut a deal with Domenici, sending a steady stream of visitors urging compromise toward the Oval Office. But Reagan had a selective ear. Just as in January he had heard the Chamber of Commerce's warnings against tax hikes but not those against defense increases, when Reagan met with economists from his advisory committee he concluded they supported him.[19] The president also insisted that the political situation did not require retreat. "I still think the issues will be ours this year," he told Senate leaders. "What are the Democrats going to run on? Raising taxes? Bargain basement defense when our planes won't fly? Where the hell have they been for the past forty years? They've been in charge and look at the mess they've created. That's why I say, 'Draw sabers and charge.'"[20] But not only liberals might be run through. The Democrats were going to run on the state of the economy, and that was steadily declining. For the first time in forty years, Time


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reported, "highly respected business analysts" were "saying out loud the dread word, depression."[21]

As the skies darkened, the administration's economic advisers fell into what Newsweek columnist Jane Bryant Quinn called "profound and angry disagreements [which] are not the sort of thing that engenders confidence."[22] Martin Anderson, believing that much of what the administration could hope to accomplish it already had, departed.[23] Paul Craig Roberts left Treasury, soon to be followed by other supply-siders. As they departed, Reagan's advisers became more united in pursuit of tax increases. Commerce Secretary Malcolm Baldrige was brought in to tell the president that the long-expected surge in capital investment was not on the horizon. The economic advisory board met again, but this time with Donald Regan, who summarized the board's advice in a March 19 memo designed to ensure that the president got the message:

The group as a whole were more gloomy than I have ever seen them.

There was agreement that the greatest barrier to a healthy and sustained recovery was high interest rates…. Most felt that large prospective budget deficits (1983 and beyond) are the primary cause for the high levels of current interest rates, and that the financial markets are convinced that deficits and prospective deficits matter, regardless of the academic debate on the subject.[24]

If all the bad economic news were not enough, Darman prepared a memo indicating that the budget was going nowhere in Congress, and pollster Richard Wirthlin reported a large drop in public support for Reaganomics.

With all this bad news in hand, Reagan met on March 19 with Meese, James Baker, and Mike Deaver. He agreed that it was time to open discussions with the Democrats in search of a budget compromise. By a willingness to talk, the administration would blunt criticism of its intransigence. They knew the Democrats would go along; James Jones had been secretly pressing James Baker to negotiate. Reagan decided that Baker could give up $10 billion in defense and accept up to $15 billion in new taxes beyond what was then in the budget, so long as the Democrats went along with proposed domestic-spending reductions. COLA changes could be accepted as long as the Democrats were induced to share the political blame. Even other members of the administration (save Darman) were not told that Baker had been given a bottom line.[25] Thus, David Gergen, the president's spokesman, was able to insist to reporters that Baker "had only the authority to listen."[26]

On March 22 James Baker requested permission from Tip O'Neill to begin talks with Jones and Rostenkowski. For public relations reasons, the Speaker could not refuse, but he wanted Richard Bolling (whom he


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trusted as a fellow liberal) rather than Jones to take the lead. Senate Republicans shot their way into the game on March 30. Howard Baker told Domenici to go ahead with marking up a budget resolution (that wasn't likely to be the president's) and the committee voted 16 to 1 to abandon OMB's economic assumptions and use CBO's instead. That forced Reagan and O'Neill to include the senators and established the principle of using CBO numbers for the economy. Using CBO's more pessimistic assumptions made deficit reduction more difficult, but market confidence would not be won with an OMB forecast that almost no one believed.

The negotiators became known as the "Gang of Seventeen." James Baker, Donald Regan, David Stockman, Richard Darman, and congressional liaison Kenneth M. Duberstein represented the president. Senate Republicans were Dole, Domenici, and Laxalt, with Hollings and Long for the Democrats. From the House came Robert Michel, Delbert Latta, Barber Conable, and Minority Whip Trent Lott for the Republicans, and Jones, Rostenkowski, and Bolling for the Democrats.

Designing a budget compromise proceeded on two tracks. At one level was the big picture—the balance among various types of spending cuts and revenue increases. Only the seventeen negotiators could bargain on the big picture, and, of them, only Jim Baker, representing the president, and Dick Bolling, representing the Speaker, could set a deal. Forming the second track were the concrete proposals that would add up to broad categories of deficit reduction. Here policy and political consequences had to be estimated by staff, serving their principals. Judging the consequences of various deficit-reduction measures required considering other values; therefore, the values of staff and the principals most directly concerned came into play.

On the second track, a number of players saw a chance to fix social security under the cover of the Gang's secret deliberations. Knowing he eventually was going to get stuck with the hot potato, Rostenkowski would gladly have gotten rid of it in early 1982. Jones, as a budget balancer and Ways and Means member, had double incentive to find measures that, by solving social security's imminent funding shortfall, would also reduce the deficit. Stockman wanted savings wherever he could get them; Jim Baker wanted the political problem to go away. Staff, therefore, very quietly drew up proposals to deal with the giant entitlement. The tax players also largely agreed on the need for new revenues, so the Senate Finance and Treasury tax staffs developed a series of revenue proposals. These tended to reflect their own judgments that ERTA had gone too far with business giveaways and the political attractiveness of "compliance" measures as opposed to rate increases.[27]

After floating a series of proposals, on April 6 the administration put


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together a package dubbed the "Baker plan," which claimed $450 billion in deficit reductions over three years. Revenues would be raised by $115 billion; defense increases pared by $66 billion. Domestic spending would be cut by $145 billion, including limiting and delaying COLAs.[28] The balance, 30 percent of the total, consisted of management initiatives and savings on debt service projected to result from all the other savings. The ratio of revenues to other deficit reductions was roughly $1 to $3.

The Baker plan exempted SSI, aid to the disabled poor, from COLA cuts. The administration's negotiators emphasized they were allowing $22 billion more for discretionary programs and $16 billion more for medical, nutritional, and public assistance than in their original budget. Many of these compromises involved leaving a popular program at the FY82 budget level. Because inflation and recession meant the needs had increased, Bolling was not so thrilled by such compromise. Because the proposals helped answer Senate Republicans' notions of fairness, however, Bolling worried that Jones too might be tempted by the offer.

"Frankly," Domenici suggested on April 8, "I believe that those of us who have been negotiating could reach an agreement tomorrow."[29] He may have spoken accurately of the majority of "Gang-sters," a fairly conservative group who valued deficit reduction above all. Domenici, Dole, Baker, Stockman, Jones, and Hollings might have been able to agree. Representing the Speaker and the Speaker's supporters, Bolling could not. The Baker plan still involved both big social cuts and a big defense buildup during a recession. "I knew we couldn't concede the things that they wanted us to concede for one vital reason," Bolling later explained. "We couldn't deliver them." Domenici also did not speak for many House Republicans. "How many people in the House of Representatives," asked Trent Lott, "would vote to cut Social Security in an election year? Maybe seventeen, and most of those retiring."[30] Domenici was in a sense wishing away deep conflicts of ideology and political interest. But he was also putting pressure on Reagan and O'Neill, trying to create the impression that a deal was there for them to make, if only they would be reasonable.

The president and the Speaker used the same tactics on each other, each asserting that he could not be moved but playing up hints (emerging from the negotiations) that the other might begin to give in. Reagan trumpeted a hard line on the tax cut; O'Neill a hard one on social security.[31]

Behind the public maneuvering was a residue of private distrust. Bolling and O'Neill felt they were being asked to clean up Reagan's deficit mess, which they had fought to prevent. Now Bolling was dealing with Stockman, who had lied before and, as far as Bolling knew, could lie again.


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Despite this distrust, neither side wanted the blame for failure. There was also some movement. The menus of revenue initiatives produced by the Joint Committee on Taxation (April 6) and by Dole (April 7) included such good things for Democrats as a minimum corporate tax, modification of tax leasing, a cap on depreciation tax breaks in the out-years, and a 4 percent income tax surcharge. By April 13 some negotiators, but not Bolling, were reported to be converging on a package that would have put a 4 percent surcharge on taxable incomes over $35,000, added a tax on crude oil, repealed income tax deductions for most consumer interest, capped COLAs at 4 percent in 1983, and accepted a number of further social cuts. Hoping to lock Reagan into a deal, Howard Baker all but endorsed the surtax, warning that without quick agreement the Senate would go off on its own.[32]

The Speaker of the House was not enthusiastic. Saving discretionary programs by cutting social security was not Tip O'Neill's idea of a compromise. Both his staff and Rostenkowski's, however, did like the idea of doing something about social security—perhaps a revenue solution? Reagan, meanwhile, kept up his public campaign for accepting the original presidential budget priorities. On April 16 he told a group of newspaper editors and broadcasters,

The one sure way to reduce projected deficits, bring down interest rates and still encourage growth is to reduce government's share of the gross national product [that is, cut spending]…. We hear so many judgments about compassion—who has it and who hasn't…. Where was the compassion in those bankrupt spending policies that brought the pain of high inflation and interest rates to so many people? Where is the compassion now in raising tax rates again on our people, making it even harder for them to work and compete?[33]

These are not the words of a leader about to retreat very far; they are the words of a leader trying to give his followers acceptable arguments against the "fairness" issue.

The negotiators were unable to overcome the differences. Bolling said he would have to consult with the House Democratic Steering and Policy Committee before going any further. The president's men began to look for ways to turn any breakdown of negotiations to their political advantage. Reagan told a news conference that he would "go the extra mile" to win an agreement, to which the Speaker scoffed that "President Reagan proved he was willing to walk a mile—for a camera."[34] These, too, were not the words of a leader planning a retreat.

The president announced that he would be willing to go to the Capitol to meet with the Speaker on Wednesday, April 28. The Democrats could hardly refuse but insisted that the talks essentially were stalemated.[35]


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When the Speaker and the president met, the essential differences between the two proposals involved the three fiscal years from 1983–1985

 

1.

Bolling proposed $145 billion in new revenues over FY83–85: the administration proposed $105 billion.

2.

House Democrats were scaling back military outlays by $42 billion; the administration by $28 billion. The budget authority differences projected to a larger outlay difference later.

3.

House Democrats proposed $23 billion in domestic discretionary cuts; the administration wanted $35 billion.

4.

House Democrats would cut the targeted entitlements (e.g., food stamps, medicaid) by $12 billion; the administration wanted $25 billion.

5.

Bolling would accept limiting the COLAs to 5 percent in both 1983 and 1984, an estimated $16 billion savings. The administration, no longer proposing a delay, wanted a 4 percent limit from 1982 through 1984, saving $26 billion.

6.

House Democrats wanted to fix social security by raising $19 billion in new revenues, with the COLA savings, and by dedicating $24 billion in old revenue from taxes on alcohol and tobacco to the social security trust fund. Their most likely source for new revenue, according to our interviews, was a tax on some portion of social security benefits received by higher-income elderly. The Speaker and Robert Ball, former commissioner of the Social Security Administration and the Democrats' expert on the issue, long had favored such taxes. The administration would have matched the Democrats' $60 billion package with its COLA caps, a smaller amount of new revenue, benefit cuts to be suggested by the Greenspan commission, and delaying the COLA date by three months beginning in 1982 (about $17 billion).

The two sides roughly agreed on some big, but dubious, numbers: $54 billion from management initiatives, including pay restraint, and $105 billion from lower interest payments. Of the latter, $64 billion would result from borrowing less because of the other deficit reductions. Less credibly, the markets were supposed to be so happy about deficit reduction that expectations would change and rates would come down enough to reduce debt service by $41 billion.[36]

In the terms that would later become matters of great recrimination, counting the more concrete social security proposals and the dubious numbers as spending reductions, the Democratic package was about three to two in spending cuts to revenue increases; the administration's plan was closer to five to two. If we exclude management initiatives and interest, however, and group defense cuts with tax hikes as changes the


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administration did not want, while it wanted to cut social spending, the difference in priorities is even more clear. The Democratic package was about 80 percent tax increases and defense cuts; the administration's proposal was about 60 percent, and the differences would grow in the out-years.

What hope there had been quickly evaporated in a fiery confrontation of strongly opposed principals. The president and the Speaker clashed bitterly over the fairness of the Reagan program. "Your budget was unfair. It had no equity," O'Neill accused. "I've heard all that crap," snapped the president. "You had a depression when I took over."[37] "Each saw the other as the archetypal representative of the opposing ideology," a participant recalled.

Howard Baker proposed a compromise in which the 1983 tax cut and 1983 COLAs would each be delayed by three months, but that foundered on social security politics. According to the New York Times,

The President wanted the group to know that he had never approved of cuts in the cost-of-living adjustment for Social Security benefits. "He said he had nothing to do with the COLAS," the Speaker said. "You fellows are going to offer the COLA to me. I said, 'I offer you nothing.'" "I told the President in no uncertain terms that they were trying to set us up," Mr. O'Neill said. When Republicans insisted that reductions in the cost-of-living adjustment had not come from them, Mr. O'Neill said, "They're not coming from us—I'll take them off the table."[38]

O'Neill didn't want the blame for a proposal he didn't even approve. Reagan felt he had already given a lot from his original budget; at the least, the president and his party did not need the blame for the package's most unpopular part. Bolling and the Speaker, meanwhile, did not want to cut more from domestic spending than they had offered. Liberals felt those programs had taken too big a hit in 1981; they wanted program increases in response to the recession. The fireworks between the principals merely widened an already unbridgeable gap.

So the blame shedding began. OMB's summary of the differences, reported in the New York Times, excluded all but the COLA limit aspects of the social security dispute—an obfuscation to which neither side objected!

Trying to show that the Democrats were being unreasonable, in a televised address on April 29 the president reported on the spending side: "Our original cuts total $101 billion … but they were rejected, believe me. Our own representatives from the Congress proposed compromising at $60 billion. Their counterparts from the Democratic side of the aisle proposed $35 [billion]." He, too, didn't mention social security COLAs. He added that "I swallowed hard and volunteered to split the


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difference between our $60 and their $35, and settle for $48. And that was rejected. The meeting was over."[39] Implicitly, although criticizing Democratic unreasonableness, Reagan also acknowledged that his own party had torpedoed his original budget plan. The president's rueful "they were rejected, believe me" reveals that the opposition to his original cuts was overwhelming.

Bolling summed up the Democrats' case succinctly:

He believes his program is working. And he believes that he hasn't hurt anybody. But the fact of the matter is that that is not what's been happening…. His program didn't work and his new budget was not acceptable, not only to many Democrats but also to many Republicans. The revolt against the President was in the Republican Senate.[40]

Why, then, one might ask, should the Democrats dig Reagan out by sacrificing social programs to the deficit?


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