Reagan: The Life (49 page)

But Volcker did not know Reagan. “
I was sitting across the table from Volcker and the view was priceless,” Anderson wrote. “His face muscles went slack and his lower jaw literally sagged a half-inch or so as his mouth fell open. For several seconds he just looked at Reagan, stunned and speechless. It is a good thing Volcker had not had time to light one of his long cigars, because he might have swallowed it. My God, he must have thought, here I am the head of the largest, most powerful banking system in the world and the very first thing this guy—who is going to be president of the United States for at least the next four years—says to me is to justify my existence.”

Volcker recovered sufficiently to give the president a primer on the Fed and its functions. Reagan seemed satisfied, and the lunch proceeded uneventfully. But Volcker became a thorn in the administration’s side, for he was determined to wring the
inflation out of the economy regardless of the pain he inflicted. Volcker was a behaviorist as well as a monetarist, and he believed that public expectations drove wages and prices higher and caused them to resist restraint even when the money supply stopped growing. The only solution, he concluded, was shock therapy: tight money for as long as necessary to change the minds and expectations of markets and individuals. Volcker’s policy produced howls across the economy as the high interest rates strangled demand and pitched the country into recession.

Don Regan thought he knew as much about money as Volcker did, and he judged that the Fed chief was carrying things too far. “
Volcker, possessed of an almost messianic desire to drive inflation out of the economy, pursued restrictive policies that created large, unpredictable swings in the money supply,” Regan wrote. When Congress continued to spend, Volcker squeezed still harder. “Thus Congress was stomping on the accelerator of the economy while Volcker was simultaneously slamming on the brakes. The administration, given the scary job of holding the steering wheel of the skidding jalopy, was sorely tempted to throw up its hands and cover its eyes.”

Regan tried to moderate Volcker’s policy. Acknowledging the insti
tutional independence of the Fed, Regan nonetheless worked on its boss. Every Thursday he ate breakfast with Volcker, at the Treasury one week, at the Fed the next. “I argued with Volcker for a steady, predictable monetary policy that would assure an adequate and dependable supply of money for the private sector,” he recalled. Volcker responded that the past decade of
inflation had rendered his rigorous policy essential. Regan asked him to consider the cost. “Volcker is a brilliant and dedicated man, and there is no doubt that his actions did, indeed, cauterize inflation,” Regan wrote afterward. “But the burn cost the patient the use of his right arm for nearly two decades.”

Regan thought Volcker sometimes chastened the bankers simply because he thought they needed chastening. “ ‘Paul, you’re a nanny!’ I used to say to him after he had given the bankers another spoonful of medicine.” Yet the bankers took their medicine, believing that they, as creditors, would ultimately benefit from a sounder dollar. “The bankers liked him,” Regan observed. “So did the press.” Regan supposed that the Volcker vogue owed something to the fact that the Fed chief was the only person in the capital who could withstand President Reagan’s popularity. “Whatever the reason, Volcker enjoyed a remarkably good press—a fact that did not escape the notice of the public relations experts in the White House.”

To the dismay of the administration, Volcker engineered the sharpest recession since World War II.
Unemployment topped 8 percent in early 1982, on its way to nearly 11 percent. Not since the
Great Depression had so many Americans been out of work. And the federal deficit grew larger than ever.

A
NOTHER BOMB
,” R
EAGAN
wrote in his diary after meeting again with his economic team. “The latest figures on deficit projections, bad.”

The president had expected pain during the adjustment to the new era of smaller government, but he hadn’t anticipated anything like this.
Inflation was falling, but so were projected tax revenues, which had counted on inflation pushing taxpayers into higher brackets until indexing took effect. “We face the prospect of low inflation and lower interest rates, all of which is good, but gigantic deficits, and that’s bad,” Reagan wrote. “
A very dark picture economically.”

In early November the administration suffered an acute embarrassment. David Stockman had been meeting secretly with
William Greider, an editor at the
Washington Post
and an occasional contributor to the
Atlantic Monthly
. Stockman later explained that Greider was a friend and a smart fellow on whom he liked to sharpen his thinking. He also said that he misunderstood the ground rules of their conversations. Greider agreed not to publish anything until after the budget bill passed or failed; evidently, he did
not
agree not to quote Stockman by name. An article by Greider appeared in the December 1981 issue of the
Atlantic
, which hit the newsstands in early November. Titled “The Education of David Stockman,” it portrayed Stockman sympathetically but evinced skepticism toward
supply-side economics. And it included quotations that weren’t shocking in the context of the long article but made damaging sound bites when excerpted. “
Kemp-Roth was always a Trojan horse to bring down the top rate,” Greider’s Stockman said of the broad-based tax
cuts, making the administration seem a shill for the wealthy. “Supply side is ‘trickle-down’ theory.”

Administration officials were slow to react to the article, in part because it was very long and they were very busy. James Baker and the administration’s
Legislative Strategy Group shared a chuckle over Stockman’s discomfiture and presented him with a framed copy of the magazine cover. “
We even autographed the darn thing,” Baker remembered.

But Democrats seized on the “Trojan horse” and “trickle-down” language as revealing a basic dishonesty at the core of Reaganomics. Senator
Gary Hart of Colorado charged Stockman with “
one of the most cynical pieces of performance by a public official since the Vietnam era.” Senator
Ernest Hollings of South Carolina called Stockman’s act the “best off-Broadway show we’ve ever had.” The media played the story for all it was worth. “
The networks hammered us for two straight nights, less about what the article said (in my opinion) than what the Democrats said it said,” Baker remarked.

Ed Meese and Mike Deaver wanted Stockman fired at once. The president had no choice, they declared. Baker disagreed. The administration needed Stockman’s skill with numbers, he judged. “
I don’t know who the hell else we could have put in there at that time,” Baker recalled.

But Stockman needed to be taught a lesson. Baker summoned him for a chat. Stockman had frequented Baker’s office during the nine months of Reagan’s presidency, until it had become familiar to him, even comfortable. “
Today was different,” Stockman recounted. “A different James Baker was now sitting two feet away. He had just plunked himself down in his chair without saying a word. His whole patented opening ritual had been completely dispensed with. No off-color joke. No casual waltz around his big office before he sat down. No jump shot that resulted in the arched flight of a paperwad across the room and without fail into the wastebasket. This time it was all business, and his eyes were steely cold.”

Stockman knew Baker had been hearing from Meese, Deaver, and others in the administration. Baker’s words indicated as much. “My friend,” he said, “I want you to listen up good. Your ass is in a sling. All of the rest of them want you shit-canned right now. Immediately. This afternoon. If it weren’t for me, you’d be a goner already. But I got you one last chance to save yourself. So you’re going to do it precisely and exactly like I tell you. Otherwise you’re finished around here … You’re going to have lunch with the president. The menu is humble pie. You’re going
to eat every last mother-f’ing spoonful of it. You’re going to be the most contrite sonofabitch this world has ever seen.”

Stockman absorbed the lecture. Baker asked him if he understood. Stockman nodded. Baker stood up to let him know the session was over. Stockman headed for the door. Baker fixed him again with his cold eyes. “Let me repeat something, just in case you didn’t get the point,” he said. “When you go through the Oval Office door, I want to see that sorry ass of yours dragging on the carpet.”

B
AKER
’
S PERFORMANCE WAS
primarily for effect. He distrusted Stockman. “
He was disloyal,” he later said. But Stockman was smart, and now that he had become a lightning rod, he could draw criticism that might otherwise have hit Reagan. He could be fired later if necessary. Meanwhile he had to learn to keep his mouth shut. He had to be whipped into better behavior.

Baker knew
he
had to do the whipping because the president wouldn’t. Reagan was known to his staff as a softy, unable to blame anyone he considered to be on his side. “
I’m reading an article about Dave Stockman supposedly telling all to a reporter in the Atlantic Monthly,” Reagan wrote in his diary. “If true, Dave is a turncoat—but in reality he was victimized by what he’d always thought was a good friend.”

Reagan shared this sympathy with Stockman at their noon session in the Oval Office. Stockman arrived suitably chagrined and expecting a dressing-down. “
I had lunch,” Reagan recorded in his diary. “He couldn’t eat. He stood up to it”—admitted speaking out of school—“and then tendered his resignation. I got him to tell the whole thing about his supposed friend who betrayed him; then refused to accept his resignation. Told him he should do a ‘mea culpa’ before the press and clear the misconception that had been created by the story.”

Stockman remembered the session more vividly. “
The president’s eyes were moist,” he wrote. “It was unmistakable—they glistened.” Stockman had expected anger; what he got was closer to sorrow. “Dave, how do you explain this?” the president asked. “You have hurt me. Why?”

Stockman stumblingly told his story. But nothing came out right. Finally he gave up. “Sir, none of that matters now,” he said. “One slip and I’ve ruined it all.” He offered to resign.

“The president responded by putting his hand on mine,” Stockman recalled. “He said, ‘No, Dave, that isn’t what I want. I read the whole
article. It’s not what they are saying. I know, the quotes and all make it look different. I wish you hadn’t said them. But you’re a victim of sabotage by the press. They’re trying to bring you down because of what you have helped us accomplish.’ ”

Reagan stood and offered Stockman his hand. “Dave, I want you to stay on,” he said. “I need your help.” He started toward his desk. But then he turned back. “Oh,” he said, “the fellas think this is getting out of control. They want you to write up a statement explaining all this and go before the press this afternoon. Would you do that?”

W
ILLIAM
C
ASEY SWALLOWED
his bitterness at being deprived of the State Department, but the dose didn’t suit his stomach, and the CIA felt his dyspepsia. “
He was frustrated by its ponderous bureaucratic ways, the amount of time it took to accomplish straightforward tasks, its reluctance to look outward, its timidity, its lack of diversity,”
Robert Gates said of his new boss. “The veteran of OSS arrived at CIA to wage war and found, instead of a clandestine dagger, a stifling bureaucracy.” Casey started a shake-up at once. “
I would like to tell you about some personnel, organizational and conceptual changes I’ve made or am in the progress of making at the CIA,” he wrote to Reagan in May 1981. “It is a good outfit, composed of dedicated people with good spirit, but it has been permitted to run down and get too thin in top level people and capabilities.” Casey blamed
Stansfield Turner for hamstringing the agency and the media for scapegoating it, but a more systemic problem was the pay cap applied to CIA personnel (and other federal officials). Able people could make far more outside the government than they could in the CIA; the result was that many left the agency just when they were reaching the prime of their careers.

Casey couldn’t do anything about the pay situation, so he concentrated on other matters. He explained to Reagan that the CIA comprised four major units: analysis, operations, technology, and administration. “As I size things up, the Analytical and Operations units are most in need of improvement and rebuilding,” he wrote. “The analysis has been academic, soft, not sufficiently relevant and realistic.” Casey said he was remedying the situation by switching the director of the operations unit to analysis. “I have frequently found that I get better intelligence judgments from the
streetwise, on-the-ground Operations staff than I get from the more academic Analytical staff.”

As for operations: “I spent most of the last three weeks talking to all the operational people and carefully sizing up all the activities of the Operations unit. It quickly became clear to me that there were too many components for any one man to manage adequately.” Consequently, Casey had divided the operations unit into two parts. Beneath a single operations chief would sit two deputies, one who would run the “worldwide clandestine service,” the other who would organize support activities. Casey described his thinking about the appropriate director of operations. “I had a tough bullet to bite,” he said. “The only one around of whom I had personal knowledge and experience which made me confident that he could impart the kind of thrust and drive that the necessary rebuilding will require is
Max Hugel.” Casey reminded Reagan that Hugel had worked on the 1980 campaign. He had a previous background in military intelligence and a career in the corporate sector. He lacked experience in intelligence operations and was being criticized on that account, but Casey was willing to defend him. “Once I concluded appointing Hugel was the best thing to do, I felt I had to bite the bullet and take the flak. I’m confident it was the right thing to do.”