Stockman shared the general view of the Reagan Administration that the United States needed a major build-up of its armed forces. But he also recognized that the Pentagon, as sole customer for weapons systems, subsidized the arms manufacturers in many direct ways and violated many free-market principles. "The defense budgets in the out-years won't be nearly as high as we are showing now, in my judgment. Hell, I think there's a kind of swamp of $10 to $20 to $30 billion worth of waste that can be ferreted out if you really push hard. "
Long before President Reagan's speech to Congress, most of the painful details of the $41.4 billion in proposed reductions were already known to Capitol Hill and the public. In early February, preparing the political ground, Stockman started delivering his "black book" to Republican leaders and committee chairmen. He knew that once the information was circulating on the Hill, it would soon be available to the news media, and he was not at all upset by the daily storm of headlines revealing the dimensions of what lay ahead. The news conveyed, in its drama and quantity of detail, the appropriate political message: President Reagan would not be proposing business as usual. The President had in mind what Stockman saw as "fiscal revolution."
But it was not generally understood that the new budget director had already lost a major component of his revolution—another set of proposals, which he called "Chapter II," that was not sent to Capitol Hill because the President had vetoed its most controversial elements.
Stockman had thought "Chapter II" would help him on two fronts: it would provide substantially increased revenues and thus help reduce the huge deficits of the next three years; but it would also mollify liberal critics complaining about the cuts in social welfare, because it was aimed primarily at tax expenditures (popularly known as "loopholes") benefiting oil and other business interests. "We have a gap which we couldn't fill even with all these budget cuts, too big a deficit," Stockman explained. "Chapter II comes out totally on the opposite of the equity question. That was part of my strategy to force acquiescence at the last minute into a lot of things you'd never see a Republican administration propose. I had a meeting this morning at the White House. The President wasn't involved, but all the other key senior people were. We brought a program of additional tax savings that don't touch any social programs. But they touch tax expenditures." Stockman hesitated to discuss details, for the package was politically sensitive, but it included elimination of the oil-depletion allowance; an attack on tax-exempt industrial-development bonds; user fees for owners of private airplanes and barges; a potential ceiling on home-mortgage deductions (which Stockman called a "mansion cap," since it would affect only the wealthy); some defense reductions; and other items, ten in all. Total additional savings: somewhere in the neighborhood of $20 billion. Stockman was proud of "Chapter II" and also very nervous about it, because, while liberal Democrats might applaud the closing of "loopholes" that they had attacked for years, powerful lobbies—in Congress and business—would mobilize against it.
Did President Reagan approve? "If there's a consensus on it, he's not going to buck it, probably."
Two weeks later, Stockman cheerfully explained that the President had rejected his "tax-expenditures" savings. The "Chapter II" issues had seemed crucial to Stockman when he was preparing them, but he dismissed them as inconsequential now that he had lost. "Those were more like ornaments I was thinking of on the tax side," he insisted "I call them equity ornaments. They're not really too good. They're not essential to the economics of the thing."
The President was willing to propose user fees for aircraft, private boats, and barges, but turned down the proposal to eliminate the oil-depletion allowance. "The President has a very clear philosophy," Stockman explained. "A lot of people criticize him for being short on the details, but he knows when something's wrong. He just jumped all over my tax proposals."
Stockman dropped other proposals. Nevertheless, he was buoyant. The reactions from Capitol Hill were clamorous, as expected, but the budget director was more impressed by the silences, the stutter and hesitation of the myriad interest groups. Stockman was becoming a favorite caricature for newspaper cartoonists—the grim reaper of the Reagan Administration, the Republican Robespierre—but in his many sessions on the Hill he sensed confusion and caution on the other side.
"There are more and more guys coming around to our side," he reported. "What's happening is that the plan is so sweeping and it covers all the bases sufficiently, so that it's like a magnifying glass that reveals everybody's pores ... In the past, people could easily get votes for their projects or their interests by saying, well, if they would cut food stamps and CETA jobs and two or three other things, then maybe we would go along with it, but they are just picking on my program. But, now, everybody perceives that everybody's sacred cows are being cut. If that's what it takes, so be it. The parochial player will not be the norm, I think. For a while."
III. The Magic Asterisk
ON Capitol Hill, ideological consistency is not a highly ranked virtue but its absence is useful grounds for scolding the opposition. David Stockman endured considerable needling when his budget appeared, revealing that many programs that he had opposed as a congressman had survived. The most glaring was the fast-breeder nuclear reactor at Clinch River, Tennessee. Why hadn't Stockman cut the nuclear subsidy that he had so long criticized? The answer was Senator Howard Baker, of Tennessee, majority leader. "I didn't have to get rolled," Stockman said, "I just got out of the way. It just wasn't worth fighting. This package will go nowhere without Baker, and Clinch River is just life or death to Baker. A very poor reason, I know."
Consistency, he knew, was an important asset in the new environment. The package of budget cuts would be swiftly picked apart if members of Congress perceived that they could save their pet programs, one by one, from the general reductions. "All those guys are looking for ways out," he said. "If they can detect an alleged pattern of preferential treatment for somebody else or discriminatory treatment between rural and urban interests or between farm interests and industrial interests, they can concoct a case for theirs."
Even by Washington standards, where overachieving young people with excessive adrenalin are commonplace, Stockman was busy. Back and forth, back and forth he went, from his vast office at the Old Executive Office Building, with its classic high ceilings and its fireplace, to the cloakrooms and hideaway offices and hearing chambers of the Capitol, to the West Wing of the White House. Usually, he carried an impossible stack of books and papers under his arm, like a harried high school student who has not been given a locker. He promised friends he would relax—take a day off, or at least sleep later than 5 A.M., when he usually arose to read policy papers before breakfast. But he did not relax easily. What was social life compared with the thrill of reshaping the federal establishment?
In the early skirmishing on Capitol Hill, Stockman actually proposed a tight control system: Senator Baker and the House Republican leader, Robert Michel, of Illinois, would be empowered to clear all budget trades on particular programs—and no one else, not even the highest White House advisers, could negotiate any deals. "If you have multiple channels for deals to be cut and retreats to be made," Stockman explained, "then it will be possible for everybody to start side-dooring me, going in to see Meese, who doesn't understand the policy background, and making the case, or [James] Baker making a deal with a subcommittee chairman." Neither the White House nor the congressional leadership liked his idea, and it was soon buried.
By March, however, Stockman could see the status quo yielding to the shock of the Reagan agenda. In dozens of meetings and hearings, public and private, Stockman perceived that it was now inappropriate for a senator or a congressman to plead for his special interests, at least in front of other members with other interests. At one caucus, a Tennessee Republican began to lecture him on the reduced financing for TVA; other Republicans scolded him. Stockman cut public-works funding for the Red River project in Louisiana, which he knew would arouse Russell Long, former chairman of the Senate Finance Committee. Long appealed personally at the White House, and Reagan stood firm.
One by one, small signals such as these began to change Stockman's estimate of the political struggle. He began to believe that the Reagan budget package, despite its scale, perhaps because of its scale, could survive in Congress. With skillful tactics by political managers, with appropriate public drama provided by the President, the relentless growth rate of the federal budget, a permanent reality of Washington for twenty years, could actually be contained.
Stockman's analysis was borne out a few weeks later, in early April, when the Senate adopted its first budget-cutting measures, 88-10, a package close enough to the administration's proposals to convince Stockman of the vulnerability of "constituency-based" politics. "That could well be a turning point in this whole process," Stockman said afterward.
Still, Stockman was even more impressed by the performance of the new Republican majority in the Senate. After a week of voting down amendments to restore funds for various programs—"voting against every motherhood title," as Stockman put it—moderate Republicans from the Northeast and Midwest needed some sort of political solace. Led by Senator John Chaffee, of Rhode Island, the moderates proposed an amendment spreading about $1 billion over an array of social programs, from education to home-heating assistance for the poor. Stockman had no objection. The amendment wouldn't cost much overall, and it would "take care of those people who have been good soldiers." Senator Pete Domenici, of New Mexico, the Senate budget chairman, decided, however, that the accommodation wasn't necessary, and he was right. The Chaffee amendment lost.
"It was the kind of amendment that should have passed," Stockman reflected afterward. "The fact that it didn't win tells me that the political logic has changed."
Not entirely, however. While the Senate majority was rejecting additional money for the coalition of social programs, it was also tinkering with an important item in Stockman's balance of equitable cuts—the Export-Import Bank. The great multinational industrial firms that received the trade subsidies from Ex-Im were already at work, arguing that U.S. sales abroad and jobs at home would suffer without the Ex-Im loans and guarantees. The Republicans, led by Senator Nancy Kassebaum, of Kansas, where Boeing is a major employer, voted to restore $250 million to the Ex-Im budget. Later, the House raised the figure even higher, with little resistance from the White House.
"We weren't really closely in control," Stockman explained. "The mark-up went so fast, and those amendments came out of the woodwork, and we weren't prepared to deal with it." Stockman seemed nonchalant about his defeat. The principle of cutting the Ex-Im's corporate subsidies, which had seemed so important to him in January, was now regarded as a minor blemish on the Senate victory. "It did open a little breach that is troublesome," he conceded.
The vulnerability of Stockman's ideology was always that the politics of winning would overwhelm the philosophical premises. But after the Senate victory, Stockman devoted his energy to the tactical questions—winning again in the House of Representatives, which was controlled by the Democrats. "This is pure politics," he said. "It's a question of a whether the President can prevail on the floor of the House, because if he can't, then the committee chairmen know they have license to do anything they want."
Stockman watched with admiration as his principal intellectual rival, Jim Jones, the Democratic chairman of the House Budget Committee, attempted to fashion a budget resolution that would hold the Democratic majority together. The budget director calculated that Jones had an impossible task, but he could see that the Oklahoma congressman was going to come closer than he had expected. The Democrats, by Stockman's analysis, were really three groups: the old-line liberal faithful, who would follow the party leadership and defend against any or all budget cuts; a middle group, including Jones and other younger members, who recognized that federal deficits were out of control and were willing to confront the problem (Stockman referred to them as "the progressives"); and, finally, the "boll weevils," the thirty-eight southerners who were pulled toward Reagan both in conservative philosophy and by the politics of their home districts, which had voted overwhelmingly for the President. Jones was drawing up a resolution that would restore some funds to social programs, to keep the liberals happy; that projected a smaller deficit than Stockman's, to appear more responsible in fiscal terms; and that did not touch the defense budget, which would offend the southerners.
Artful as it was, the Jones resolution was, according to Stockman, a series of gimmicks: economic estimates and accounting tricks. "Political numbers," he called them. But Stockman was not critical of Jones for these budget ploys, because he cheerfully conceded that the administration's own budget numbers were constructed on similar shaky premises, mixing cuts from the original 1981 budget left by Jimmy Carter with new baseline projections from the Congressional Budget Office in a way that, fundamentally, did not add up. The budget politics of 1981, which produced such clear and dramatic rhetoric from both sides, was, in fact, based upon a bewildering set of numbers that confused even those, like Stockman, who produced them.
"None of us really understands what's going on with all these numbers," Stockman confessed at one point. "You've got so many different budgets out and so many different baselines and such complexity now in the interactive parts of the budget between policy action and the economic environment and all the internal mysteries of the budget, and there are a lot of them. People are getting from A to B and it's not clear how they are getting there. It's not clear how we got there and it's not clear how Jones is going to get there."
These "internal mysteries" of the budget process were not dwelt upon by either side, for there was no point in confusing the clear lines of political debate with a much deeper and unanswerable question: Does anyone truly understand, much less control, the dynamics of the federal budget intertwined with the mysteries of the national economy? Stockman pondered this question occasionally, but since there was no obvious remedy, no intellectual construct available that would make sense of this anarchical universe, he was compelled to shrug at the mystery and move ahead. "l'm beginning to believe that history is a lot shakier than I ever thought it was," he said, in a reflective moment. "In other words, I think there are more random elements, less determinism and more discretion, in the course of history than I ever believed before. Because I can see it."
The "random elements" were working in Stockman's behalf in the House of Representatives. He had a good fix on what Jones would produce as the Democratic alternative, in part because he had a spy in the Democratic meetings—Phil Gramm, of Texas, a like-minded conservative and friend who agreed to co-sponsor the administration's substitute resolution. Did Jones know that one of his Democratic committee members was really on the other side? "No," said Stockman. "That's how I know what's in Jones's budget."
Stockman was also dealing with the recognized leaders of the "boll weevils." He thought that the southerners could be won to the President's side with a minimum of trading, but he was prepared to trade. He agreed with G. V. "Sonny" Montgomery, chairman of the House Veterans' Affairs Committee and a genuine leader among the southern Democrats, to acquiesce in the restoration of $350 to $400 million for staffing at veterans' hospitals. Once Montgomery announced he was with the President, it would be a respectable position, which other southerners could embrace, Stockman felt. Still, he was confident that he could defend the agenda against general trading for votes.
IN political terms, Stockman's analysis was sound. The Reagan program was moving toward a series of dramatic victories in Congress. Beyond the brilliant tactical maneuvering, however, and concealed by the public victories, Stockman was privately staring at another reality—a gloomy portent that the economic theory behind the President's program wasn't working. While it was winning in the political arena, the plan was losing on Wall Street. The financial markets, which Stockman had thought would be reassured by the new President's bold actions, and which were supposed to launch a historic "bull market" in April, failed to respond in accordance with Stockman's script. The markets not only failed to rally, they went into a new decline. Interest rates started up again; the bond market slumped. The annual inflation rate, it was true, was declining, dropping below double digits, but even Stockman acknowledged that this was owing to "good luck" with grain harvests and world oil supplies, not to Reaganomics. Investment analysts, however, were looking closely at the Stockman budget figures, looking beyond the storm of political debate and the President's winning style, and what they saw were enormous deficits ahead—the same numbers that had shocked David Stockman when he came into office in January. Henry Kaufman, of Salomon Brothers, one of the preeminent prophets of Wall Street, delivered a sobering speech that, in the cautious language of financiers, said the same thing that John Anderson had said in 1980: cutting taxes and pumping up the defense budget would produce not balanced budgets but inflationary deficits.
Was Kaufman right? Stockman agreed that he was, and conceded that his own original conception—that dramatic political action would somehow alter the marketplace expectations of continuing inflation—had been wrong. "They're concerned about the out-year budget posture, not about the near-term economic situation. The Kaufmans don't dispute our diagnosis at all. They dispute our remedy. They don't think it adds up ... I take the performance of the bond market deadly seriously. I think it's the best measure there is. The bond markets represent worldwide psychology, worldwide perception and evaluation of what, on balance, relevant people think about what we're doing ... It means we're going to have to make changes ... I wouldn't say we are losing. We're still not winning. We're not winning."
THE underlying problem of the deficits first surfaced, to Stockman's embarrassment, in the Senate Budget Committee in mid-April, when committee Republicans choked on the three-year projections supplied by the nonpartisan Congressional Budget Office. Three Republican senators refused to vote for a long-term budget measure that predicted continuing deficits of $60 billion, instead of a balanced budget by 1984.
Stockman thought he had taken care of embarrassing questions about future deficits with a device he referred to as the "magic asterisk." (Senator Howard Baker had dubbed it that in strategy sessions, Stockman said.) The "magic asterisk" would blithely denote all of the future deficit problems that were to be taken care of with additional budget reductions, to be announced by the President at a later date. Thus, everyone could finesse the hard questions, for now.
But, somehow or other, the Senate Budget Committee staff insisted upon putting the honest numbers in its resolution—the projected deficits of $60 billion—plus running through 1984. That left the Republican senators staring directly at the same scary numbers that Stockman and the Wall Street analysts had already seen. The budget director blamed this brief flare-up on the frantic nature of his schedule. When he should have been holding hands with the Senate Budget Committee, he was at the other end of the Capitol, soothing Representative Delbert Latta, of Ohio, the ranking Republican in budget matters, who was pouting. Latta thought that since he was a Republican, his name should go ahead of that of Phil Gramm, a Democrat, on the budget resolution: that it should be Latta-Gramm instead of Gramm-Latta. After a few days of reassurances, Stockman persuaded the Republican senators to relax about the future and two weeks later they passed the resolution—without being given any concrete answers as to where he would find future cuts of such magnitude. In effect, the "magic asterisk" sufficed.
But the real problem, as Stockman conceded, was still unsolved. Indeed, pondering the reactions of financial markets, the budget director made an extraordinary confession in private: the original agenda of budget reductions, which had seemed so radical in February, was exposed by May as inadequate. The "magic asterisk" might suffice for the political debate in Congress, but it would not answer the fundamental question asked by Wall Street: How, in fact, did Ronald Reagan expect to balance the federal budget? "It's a tentative judgment on the part of the markets and of spokesmen like Kaufman that is reversible because they haven't seen all our cards. From the cards they've seen, I suppose that you can see how they draw that conclusion."
"It means," Stockman said, "that you have to have some recalibration in the policy. The thing was put together so fast that it probably should have been put together differently." With mild regret, Stockman looked back at what had gone wrong:
"The defense numbers got out of control and we were doing that whole budget-cutting exercise so frenetically. In other words, you were juggling details, pushing people, and going from one session to another, trying to cut housing programs here and rural electric there, and we were doing it so fast, we didn't know where we were ending up for sure ... In other words, we should have designed those pieces to be more compatible. But the pieces were moving on independent tracks—the tax program, where we were going on spending, and the defense program, which was just a bunch of numbers written on a piece of paper. And it didn't quite mesh. That's what happened. But, you see, for about a month and a half we got away with that because of the novelty of all these budget reductions."
Reagan's policy-makers knew that their plan was wrong, or at least inadequate to its promised effects, but the President went ahead and conveyed the opposite impression to the American public. With the cool sincerity of an experienced television actor, Reagan appeared on network TV to rally the nation in support of the Gramm-Latta resolution, promising a new era of fiscal control and balanced budgets, when Stockman knew they still had not found the solution. This practice of offering the public eloquent reassurances despite privately held doubts was not new, of course. Every contemporary President—starting with Lyndon Johnson, in his attempt to cover up the true cost of the war in Vietnam—had been caught, sooner or later, in contradictions between promises and economic realities. The legacy was a deep popular skepticism about anything a President promised about the economy. Barely four months in office, Ronald Reagan was already adding to the legacy.
Indeed, Stockman began in May to plot what he called the "recalibration" of Reagan policy, which he hoped could be executed discreetly over the coming months to eliminate the out-year deficits for 1983 and 1984 that alarmed Wall Street—without alarming political Washington and losing control in the congressional arena. "It's very tough, because you don't want to end up like Carter, where you put a plan out there and then, a month into it, you visibly and unmistakably change postures. So what you have to do is solve this problem incrementally, without the appearance of reversal, and there are some ways to do that."
Stockman saw three main areas of opportunity for closing the gap: defense, Social Security, and health costs, meaning Medicare and Medicaid. And there was a fourth: the Reagan tax cut; if it could be modified in the course of the congressional negotiations already under way, this would make for additional savings on the revenue side. The public alarm over the deficits was, to some extent, "fortuitous," from Stockman's viewpoint, because the Wall Street message supported the sermon that he was delivering to his fellow policy-makers at the White House: the agonies of budget reduction were only beginning, and, more to the point, the Reagan Administration could not keep its promise of balanced budgets unless it was willing to back away from its promised defense spending, its 10-10-10 tax-cut plan, and the President's pledge to exempt from cutbacks the so-called "safety-net" programs. Stockman would deliver this speech, in different forms, all through the summer ahead, trying to create the leverage for action on those fronts, particularly on defense. He later explained his strategy: