America's Fiscal Constitution (48 page)

After Reagan’s weak performance in the first presidential debate, speech coach Roger Ailes encouraged the candidate return to his polished style of storytelling. Reagan used this talent at the next debate when responding to criticism from Congressman John Anderson of Illinois, the Republican-turned-Independent candidate. When Anderson pressed Reagan to require that tax cuts be conditioned on spending cuts, Reagan quipped that the best way to discipline a spendthrift teenager was to cut his allowance. That analogy made less sense if the teenager could use a credit card. Reagan had used the same analogy when advocating a cap in
the growth of taxes during his second term as governor, when California’s constitution prohibited the use of debt to fund operations.

On the night of Reagan’s victory in November 1980, a CBS News/
New York Times
exit poll showed that voters were most concerned about “inflation and economy” (33 percent); “jobs and employment” (24 percent); and “balancing the federal budget” (21 percent). Only 10 percent identified tax cuts as the highest priority. By a margin of 53 percent to 30 percent, voters rejected the idea that “cutting taxes is more important than balancing the federal budget.”
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Reagan won by more than a two-to-one among voters who identified balancing the budget as a top priority. Reagan reassured them by evoking the values underlying the American Fiscal Tradition in his inaugural address: “You and I as individuals can, by borrowing, live beyond our means, but only for a limited period of time. Why should we think that collectively, as a nation, we are not bound by that same limitation?”
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C
AMPAIGN
C
OMMITMENTS AND
F
LAWED
P
ROJECTIONS

At Kemp’s urging, Reagan chose the thirty-four-year-old congressman David Stockman to serve as budget director. Stockman, who had served as an unofficial budget expert for a group of House Republicans, worked nonstop to prepare a budget incorporating Reagan’s tax and spending commitments. That budget for fiscal year 1982, beginning in October 1981, assumed an annual inflation rate of 7.7 percent and economic growth at the extraordinary rate of 5.2 percent. Budget insiders called that projection “the Rosy Scenario.”
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Estimates based on those premises showed that tax revenues would skyrocket without a cut in tax rates, much like projected revenues in Anderson’s fact sheet. While in hindsight those projections may seem like a ploy to ease the passage of Reagan’s agenda, both the Congressional Budget Office and Carter’s outgoing Office of Management and Budget used similar assumptions.

The Federal Reserve’s restrictive monetary policy was, however, dropping the rate of inflation and slowing down the economy. Estimates of tax revenues should have declined as those trends pushed less taxable income into higher tax brackets.

Stockman cut some federal spending, notably for research and development of alternative energy sources. Members of Reagan’s cabinet resisted
most other cuts. Budget cuts proposed by the Reagan administration were dwarfed by the higher requested spending for national security—the single largest component of the federal funds budget.

In January 1981 Secretary of Defense Caspar Weinberger, a former assistant federal budget director, convinced Stockman to increase defense spending for fiscal year 1982 by a larger amount than Reagan had promised during the campaign. Stockman only later realized that he had failed to fully account for the impact of the massive increase in defense spending for fiscal 1981.

Even with the optimistic revenue estimates, Stockman’s budget contained a projected deficit greater than the one listed in the September 1980 fact sheet. The young budget director reviewed a draft of his budget with Senate Budget Committee Chairman Pete Domenici, Senate Finance Chairman Bob Dole, and Senate Majority Leader Howard Baker. Baker agreed that the budget would need to show savings of at least $44 billion from unspecified sources—a “magic asterisk”—in order to create the appearance of a lower deficit.
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The Senate Budget Committee—including its Republican majority—did not accept magic asterisk accounting and voted down the resolution containing Reagan’s budget. The committee recoiled at the prospect of a debt-financed tax cut.

On March 30, 1981, President Reagan was shot. Americans admired the grit and grace that he demonstrated during his recovery.

The president delivered a moving speech before a large television audience on April 28. Members of Congress greeted him with a long and emotional standing ovation. Reagan began by noting that his health had improved, but the economy had not. After criticizing the size of the national debt, he called on Congress to lower tax rates. Members of Congress were about to return home for their Easter recess, and Reagan framed the question he asked them to pose to their constituents: “Our choice is not between a balanced budget and a tax cut. Properly asked, the question is, ‘Do you want a great big raise in your taxes this coming year or, at the worst, a very little increase with the prospect of a tax reduction and a balanced budget down the road a ways?’”
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Majority Leader Jim Wright had been lining up votes for a Democratic budget alternative. After Reagan’s speech, Wright confided to his diary that the president’s aura of heroism had left those opposing him “outflanked and outgunned.”
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Congressman Jack Kemp pushed forward without even the promise of a balanced budget “down the road a ways.”
He told the House Budget Committee: “The Republican Party no longer worships at the altar of a balanced budget.”
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Stockman was unable to replace the magic asterisk with real cuts. At one point he proposed to freeze the level of Social Security benefits, though that action would not close the gap in the federal funds budget and validated fears that the administration intended to compensate for tax cuts by reducing pensions. A Senate resolution condemning Stockman’s idea passed unanimously.

N
EW
C
ONGRESSIONAL
T
AX
L
EADERSHIP

Never in the nation’s history had a president proposed large, simultaneous spending increases and tax cuts when the federal budget already had a deficit. For decades powerful House and Senate chairmen like Wilbur Mills and Harry Byrd had killed tax initiatives that threatened fiscal discipline. In 1981, however, both the House and Senate tax committees had new chairmen, and each was busy trying to consolidate support in Congress for his leadership.

The new Democratic chairman of the Ways and Means Committee, Representative Dan Rostenkowski of Chicago, knew how to count votes. He had joined the Ways and Means Committee five years after being elected to Congress at age thirty. For years Rostenkowski had deferred to Mills and to Mayor Richard Daley of Chicago. He earned a reputation as an effective negotiator, and he would need that skill—and more—to maximize his bargaining power in the conference committees that reconciled differences between the House and Senate tax bills. Since the Republican-led Senate Finance Committee had the backing of the White House, Rostenkowski had to count on solid support from House Democrats. In 1981 most House Democrats represented districts in or bordering the South, where Reagan had a strong following.

Before the assassination attempt and the president’s comeback speech, Rostenkowski declared that Reagan’s plan for large, multiyear tax cuts was “dead.”
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He planned to compete with Reagan by offering a less costly tax cut rather than insisting on a balanced budget.

Quick-witted senator Bob Dole of Nebraska had replaced Russell Long as chairman of the Senate Finance Committee. Dole, a disabled veteran with a national profile from his stint as Ford’s running mate, was a traditional conservative who questioned the wisdom of debt-financed tax cuts.
In 1981, however, he was unwilling to fight his party’s new president or allow the House to dominate tax policy.

Rostenkowski and the rest of the Democratic House leadership endured a stunning loss in the first round of the budget fight after Reagan’s speech. Republicans and an allied group of Southern Democrats found an innovative way to use the budget reconciliation procedure created by Congress the previous year. That procedure gave a majority in Congress the power to direct committees—including the Ways and Means Committee—to prepare legislation conforming to revenue estimates and spending ceilings adopted in the annual budget resolution. On May 7, 1981, House members working with Stockman won a close vote amending the House Budget Committee’s resolution. Their amendment, which passed over the opposition of the Speaker and every single committee chairman, bound the Ways and Means Committee to prepare legislation that included at least the first year of Reagan’s proposed tax cut.

Afterwards the Senate and House tax committees devised more tax reductions for businesses than had been proposed by the White House, a process observers characterized as a bidding war. However, while the Reagan administration had sought to phase in reductions in tax rates over three years, Rostenkowski’s Ways and Means Committee conditioned the third installment on a balanced budget.

In June 1981 a worried Stockman showed the president projections of rising future deficits, a prospect Reagan said he could not “accept.”
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Reagan met in the White House with House Republican leaders and Congressman Kent Hance from Lubbock, Texas, an organizer of the thirty-one-member Conservative Democratic Forum that had helped the White House win the reconciliation resolution. Hance and many conservative members in both parties represented districts with a large number of seniors, veterans, and farmers who depended on federal programs that had largely escaped budget cuts. Hance told the president that if the White House insisted on lower spending, its tax bill would “be in a heap of trouble.”
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Reagan backed down on the issue of additional spending cuts.

On July 27 the president delivered a nationally televised speech opposing the House plan to link the third installment of the tax cut to a balanced budget. Based on the assumption that high inflation would continue to push taxpayers into ever higher brackets, the president held up a chart showing Americans that their taxes would go up “22 percent in three years” without his tax plan.
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After the speech, Hance successfully
amended the House tax bill to remove the restriction on the third installment of the tax cut. Debt would have to replace the foregone tax revenues. The House passed the tax bill with a bipartisan vote, 323–107.

A young Republican in West Texas whom Hance had beaten to enter Congress just three years earlier, George W. Bush, closely followed the 1981 budget debate. After that defeat, the vice president’s son vowed never again to be “good ol’ boyed” by a populist like Hance. In prior decades the district in which both Hance and Bush lived had reelected George Mahon, the conservative former chairman of the House Appropriations Committee. Mahon had always given priority to balanced budgets. Bush’s father had gained little traction with sound arguments based on budget math during his primary challenge of Reagan. Perhaps something was changing in the definition of a fiscal conservative.

One sign of that change occurred shortly after passage of the tax bill; Stockman warned his former colleagues in the Republican House leadership about the need to slash spending in order to avoid record peacetime borrowing. The chairman of the House Republican Policy Committee, Representative Dick Cheney of Wyoming, replied to Stockman: “The deficit isn’t the worst thing that could happen.”
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B
ORROWING FOR
U
NSPECIFIED
P
URPOSES

The debate over the budget in August 1981 did not indicate a deliberate decision to incur vast debts. Official budget estimates at that time had not yet incorporated the effects of a deteriorating economy and lower inflation. The House budget resolution, passed in the spring, projected a $24.8 billion deficit—the lowest in years. The final budget resolution emerging from the conference committee forecasted an only slightly larger $37.6 billion deficit.
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Moreover, the multiyear budget forecast showed that the budget could be balanced by 1984.

Unexpected deficits were nothing new. For decades good faith estimates by professionals in the White House Budget Office had failed to correctly anticipate the precise levels of spending and tax revenues for the next fiscal year.
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With polls that showed overwhelming public support for a constitutional amendment requiring a balanced budget, few in Congress embraced routine borrowing as a matter of policy. As the size of the budget gap became more apparent in the fall of 1981, Republican Senate and House
leadership did not publicly justify debt as a means of paying for tax cuts and higher defense spending. Then, and throughout his presidency, Reagan consistently denied that the federal government borrowed for those purposes.

In late 1981, Stockman and senior Senate Republicans tried once more to curb future borrowing. Slowing the rate of the military buildup offered the most obvious means of cutting the deficit, yet Stockman largely failed to reduce defense spending in his three meetings with the president and Secretary of Defense Weinberger from July through September 1981. The increase in Department of Defense spending in fiscal year 1981 was so large that Pentagon planners scrambled to develop new programs. Pentagon spending, even excluding larger outlays for foreign military assistance and veterans, would increase from $134 billion in fiscal year 1980 to $253 billion in 1985.
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The Reagan administration asked for even more money for the military than Congress appropriated every fiscal year after 1982.