The Election, the Economy, and a Fragmented Budget

The Democrats still controlled the government, so they still had to govern. Budget deadlines required that they unite to pass the reconciliation and appropriations bills. Having disposed of the First Resolution, they still had to deal with the Second Resolution. Because the second set required binding targets, they would have to admit they would fail to balance the budget, cut spending further, ignore the resolution, lie, or all of the above. In the meantime, the economy would continue to gyrate so wildly as to confuse everyone about what good policy might be.

Carter had to find an economic plank on which to campaign. Because he did not wish to change his policy, he repackaged it as an emphasis on the "future"—including future tax cuts. One aide described Carter's strategy as "the past is behind us—may it rest in peace."^[69] His tax plan

emphasized business tax cuts (55 percent), and personal cuts took the form of a social security tax offset. Some observers remarked on the irony of Republicans emphasizing personal and Democrats emphasizing business tax cuts, but the Wall Street Journal correctly argued that the "basic concept" for Democrats remained "that the government must play the central role in managing economic change."^[70]

Carter tried to exploit fears of the Republican platform's "Kemp-Roth" tax cut, which called for 10 percent cuts in income tax rates over three successive years. Kemp-Roth seemed to many a dangerous experiment that risked inflationary budget deficits. The Reagan campaign tried to blunt fears of such deficits by issuing projections that showed budget balance largely by assuming that inflation continued.^[71] (If that sounds strange, you're right. It was strange but important; see Chapter 4). Skepticism remained.

Senate Democrats were torn between the commonsense notion that voters were hurting and would like a tax cut and the contrasting considerations: it would help nobody to get into a fight with their own president; the public was worried about deficits; House leaders would side with Carter; and the Senate's budget-balancers, led by Hollings, still opposed a tax cut. At a meeting of the party caucus, Byrd reversed course again, siding with Hollings and the president rather than fighting Carter just before the election. The party decided to have no votes on either tax cuts or a second budget resolution until after the election. The House had already decided not to admit the unbalanced budget until then.

Senator Moynihan swore that his party had just blown five or six Senate seats; and Senator Long never forgave Byrd for preventing the vote for a tax cut.^[72] Yet the opponents of tax cuts could argue that they were being responsible, for the economy seemed to have zigged again.^[73] The leading indicators began to rise sharply in June, as did retail sales.^[74] Arguments could be made (and were) for any economic prediction.^[75]

But economists, as Alfred Malabre of the Wall Street Journal reported on October 1, could not even say if the recession was over. "Some say yes. Some say no. And some, a cheerful few indeed, say there hasn't been a recession at all this year." And the politicians were supposed to know what the economy would do next.

Having contracted at an annual rate of 10 percent in the second quarter of 1980, the economy, we can see now, turned around and expanded at a rate of 2.4 percent in the third quarter. Although no one can say for sure what happened, the most plausible story centers on the Federal Reserve's monetary policy.

The economy collapsed so suddenly at the end of March that all but the most hardened inflation-fighters at the Fed were concerned. They had been trying to slow the growth of the money supply in order to (a)

seem to be following monetarist prescriptions to control inflation, thereby making monetarists in the markets happy; and (b) raise interest rates enough to provoke recession. Interest rates had gone through the roof, then the money supply had begun to shrink. It shrank by 4 percent in six weeks. Maybe people were paying off debts or maybe they were putting their money in long-term accounts. But whatever they were doing, money was disappearing from the checking accounts where it serves as the medium of exchange.

"The Federal Reserve," William Greider writes, "had not intended anything like this."^[76] The question was, was it a blip or real? If the Fed ignored the monetary numbers, saying they were a blip, it would (a) lose the support of monetarists; (b) lose the political cover Volcker gained by claiming to be monetarist, which had allowed him to drive up interest rates while disclaiming that as his goal; and (c) risk what Board Governor Charles Partee called "the Big Mistake."^[77] If the numbers were real, ignoring them could mean a depression.

Unwilling to take all those risks, Volcker convinced his divided colleagues to step on the monetary accelerator. The aggregates responded sluggishly. Within ten weeks after the Fed put the pedal to the floor, the short-term price of money was cut roughly in half. For good measure the Fed, with Carter's approval, dismantled its consumer credit controls, which no longer seemed necessary to bring on a recession. Suddenly the economy leaped back on its feet; the inflation and money-supply numbers soon followed. The Fed, it seemed, had lost control.^[78]

There was a lesson and a consequence. The lesson was that nobody knew what was going on. An October survey of business executives showed they had no better vision than the economists.^[79] Even the governors of the Federal Reserve were confused. The consequence was that the Fed's governors determined not to repeat their "mistake." They decided to squeeze hard, damning both the election or any puzzling numbers.^[80] Interest rates returned to 13 to 14 percent by late September, confounding analysts.^[81] They would go much higher.

In Congress, members had to decide on specific policies. Budget resolutions don't spend money; appropriations do. Budget resolutions don't cut programs; reconciliation might. Congressional action on spending and taxing while rushing toward a preelection recess revealed three patterns that would recur continually in later years.

The First Resolution didn't determine the balance of defense and domestic spending. Warren Magnuson (D-Wash.), chairman of Senate Appropriations, tried to move $4 billion from defense to social within his committee. He failed only because he didn't have the votes. The prodefense mood controlled action while House Appropriations and

then Senate Appropriations raised previous bids on the military. "The only debate on the committee's overall funding recommendation," the Congressional Quarterly reported about the House vote on September 16, "was on whether the increase was large enough."^[82]

By then Congress was running short on time; the fiscal year would begin on October 1, Congress would recess on October 4. Only two of thirteen appropriations had passed, so Congress needed a massive continuing resolution (CR). Traditionally, continuing resolutions bridged the gap between expiration of one year's appropriation and enactment of a new one by allowing agencies to continue activities at the previous fiscal year's levels. On September 16, however, Norman Dicks (D-Wash.) proposed breaking with the tradition. Because both policy and inflation meant the FY81 defense figures would be much higher than FY80 figures, the Senate would not act before recess, and the election would delay action for another two months. Therefore, Dicks proposed including the House's FY81 defense numbers in the CR. Thus, the resolution was not at all a stopgap but a new grant of authority. House leadership demanded equal treatment for domestic programs, but the Senate disagreed. The CR, once a housekeeping device, became a battleground over policy and priorities.^[83]

The confrontation was made more serious because, earlier in the year, the attorney general had ruled that most agencies would be unable to operate if their appropriations authority lapsed. If the CR did not pass, agencies would have to shut down.^[84] The prospect of a government shutdown could encourage either settlement or hostage taking. Bogged down over a rider restricting federal funding of abortions, conferees did not settle until late on October 1. Only defense was funded at FY81 levels,^[85] revealing again Congress's tilt toward military, against social, spending.

The battle over policy on the formula for the CR prefigured developments under Reagan. The CR would become one of two vehicles for omnibus action on the budget; the other was reconciliation.

Senate committees quickly complied with their reconciliation instructions. On July 23 a package of spending cuts passed, hitting the targets though cheating a few: some cuts were temporary; others involved changing the dates of payments; Senate Finance and assorted other committees added some sweeteners to the package of revenue increases.

Reconciliation meant cutting people, which was politically difficult. Members hoped that by packaging lots of cuts no group could claim to be singled out; thus, the total would make enough of a dent in the deficit that members could say they had to support the bill. House leaders wanted a closed rule on the package, forbidding amendments, so that

cuts would not be subjected to individual votes. The closed rule, by allowing the sweeteners Republicans wanted a chance to cut, also gave Democrats on the committees some stake in an unpleasant process.

The rule therefore was crucial. Unfortunately the leadership nearly lost control of the Rules Committee, which by 8 to 7 (all five Republicans united with three Democrats) allowed a separate vote on one of the biggest cuts, a reduction in civil service pensions.^[86] The leaders held the rule to that one amendment, however, and then made the floor vote on the rule a party matter. They won, with only fourteen Democrats defecting. They then lost on civil service pensions (seemingly proving the point that members were more likely to vote for cuts if they were not singled out) before the whole package passed easily. All representatives wanted to appear thrifty.

The bill then had to go to conference, where its unprecedented breadth required more than a hundred conferees. Disputes had to be settled over (to name only the most important) civil service pension COLAs, medicare and medicaid provisions, child nutrition, mortgage subsidy bonds, and the windfall profits tax.

October was spent campaigning. The public hesitated, torn between the devil whose performance it knew and disliked and the devil whose words were vaguely disquieting. Exploiting the uncertainty about Reagan's foreign policy and tax cuts, Carter drew close in the polls. But in the climax of the campaign—the debate just before the election—Reagan managed to quell many doubts. An expected close election turned into a landslide. Most dramatically, Republicans captured the Senate, as a covey of liberals in fairly conservative states fell to defeat. Democratic senators had had good reason to be jittery.