William Greider died this week at age 83. This essay, originally published in 1981, is widely considered his most famous piece of writing. It caused a firestorm of controversy when it first appeared. David A. Stockman, the budget director for the incoming Reagan administration, spoke too freely with Greider about his doubts over Reagan’s supply-side theory of economics. Stockman was then, in his words, “taken to the woodshed” by the president.
I. How the World Works
Generally, he had no time for idle sentimentality, but David A. Stockman indulged himself for a moment as he and I approached the farmhouse in western Michigan where Stockman was reared. With feeling, he described a youthful world of hard work, variety, and manageable challenges. “It’s something that’s disappearing now, the working family farm,” Stockman observed. “We had a little of everything—an acre of strawberries, an acre of peaches, a field of corn, fifteen cows. We did everything.”
A light snow had fallen the day before, dusting the fields and orchards with white, which softened the dour outline of the Stockman brick farmhouse. It was built seventy years ago by Stockman’s maternal grandfather, who also planted the silver birches that ring the house. He was county treasurer of Berrien County for twenty years, and his reputation in local politics was an asset for his grandson.
The farm has changed since Stockman’s boyhood; it is more specialized. The bright-red outbuildings behind the house include a wooden barn where livestock was once kept, a chicken coop also no longer in use, a garage, and a large metal-sided building, where the heavy equipment—in particular, a mechanical grape picker—is stored. Grapes are now the principal crop that Allen Stockman, David’s father, produces. He earns additional income by leasing out the grape picker. The farm is a small but authentic example of the entrepreneurial capitalism that David Stockman so admires.
As the car approached the house, Stockman’s attention was diverted by a minor anomaly in the idyllic rural landscape: two tennis courts. They seemed out of place, alone, amidst the snow-covered fields at an intersection next to the Stockman farm. Stockman hastened to explain that, despite appearances, these were not his family’s private tennis courts. They belonged to the township. Royalton Township (of which Al Stockman was treasurer) had received, like all other local units of government, its portion of the federal revenue-sharing funds, and this was how the trustees had decided to spend part of the money from Washington. “It’s all right, I suppose,” Stockman said amiably, “but these people would never have taxed themselves to build that. Not these tight-fisted taxpayers! As long as someone is giving them the money, sure, they are willing to spend it. But they would never have used their own money.”
Stockman’s contempt was directed not at the local citizens who had spent the money but at the people in Washington who had sent it. And soon he would be in a position to do something about them. This winter weekend was a final brief holiday with his parents; in a few weeks he would become director of the Office of Management and Budget in the new administration in Washington. Technically, Stockman was still the U.S. congressman from Michigan’s Fourth District, but his mind and exceptional energy were already concentrated on running OMB, a small but awesomely complicated power center in the federal government, through which a President attempts to monitor all of the other federal bureaucracies.
Stockman carried with him a big black binder enclosing a “Current Services Budget,” which listed every federal program and its current cost projections. He hoped to memorize the names of 500 to 1,000 program titles and major accounts by the time he was sworn in—an objective that seemed reasonable to him, since he already knew many of the budget details. During four years in Congress, Stockman had made himself a leading conservative gadfly, attacking Democratic budgets and proposing leaner alternatives. Now the President-elect was inviting him to do the same thing from within. Stockman had lobbied for the OMB job and was probably better prepared for it, despite his youthfulness, than most of his predecessors.
He was thirty-four years old and looked younger. His shaggy hair was streaked with gray, and yet he seemed like a gawky collegian, with unstylish glasses and a prominent Adam’s apple. In the corridors of the Capitol, where all ambitious staff aides scurried about in serious blue suits, Representative Stockman wore the same uniform, and was frequently mistaken for one of them.
Inside the farmhouse, the family greetings were casual and restrained. His parents and his brothers and in-laws did not seem overly impressed by the prospect that the eldest son would soon occupy one of the most powerful positions of government. Opening presents in the cluttered living room, watching the holiday football games on television, the Stockmans seemed a friendly, restrained, classic Protestant farm family of the Middle West, conservative and striving. As sometimes happens in those families, however, the energy and ambition seemed to have been concentrated disproportionately in one child, David, perhaps at the expense of the others. His mother, Carol, a big-boned woman with metallic blond hair, was the family organizer, an active committee member in local Republican politics, and the one who made David work for A’s in school. In political debate, David Stockman was capable of dazzling opponents with words; his brothers seemed shy and taciturn in his presence. One brother worked as a county corrections officer in Michigan. Another, after looking on Capitol Hill, found a job in an employment agency. A third, who had that distant look of a sixties child grown older, did day labor, odd jobs. His sister was trained as an educator and worked as a consultant to manpower-training programs in Missouri that were financed by the federal government. “She believes in what she’s doing and I don’t quarrel with it,” Stockman said. “Basically, there are gobs of this money out there. CETA grants have to do evaluation and career planning and so forth. What does it amount to? Somebody rents a room in a Marriott Hotel somewhere and my sister comes in and talks to them. I think Marriott may get more out of it than anyone else. That’s part of what we’re trying to get at, and it’s layered all over the government.”
While David Stockman would speak passionately against the government in Washington and its self-aggrandizing habits, there was this small irony about his siblings and himself: most of them worked for government in one way or another—protected from the dynamic risk-taking of the private economy. Stockman himself had never had any employer other than the federal government, but the adventure in his career lay in challenging it. Or, more precisely, in challenging the “permanent government” that modern liberalism had spawned.
By that phrase, Stockman and other conservatives meant not only the layers and layers of federal bureaucrats and liberal politicians who sustained open-ended growth of the central government but also the less visible infrastructure of private interests that fed off of it and prospered—the law firms and lobbyists and trade associations in rows of shining office buildings along K Street in Washington; the consulting firms and contractors; the constituencies of special interests, from schoolteachers to construction workers to failing businesses and multinational giants, all of whom came to Washington for money and for legal protection against the perils of free competition.
While ideology would guide Stockman in his new job, he would be confronted with a large and tangible political problem: how to resolve the three-sided dilemma created by Ronald Reagan’s contradictory campaign promises. In private, Stockman agreed that his former congressional mentor, John Anderson, running as an independent candidate for President in 1980, had asked the right question: How is it possible to raise defense spending, cut income taxes, and balance the budget, all at the same time? Anderson had taunted Reagan with that question, again and again, and most conventional political thinkers, from orthodox Republican to Keynesian liberal, agreed with Anderson that it could not be done.
But Stockman was confident, even cocky, that he and some of his fellow conservatives had the answer. It was a theory of economics—the supply-side theory—that promised an end to the twin aggravations of the 1970s: high inflation and stagnant growth in America’s productivity. “We’ve got to figure out a way to make John Anderson’s question fit into a plausible policy path over the next three years,” Stockman said. “Actually, it isn’t all that hard to do.”
The supply-side approach, which Stockman had only lately embraced, assumed first of all, that dramatic action by the new President, especially the commitment to a three-year reduction of the income tax, coupled with tight monetary control, would signal investors that a new era was dawning, that the growth of government would be displaced by the robust growth of the private sector. If economic behavior in a climate of high inflation is primarily based on expectations about the future value of money, then swift and dramatic action by the President could reverse the gloomy assumptions in the disordered financial markets. As inflation abated, interest rates dropped, and productive employment grew, those marketplace developments would, in turn, help Stockman balance the federal budget.
“The whole thing is premised on faith,” Stockman explained. “On a belief about how the world works.” As he prepared the script in his mind, his natural optimism led to bullish forecasts, which were even more robust than the Reagan Administration’s public promises. “The inflation premium melts away like the morning mist,” Stockman predicted. “It could be cut in half in a very short period of time if the policy is credible. That sets off adjustments and changes in perception that cascade through the economy. You have a bull market in ’81, after April, of historic proportions.”
How The World Works. It was a favorite phrase of Stockman’s, frequently invoked in conversation to indicate a coherent view of things, an ideology that was whole and consistent. Stockman took ideology seriously, and this distinguished him from other bright, ambitious politicians who were content to deal with public questions one at a time, without imposing a consistent philosophical framework upon them.
In 1964, when he went off to Michigan State, having played quarterback in high school and participated in Future Farmers of America, Stockman assumed that he would be a farmer, like his father. His political views were orthodox Republic, derived from his mother, and from his reading of The Conscience of a Conservative, by Senator Barry Goldwater. “In my first three months, I went through an absolute clash of cultures,” Stockman recalls. “My first professor was an atheist and socialist from Brooklyn, and within three months I think he destroyed everything I believed in, from God to the flag.” When the Vietnam War became the focus of campus radicalism, Stockman became a leader, and read Herbert Marcuse, C. Wright Mills, and Paul Goodman’s critiques of American society. “I became a radical, not in the hard-core sense but in the more casual sense that nearly everybody was on campus in those days. Naturally, as a good Methodist, I looked for the Methodist youth center, which became the anti-war center, because that was the socially conscious thing to do. I was still enough of a farm boy to believe that revolution was God’s work.”
After graduation, he enrolled at Harvard Divinity School, thinking he might become a great moral philosopher in the tradition of Christian social activists. (He was perhaps also thinking like so many other students of the time, that divinity school would extend his deferment from the draft.) At Michigan State, he had dropped the study of agriculture and moved into the humanities. At Harvard, he dropped theology and moved into the social sciences (though he never received training as an economist). “I guess I always had a strong intellectual bent, so I needed a strong theory of how the world worked.”
When he found the divinity courses uninspiring, he began taking political science and history—studying under neo-conservatives such as James Q. Wilson, Nathan Glazer, and Daniel Patrick Moynihan—and discovered, he said, “that it was possible to have a sophisticated view of the world without being a Marxist.” In a Harvard seminar, he made a connection with John Anderson, who was looking for a bright young idea man to help prepare issues for the House Republican Conference, which Anderson chaired. The Illinois congressman was moving gradually leftward in his views; Stockman was continuing his intellectual search in the opposite direction.
Stockman’s congressional district was composed of small towns and countryside, a world that worked quite well without Washington, in his view. After dinner at the farm that day, we took a driving tour of the area. The government’s good works were everywhere—a new sewer system in Bridgman, a modern municipal building in Stevensville—but Stockman belittled them as “pork barrel.” Stockman’s district was overwhelmingly rural and Republican, but he saw it as a fair representation of America.
Indeed, as a congressman, Stockman himself had worked hard to make certain that his Fourth District constituents exploited the system. His office maintained a computerized alert system for grants and loans from the myriad agencies, to make certain that no opportunities were missed. “I went around and cut all the ribbons and they never knew I voted against the damn programs,” he said.
Still, more than most other politicians, Stockman was known for standing by his ideological principles, not undermining them. When Congress voted its bail-out financing to rescue Chrysler from bankruptcy, Stockman was the only Michigan representative to oppose it, even though a large town in his district, St. Joseph, would be hurt. The town’s largest employer, St. Joe’s Auto Specialties, was a Chrysler supplier, and its factory was laying off workers. Its owners were among Stockman’s earliest and largest contributors when he first ran for Congress, in 1976. Still, he opposed the bail-out. “Some of them were a little miffed at me and others applauded. I only had one or two argue strenuously with me. They’re probably more derogatory behind my back.”
Stockman felt protected from local pressures, in a way that most members of Congress do not—partly by the Republicanism of the district but also by the consistency of his ideology. Since he had a clear, strong view of what government ought and ought not to do, he found it easier to resist claims that seemed illegitimate, no matter who their sponsors might be. “Too many politicians are intimidated by the squeaking wheel, in my judgment. Regardless of their ideological viewpoint, they’re able to incorporate the squealing wheel into their general position. If the proposal is pro-business, they call it conservative. If they’re from Nebraska, it’s pro-farmer. It’s whatever serves the constituencies.”
This was the core of his complaint against the modern liberalism launched by Franklin Roosevelt’s New Deal. He did not quarrel with the need for basic social-welfare programs, such as unemployment insurance or Social Security; he agreed that the government must regulate private enterprise to protect general health and safety. But liberal politics in its later stages had lost the ability to judge claims, and so yielded to all of them, Stockman thought, creating what he describes as “constituency-based choice-making,” which could no longer address larger national interests, including fiscal control. As Stockman saw it, this process did not ameliorate social inequities; it created new ones by yielding to powerful interest groups at the expense of everyone else. “What happens is the politicization of the society. All decisions flow to the center. Once we decide to allocate credit to certain activities—and we’re doing that on a massive scale—or to allocate the capital for energy development, the levels of competency and morality fall. Then the outcomes in society begin to look more and more like the work of brute muscle. The other thing it does is destroy ideas. Once things are allocated by political muscle, by regional claims, there are no longer idea-based agendas.”
Across the river from St. Joe’s, Stockman drove through the deserted Main Street of Benton Harbor, his favorite example of failed liberalism. Once it had been a prosperous commercial center, but now most of its stores and buildings were boarded up and vacant except for an occasional storefront church or social-service agency. As highways and suburban shopping centers pulled away commerce, the downtown collapsed, whites moved, and the city became predominantly black and overwhelmingly poor. The federal government’s various efforts to revive Benton Harbor had quite visibly failed.
“When you have powerful underlying demographic and economic forces at work, federal intervention efforts designed to reverse the tide turn out to have rather anemic effect,” Stockman said, surveying the dilapidated storefronts. “I wouldn’t be surprised if $100 million had been spent here in the last twenty years. Urban renewal, CETA, model cities, they’ve had everything. And the results? No impact whatever.”
The drastic failure seemed to please him, for it confirmed his view of how the world works. As budget director, he intended to proceed against many of the programs that fed money to the poor blacks of Benton Harbor, morally confident because he knew from personal observation that the federal revitalization money did not deliver what such programs promised. But he would also go after the Economic Development Administration (EDA) grants for the comfortable towns and the Farmers Home Administration loans for communities that could pay for their own sewers and the subsidized credit for farmers and business—the federal guarantees for economic interests that ought to take their own risks. He was confident of his theory, because, in terms of the Michigan countryside where he grew up, he saw it as equitable and fundamentally moral.
“We are interested in curtailing weak claims rather than weak clients,” he promised. “The fear of the liberal remnant is that we will only attack weak clients. We have to show that we are willing to attack powerful clients with weak claims. I think that’s critical to our success—both political and economic success.”
II. A Radical in Power
Three weeks before the Inauguration, Stockman and his transition team of a dozen or so people were already established at the OMB office in the Old Executive Office Building. When his appointment as budget director first seemed likely, he had agreed to meet with me from time to time and relate, off the record, his private account of the great political struggle ahead. The particulars of these conversations were not to be reported until later, after the season’s battles were over, but a cynic familiar with how Washington works would understand that the arrangement had obvious symbiotic value. As an assistant managing editor at The Washington Post, I benefited from an informed view of policy discussions of the new administration; Stockman, a student of history, was contributing to history’s record and perhaps influencing its conclusions. For him, our meetings were another channel—among many he used—to the press. The older generation of orthodox Republicans distrusted the press; Stockman was one of the younger “new” conservatives who cultivated contacts with columnists and reporters, who saw the news media as another useful tool in political combat. “We believe our ideas have intellectual respectability, and we think the press will recognize that,” he said. “The traditional Republicans probably sensed, even if they didn’t know it, that their ideas lacked intellectual respectability.”
In any case, for the eight months that followed, Stockman kept the agreement, and our regular conversations, over breakfast at the Hay-Adams, provided the basis of the account that follows.
In early January, Stockman and his staff were assembling dozens of position papers on program reductions and studying the internal forecasts for the federal budget and the national economy. The initial figures were frightening—“absolutely shocking,” he confided—yet he seemed oddly exhilarated by the bad news, and was bubbling with new plans for coping with these horrendous numbers. An OMB computer, programmed as a model of the nation’s economic behavior, was instructed to estimate the impact of Reagan’s program on the federal budget. It predicted that if the new President went ahead with his promised three-year tax reduction and his increase in defense spending, the Reagan Administration would be faced with a series of federal deficits without precedent in peacetime—ranging from $82 billion in 1982 to $116 billion in 1984. Even Stockman blinked. If those were the numbers included in President Reagan’s first budget message, the following month, the financial markets that Stockman sought to reassure would instead be panicked. Interest rates, already high, would go higher; the expectation of long-term inflation would be confirmed.
Stockman saw opportunity in these shocking projections. “All the conventional estimates just wind up as mud,” he said. “As absurdities. What they basically say, to boil it down, is that the world doesn’t work.”
Stockman set about doing two things. First, he changed the OMB computer. Assisted by like-minded supply-side economists, the new team discarded orthodox premises of how the economy would behave. Instead of a continuing double-digit inflation, the new computer model assumed a swift decline in prices and interest rates. Instead of the continuing pattern of slow economic growth, the new model was based on a dramatic surge in the nation’s productivity. New investment, new jobs, and growing profits—and Stockman’s historic bull market. “It’s based on valid economic analysis,” he said, “but it’s the inverse of the last four years. When we go public, this is going to set off a wide-open debate on how the economy works, a great battle over the conventional theories of economic performance.”
The original apostles of supply-side, particularly Representative Jack Kemp, of New York, and the economist Arthur B. Laffer, dismissed budget-cutting as inconsequential to the economic problems, but Stockman was trying to fuse new theory and old. “Laffer sold us a bill of goods,” he said, then corrected his words: “Laffer wasn’t wrong—he didn’t go far enough.”
The great debate never quite took hold in the dimensions that Stockman had anticipated, but the Reagan Administration’s economic projections did become the source of continuing controversy. In defense of their counter-theories, Stockman and his associates would argue, correctly, that conventional forecasts, particularly by the Council of Economic Advisers in the preceding administration, had been consistently wrong in the past. His critics would contend that the supply-side premises were based upon wishful thinking, not sound economic analysis.
But, second, Stockman used the appalling deficit projections as a valuable talking point in the policy discussions that were under way with the President and his principal advisers. Nobody in that group was the least bit hesitant about cutting federal programs, but Reagan had campaigned on the vague and painless theme that eliminating “waste, fraud, and mismanagement” would be sufficient to balance the accounts. Now, as Stockman put it, “the idea is to try to get beyond the waste, fraud, and mismanagement modality and begin to confront the real dimensions of budget reduction.” On the first Wednesday in January, Stockman had two hours on the President-elect’s schedule to describe the “dire shape” of the federal budget; for starters, the new administration would have to go for a budget reduction in the neighborhood of $40 billion. “Do you have any idea what $40 billion means?” he said. “It means I’ve got to cut the highway program. It means I’ve got to cut milk-price supports. And Social Security student benefits. And education and student loans. And manpower training and housing. It means I’ve got to shut down the synfuels program and a lot of other programs. The idea is to show the magnitude of the budget deficit and some suggestion of the political problems.”
How much pain was the new President willing to impose? How many sacred cows would he challenge at once? Stockman was still feeling out the commitment at the White House, aware that Reagan’s philosophical commitment to shrinking the federal government would be weighed against political risks.
Stockman was impressed by the ease with which the President-elect accepted the broad objective: find $40 billion in cuts in a federal budget running well beyond $700 billion. But, despite the multitude of expenditures, the proliferation of programs and grants, Stockman knew the exercise was not as easy as it might sound.
Consider the budget in simple terms, as a federal dollar representing the entire $700 billion. The most important function of the federal government is mailing checks to citizens—Social Security checks to the elderly, pension checks to retired soldiers and civil servants, reimbursement checks for hospitals and doctors who provide medical care for the aged and the poor, welfare checks for the dependent, veterans’ checks to pensioners. Such disbursements consume forty-eight cents of the dollar.
Another twenty-five cents goes to the Pentagon, for national defense. Stockman knew that this share would be rising in the next four years, not shrinking, perhaps becoming as high as thirty cents. Another ten cents was consumed by interest payments on the national debt, which was fast approaching a trillion dollars.
That left seventeen cents for everything else that Washington does. The FBI and the national parks, the county agents and the Foreign Service and the Weather Bureau—all the traditional operations of government—consumed only nine cents of the dollar. The remaining eight cents provided all of the grants to state and local governments, for aiding handicapped children or building highways or installing tennis courts next to Al Stockman’s farm. One might denounce particular programs as wasteful, as unnecessary and ineffective, even crazy, but David Stockman knew that he could not escape these basic dimensions of federal spending.
As he and his staff went looking for the $40 billion, they found that most of it would have to be taken from the seventeen cents that covered government operations and grants-in-aid. Defense was already off-limits. Next Ronald Reagan laid down another condition for the budget-cutting: the main benefit programs of Social Security, Medicare, veterans’ checks, railroad retirement pensions, welfare for the disabled—the so-called “social safety net” that Reagan had promised not to touch—were to be exempt from the budget cuts. In effect, he was declaring that Stockman could not tamper with three fourths of the forty-eight cents devoted to transfer payments.
No President had balanced the budget in the past twelve years. Still, Stockman thought it could be done, by 1984, if the Reagan Administration adhered to the principle of equity, cutting weak claims, not merely weak clients, and if it shocked the system sufficiently to create a new political climate. He still believed that it was not a question of numbers. “It boils down to a political question, not of budget policy or economic policy, but whether we can change the habits of the political system.”
The struggle began in private, with Ronald Reagan’s Cabinet. By inaugural week, Stockman’s staff had assembled fifty or sixty policy papers outlining major cuts and alterations, and, aiming at the target of $40 billion, Stockman was anxious to win fast approval for them, before the new Cabinet officers were fully familiar with their departments and prepared to defend their bureaucracies. During that first week, the new Cabinet members had to sit through David Stockman’s recital—one proposal after another outlining drastic reductions in their programs. Brief discussion was followed by presidential approval. “I have a little nervousness about the heavy-handedness with which I am being forced to act,” Stockman conceded. “It’s not that I wouldn’t want to give the decision papers to the Cabinet members ahead of time so they could look at them, it’s just that we’re getting them done at eight o’clock in the morning and rushing them to the Cabinet room ... It doesn’t work when you have to brace these Cabinet officers in front of the President with severe reductions in their agencies, because then they’re in the position of having to argue against the group line. And the group line is cut, cut, cut. So that’s a very awkward position for them, and you make them resentful very fast."
Stockman proposed to White House counselor Edwin Meese an alternative approach—a budget working group, in which each Cabinet secretary could review the proposed cuts and argue against them. As the group evolved, however, with Meese, chief of staff James Baker, Treasury Secretary Donald Regan, and policy director Martin Anderson, among others, it was stacked in Stockman’s favor. "Each meeting will involve only the relevant Cabinet member and his aides with four or five strong keepers of the central agenda,” Stockman explained at one point. “So on Monday, when we go into the decision on synfuels programs, it will be [Energy Secretary James B.] Edwards defending them against six guys saying that, by God, we’ve got to cut these back or we’re not going to have a savings program that will add up.”
In general, the system worked. Stockman’s agency did in a few weeks what normally consumes months; the process was made easier because the normal opposition forces had no time to marshal either their arguments or their constituents and because the President was fully in tune with Stockman. After the budget working group reached a decision, it would be taken to Reagan in the form of a memorandum, on which he could register his approval by checking a little box. “Once he checks it,” Stockman said, “I put that in my safe and I go ahead and I don’t let it come back up again.”
The check marks were given to changes in twelve major budget entitlements and scores of smaller ones. Eliminate Social Security minimum benefits. Cap the runaway costs of Medicaid. Tighten eligibility for food stamps. Merge the trade adjustment assistance for unemployed industrial workers with standard unemployment compensation and shrink it. Cut education aid by a quarter. Cut grants for the arts and humanities in half. “Zero out” CETA and the Community Services Administration and National Consumer Cooperative Bank. And so forth. “Zero out” became a favorite phrase of Stockman’s; it meant closing down a program “cold turkey,” in one budget year. Stockman believed that any compromise on a program that ought to be eliminated—funding that would phase it out over several years—was merely a political ruse to keep it alive, so it might still be in existence a few years hence, when a new political climate could allow its restoration to full funding.
“I just wish that there were more hours in the day or that we didn’t have to do this so fast. I have these stacks of briefing books and I’ve got to make decisions about specific options ... I don’t have time, trying to put this whole package together in three weeks, so you just start making snap judgments.”
In the private deliberations, Stockman began to encounter more resistance from Cabinet members. He was proposing to cut $752 million from the Export-Import Bank, which provides subsidized financing for international trade—a cut of crucial symbolic importance, because of Stockman’s desire for equity. Two thirds of the Ex-Im’s direct loans benefit some of America’s major manufacturers—Boeing, Lockheed, General Electric, Westinghouse, McDonnell Douglas, Western Electric, Combustion Engineering—and, not surprisingly, the program had a strong Republican constituency on Capitol Hill. Stockman thought the trade subsidies offended the free-market principles that all conservatives espouse—in particular, President Reagan’s objective of withdrawing Washington from business decision-making. Supporters of the subsidies made a practical argument: the U.S. companies, big as they were, needed the financial subsidies to stay even against government-subsidized competition from Europe and Japan.
The counter-offensive against the cut was led by Commerce Secretary Malcolm Baldrige and U.S. Trade Representative William Brock, who argued eloquently before the budget working group for a partial restoration of Ex-Im funds. By Stockman’s account, the two “fought, argued, pounded the table,” and the meeting seemed headed for deadlock. “I sort of innocently asked, well, isn’t there a terrible political spin on this? It’s my impression that most of the money goes to a handful of big corporations, and if we are ever caught not cutting this while we’re biting deeply into the social programs, we’re going to have big problems.” Stockman asked if anyone at the table had any relevant data. Deputy Secretary of the Treasury Tim McNamar thereupon produced a list of Ex-Im’s major beneficiaries (a list that Stockman had given him before the meeting). “So then I went into this demagogic tirade about how in the world can I cut food stamps and social services and CETA jobs and EDA jobs and you’re going to tell me you can’t give up one penny for Boeing?”
Stockman won that argument, for the moment. But, as with all the other issues in the budget debate, the argument was only beginning. “I’ve got to take something out of Boeing’s hide to make this look right ... You can measure me on this, because I’ll probably lose but I’ll give it a helluva fight.”
Stockman also began what was to become a continuing struggle, occasionally nasty, with the new secretary of energy. Edwards, a dentist from South Carolina, was ostensibly appointed to dismantle the Department of Energy, as Reagan had promised, but when Stockman proposed cutting the department in half, virtually eliminating the vast synthetic-fuels program launched by the Carter Administration, Edwards argued in defense. In the midst of the battle, Stockman said contemptuously, “I went over to DOE the other day and here’s a whole roomful of the same old bureaucrats I’ve been kicking around for the last five years—advising Edwards on why we couldn’t do certain things on oil decontrol that I wanted to do.” The relationship did not improve as the two men got to know each other better.
But Stockman felt only sympathy for Secretary of Agriculture John Block, an Illinois farmer. The budget cuts were hitting some of Agriculture’s principal subsidy programs. A billion dollars would be cut from dairy-price supports. The Farmers Home Administration loans and grants were to be sharply curtailed. The low-interest financing for rural electric cooperatives and the Tennessee Valley Authority would be modified. In the early weeks of the new administration, the peanut growers and their congressional lobby had campaigned, as they did every year, to have the new secretary of agriculture raise the price-support level for peanuts. Stockman told Block he would have to refuse—for Stockman wanted to abolish the program. “I sympathize with Jack Block,” Stockman said. “I forced him into a position that makes his life miserable over there. He’s on the central team, he’s not a departmental player, but the parochial politics of that department are fierce.” Victories over farm lobbies could be won, Stockman believed, if he kept the issues separate—attacking each commodity program in turn, and undermining urban support by cutting the food and nutrition programs. “My strategy is to come in with a farm bill that’s unacceptable to the farm guys so that the whole thing begins to splinter.” An early test vote on milk-price supports seemed to confirm the strategy—the dairy farmers lobbied and lost.
The only Cabinet officer Stockman did not challenge was, of course, the secretary of defense. In the frantic preparation of the Reagan budget message, delivered in broad outline to Congress on February 18, the OMB review officers did not give even their usual scrutiny to the new budget projections from Defense. Reagan had promised to increase military spending by 7 percent a year, adjusted for inflation, and this pledge translated into the biggest peacetime arms build-up in the history of the republic—$1.6 trillion over the next five years, which would more than double the Pentagon’s annual budget while domestic spending was shrinking. Stockman acknowledged that OMB had taken only a cursory glance at the new defense budget, but he was confident that later on, when things settled down a bit, he could go back and analyze it more carefully.
In late February, months before the defense budget became a subject of Cabinet debate, Stockman privately predicted that Defense Secretary Caspar Weinberger, himself a budget director during the Nixon years, would be an ally when he got around to cutting back military spending. “As soon as we get past this first phase in the process, I’m really going to go after the Pentagon. The whole question is blatant inefficiency, poor deployment of manpower, contracting idiocy, and, hell, I think that Cap’s going to be a pretty good mark over there. He’s not a tool of the military-industrial complex. I mean, he hasn’t been steeped in its excuses and rationalizations and ideology for twenty years, and I think that he’ll back off on a lot of this stuff, but you just can’t challenge him head-on without your facts in line. And we’re going to get our case in line and just force it through the presses.”
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:
“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.”