Reagan: The Life (53 page)

As the deficit projections continued to swell, Reagan encountered increasing pressure from traditional conservatives to raise taxes. “
Met with Senate leaders who are beginning to panic on taxes,” he wrote. “They want us to raise or impose new ones. I’m resisting. D--n it, our program will work, and it’s based on reduced taxes.”

Reagan worked his team harder than ever to reduce spending, to ease the tax-hike pressure. But Congress refused to trim much of anything
except defense. “
They’re so used to spending (for votes),” he observed, “they’re getting edgy with ’82 being an election year.”

One by one Reagan’s own advisers concluded that new taxes were unavoidable, given the daunting deficit and the uncooperativeness of Congress. “The recession has worsened, throwing our earlier figures off,” Reagan wrote in late December. “Now my team is pushing for a tax increase to help hold down the
deficits.” Yet Reagan dug in his heels the harder. “I’m being stubborn,” he wrote. “I think our tax cuts will produce more revenue by stimulating the economy. I intend to wait and see some results.”

He grew lonelier as the calendar turned. He met with Republican House leaders in the second week of January. “
Except for
Jack Kemp they are h--l bent on new taxes and cutting the defense budget,” Reagan observed after the meeting. “Looks like a heavy year ahead.”

D
ON
R
EGAN STOOD
by Reagan longer than anyone else. The Treasury secretary listened impatiently as
Bob Dole, the Republican chairman of the Senate Finance Committee, explained that Congress would insist on new revenues to reduce the deficit. Dole was spouting the same line the legislature always used, Regan concluded. “
In other words, Capitol Hill, which in fiscal year 1982 had mandated spending $128 billion more than Treasury was receiving in taxes and other revenues, claimed it wanted more money so that it could balance the books and start over again with a clean slate. This Orwellian argument did not make sense to me in practical terms or in terms of the president’s promises to bring government spending under control and cut taxes.” To acquiesce in new taxes would destroy the positive effect of the hard-won tax cut, Regan believed. “It meant sacrificing not only the tangible benefits of this measure, but also its symbolic meaning.” Nor would a tax increase have the effect its advocates predicted. “Suppose the president could somehow renege on his promise to reduce taxes without inflicting mortal damage on his political credibility, what then? I was convinced that an increase in taxes, coupled to a monetary policy that was already starving business of capital, would make our economic troubles worse. An economy could not expand if it was burdened by new taxes at the moment when it was already all but overwhelmed by high interest rates that devastated profits and eliminated millions of jobs.”

This last point was the critical element, Regan contended. “In my judgment, having 8 or 9 million unemployed was worse than having a
deficit of $128 billion”—the current Stockman estimate. Regan thought an obsession with deficits could hamstring the administration and sabotage the economy. “I did and do believe that deficits did not matter in the short run,” he said, “if in the long run the economy generates sufficient revenues to pay off the deficits, and the rate of government spending is controlled in such a way that it is consistently less than the real growth of the economy.” The key was consistency over the long term—and help from the Fed. “The deficit could be reduced and confidence could be restored if a slow, steady increase in the money supply”—which he continued to work on Volcker about—“was accompanied by a controlled rate of federal spending.” A resort to new taxes would spoil everything. It would eliminate the pressure on Congress to agree to spending limits, the sine qua non of a long-term
balanced budget. And it would undermine such progress as had been painfully made toward ending the recession.

Regan urged the president to stick to his tax cuts and ignore the deficit until the economy recovered. “It was better to borrow money to finance the deficit while the economy recovered and people went back to work than to impose taxes that would cripple the recovery or prevent it altogether. I never have believed, and never will believe, that increasing taxes is a cure for recession.”

R
EGAN
’
S RECOMMENDATION TO
ignore the deficit carried the administration further across the Rubicon that guarded the Italy of fiscal responsibility from the Gaul of unconditioned tax cuts. Regan was a money man, and if he gave permission to set budget balance aside, who was the president to contradict him?

Jim Baker wasn’t ready to go as far as Regan. The chief of staff agreed that an obsession with the deficit could be counterproductive. “
Downplay deficits and avoid specific deficit numbers,” he wrote in a memo of tactical guidance to the president. Yet Baker appreciated the revolutionary nature of Regan’s advice, and he realized that revolutions evoke resistance. Baker knew that the looming deficit terrified many Republicans and that Congress was going to act on the deficit whether the White House liked it or not. Baker still preferred spending cuts to tax increases, but he realized the cuts wouldn’t happen. “
Both parties in Congress had simply lost their appetite for major spending cuts,” Baker recalled later. “So had a lot of cabinet officers.” The administration was forced to face political facts.
“We could be proud of the budget cuts of 1981, but we would never again repeat that success.”

New taxes were the only option, Baker judged. He got Meese and Deaver to agree. He found another ally in Nancy Reagan. The First Lady was pained by the criticism of her husband as insensitive in demanding more cuts in social programs at a time of high unemployment and a growing defense budget, and she quietly added her voice to those in favor of new taxes.

Her husband remained stubborn. “
I told our guys I couldn’t go for tax increases,” he wrote on January 22. “If I have to be criticized I’d rather be criticized for a deficit than for backing away from our economic program.”

Reagan thought he should appeal to the public again. He blamed the media for exaggerating and misinterpreting the recession. “
The press has done a job on us, and the polls show its effect,” he observed. “The people are confused about the economic program. They’ve been told it has failed, and it’s just started.”

Baker declined to schedule a presidential speech, believing it would merely postpone the inevitable. Through the end of winter and into spring the economic numbers kept getting worse, and so did Reagan’s job ratings. In April,
Gallup showed that only 43 percent of Americans approved of his handling of the presidency. Reagan again blamed the media. “
It reflects the constant media drumbeat of biased reporting against what we’re trying to do,” he said.

At Baker’s urging, Reagan reluctantly consented to negotiations between the White House and Congress. The Senate sent five delegates, the House seven, and the administration five. The “Gang of Seventeen” met almost constantly for weeks. “
We met at Blair House, in the family theater in the White House, in the Roosevelt Room, at the Vice President’s residence,” Don Regan recalled. The talks weren’t exactly secret, but neither did the participants want them publicized—hence the changing venues. Progress came slowly. “Innumerable sets of numbers were discussed, innumerable formulas were proposed, but no obvious compromise emerged,” Regan said. “We could not even agree on the size of the deficit.” At this point Regan was willing to grant the sincerity of all concerned. Yet the difference between the two sides seemed intractable. “The administration wanted to cut spending in domestic programs and control it more closely in defense programs; Congress wanted to increase revenues and slash defense spending so as to maintain high levels of domestic spending.
We thought that Congress was running up the bills with no thought for the consequences; they thought that the administration was letting untold billions in revenue slip through its fingers as a result of its unprecedented tax cuts.”

Reagan grew impatient at the slow pace of the talks and again threatened to go to the people. He proposed to tell the country that the Democrats were putting party interest above the national interest. “
There will be blood on the floor,” he vowed.

Baker thought blood would make matters worse, and he again put the president off. Reagan grew more frustrated. “
The D’s are playing games,” he growled of Tip O’Neill’s crew. The Democrats were demanding that Reagan rescind the third year of the tax cuts. “Not in a million years!” Reagan swore.

Reagan called O’Neill and suggested a personal conversation. The House speaker agreed, and Reagan rode to the Capitol. The president had originally proposed $100 billion in spending cuts; O’Neill and the Democrats had countered with $35 billion. During the course of the
Gang of Seventeen discussions, the administration had come down to $60 billion. The Democrats hadn’t budged. Reagan hoped to induce movement during his meeting with O’Neill. In three hours he got nowhere.
He made a last offer—to split the difference between the administration’s $60 billion and the Democrats’ $35 billion. O’Neill again refused. Reagan gathered his papers and left.

The next day he finally took his case to the people. He explained the concessions the administration had been willing to make, and he denounced the intransigence of the Democrats. With charts he asserted that the Democrats’ policies would lead to unsustainable spending and taxes. “
The philosophical difference between us is that they want more and more spending and more and more taxes,” Reagan said. “I believe we should have less spending, less taxes, and more prosperity.” He pledged to continue working with “responsible members” of the Democratic Party to find a solution to the fiscal impasse. And he once again called on Americans to support him. “Make your voice heard. Let your representatives know that you support the kind of fair, effective approach I have outlined for you tonight. Let them know you stand behind our recovery program. You did it once, you can do it again.”

T
HIS TIME THE
Reagan magic failed. The public declined to rally to the president. His approval numbers slipped further. He continued to deny that anything was wrong with his policies. “
People are confused on the whole budget issue,” he said.

O’Neill and the Democrats read the polls and grew more determined to hold their ground. Baker urged Reagan to cut a deal before he lost the public entirely. Baker gathered Ed Meese and Mike Deaver, and the troika made a united pitch for a bargain that included higher taxes.

Reagan didn’t like the idea any more than he had from the start. But he realized he was out of options. “
The president listened,” Baker recalled, “then took off his reading glasses and threw them down on the Oval Office desk. ‘All right, goddammit,’ he said. ‘I’m gonna do it, but it’s wrong.’ ” Decades later, Baker remembered the president’s vehemence. “
I thought they were going to break,” he said of the flung spectacles.

What Reagan agreed to was increases in business and excise taxes, to yield the Treasury almost $100 billion over three years. The 1981 personal income tax cuts remained in place. Reagan wasn’t happy, but he understood that politics rarely made anyone really happy. “
A compromise is never to anyone’s liking,” he observed. “It’s just the best you can get and contains enough of what you want to justify what you give up.”

Reagan hoped that by yielding on taxes, he would win on spending. “
The tax increase is the price we have to pay to get the budget cuts.”

T
HE QUESTION FOR
any administration is not whether scandal will strike but when. The executive branch comprises many thousands of men and women, subject to the same temptations to sin and opportunities for error humans are always prone to. The closer the individuals are to the center of power, the greater the temptations and opportunities, and the sharper the scrutiny by the media and the public.

The first
scandal of the Reagan administration was small beer as scandals go, but it nonetheless rocked Reagan’s inner circle. In September 1981, $1,000 was discovered in the office safe of Richard Allen. The national security adviser had shifted quarters in the West Wing, and the money was left behind. Allen explained to Reagan that a Japanese magazine that had interviewed Nancy Reagan had tried to pay her for the interview. Allen had intercepted the money to avert embarrassment to Nancy or to the magazine. His secretary put the money in his office safe, and he forgot about it until its recent discovery. Reagan accepted Allen’s explanation. But the FBI had to investigate, and the investigation leaked, embarrassing the president.

Reagan interpreted the leak politically. “
I suspect bureaucratic sabotage,” he wrote. “Our administration and not Dick Allen is the target.” The FBI found nothing against Allen, who wanted to keep his job.

But Reagan, usually a forgiving boss, decided to get rid of him. Reagan’s foreign policy team wasn’t working smoothly; Allen was often at odds with Al Haig or Caspar Weinberger or both. Reagan judged Allen the most expendable of the three. “
The press is not going to let up if he’s in that job,” the president wrote.

W
ILLIAM
C
LARK MOVED
over from the State Department to take Allen’s post. Reagan knew Clark from California, where he had served on the state supreme court. He also owned a ranch near Reagan’s and shared an outdoorsy sensibility. Clark’s quiet style promised fewer distractions from the substance of foreign policy, which remained focused on the Caribbean. “
We are now at a watershed in U.S. foreign policy,” Clark told a meeting of the NSC in February 1982. “The greater Caribbean is to us what the Mediterranean is to Europe. It is our front yard—not our back yard, a metaphor which suggests an area of marginal concern.” American interest in the Caribbean dated to the nineteenth century; by World War II the region had become a secure part of the American sphere. “This is no longer the case entirely,” Clark said. “In the region today we are faced with a combination of threats.” Weak economies and fragile political institutions invited subversion by anti-American forces. “The chief instigators are Cuba and its patron, the
Soviet Union.” Leftists in
Nicaragua and
Grenada aggravated the turmoil. “It is a formidable political, military, economic, propaganda apparatus facing us with new targets of opportunity being developed all the time.” Clark didn’t mind sounding alarmist. “The threat to the Caribbean is unprecedented in severity and proximity and complexity. By contrast, the Nazi threat in the 1930s and 1940s and the Castro threat in the 1960s were more limited in scope, with fewer resources being expended. The strategies were of a less sophisticated nature and were employed for a shorter period of time.”