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:
“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.”
Stockman himself had been a late convert to supply-side theology, and now he was beginning to leave the church. The theory of “expectations” wasn’t working. He could see that. And Stockman’s institutional role as budget director forced him to look constantly at aspects of the political economy that the other supply-siders tended to dismiss. Whatever the reason, Stockman was creating some distance between himself and the supply-side purists; eventually, he would become the target of their nasty barbs. For his part, Stockman began to disparage the grand theory as a kind of convenient illusion—new rhetoric to cover old Republican doctrine.
“The hard part of the supply-side tax cut is dropping the top rate from 70 to 50 percent—the rest of it is a secondary matter,” Stockman explained. “The original argument was that the top bracket was too high, and that’s having the most devastating effect on the economy. Then, the general argument was that, in order to make this palatable as a political matter, you had to bring down all the brackets. But, I mean, Kemp-Roth was always a Trojan horse to bring down the top rate.”
A Trojan horse? This seemed a cynical concession for Stockman to make in private conversation while the Reagan Administration was still selling the supply-side doctrine to Congress. Yet he was conceding what the liberal Keynesian critics had argued from the outset—the supply-side theory was not a new economic theory at all but only new language and argument to conceal a hoary old Republican doctrine: give the tax cuts to the top brackets, the wealthiest individuals and largest enterprises, and let the good effects “trickle down” through the economy to reach everyone else. Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican orthodoxy. “It’s kind of hard to sell ‘trickle down,’” he explained, “so the supply-side formula was the only way to get a tax policy that was really ‘trickle down.’ Supply-side is ‘trickle-down’ theory.”
But the young budget director once again misjudged the political context. The scaled-down version of the administration’s tax bill would need to carry a few “ornaments” in order to win—a special bail-out to help the troubled savings-and-loan industry, elimination of the so-called marriage penalty—but he was confident that the Reagan majority would hold and he could save $70 billion against those out-year deficits. The business lobbyists would object, he conceded, when they saw the new Republican version of depreciation allowances, but the key congressmen were “on board,” and the package would hold.
In early June, it fell apart. The tax lobbyists of Washington, when they saw the outlines of the Reagan tax bill, mobilized the business community, the influential economic sectors from oil to real estate. In a matter of days, they created the political environment in which they flourish best—a bidding war between the two parties. First the Democrats revealed that their tax bill would be more generous than Reagan’s in its depreciation rules. Despite Stockman’s self-confidence, the White House quickly retreated—scrapped its revised and leaner proposal, and began matching the Democrats, billion for billion, in tax concessions. The final tax legislation would yield, in total, an astounding revenue loss for the federal government of $750 billion over the next five years.
Stockman, with his characteristic ability to adjust his premises to new political realities, at first insisted that the White House cave-in on the business-depreciation issue was of no consequence to his budget problems, since the major impact of the concessions would hit the period 1985 and 1986, beyond the budget years he was struggling with.
Nevertheless, Stockman conceded that the administration had flinched, sending a clear signal to the political interests that it would respond to pressure. “I think we’re in trouble on the tax bill,” he said in mid-June, “because we started with the position that this was a policy-based bill ... that we weren’t going to get involved in the tax-bill brokering of special-interest claims. But then we made the compromise ... My fear now is that, if we do that too many times, it becomes clear to the whole tax-lobby constituency in Washington that we will deal with them one at a time, and then you’ll find their champions on the tax-writing committees, especially Finance, swinging into action, and we are going to end up back-pedaling so fast that we will have the ‘Christmas tree’ bill before we know it.”
That was an astute forecast of what unfolded over the next six weeks. Stockman both participated in the process and privately denounced it. But he was not fully engaged in the political scramble for tax concessions, because he was preoccupied with controlling another political auction already under way: the furious bumping-and-trading for the final budget-cutting measure, the reconciliation bill. The thirteen authorizing committees of the House were drawing up the legislative parts to comply with the budget instructions voted by the House in May; simultaneously, the Republican minority members of those committees were drawing up their alternatives, which would become pieces of the administration’s alternative—“Son of Gramm-Latta.” Stockman was working closely with the Republican drafting in the House, but at the same time he was trying to keep the specific cuts and policy changes in line with the work of the Republican committee chairmen in the Senate. Stockman had a believable nightmare: if House and Senate produced drastically different versions of the final reconciliation measure, there could be a conference committee between the two chambers that would include hundreds of members and months of combat over the differences. Failure to settle quickly could sink the entire budget-cutting enterprise.
Some of the Democratic committee chairmen were playing the “Washington Monument game” (a metaphor for phony budget cuts, in which the National Park Service, ordered to save money, announces that it is closing the Washington Monument). The Education and Labor Committee made deep cuts in programs that it knew were politically sacred: Head Start and impact aid for local schools, and care for the elderly. The Post Office and Civil Service Committee proposed closing 5,000 post offices. Stockman could deal with those ploys—indeed, he felt they strengthened his hand—but he was weakened on other fronts. Again, he had to hold all Republicans and win several dozen of the “boll weevils”—to demonstrate that Ronald Reagan controlled the House. It was not a matter of trading with liberal constituencies and their representatives; Stockman had to do his trading with the conservatives. “In that kind of game,” he said, “everybody can ask a big price for one vote.”
The final pasted-together measure would be several thousand pages of legislative action and, Stockman feared, another version of the Trojan horse—“a Trojan horse filled full of all kinds of budget-busting measures and secondary agendas.”
A group of twenty northern and midwestern, more moderate Republicans, who organized themselves as “gypsy moths” as a counterweight to the “boll weevils,” threatened defection. In the end, concessions were made: $350 million more for Medicaid, $400 million more for home-heating subsidies for the poor, $260 million in mass-transit operating funds, more money for Amtrak and Conrail. The administration agreed to put even more money into the nuclear-power project that Stockman loathed, the Clinch River fast-breeder reactor. It accepted a large authorization for the Export-Import Bank, and more.
Stockman tried to keep everything in line. When he agreed with House Republicans to restore $100 million or so to Amtrak, he had to go back and alert Bob Packwood, of Oregon, chairman of the Senate committee. “The Senate level which his committee tentatively voted out would have shut down a train in Oregon,” Stockman said, “and he didn’t relish the prospect of not being able to defend his train in the Senate and have it put back in by House Republicans.”
In private, the budget director claimed that these new spending figures that Republicans had agreed upon for the various federal programs were not final but merely authorization ceilings, which could be reduced later on, when the appropriations bills for departments and agencies worked their way through the legislative process. “It doesn’t mean that you’ve lost ground,” he said blithely of his compromises, “because in the appropriations process we can still insist on $100 million (or whatever other figures appeared in the original Reagan budget) and veto the bill if it goes over ... On these authorizations, we can give some ground and then have another run at it.”
This codicil of Stockman’s was apparently not communicated to the Republicans with whom he was making deals. They presumed that the final figures negotiated with Stockman were final figures. Later on, they discovered that the budget director didn’t agree. When in September the President announced a new round of reductions, $13 billion in across-the-board cuts for fiscal year 1982, the ranks of his congressional supporters accused Stockman of breaking his word. In private, some used stronger language. The new budget cuts Stockman prepared in September did, indeed, scrap many of the agreements he negotiated in June when he was collecting enough votes to pass the President’s reconciliation bill. In the political morality that prevails in Washington, this was regarded as dishonorable behavior, and Stockman’s personal standing was damaged.
“Piranhas,” Stockman called the Republican dealers. Yet he was a willing participant in one of the rankest trades—his casual promise that the Reagan Administration would not oppose revival of sugar supports, a scandalous price-support loan program killed by Congress in 1979. Sugar subsidies might not cost the government anything, but could cost consumers $2 to $15 billion. “In economic principle, it’s kind of a rotten idea,” he conceded. Did Ronald Reagan’s White House object? “They don’t care, over in the White House. They want to win.”
This process of trading, vote by vote, injured Stockman in more profound ways, beyond the care or cautions of his fellow politicians. It was undermining his original moral premise—the idea that honest free-market conservatism could unshackle the government from the costly claims of interest-group politics in a way that was fair to both the weak and the strong. To reject weak claims from powerful clients—that was the intellectual credo that allowed him to hack away so confidently at wasteful social programs, believing that he was being equally tough-minded on the wasteful business subsidies. Now, as the final balance was being struck, he was forced to concede in private that the claim of equity in shrinking the government was significantly compromised if not obliterated.
The final reconciliation measure authorized budget reductions of $35.1 billion, about $6 billion less than the President’s original proposal, though Stockman and others said the difference would be made up through shrinking “off-budget” programs, which are not included in the appropriations process. The block grants and reductions and caps that Reagan proposed were partially successful—some sixty major programs were consolidated in different block-grant categories—though Stockman lost several important reforms in the final scrambling, among them the cap on the runaway costs of Medicaid, and user fees for federal waterways. The Reagan Administration eliminated dozens of smaller activities and drastically scaled down dozens of others.
In political terms, it was a great victory. Ronald Reagan became the first President since Lyndon Johnson to demonstrate both the tactical skill and the popular strength to stare down the natural institutional opposition of Congress. Moreover, he forced Congress to slog through a series of unique and painful legislative steps—a genuine reconciliation measure—that undermined the parochial baronies of the committee chairmen. Around Washington, even among the critics who despised what he was attempting, there was general agreement that the Reagan Administration would not have succeeded, perhaps would not even have gotten started, without the extraordinary young man who had a plan. He knew what he wanted to attack and he knew Congress well enough to know how to attack.
Yet, in the glow of victory, why was David Stockman so downcast? Another young man, ambitious for his future, might have seized the moment to claim his full share of praise. Stockman did appear on the Sunday talk shows, and was interviewed by the usual columnists. But in private, he was surprisingly modest about his achievement. Two weeks after selling Congress on the biggest package of budget reductions in the history of the republic, Stockman was willing to dismiss the accomplishment as less significant than the participants realized. Why? Because he knew that much more traumatic budget decisions still confronted them. Because he knew that the budget-resolution numbers were an exaggeration. The total of $35 billion was less than it seemed, because the “cuts” were from an imaginary number—hypothetical projections from the Congressional Budget Office on where spending would go if nothing changed in policy or economic activity. Stockman knew that the CBO base was a bit unreal. Therefore, the total of “cuts” was, too.
Stockman explained: “There was less there than met the eye. Nobody has figured it out yet. Let’s say that you and I walked outside and I waved a wand and said, I’ve just lowered the temperature from 110 to 78. Would you believe me? What this was was a cut from an artificial CBO base. That’s why it looked so big. But it wasn’t. It was a significant and helpful cut from what you might call the moving track of the budget of the government, but the numbers are just out of this world. The government never would have been up at those levels in the CBO base.”
Stockman was proud of what had been changed—shutting down the $4 billion CETA jobs program and others, putting real caps on runaway programs such as the trade adjustment assistance for unemployed industrial workers. “Those were powerful spending programs that have been curtailed,” he said, “but there was a kind of consensus emerging for that anyway, even before this administration.”
All in all, Stockman gave a modest summary of what had been wrought by the budget victory. “It has really slowed down the momentum, but it hasn’t stopped what you would call the excessive growth of the budget. Because the budget isn’t something you reconstruct each year. The budget is a sort of rolling history of decisions. All kinds of decisions, made five, ten, fifteen years ago, are coming back to bite us unexpectedly. Therefore, in my judgment, it will take three or four or five years to subdue it. Whether anyone can maintain the political momentum to fight the beast for that long, I don’t know.”
Stockman, the natural optimist, was not especially optimistic. The future of fiscal conservatism, in a political community where there are “no real conservatives,” no longer seemed so promising to him. He spoke in an analytical tone, a sober intellect trying to figure things out, and only marginally bitter, as he assessed what had happened to his hopes since January. In July, he was forced to conclude that, despite the appearance of a great triumph, his original agenda was fading, not flourishing.
“I don’t believe too much in the momentum theory any more,” he said. “I believe in institutional inertia. Two months of response can’t beat fifteen years of political infrastructure. I’m talking about K Street and all of the interest groups in this town, the community of interest groups. We sort of stunned it, but it just went underground for the winter. It will be back ... Can we win? A lot of it depends on events and luck. If we got some bad luck, a flare-up in the Middle East, a scandal, it could all fall apart.”
Stockman’s dour outlook was reinforced two weeks later, when the Reagan coalition prevailed again in the House and Congress passed the tax-cut legislation with a final frenzy of trading and bargaining. Again, Stockman was not exhilarated by the victory. On the contrary, it seemed to leave a bad taste in his mouth, as though the democratic process had finally succeeded in shocking him by its intensity and its greed. Once again, Stockman participated in the trading—special tax concessions for oil—lease holders and real-estate tax shelters, and generous loopholes that virtually eliminated the corporate income tax. Stockman sat in the room and saw it happen.
“Do you realize the greed that came to the forefront?” Stockman asked with wonder. “The hogs were really feeding. The greed level, the level of opportunism, just got out of control.”
Indeed, when the Republicans and Democrats began their competition for authorship of tax concessions, Stockman saw the “new political climate” dissolve rather rapidly and be replaced by the reflexes of old politics. Every tax lobby in town, from tax credits for wood-burning stoves to new accounting concessions for small business, moved in on the legislation, and pet amendments for obscure tax advantage and profit became the pivotal issues of legislative action, not the grand theories of supply-side tax reduction. “The politics of the bill turned out to be very traditional. The politics put us back in the game, after we started making concessions. The basic strategy was to match or exceed the Democrats, and we did.”
But Stockman was buoyant about the political implications of the tax legislation: first, because it put a tightening noose around the size of the government; second, because it gave millions of middle-class voters tangible relief from inflation, even if the stimulative effects on the economy were mild or delayed. Stockman imagined the tax cutting as perhaps the beginning of a large-scale realignment of political loyalties, away from old-line liberalism and toward Reaganism.
And where did principle hide? Stockman, with his characteristic mixture of tactical cynicism and intellectual honesty, was unwilling to defend the moral premises of what had occurred. The “idea-based” policies that he had espoused at the outset were, in the final event, greatly compromised by the “constituency-based” politics that he abhorred. What had changed, fundamentally, was the list of winning clients, not the nature of the game. Stockman had said the new conservatism would pursue equity, even as it attempted to shrink the government. It would honor just claims and reject spurious ones, instead of simply serving powerful clients over weak clients. He was compelled to agree, at the legislative climax, that the original moral premises had not been served, that the new principles of Reaganism were compromised by the necessity of winning.
“I now understand,” he said, “that you probably can’t put together a majority coalition unless you are willing to deal with those marginal interests that will give you the votes needed to win. That’s where it is fought—on the margins—and unless you deal with those marginal votes you can’t win.”
In order to enact Reagan’s version of tax reduction, “certain wages” had to be paid, and, as Stockman reasoned, the process of brokering was utterly free of principle or policy objectives. The power flowed to the handful of representatives who could reverse the majority regardless of the interests they represented. Once the Reagan tacticians began making concessions beyond their “policy-based” agenda, it developed that their trades and compromises and giveaways were utterly indistinguishable from the decades of interest-group accommodations that preceded them, which they so righteously denounced. What was new about the Reagan revolution, in which oil-royalty owners win and welfare mothers lose? Was the new philosophy so different from old Republicanism when the federal subsidies for Boeing and Westinghouse and General Electric were protected, while federal subsidies for unemployed black teenagers were “zeroed out”? One could go on, at great length, searching for balance and equity in the outcome of the Reagan program without satisfying the question; the argument will continue as a central theme of electoral politics for the next few years. For now, Stockman would concede this much: that “weak clients” suffered for their weakness.
“Power is contingent,” he said. “The power of these client groups turned out to be stronger than I realized. The client groups know how to make themselves heard. The problem is, unorganized groups can’t play in this game.”
When Congress recessed for its August vacation and President Reagan took off for his ranch in the West, David Stockman had a surprising answer to one of his original questions: could he prevail in the political arena, against the status quo? His original skepticism about Congress was mistaken; the administration had prevailed brilliantly as politicians. And yet, it also seemed that the status quo, in an intangible sense that most politicians would not even recognize, much less worry over, had prevailed over David Stockman.
V. “Who Knows?”
Generally, he did not lose his temper, but on a pleasant afternoon in early September, Stockman returned from a meeting at the White House in a terrible black mood. In his ornately appointed office at OMB, he slammed his papers down on the desk and waved away associates. At the Oval Office that afternoon, Stockman had lost the great argument he had been carefully preparing since February: there would be no major retrenchment in the defense budget. Over the summer, Stockman had made converts, one by one, in the Cabinet and among the President’s senior advisers. But he could not convince the only hawk who mattered—Ronald Reagan. When the President announced that he would reduce the Pentagon budget by only $13 billion over the next three years, it seemed a pitiful sum compared with what he proposed for domestic programs, hardly a scratch on the military complex, which was growing toward $350 billion a year.
“Defense is setting itself up for a big fall,” Stockman had predicted. “If they try to roll me and win, they’re going to have a huge problem in Congress. The pain level is going to be too high. If the Pentagon isn’t careful, they are going to turn it into a priorities debate in an election year.”
Two days later, when we met for another breakfast conversation, Stockman had recovered from his anger. The argument over the defense budget, he insisted crankily, was a tempest stirred up by the press. The defense budget was never contemplated as a major target for savings. When Stockman was reminded of his earlier claims and predictions—how he would attack the Pentagon’s bloated inefficiencies, assisted by a clear-eyed secretary of defense—he shrugged and smiled thinly.
Autumn was cruel to David Stockman’s idea of how the world should work. The summer, when furious legislative trading was under way, had tattered his moral vision of government. Politics, in the dirty sense, had prevailed. Now he was confronted with more serious possibilities—the failure of the economic strategy and the political unraveling that he had feared from the beginning. On Capitol Hill, where Stockman was admired and envied for his nimble mind, where even critics conceded that his presence in the Cabinet was essential to Ronald Reagan’s opening victories, politicians of both parties were beginning to reach a different conclusion about him. Despite the wizardry, Stockman did not have all the answers, after all. The wizard was prepared to agree.
His failed expectations were derived from many events. In August, when enactment of the Reagan program was supposed to create a boom, instead, the financial markets sagged. Interest rates went still higher, squeezing the various sectors of the American economy. Real-estate sales were dead, and the housing industry was at a historic low point. The same was true for auto sales. Farmers complained about the exorbitant interest demanded for annual crop loans. Hundreds of savings-and-loan associations were at the edge of insolvency. The treasury secretary, perhaps also losing his original faith in the supply-side formulation, suggested that it was time for the Federal Reserve Board to loosen up on its tight monetary policy. Donald Regan saw a recession approaching.
Stockman’s prospects for balancing the budget were getting worse, not better. The optimistic economic forecast made in January to improve his original budget projections came back to haunt him in September. The inflation rate was down considerably (a prediction fortuitously correct because of oil and grain prices) but interest rates were not: the cost of federal borrowing and debt payments went still higher.
Stockman was boxed in, and he knew it. Unable to cut defense or Social Security or to modify the overly generous tax legislation, he was forced to turn back to the simple arithmetic of the federal budget—and cut even more from that smaller slice of the federal dollar that pays for government operations and grants and other entitlements. For six months, Stockman had been explaining to “the West Wing guys” that this math wouldn’t add. When Reagan proposed his new round of $16 billion in savings, the political outrage confirmed the diagnosis. Stockman was accused of breaking the agreements he had made in June: Senate Republicans who had accepted the “magic asterisk” so docilely were now talking of rebellion—postponing the enormous tax reductions they had just enacted. While the White House promised a war of vetoes ahead, intended to demonstrate “fiscal control,” Stockman knew that even if those short-range battles were won, the budget would not be balanced.
Disappointed by events and confronted with potential failure, the Reagan White House was developing a new political strategy: wage war with Congress over the budget issues and, in 1982, blame the Democrats for whatever goes wrong.
The budget director developed a new wryness as he plunged gamely on with these congressional struggles; it was a quality more appealing than certitude. Appearing before the House Budget Committee, Stockman listed a new budget item on his deficit sheet, drolly labeled “Inaction on Social Security.” With remarkable directness and no “magic asterisks,” he described the outlook: federal deficits of $60 billion in each of the next three years. Some analysts thought his predictions were modest. In the autumn of 1981, despite his great victories in Congress, Ronald Reagan had not as yet produced a plausible answer to John Anderson’s question.
Still, things might work out, Stockman said. They might find an answer. The President’s popularity might carry them through. The tax cuts would make people happy. The economy might start to respond, eventually, to the stimulation of the tax cuts. “Who knows?” Stockman said. From David Stockman, it was a startling remark. He would continue to invent new scenarios for success, but they would be more complicated and cloudy than his original optimism. “Who knows?” The world was less manageable than he had imagined; this machine had too many crazy moving parts to incorporate in a single lucid theory. The “random elements” of history—politics, the economy, the anarchical budget numbers—were out of control.
Where did things go wrong? Stockman kept asking and answering the right questions. The more he considered it, the more he moved away from the radical vision of reformer, away from the wishful thinking of supply-side economics, and toward the “old-time religion” of conservative economic thinking. Orthodoxy seemed less exciting than radicalism, but perhaps Stockman was only starting into another intellectual transition. He had changed from farm boy to campus activist at Michigan State, from Christian moralist to neo-conservative at Harvard; once again, Stockman was reformulating his ideas on how the world worked. What had he learned?
“The reason we did it wrong—not wrong, but less than the optimum—was that we said, Hey, we have to get a program out fast. And when you decide to put a program of this breadth and depth out fast, you can only do so much. We were working in a twenty- or twenty-five-day time frame, and we didn’t think it all the way through. We didn’t add up all the numbers. We didn’t make all the thorough, comprehensive calculations about where we really needed to come out and how much to put on the plate the first time, and so forth. In other words, we ended up with a list that I’d always been carrying of things to be done, rather than starting the other way and asking, What is the overall fiscal policy required to reach the target?”
That regret was beyond remedy now; all Stockman could do was keep trying on different fronts, trying to catch up with the shortcomings of the original Reagan prospectus. But Stockman’s new budget-cutting tactics were denounced as panic by his former allies in the supply-side camp. They now realized that Stockman regarded them as “overly optimistic” in predicting a painless boom through across-the-board tax reduction. “Some of the naive supply-siders just missed this whole dimension,” he said. “You don’t stop inflation without some kind of dislocation. You don’t stop the growth of money supply in a three-trillion-dollar economy without some kind of dislocation ... Supply-side was the wrong atmospherics—not wrong theory or wrong economics, but wrong atmospherics ... The supply-siders have gone too far. They created this nonpolitical view of the economy, where you are going to have big changes and abrupt turns, and their happy vision of this world of growth and no inflation with no pain.”
The “dislocations” were multiplying across the nation, creating panic among the congressmen and senators who had just enacted this “fiscal revolution.” But Stockman now understood that no amount of rhetoric from Washington, not the President’s warmth on television nor his own nimble testimony before congressional hearings, would alter the economic forces at work. Tight monetary control should continue, he believed, until the inflationary fevers were sweated out of the economy. People would be hurt. Afterward, after the recession, perhaps the supply-side effects could begin—robust expansion, new investment, new jobs. The question was whether the country or its elected representatives would wait long enough.
His exasperation was evident: “I can’t move the system any faster. I can’t have an emergency session of Congress to say, Here’s a resolution to cut the permanent size of government by 18 percent, vote it up or down. If we did that, it would be all over. But the system works much more slowly. But what can I do about it? Okay? Nothing. So I’m not going to navel-gaze about it too long.”
Still trying, still energetic, but no longer abundantly optimistic, Stockman knew that congressional anxieties over the next election were already stronger, making each new proposal more difficult. “The 1982 election cycle will tell us all we need to know about whether the democratic society wants fiscal control in the federal government,” Stockman said grimly.
The alternative still energized him. If they failed, if inflation and economic disorder continued, the conservative reformers would be swept aside by popular unrest. The nation would turn back toward “statist” solutions, controls devised and administered from Washington. Stockman shrugged at that possibility.
“Whenever there are great strains or changes in the economic system,” he explained, “it tends to generate crackpot theories, which then find their way into the legislative channels.”