"I put together a list of twenty social programs that have to be zeroed out completely, like Job Corps, Head Start, women and children's feeding programs, on and on. And another twenty-five that have to be cut by 50 percent: general revenue sharing, CETA manpower training, etcetera, etcetera. And then huge bites that would have to be taken out of Social Security. I mean really fierce, blood-and-guts stuff—widows' benefits and orphans' benefits, things like that. And still it didn't add up to $40 billion. So that sort of created a new awareness of the defense budget ...
"Once you set aside defense and Social Security, the Medicare complex, and a few other sacred cows of minor dimension, like the VA and the FBI, you have less than $200 billion worth of discretionary room—only $144 billion after you cut all the easy discretionary programs this year."
In short, the fundamental arithmetic of the federal budget, which Stockman and others had brushed aside in the heady days of January, was now back to haunt them. If the new administration would not cut defense or Social Security or major "safety-net" programs that Reagan had put off limits, then it must savage the smaller slice remaining. Otherwise, balancing the budget in 1984 became an empty promise. The political pain of taking virtually all of the budget savings from government grants and operations would be too great, Stockman believed; Congress would never stand for it. Therefore, he had to begin educating "the West Wing guys" on the necessity for major revisions in their basic plan. He was surprisingly optimistic. "They are now understanding all those things," Stockman said. "A month ago, they didn't. They really thought you could find $144 billion worth of waste, fraud, and abuse. So at least I've made a lot of headway internally."
Revisions of the original tax-cut plan would probably be the easiest compromise. A modest delay in the effective date would save billions and, besides, many conservatives in Congress were never enthusiastic about the supply-side tax-cutting formula. In order to win its passage, the administration was "prepared to give a little bit on the tax bill," Stockman said, which would help cure his problem of deficits.
Social Security was much more volatile, but Stockman noted that the Senate had already expressed a willingness in test votes to reconsider such basic components as annual cost-of-living increases for retirees. In the House, the Democrats, led by J. J. Pickle, of Texas, were preparing their own set of reforms to keep the system from bankruptcy, so Stockman thought it would be possible to develop a consensus for real changes. He didn't much care for Pickle's proposals, because the impact of the reforms stretched out over some years, whereas Stockman was looking for immediate relief. "I'm just not going to spend a lot of political capital solving some other guy's problem in 2010." But he felt sure a compromise could be worked out. "If you don't do this in 1981, this system is going to land on the rocks," he predicted, "because you won't do it in '82 [a congressional election year] and by '83, you will have solvency problems coming out of your ears. You know, sometimes sheer reality has a sobering effect."
Finally, there was defense. Stockman thought the sobering effects of reality were working in his favor there, too, but he recognized that the political tactics were much trickier. In order to get the first round of budget cuts through Congress, particularly in order to lure the southern Democrats to the President's side, there must be no hint of retreat from Reagan's promises for the Pentagon. That would mobilize the defense lobby against him and help the Democrats hold control of the House. Still, when the timing was right, Stockman thought he would prevail.
"They got a blank check," Stockman admitted. "We didn't have time during that February-March period to do anything with defense. Where are we going to cut? Domestic? Or struggle all day and night with defense? So I let it go. But it worked perfectly, because they got so goddamned greedy that they got themselves strung way out there on a limb."
As policy-makers and politicians faced up to the additional cuts required in programs, the pressure would lead them back, inevitably, to a tough-minded re-examination of the defense side. Or so Stockman believed. That combination of events, he suggested, would complete the circle for Wall Street.
"The markets will respond to that. Unless they are absolutely perverse."
IV. Old Politics
THE President's televised address, in April, was masterly and effective: the nation responded with a deluge of mail and telephone calls, and the House of Representatives accepted Reagan's version of budget reconciliation over the Democratic alternative. The final roll call on the Gramm-Latta resolution was not even close, with sixty-three Democrats joining all House Republicans in support of the President. The stunning victory and the disorganized opposition from the Democrats confirmed for Stockman a political hunch he had first developed when he saw the outlines of Representative Jim Jones's resolution, mimicking the administration's budget-cutting. The 1980 election results may not have been "ideological," but the members of Congress seemed to be interpreting them that way.
This new context, Stockman felt, would be invaluable for the weeks ahead, as the budget-and-tax issues moved into the more complicated and vulnerable areas of action. The generalized budget-cutting instructions voted by the House were now sent to each of the authorizing committees, most of them chaired by old-line liberal Democrats who would try to save the programs in their jurisdictions, but their ability to counterattack was clearly limited by the knowledge that President Reagan, not Speaker Tip O'Neill, controlled the floor of the House. Stockman expected the Democratic chairmen to employ all of their best legislative tricks to feign cooperation while actually undermining the Reagan budget cuts, but he was already preparing another Republican resolution, dubbed "Son of Gramm-Latta," to make sure the substantive differences were maintained—the block grants that melded social programs and turned them over to the states, the "caps" on Medicaid and other open-ended entitlement programs, the "zeroing out" of others.
In the first round, Stockman felt that he had retreated on very little. He made the trade with Representative Montgomery on VA hospitals, and his old friend Representative Gramm had restored some "phase-out" funds for EDA, the agency Stockman so much wished to abolish. "He put it in there over my objections," Stockman explained, "because he needed to keep three or four people happy. I said okay, but we're not bound by it." The Republican resolution also projected a lower deficit than Stockman thought was realistic, as a tactical necessity. "Gramm felt he couldn't win on the floor unless they had a lower deficit, closer to Jones's deficit, so they got it down to $31 billion by hook or by crook, mostly the latter."
Stockman was supremely confident at that point. The Reagan Administration had taken the measure of its political opposition and had created a new climate in Washington, a new agenda. Now what remained was to follow through in a systematic way that would convince the financial markets. In the middle of May, he made another prediction: the bull market on Wall Street, the one he had expected in April, would arrive by late summer or early fall.
"I think we're on the verge of the response in the financial markets. It takes one more piece of the puzzle, resolution of the tax bill. And that may happen relatively quickly, and when it does, I think you'll start a long bull market, by the end of the summer and early fall. The reinforcement that the President got politically in the legislative process will be doubled, barring some new war in the Middle East, by a perceived economic situation in which things are visibly improving. I'm much more confident now."
Stockman was wrong, of course, about the bull market. But his misinterpretation of events was more profound than that. Without recognizing it at the time, the budget director was headed into a summer in which not only financial markets but life itself seemed to be absolutely perverse. The Reagan program kept winning in public, a series of well-celebrated political victories in Congress—yet privately Stockman was losing his struggle.
Stockman was changing, in a manner that perhaps he himself did not recognize. His conversations began to reflect a new sense of fatalism, a brittle edge of uncertainty.
"There was a certain dimension of our theory that was unrealistic..."
"The system has an enormous amount of inertia..."
"I don't believe too much in the momentum theory any more..."
"I have a new theory—there are no real conservatives in Congress..."
THE turning point, which Stockman did not grasp at the time, came in May, shortly after the first House victory. Buoyed by the momentum, the White House put forward, with inadequate political soundings, the Stockman plan for Social Security reform. Among other things, it proposed a drastic reduction in the benefits for early retirement at age sixty-two. Stockman thought this was a privilege that older citizens could comfortably yield, but 64 percent of those eligible for Social Security were now taking early retirement, and the "reform" plan set off a sudden tempest on Capitol Hill. Democrats accused Reagan of reneging on his promise to exempt Social Security from the budget cuts and accused Stockman of trying to balance his budget at the expense of Social Security recipients, which, of course, he was. "The Social Security problem is not simply one of satisfying actuaries," Stockman conceded. "It's one of satisfying the here-and-now of budget requirements." In the initial flurry of reaction, the Senate passed a unanimous resolution opposing the OMB version of how to reform Social Security, and across the nation, the elderly were alarmed enough to begin writing and calling their representatives in Congress. But Stockman seemed not to grasp the depth of his political problem: he still believed that congressional reaction would quiet down eventually and Democrats would cooperate with him.
"Three things," he explained. "First, the politicians in the White House are over-reacting. They're overly alarmed. Second, there is a serious political problem with it, but not of insurmountable dimensions. And third, basically I screwed up quite a bit on the way the damn thing was handled."
Stockman said that Republicans on Ways and Means were urging him to propose an administration reform plan as an alternative to the Democrats'; Stockman misjudged the political climate. The White House plan, put together in haste, had "a lot of technical bloopers," which made it even more vulnerable to attack, Stockman said. "I was just racing against the clock. All the office things l knew ought to be done by way of groundwork, advance preparation, and so forth just fell by the wayside ... Now we're taking the flak from all the rest of the Republicans because we didn't inform them."
Despite the political uproar, Stockman thought a compromise would eventually emerge, because of the pressure to "save" Social Security. This would give him at least a portion of the budget savings he needed. "I still think we'll recover a good deal of ground from this. It will permit the politicians to make it look like they're doing something for the beneficiary population when they are doing something to it which they normally wouldn't have the courage to undertake."
But there was less "courage" among politicians than Stockman assumed. Indeed, one politician who scurried away from the President's proposed cuts in Social Security was the President. Stockman wanted him to go on television again, address the nation on Social Security's impending bankruptcy, and build a popular constituency for the changes. But White House advisers did not.
"The President was very interested [in the reform package] and he believed it was the right thing to do. The problem is that the politicians are so wary of the Social Security issue per se that they want to keep him away from it, thinking they could somehow have an administration initiative that came out of the boondocks somewhere and the President wouldn't be tagged with it. Well, that was just pure naive nonsense ... My view was, if you had to play this thing over, you should have the President go on TV and give a twenty-minute Fireside Chat, with some nice charts ... You could have created a climate in which major things could be changed."
The White House rejected that idea. Ronald Reagan kept his distance from the controversy, but it would not go away. In September, Reagan did finally address the issue in a televised chat with the nation: he disowned Stockman's reform plan. Reagan said that there was a lot of "misinformation" about in the land, to the effect that the President wanted to cut Social Security. Not true, he declared, though Reagan had proposed such a cut in May. Indeed, the President not only buried the Social Security cuts he had proposed earlier but retreated on one reform measure—elimination of the minimum benefits—that Congress had already, reluctantly, approved. As though he had missed the long debate on that issue, Reagan announced that it was never his intention to deprive anyone who was in genuine need. Any legislative action toward altering Social Security would be postponed until 1983, after the 1982 congressional elections, and too late to help Stockman with his stubborn deficits. In the meantime, Reagan accepted a temporary solution advocated by the Democrats and denounced by Stockman as "irresponsible"—borrowing from another federal trust fund that was in surplus, the health-care fund, to cover Social Security's problems. Everyone put the best face on it, including Stockman. The tactical retreat, they explained, was the only thing Reagan could do under the circumstances—a smart move, given the explosive nature of the Social Security protest. Still, it was a retreat, and, for David Stockman, a fundamental defeat. He lost one major source of potential budget savings. The political outcome did not suggest that he would do much better when he proposed reforms for Medicare, Social Security's twin.
WHERE would Stockman find the money to cover those deficits, variously estimated at $44 to $65 billion? The tax-cut legislation itself became one of Stockman's best hopes. The tax bargaining had begun in the spring as a delicate process of private negotiations and reassurances with different groups—with Democrats needed for a House majority, with nervous Republicans still leery of the supply-side theology, and with the supply-side apostles zealously defending their creed. Stockman was a participant, though not the lead player, in this process; he met almost daily with the legislative tactical group at the White House—Edwin Meese, Jim Baker, Donald Regan, presidential assistant Richard Darman, and others—that called signals on both the tax legislation and budget reconciliation.
Stockman's interest was made clear to the others: he wanted a compromise on the tax bill which would substantially reduce its drain on the federal treasury and thus moderate the fiscal damage of Reaganomics. Stockman thought that if the Republicans could compromise with the Ways and Means chairman, Representative Dan Rostenkowski, the tax legislation would still be a supply-side tax cut in its approach but considerably smaller in size. More important, they would avoid a bidding war for votes. "We're kind of divided, not in an antagonistic sense, just sort of a judgment sense, between those who want to call off the game ... and those of us who want to give Rostenkowski a few more days to see what he can achieve."
The negotiations with Rostenkowski ended in failure, and the Reagan team agreed that it would have to modify its own tax-cut plan in order to lure fiscal conservatives. Under the revised plan, the first-year reduction was only 5 percent and, more important, the impact was delayed until late in the year, substantially reducing the revenue loss. The White House also made substantial changes in the business-depreciation and tax-credit rules, which were intended to stimulate new industrial investments, reducing the overly generous provisions for business tax write-offs on new equipment and buildings.
Stockman was privately delighted: he saw a three-year revenue savings of $70 billion in the compromise. The depreciation rules that big business wanted were "way out of joint," Stockman insisted. But he was nervous about the $70 billion figure, because he feared that when Representative Jack Kemp (co-sponsor of the original supply-side tax proposal, the Kemp-Roth bill) and other supply-side advocates heard it, they might regard the savings as so large that it would undermine the stimulative effects of the major tax reduction. "As long as Jack is happy with what's happening," Stockman said, "it's hard for the [supply-side] network to mobilize itself with a shrill voice. Jack's satisfied, although we're sort of on the edge of thin ice with him."
The supply-side effects would still be strong, Stockman said, but he added a significant disclaimer that would have offended true believers, for it sounded like old orthodoxy: "I've never believed that just cutting taxes alone will cause output and employment to expand."