Reagan: The Life

by H. W. Brands

  Five days into the strike, the Federal Aviation Administration and the airlines had managed to get three-quarters of the planes back into the air. “United Airlines is still flying. So you can keep flying, too,” United advertised. “Delta is ready when you are,” Delta chimed. The FAA allowed the airlines to decide which flights to cancel, letting them focus on their best-performing routes. “We cancel those flights that have the fewest number of people on them, those with the least demand,” a spokesman for American Airlines explained. The companies’ profits per flight accordingly increased, though total revenues were still down.

  After a week it was clear that Reagan had won. Columnists Rowland Evans and Robert Novak called the strike a “crisis made in heaven” for the president, as it played at once to his principles and to his political convenience. The president had demonstrated his resolve and his willingness to inflict pain on those who doubted or opposed him.

  YET REAGAN GAVE no victory speeches. If anything, he made an effort not to gloat. A Mrs. Browning sent a letter to the White House complaining that her son, a military veteran, had been among the controllers fired. Reagan responded sympathetically. “I can understand your concern and heartache,” he wrote back. Then he took the time to explain his position. “I can only hope that you will understand why it isn’t possible for me to reinstate all those who went on strike. The law specifically prohibits public employees from striking. As you say, striking ‘is an inalienable right’—but not for government employees.” Strikes in the public sector were very different from those in the private sector. “A strike is an economic contest between labor and management when negotiations have failed to resolve an issue. But governments can’t shut down the assembly line. The services provided to the people, who in this case are the employers of all of us in government, must be continued.” Reagan asked his correspondent to consider the consequences of her request, however well-intentioned. “Mrs. Browning, there are more than two million federal employees. What message would we be sending to all of them if we allowed a strike by one group or gave amnesty to them if they did strike? Believe me, there is no thought of punishment in what we are doing. There just is no way I can avoid enforcing the law.” Even so, he was weighing means to ease the plight of the fired controllers. Law prohibited fired federal employees from reapplying for federal work for a period of three years. “I am trying to arrange a waiver of that law so that all the 12,000 can apply for whatever government jobs are available without waiting.” Reagan reiterated the concern he had for Mrs. Browning’s son. “I do feel a very real sorrow for those who followed the union leadership at such sacrifice. This is especially true of someone like your son who served our country in uniform.”

  His stronger sympathies, though, were with the controllers who crossed the picket lines to honor their commitment to the public welfare. This was Reagan’s message to another correspondent, one of the faithful controllers. “I am more grateful than I can say to all of you who are undergoing the hardships of added hours and added days of the week to keep our planes in the air,” he wrote to Jerry McMillan of Atlanta. McMillan had urged the president to hold fast, and Reagan said he would. “Our obligation is to you, and I certainly have no intention of weakening in the stand I have taken with regard to those who chose to ignore their pledge.”

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  R EAGAN KNEW THERE was another budget battle coming, but he didn’t realize it would be so soon. Nor that it would be fought under such adverse conditions. Only days after his Capitol Hill victory, the president met with David Stockman and the rest of the administration’s economic team. Stockman had recognized he was playing loose with projections for the economy four and five years out, yet, faced with the need to enlist votes in Congress, he had kept his qualms to himself. Now that the bills had passed, he ran his numbers again and discovered that his projections were more troubling than ever. Balancing the budget would require drastic cuts beyond those already included in the budget. At this meeting Stockman handed out black binders detailing the grim news. “The scent of victory is still in the air,” he said, “but I’m not going to mince words. We’re heading for a crash landing on the budget. We’re facing potential deficit numbers so big that they could wreck the president’s entire economic program. It’s going to be harder than hell to get to a balanced budget even by 1986. On the margin, every single number in the budget is going in the wrong direction.” Stockman reminded the group that the budget bill contained numerous and large unspecified savings; these would have to be specified, at political cost. More worrisome were the economic assumptions on which the budget bill was premised. Stockman had assumed rapid economic growth in response to the tax cuts, but even he knew he was pushing the bounds of the plausible. Now, behind the closed doors of the Cabinet Room, he spoke more candidly. The federal deficit seemed likely to top $80 billion by fiscal 1983 and $110 billion by 1986.

  “The president was stunned,” Stockman recalled later. “His response was an irritated stammer: ‘Dave, if what you are saying is true, then Tip O’Neill was right all along.’ ”

  Ed Meese objected that Stockman wasn’t reckoning with the new tax revenues the cut in tax rates would yield. “Meese was referring, of course, to the Laffer curve,” Stockman noted. Stockman had never believed in the Laffer curve, and he was irritated that anyone in the administration did. “The whole California gang had taken it literally (and primitively),” he recounted. “The way they talked, they seemed to expect that once the supply-side tax cut was in effect, additional revenue would start to fall, manna-like, from the heavens.” They were wrong, he proceeded to tell Meese and the others at the meeting. “Higher real GNP and employment growth will not increase projected revenues by a dime,” he said. “Remember, we’re putting the squeeze on inflation at the same time. That will bring down the growth rate of money GNP and federal revenue.”

  Stockman’s lecture had little effect. “As I looked around the table, it was evident I had accomplished nothing,” he recounted. The few who understood nodded their heads but kept silent. “The others were puzzled, bored, or annoyed.” Stockman pressed on. He said the benefit of the anticipated recovery had already been factored into the projections. “So the only way to reduce these red ink projections is by cutting more spending or raising some new revenue. That is the strategic choice we face.” On the other hand, the administration could simply live with the deficit and abandon its promise of a balanced budget.

  Reagan refused to countenance such defeatism. “No, we can’t give up on the balanced budget,” he said. “Deficit spending is how we got into this mess.”

  Stockman pointed to another option. The Pentagon was scheduled to gain nearly 10 percent annually; if this was pared to 7 percent, the savings would add up fast.

  Again Reagan refused. “There must be no perception by anyone in the world that we’re backing down an inch on the defense buildup,” he said. “When I was asked during the campaign about what I would do if it came down to a choice between defense and deficits, I always said national security had to come first, and people applauded every time.” He wouldn’t go back on his word, he said, and he wouldn’t betray the people who supported him.

  BUT SOMETHING HAD to give, Stockman insisted. Perhaps the administration should consider modest increases in excise taxes—on tobacco, alcohol, and imported oil, for example—and user fees.

  Donald Regan now spoke up. “I strongly object to that kind of tax increase talk,” the Treasury secretary said. “We’ve just worked our fanny off to give the American people a tax cut.” Employing an analogy he liked, he continued, “You can raise the bridge or lower the water level. Our job is to do the latter—to cut the spending.”

  Regan had been working on Reagan—working to gain access to the president, despite the barriers imposed by the Baker-Deaver-Meese troika, and working to educate the president on the details of the budget and government finance. “My job was to establish an atmosphere of frank give-and-take with the president that would permi
t him to know about and approve the policies and actions Treasury proposed to undertake,” Regan recalled. “I would have preferred to speak my mind in private, but as I have said, I never saw the president in private. Therefore I had to make my points in the presence of the sizable group that crowded into the Oval Office or any other room in which the president happened to be receiving one of his advisers.” Regan, an informal sort by temperament, found it hard to break through the formality that inevitably invested these large affairs.

  On one occasion, though, he found a way to reach Reagan emotionally. For years the Treasury had been selling Series E bonds, the successors to the war bonds that had been marketed to patriotic citizens during the Civil War and the two world wars. The Treasury still relied on patriotism in pitching the bonds, for the E series paid a mere 5 percent, far below the market rate for bonds and substantially below the inflation rate. The purchasers were losing money on each bond they bought. Regan’s conscience bothered him, and he decided to broach the issue with Reagan.

  “Mr. President,” he said, “I don’t know how you expect me to sell these goddamn things when I know in my heart that the buyer is getting ripped off. The government doesn’t put out a prospectus on Series E bonds, but if it did, we’d all deserve to go to jail. Five percent with a thirteen percent rate of inflation? It’s a fraud and we’re perpetrating it on the very people who trust us most and know the least about money.”

  Reagan responded as Regan hoped. “I can’t believe what I’m hearing,” the president said. “We can’t do that to people. I take it you want to change the situation?”

  “I certainly do,” Regan said.

  “Then go to it,” Reagan replied.

  Regan felt doubly good about the session. He had rectified an indefensible policy, and he had connected with Reagan. “That was the first hammer-and-nails discussion I had with the president,” he remarked.

  HE HOPED TO have more as the looming deficit threatened to derail Reagan’s economic program. Events confirmed his skepticism about Stockman’s budget-driven approach to government reform. Congressional promises to cut spending were one thing; actual cutting was wholly another. Not even the offices of the executive branch could be relied on. “The cabinet departments and other agencies had resisted the Office of Management and Budget’s efforts to manage their programs and dictate their priorities by manipulating their budgets, and in so doing had found effective allies on Capitol Hill,” Regan recalled. Democrats and more than a few Republicans, guessing that the president wouldn’t be able to repeat his appeals to the people indefinitely, reembraced the spending that pleased their constituents and generally helped reelect them. The economy meanwhile tipped into recession, which reduced tax revenues and increased outlays for unemployment compensation and other relief, making the bad deficit situation worse.

  Regan, with many others, blamed the Federal Reserve for the recession. The administration had gotten off to an unpromising start with Paul Volcker, who refused the president’s invitation to come to the White House to talk about monetary policy. Accepting the invitation would compromise the Fed’s independence, Volcker said. He likewise refused Reagan’s offer of a presidential visit to the Fed. Eventually, though, he consented to eat lunch with the president on the comparatively neutral ground of the Treasury Building. Reagan walked the quarter mile from the White House, alarming the Secret Service and stopping traffic on Pennsylvania Avenue. And he flabbergasted Volcker at the start of the lunch meeting by saying, “I was wondering if you could help me with a question that’s often put to me. I’ve had several letters from people who raise the question of why we need any Federal Reserve at all. They seem to feel that it is the Fed that causes much of our monetary problems and that we would be better off if we abolished it. Why do we need the Federal Reserve?”

  “The president was serious,” Martin Anderson recollected. Anderson knew Reagan well enough not to be surprised. Reagan’s question reflected his characteristic combination of innocence and self-confidence: innocence in that he really wondered just what the Fed did and why, self-confidence in that he was not afraid to ask. Phil Gramm of Texas, an economist by training, later characterized the president’s mind-set simply: “He knew what he knew.” He also knew what he didn’t know. And he was willing to be educated.

  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.

  48

  ANOTHER BOMB,” REAGAN wrote in his diary aft
er 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.