Power Game

by Hedrick Smith

  For three decades, as a conservative crusader, Reagan had been preaching about less government and lower taxes. For years, he had been attacking Washington and the “puzzle palaces on the Potomac” as obstacles to the individual and the free market. He had romanticized the role of the business entrepreneur. As governor of California, he had actually taken some liberal actions—raising taxes, imposing tax withholding, giving cost-of-living increases to welfare recipients—but those had been lost in the contagion of his rhetorical blasts at big government.

  Reagan’s deep antitax instincts got intellectual underpinning from the new gospel of supply-side economics. Shrewdly, Reagan and the Republican New Right dressed up supply side as a radical innovation, but actually the idea was a throwback to classical economics, a nostalgic return to the laissez-faire probusiness politics of Calvin Coolidge.

  As a theory, Reaganomics deliberately stood Keynesian economics on its head. Keynes had argued that demand, the purchasing power of consumers, was what drove the economy; when demand was insufficient, factories were idle, masses of workers were unemployed, and the government had to pump-prime the economy with deficit spending to create new jobs. The supply-side theology took the opposite tack. It reached back to one of the teachings of Jean-Baptiste Say, a nineteenth-century French economist and follower of Adam Smith: “Supply creates its own demand.” In other words, production (supply) drives the economy, generating appetites among consumers. Hence the nickname supply-siders, coined by Herbert Stein, formerly chairman of Nixon’s Council of Economic Advisers. The role of government, in the modern supply-side version of University of Southern California economist Arthur Laffer, is to free entrepreneurs from the burden of taxes and regulations, to let business innovate and produce.

  This supply-side approach was an economic theology well suited to Reagan. It fit the classical, pre-Keynesian economics Reagan had studied at Eureka College in 1928-32, and it meshed with his sunny optimism. Supply-side economics explicitly rejected the pessimistic 1970s vogue of “limits to growth.” With the magic of the marketplace free to operate, supply-siders said, growth would be unbounded.15

  There were two other attractions for Reagan, important ingredients for his message and his agenda. One was known as the Laffer Curve. Arthur Laffer asserted that under certain conditions cutting tax rates could actually increase government tax revenues by giving people more incentive to work. With more work and more production to be taxed, there would be more taxes to collect. Laffer told Reagan that the natural expansion of the American economy was being constricted by the wasteful welfare state. It was music to Reagan’s ears.

  The other concept came from Columbia University economist Robert Mundell, who asserted that it was possible to have both tight money policies to check inflation and the fiscal stimulus of tax reduction to spur economic growth. Most economists and policymakers contended that monetary and fiscal policies have to be used together, against either inflation or unemployment. But Mundell said they could be used separately, one to slay inflation and the other to lick unemployment. Again, Mundell’s argument was music to Reagan. A few advisers warned him that Mundell’s approach would not work, could not work—indeed, Reagan’s own experience would prove that in 1982-83. But Reagan bought Mundell’s theory anyway, for it told Reagan what he wanted to believe: that you could cut taxes, cut inflation, have economic growth, and balance the budget all at the same time.

  The main outlines of the supply-side gospel were infused into Reagan’s political bloodstream during an all-day seminar at the swank Beverly Wilshire Hotel in Beverly Hills in January 1980. Reagan’s economic tutors were an inner core of supply-siders: Jack Kemp, Arthur Laffer, and Jude Wanninski, a former editorial writer for The Wall Street Journal.16 Banking on their theory, Reagan committed himself to Kemp’s pet idea: a ten-percent-per-year cut in individual tax rates over three years, thirty percent in all. That was a critical step in setting Reagan’s future presidential agenda. Other economic planks were added later.

  During the 1980 campaign, Reagan’s rivals cautioned the country not to buy the supply-side mirage. George Bush warned that the Kemp-Laffer-Mundell ideas were “voodoo economics.” John Anderson, the independent third-party candidate, quipped prophetically that it would take “blue smoke and mirrors” for Reagan’s economic policies to work, especially with a costly military buildup. But voters ignored such warnings, and Reagan nursed his impossible dream.

  Reagan has a political genius for selling his message—like the genius of Franklin Roosevelt. His secret is his mastery of political shorthand. He knows how to make ideas accessible and popular. They became powerful political tools in Reagan’s hands because of his ability to simplify, to project themes, to limn gossamer vistas of “a rising tide that will lift all boats” (a phrase borrowed from Kennedy). In an age of thirty-second television sound bites, politics lives by shorthand communication. Politicians and voters depend on labels, slogans, quick-stick, fast-fix clichés immediately recognizable to millions (though vaguely understood): Communists, welfare cheats, bureaucrats, New Right, New Deal, Star Wars, deficit spenders, supply-side, tax reform, evil empire. Reagan has a knack for coining phrases that tap into reservoirs of popular feeling—like his refrain to “get government off your back”—without having to explain what he means in policy terms, what his ideas will cost, or whom they will hurt. He is a master at using symbols that convey broad intention and leave him free later to interpret their meaning.

  This political shorthand helped Reagan frame the political agenda, for when he entered the White House, people felt they knew what Reaganism meant. That gave Reagan a distinct advantage over Carter and Nixon, in the essential tasks of setting the battle plan and rallying the troops. The most important axiom of the agenda game is to keep the focus on your main priorities; don’t get led astray. Any president is constantly buffeted by events and torn by conflicting advice. It is easy for him to lose his compass. For policy-making is a battle for a president’s mind among rival factions, and Reagan’s administration was faction ridden. Reagan had cast out the bait of many campaign pledges to lure his fifty-one-percent majority, and by the time he had won the White House, he had plenty of rival constituencies to satisfy—all with different agendas.

  At the core, his movement embraced ideologues and pragmatists; an old-boy California network and new boys from the Bush and Ford camps; traditional Republicans and the New Right; the “Market Right,” whose main agenda was laissez-faire economics; and the “Moralistic Right,” whose priorities were outlawing abortion and restoring school prayer.17 There were orthodox budget-balancing economists (Alan Greenspan and George Shultz), money-managing monetarists (Milton Friedman), and tax-cutting supply-siders (Paul Craig Roberts and Norman Ture). It was no easy trick to weld them together.

  As Reagan’s first term began, some supporters had to take a back seat if economic policy was to be given clear priority. The Moralistic Right, led by senators Jesse Helms of North Carolina and James McClure of Idaho, had to be told their social agenda of prayer in schools and battling abortion was going on the back burner. Then Reagan had to slough off his campaign pledges to eliminate the departments of Energy and Education. (Actually, he did ask Congress for authority to reorganize the executive branch but did not follow up.) Reagan also put off promised efforts to seek the power of line-item veto for himself and to pass a constitutional amendment requiring a balanced budget. Only one other priority stood on a par with his economic program: the defense buildup. That produced a conflict in priorities, a conflict that was ignored for several months.

  In the critical early weeks, Secretary of State Alexander Haig nearly upset the Reagan applecart by taking attention away from economic policy and shifting it to foreign policy. Haig made Central America a dramatic, visible, and controversial issue. Taking his cue from Reagan’s stridently anti-Communist campaign, Haig issued a State Department white paper on Soviet, Cuban, and Nicaraguan aid to leftist guerrillas in El Salvador and talked of escal
ating Central America into a global confrontation with Moscow.

  By early March, Haig was getting almost daily front-page headlines, upstaging Reagan’s desired focus on economic policy. Among a list of action options on Central America for Reagan, Haig proposed “going to the source”—meaning Cuba. State Department leaks indicated that Haig wanted to beef up American forces in the Caribbean and take some action against Cuba, possibly a naval quarantine. House Speaker Tip O’Neill quoted Haig as saying U.S. troops would have to be used in Nicaragua.18 At a National Security Council meeting in March 1981, Haig pushed Reagan to be bold in El Salvador: “This is one you can win, Mr. President.” After that session, one well-placed White House aide told me, Haig stunned Baker and Deaver with brash talk about bombing Cuba: “We can make that fucking place look like a parking lot!” On March 23, by Haig’s account, he told Edwin Meese that action in the Caribbean had to get under way within ten days. But neither Defense Secretary Caspar Weinberger nor the Joint Chiefs of Staff favored military actions. Moreover, Haig’s menacing talk had raised alarms in Congress and revived public worries about Reagan’s warmonger image.

  White House strategists were worried that events were getting out of control. According to their daily tabulation of television news coverage, Central America was getting more airtime than the Reagan economic program. Haig was trampling all over the White House agenda. Political advisers Meese, Baker, Deaver, and Darman feared Haig might draw Reagan into repeating Carter’s ill-fated mistake in 1977 of fighting Congress prematurely on a secondary issue. Newspaper polls showed rising public anxiety about Central America. Baker, eager for ammunition that could persuade Reagan to call off Haig, secretly asked Reagan pollster Richard Wirthlin to do a rush poll of public reactions to Haig’s talk against Cuba. “Dick,” Baker told Wirthlin, “Al Haig is talking about throwing an embargo around Cuba. Let’s get a study in the field so we can have something to present to the president.”

  “At the time, we were taking surveys week to week and we saw some slippage in Reagan’s popularity,” David Gergen recalled. “Our domestic stuff had dominated the news play in the first weeks, and Reagan’s polls went up. Then we got the Salvadoran news, and Reagan’s polls fell because it brought up the trigger-happy stuff [Democratic charges in 1980 that Reagan was trigger happy]. People got afraid of what Reagan would do. We were losing control of the agenda. We had a different game we wanted to play. Important as Central America was, it diverted attention from our top priority, which was economic recovery, which we wanted to be the only priority. Haig didn’t understand that. We decided we had to cut off his story.”19

  Wirthlin’s poll, conducted March 6–8, showed the public reacting negatively to Haig’s bellicose talk and opposed to embargos and military action against Cuba. One Reagan intimate told me Baker took the poll results to the president to persuade him that Haig’s tactics were hurting Reagan politically; the president got the message. According to one White House account, Baker telephoned Haig in late March and told him the president wanted him “to knock it off.” Haig complied, only to kick up new troubles with the White House over who should manage foreign-policy crises. Control of Reagan’s agenda continued to slip away, until the president was shot on March 30. The outpouring of public sympathy gave Reagan a boost in popularity. It also halted the drift in policy, for it gave Reagan a new platform to turn public attention back to his economic agenda. Reagan did that, after his hospital recovery, with a moving appearance before a joint session of Congress on April 28. Luck—bad luck turned to good fortune—as well as a superb political performance, rescued Reagan’s wayward game plan.

  Reagan’s agenda was also kept on track—and given life—by David Stockman. No single figure, other than Reagan, was more important to Reagan’s early success than Stockman, the cocky, zealous, young budget director whose oversized glasses gave him an owlish look. Without Stockman, the supply-side superachiever, Reagan would have been unable to fashion his first budget proposals and make his stunning start. Reagan had a vision; Stockman had a strategy.

  Stockman’s operation is a lesson in early game planning. No one else in the administration understood enough budget economics, enough of the operation of Congress, enough of the existing programs and policies to put a budget package together rapidly. None of the old Reagan crowd had the experience or the intellect to draft the Reagan blueprint, to convert Reagan’s glowing visions into concrete proposals. It took enormous energy, knowledge, and intellect to impose order on the contending Reaganite factions and the sprawling complexities of the federal budget. The president had neither the driving intelligence nor the inclination to impose such order; nor did others in his inner circle. The intellectual leadership was turned over to Stockman, and even he, as he later admitted, was way over his head.

  Stockman got a jump on everyone else because he had his own agenda and his own legislative blueprint already prepared, and he understood the real levers of power. Two terms as a Michigan congressman plus a network of key Republican and Democratic connections had taught Stockman how to play the power game. Through Jack Kemp, Stockman gained entrée to the Reagan circle as one of the drafters of the 1980 Republican economic platform. Because Stockman had once worked for John Anderson, he was tapped as Reagan’s sparring partner to rehearse for the presidential debates with Anderson, the independent candidate, and President Carter. Stockman’s impersonations impressed Reagan, and when it came time to form the Reagan cabinet, Kemp and Senator Paul Laxalt pushed Stockman for a top post. Stockman was offered the job of Energy secretary, but he knew enough about how power works in Washington to turn down a cabinet post and ask for another job, theoretically more junior. Stockman wanted to be budget director, or formally, director of the Office of Management and Budget (OMB) because he understood how he could make that more powerful than a cabinet position.

  The Reagan Californians did not understand the importance of the budget post. In those early, heady days, they were preoccupied with settling prominent cabinet positions such as State, Defense, Treasury, and Justice. Stockman had no real rivals for OMB, and he got the job easily. Edwin Meese obviously expected to be making policy through his cabinet councils and assumed that the budget would flow from his policy outline. Like many others, he did not understand the power of the technical expertise lodged in the budget bureau. “Meese had a funny attitude,” Stockman told me. “He thought that the Office of Management and Budget was where they did the technical auditing work to see if the motor pool had too many cars in it or something like that. They didn’t understand that OMB is really the policy switchboard of the executive branch [emphasis added].”20

  Stockman was enormously ambitious for real power. Political instinct and knowledge of the power game told him that Reagan’s plans for sweeping changes in government and the tax system would inevitably make budget economics the heart of the Reagan program. The budget would drive policy, not vice versa. That would mean centralized authority for the budget director over cabinet members. Already, OMB had become the choke point for most cabinet officers. It reviewed and cut their budgets, approved their legislative proposals, the regulations they wanted to issue, and all their major policy testimony to Congress. In short, their policies had to clear through OMB. So long as Stockman had backing at the White House—and he was quick to forge a working alliance with Baker, Darman, and cabinet secretary Craig Fuller—he had wide power.

  Moreover, Stockman understood that to move rapidly in those first weeks would require a body of experts available only in OMB. For the apparatus of OMB is the second most powerful staff in Washington, almost rivaling the top White House staff. Inevitably, President Reagan and his entourage had to lean on OMB for the substance of the budget. Meese’s White House domestic staff was far too small and too green in early 1981 to draft a budget or to keep pace with the trained civil servants at OMB. Its staff of six hundred included some of the very best career professionals in government, experts on every field.

  “What Sto
ckman did would not have been possible had OMB not had the kind of staff capability to turn out, within a thirty-day period, an enormous amount of collected historical wisdom on where you cut,” Stuart Eizenstat, Carter’s highly regarded domestic policy chief, remarked to me. “The fact is OMB enabled President Reagan to hit the ground running. It enabled him to get his package up to Congress very early, without delay, before opposition could form, both within the executive branch and in the Congress. That to me was the quintessential event in the entire administration—because had Reagan gotten off to a slow start on the budget cuts, had he permitted opposition to grow within the executive branch, and had opposition had a chance to form on Capitol Hill, you might have seen a very different situation with respect to the success of the budget cuts.”21

  Stockman’s ace in the hole was the game plan he had developed and already market-tested in Congress. In March 1980, Stockman and Phil Gramm, then a radically conservative Democratic congressman from Texas, had drafted their own budget for fiscal year 1981, in what amounted to a dry run of the Reagan proposals.

  The Gramm-Stockman budget gave Reagan’s practical political agenda a head start. Their bill embraced both Kemp’s ten-percent cut in individual income tax rates and a depreciation-based tax cut for business. The big budget cuts that Stockman would fashion for Reagan in 1981 were all there: multibillion-dollar cuts in the public service jobs program, food stamps, housing and energy subsidies to the poor, revenue sharing with state and local governments The Gramm-Stockman bill also capped Medicaid reimbursement to the states, restricted longer term unemployment benefits, eliminated student and minimum benefits from Social Security, and cut mass transit subsidies. The Gramm-Stockman bill did not pass, but it got 170 votes—140 Republicans and thirty Democrats—a very solid core for Reagan’s own budget coalition in 1981. That was a critical prelude for Reagan’s agenda.22