Reagan Hangs Tough

Reagan adjusted the facts to fit his worldview. At his worst, in a long profile of "How Reagan Decides," Time reported, "He has a propensity to seize on one comforting truth and magnify it into the whole truth,

blocking out all evidence of continuing or looming trouble."^[3] It was not that Reagan learned nothing from events but, rather, what he learned. Events did not make him question his principles; instead, he developed new tactical judgments about how he might better achieve his objectives. "Do you think that any of your preconceptions about problems and policies have been wrong?" Time 's correspondents asked him. "Well," he responded, "not as to basic philosophy: my belief that government in recent years has been more a part of the problem than part of the solution in many ways. No, I haven't changed my mind in those ways." But yes, he added, you have different information as president than as an outsider. Asked for an example that showed his preconceptions as not matching the information he received as president, Reagan replied,

I don't think I was prepared for how much of the budget was built in by the original legislation, how many programs were instituted … with features in them that made them automatically increase. So you look and say, wait a minute. If there were no recession, the budget would keep increasing at a rate that is higher than the normal increase in revenues, and you find that somehow you have got to find a way to make a structural change that will require the Congress agreeing not just to a cut in the budget but to actually changing the structure of a program.^[4]

Note the real, though selective, learning at work. Stockman and other aides had taught the president some budget truths, and he had incorporated them into his tactical understanding (structural changes are hard, so be patient) without altering at all his strategic objectives (abolishing and diminishing domestic programs).

A Business Week interview in early February also shows how Reagan adapted arguments to his own purposes. Asked why his economic program did not produce the expected surge of growth, he replied,

People began talking about whether the program was succeeding or not at a time when only a part of it had been put into effect. We believe that the tax cut will stimulate the economy, savings and investment. But you have to wait until the people get the money. Just signing the bill and saying we've got a tax cut hasn't changed their fortunes yet.^[5]

As excuses go, one could hardly do better than this. Yet much of the argument in 1981 claimed that "expectations" created by the new policy would themselves fuel a boom. And Reagan returned to expectations logic when he explained that, although he hoped the taxes would not be necessary, the contingency tax proposal "will psychologically reassure the money markets." Then Reagan rejected repeal of the third year of the tax cut or indexing, explaining "part of the optimism that we are seeing right now is because people and business have been able to look

ahead knowing that these things are going to happen."^[6] In other words, the tax cuts create optimism so should not be repealed in 1983, but the policy depended on the money actually being in people's pockets to have any effect in 1981.

It makes more sense to view Reagan as a salesman or advocate than as confused or disengaged. In spite of the judgment of pundits, therefore, the president had no intention of changing course. His aides were another matter.

Stockman and Darman in particular strove to get Reagan to sign on to a big deficit-reduction package. They were joined by the new CEA Chairman Martin Feldstein, far more aggressive than his predecessor. Determined to prevent the kind of optimistic error made in 1981 and 1982, Feldstein threatened to resign if he did not get his way when the economic forecast was prepared: prediction of a weak recovery in 1983 and steady GNP growth of 4 percent the following year. His short-term forecast, more pessimistic than many others, added to the pressure on Reagan.

Feldstein would soon become Stockman's most public ally within the administration, predicting horrible consequences from deficits and recommending tax hikes, if spending could not be cut, to reduce those deficits. His disputes with Donald Regan and other members of the administration got so much publicity and raised such acrimony that one might get the impression that Feldstein was a Keynesian mole who had somehow burrowed into the administration in an effort to undermine its policies. Yet that impression would be very wrong; Feldstein, in fact, was the "superstar of the new economists," the most prestigious supporter of "supply-side" emphases (but not doctrines), and an influential critic of the welfare state. He argued that government policies distorted incentives: that unemployment insurance increased unemployment; medicare boosted the cost of health care; social security was "probably the most important cause of our capital scarcity problem."^[7] Feldstein's work was sufficiently good and prolific that, at age thirty-eight, he became president of the National Bureau of Economic Research, a prestigious and independent association of economic researchers. He was a strenuous advocate of changes in tax laws that would increase investment. In 1980, while Carter tried to balance the budget, Feldstein attacked those who "made a fetish" out of balancing the budget. Tax cutter and opponent of the most sacred cows among government programs, Feldstein seemed the ideal Reagan economist. The fact that many Keynesians vehemently disagreed with his analyses and conclusions, yet accepted his stature, should have made Feldstein even more attractive. When Murray Weidenbaum resigned, the administration needed a new chairman in tune with its ideology yet so well-respected that his forecasts would receive

some credence. Feldstein met the bill; no one could mock his conclusions.^[8] The administration's difficulties with Feldstein stemmed from the fact that he shared the president's moral economy but was, for all that, a mainstream economist.

Feldstein and Stockman kept trying to make Reagan face up to the deficit, both by explaining its substance and by creating situations in which Reagan would be under political pressure to endorse a package. Stockman presented the substance to his boss in a lengthy preference quiz in November 1982. The budget director divided the budget into fifty major components with three choices to be made on each, "ranging from a nick to a heavy whack." Policy and political consequences accompanied each option. Reagan spent several days deciding; Stockman then added them up and reported back that, based on the president's choices, the remaining deficit would be $800 billion over five years. The budget director was sure the president would see that the difference had to be made up with revenue; after all, "the $800 billion worth of deficits were the result of spending he didn't want to cut." But Reagan continued to insist that "the problem is deficit spending!"^[9]

Stockman and Darman decided (correctly, we think) that Reagan did not believe in the long-term deficit forecasts. "When you sit there going over the deficit- projections," Darman said, "the man's eyes glaze over. He tunes out completely because he doesn't fully appreciate that the pony [a reference to a well-known joke about incorrigible optimists] is already built into the numbers."^[10] In other words, though the projections assumed a strong recovery, Reagan felt that current deficits were largely due to recession and did not realize that the projections led to deficits even if the economic plan worked quite well.

What Darman did not realize was the president's desire to believe and his experience, as another adviser told us, that over a long career his usually greater optimism than his advisers' had usually been right. Why should this case be different? Why should he give up things he cared about in response to economic forecasts? And, because he was president, nobody would confront him directly; his aides, including Stockman, kept leaving him to draw the conclusion.^[11]

A series of "kiss-and-tell" books have documented the president's distaste for conflict among his advisers. That distaste was fed, however, by his aides; even the most opinionated of men may be awed by the office of the president, if not by its inhabitant.^[12] Thus, Stockman and Darman would not say "you're wrong"; instead they tried to trick Reagan into a tax hike with a "perfectly disingenuous plan" involving a long-term proposal to create a flat tax.^[13] That plan metamorphosed, due in part to suggestions by Treasury Secretary Regan, into a "contingency" tax package, to take effect in FY86 if the deficits were too high and if Congress

accepted the FY84 budget's spending cuts. Stockman found no way to argue against those proposals. By passing the tax(es) and the trigger mechanism in 1983, the government might reduce market fears of future deficits.^[14]

Reagan's aides trotted in members of Congress to give him their message that the defense buildup had to be scaled back if they were to have any shot at reducing the deficit. Newt Gingrich of the Conservative Opportunity Society urged "pretty much an across-the-board freeze" for two years on defense and domestic outlays. He would sacrifice defense to save the tax cut.^[15] Senate leaders also—with conservative Jake Garn (R-Utah) and Paul Laxalt (R-Nev.) leading off so that Reagan would take the message seriously—urged Reagan to back down from his stand on a continued buildup. Weinberger was requesting all the dollars in the 1981 plan, despite both lower inflation and the FY83 budget resolution agreement to scale back increases. Yet congressional Republicans weren't successful. The president's budget cut Weinberger's request but remained higher in real dollars than the original 1981 plan.

Shortly before the State of the Union message on January 25, an honor roll of the "Establishment" issued its own message. Peter G. Peterson, secretary of Commerce from 1972 to 1973 and managing partner of Lehman Bros. investment bankers, along with five former secretaries of the Treasury, organized the "Bi-Partisan Budget Appeal." Its 500 signers ranged from Gardner Ackley, chairman of the CEA under President Johnson, to Admiral Elmo R. Zumwalt, Jr., chief of Naval Operations from 1970 to 1974, from conservative economist Michael Boskin of Stanford to liberal Lester Thurow of MIT, including leaders of some of the nation's most prestigious law, accounting, and investment firms and corporations.^[16]

The Bi-Partisan Appeal ad proposed a one-year freeze on universal entitlement benefits and other nondefense subsidies that were not means-tested. Afterward, indexing should be limited (e.g., to 60 percent of the CPI). These steps would (maybe) save $60 billion from the FY85 budget. Another $25 billion could be taken from defense. That would still allow for 7 percent real growth per year between 1981 and 1985. Then revenues would be increased by $60 billion in FY85. Because the Appeal's supporters were particularly concerned about investment, they preferred consumption taxes (such as a national VAT or excises) and user fees. Income tax changes would be approved "only in the context of a prior agreement on the kind and magnitude of spending cuts" specified above. In turn, entitlement, defense, and revenue measures to reduce the deficit would lower interest payments by about $30 billion and thus reduce the FY85 deficit by $175 billion.

The Bi-Partisan Appeal went nowhere; given its honor roll of sponsors,

this in itself is worth some attention. If there is a "power elite" in American society, Peter Peterson had rounded it up, and it proved powerless.

But the appeal is interesting because, give or take $10 or $20 billion in the estimates, it was actually a serious proposal to reduce the deficits; its logic and failure thereby illuminate the basic difficulty. First, because such a large deficit reduction in FY85 would have to take effect largely in FY84, the Appeal was suggesting a sharp contraction of fiscal policy in the early stages of a weak recovery. The proposed debt reductions would exceed the planned 1983 stimulus expected from the third stage of the tax cut and defense buildup, and thus they would leave fiscal policy tighter than it had been at the time the Bi-Partisan Appeal appeared.^[17] As they belatedly realized this, Keynesian sponsors such as Alfred Kahn and Lester Thurow recanted their support for the plan. Second, $60 billion in extra revenues in FY85 was a lot of money. Economists like consumption taxes, but states (because sales taxes are their main revenue source) and Democrats (because they are regressive) do not. Because higher corporate taxes were hardly what the Appeal's sponsors had in mind and because the president would oppose income tax changes, there was no good, that is, harmless or painless, way to find the needed revenues.

Domestic savings of $60 billion might be possible, but it would mean more than a 10 percent reduction (in real dollars) in such benefits. Most Democrats had little interest in that idea; when it came right down to it, neither did many Republicans.

Even in failure, the Bi-Partisan Appeal foreshadowed quick rejection of the president's budget. If such a business-oriented and prosperous group called for scaling back the defense buildup and opposed further cuts in the means-tested programs, citing medicaid and legal services as examples, administration priorities were in trouble. Reagan had lost the center.