It was a supreme irony that a president elected on the promise of rolling back the secrecy that had enveloped the Nixon White House would have approved, indeed required, a closed process to develop his most important domestic policy. Not long after the fiasco of developing the energy package, I sent him a decision memorandum on another issue summarizing the views of all the agencies involved. The president called me on my secure line and said, “I want you to give me your opinion, not just those of others.” I wish I had felt that empowered at the time of the first energy debate as the bill headed toward a climax in April 1977.
Too late, the secrecy led to an internal revolt. It came from the administration’s most important economic voices, Treasury Secretary Michael Blumenthal and Charles Schultze, chairman of the Council of Economic Advisers. Blumenthal phoned me28 to appeal for a thirty-day postponement to consider the wider economic implications. At a time when the administration was preparing a tax reform measure to lower rates in return for closing tax loopholes, the energy bill was packed with new tax incentives to promote conservation. More broadly, the energy package was huge, and Schultze had not had time to calculate its full economic impact. The request for a delay was denied, despite the valid, unanswered, economic questions, because the president was so far out on a limb on the ninety-day deadline that he feared a delay would make him look indecisive and subject the program to greater interagency scrutiny that might dilute it.
With only about two weeks left before the public rollout, the president asked me to come to his small study next to the Oval Office.29 He was worried. Wearing his trademark tan cardigan, he declared that he found Schlesinger’s plan complex and difficult, and he said frankly, “I do not fully understand it, and do not know how I can adequately explain it to the American people.” As he admitted later, he had not envisioned the multiplicity of issues, the uncertain costs, and how they could be aligned.30 But at that late date only minor changes were possible.31
An eruption was also not long in coming from the nation’s elected representatives. At the congressional leadership breakfast,32 Majority Leader Byrd complained that senators had not been brought into the energy discussions, and this was holding up business. To make his point, he told the group that Senator Muskie of Maine refused to allow the Clean Air Act amendments out of his Environment Subcommittee for a vote by the full Senate on the Senate floor, without first knowing the impact of our energy plan on the environment.
I moved fast and organized a full interagency meeting in the Cabinet Room on the same day.33 All the major decision makers were there—with Ham to provide political input for the first time—and it produced a healthy debate, with the president engaged and asking good questions. But it should have been convened near the start and not the end of the process.
The president began the meeting by declaring that when his principal advisers disagreed, he would decide—and that if the disagreements remained, that aspect of the plan could be presented in a less detailed manner until details were thrashed out. Schlesinger countered abruptly: “We are going to galley proofs on Monday, and we can’t just lay out pious hopes.” He wanted decisions on proposed legislative language, but Carter replied defensively that some elements of the plan could be put forward by April 20, but the entire legislative “book” could come a few days later.
Schlesinger’s plan called for roughly $1 billion in tax credits to encourage insulation, and he was considering establishing insulation standards below which banks would be prohibited from writing home mortgages. This immediately drew strong objections from Blumenthal and Schultze, who pointed out that it would make banks federal inspectors of home insulation. Schultze also challenged Schlesinger’s estimates that his insulation initiatives would save one million barrels of oil a day, since wealthier property owners—the ones who used more fuel—were already retrofitting their homes. That ended bank certification right there.
Schlesinger then discussed a national building code to focus on energy conservation, which would raise constitutional questions by superseding local codes. And who would perform the inspections to ensure compliance? I noted privately in the margin of my legal pad that while we were about to announce a comprehensive national plan, at this late stage we were only beginning to examine such critical issues. Schlesinger was also forced to retreat on mandatory efficiency standards for industrial motors and boilers. Blumenthal and Schultze argued it would be simpler and more effective to require manufacturers to list efficiency ratings so buyers could calculate their own energy-cost savings. Carter weighed in as an engineer: Not only would it be hard to defend specific designs as more efficient, but a bureaucracy would be required to verify the efficiency claims.
Turning to automobiles, Schlesinger proposed to tax gas guzzlers and offer a rebate to buyers of fuel-efficient cars made in America—but not those made in Japan, where auto engines delivered far better mileage than Detroit’s products. Blumenthal, who had been a senior trade negotiator in the Kennedy administration, warned that this would violate a number of our international trade obligations to treat foreign and U.S. products equally and could end with the United States paying Japan $6 billion in compensation. The president interjected that he was “not sure it saves enough gas to warrant the extra cost.”
Schultze estimated that the plan would raise inflation by half a percentage point, just from the oil and gas provisions, but he had not had time to calculate the impact of the rest. Schlesinger retorted that it was impossible to judge the impact without knowing exactly what the legislation would look like when finally enacted. To me this inconclusive debate showed the wicked trade-off between good energy policy and its economic consequences.
On the day after the plan was introduced, the president asked me to resolve interagency disputes on the economic costs. Every agency had its own figures; like most businesses and professions, each one tended to see the world through its own perspective—and as an old Washington adage goes, “Where you stand depends on where you sit.” It took me a week to align the different perspectives into one unified estimate, and even then the many variables left it uncertain. Moreover, the lack of consultation meant that we had no earthly idea of the different reactions among the members of Congress, who would be the ones to resolve the fate of the massive legislation on which the president had staked his reputation.
PRICING OIL AND GAS
As we drilled down to bedrock that April day, the problem was not only the plan’s inherent conflicts, but how to price crude oil and natural gas. On crude oil we had inherited a complicated three-tier system with different prices for “old oil” from wells currently in production that had already amortized their drilling costs (about half the total), and from newly discovered oil still paying off start-up costs. The third tier was the world price of imported oil. There was a difference of almost eight dollars a barrel between the price of old oil and the world price of about thirteen dollars a barrel; the policy goal was to raise domestic oil prices to world prices to encourage conservation and production.
Schlesinger proposed a tax as ungainly as its name—the Crude Oil Equalization Tax, or COET, in a typically bureaucratic acronym. The government would impose a tax at the wellhead to claw back the difference between old oil and the world price, and as the regulated price of new oil rose, the government would collect the difference and rebate the money to consumers. The producers, of course, wanted to pocket the higher prices so they could drill new wells—or so they said. The natural suspicion was that they simply wanted to pocket the profits, period. Carter asked whether this system would not effectively let OPEC set American prices as well. They already did, Schlesinger replied, because by setting the price of our domestic oil, the federal control system in effect was subsidizing the price of foreign oil. What if OPEC viewed the rise in U.S. market prices as an invitation to jack up world prices again? Carter asked. Schultze suggested that the president could be given authority to reimpose controls if prices rose too fast.
The wellhead tax w
as a brilliantly designed, but complicated, device to charge Americans market prices for crude oil while preventing the oil companies from gaining all the additional profit. But we never came down squarely on what to do with these large revenues, estimated at $15 billion a year by Schlesinger. It was not necessarily a bad political idea to shift that debate on dividing up the tax revenues to the elected members of Congress. But it opened an unseemly battle among the government departments; each would want a scoop from this new fiscal honeypot and would seek support from its congressional overseers. Its most significant flaw was that COET had no champions in Congress. The liberals opposed anything that raised oil prices, the conservatives and producer-state representatives simply wanted to decontrol crude oil prices.
But the Achilles’ heel of Schlesinger’s plan was the even more politically radioactive issue of natural-gas prices. No domestic issue was more contentious for a longer period of time. Decades of political pressure combined with eccentric Supreme Court decisions produced a pricing policy that could only have been invented in an insane asylum. The producing states could charge whatever the local market could bear in an unregulated market; but as soon as the gas crossed state lines, the federal government controlled the price at about one-third the state level. The economic effects were perverse, as energy producers had no incentive to ship their natural gas to consuming states in the North and Midwest: Householders and industries in the North were cut off from cheap energy, while the producing states in the South and Southwest attracted chemical and manufacturing industries that prospered on chemical feedstock used to produce plastics and fertilizer, and energy from abundant local gas.34
Schlesinger and his staff agreed on the necessity of one uniform nationwide price for gas, but proposed to accomplish this by extending federal controls into the unregulated producing-states’ market, rather than deregulating the price wherever natural gas was sold, as we had promised during the campaign. That new regulated price would be hooked to the energy (BTU) equivalent of crude oil and be sufficiently competitive to open new markets to the gas producers.
This was political poison for the energy companies and the producing states. But the idea had great attraction for key members of Schlesinger’s team, who had deep connections with Northern liberals in the Senate, and were suspicious of price deregulation as a consumer rip-off favoring the free-market oilmen who already enjoyed huge government tax subsidies. From a policy standpoint the choice between the predictability of government regulation and the risky attraction of market-based prices was one they were not prepared to make.
Schlesinger’s staff, largely drawn from the ranks of government, did not see the seismic shift of public and congressional opinion toward the principle of the marketplace as an efficient provider of goods and services—and that placed Jimmy Carter at a turning point in American history. The change in political attitude toward deregulation was one Carter would later ride to success in deregulating transportation, communications, and banking to the benefit of consumers. Schlesinger’s proposal satisfied neither of the major combatants in the energy wars. It raised prices higher than consumer groups wanted, but did not provide for an end to federal controls that producers had long advocated, and that we backed in the campaign.
Opposition to the energy package began to bubble up to the highest levels of the government. At a cabinet meeting on April 11, an unusual voice was heard. Brzezinski, who rarely spoke on economic or energy issues, said our allies feared that the energy program would have negative effects on both inflation and growth.35 At the same time I argued that the plan depended on higher energy costs, and Congress had already rejected that approach. I was also concerned that we were asking for short-term sacrifices for ill-defined long-term benefits. The rapid introduction of the wellhead tax on oil risked an inflationary jolt, yet we did not have a calculation of the impact on middle- and low-income Americans. Our insulation program would be adding government regulation while we were simultaneously talking about deregulation elsewhere. In my notes, I wrote and underlined: “No one knows the impact in macro sense. Need for greater congressional input and time to assess economic impact; changing life-styles, so do more gradually.”36 I presented some of these concerns to the president in a private meeting, but they fell on deaf ears.
Just four days before his deadline, with these issues still unsettled, President Carter called us together on April 16 for a climactic meeting in the Cabinet Room, what Schlesinger called the “big pow-wow.”37 This was the kind of contentious meeting of all hands, representing all administration viewpoints, that should have been held weeks before. The president opened by declaring that he wanted his message to contain clear goals, principles, and as many specifics as possible. He got what he asked for, but the degree of uncertainty about many of the details and effects was unsettling to say the least.38
The first issue was what to do with the huge revenues that would come from the COET. How much if any of it should be rebated to the energy industry to encourage more production? Would it be rebated to consumers through reduced Social Security taxes, welfare reform, or tax reform? The president favored a combination of these two. Schlesinger insisted it all had to be recycled back to the people. Blumenthal wanted to use some of the revenues for tax reform. Transportation Secretary Adams put in a claim to have the funds dedicated to the highway trust fund for maintaining the roads. Schultze favored using the money to keep Social Security taxes down. In the end we simply left it to Congress, and our inability to reach a consensus became a fatal flaw.
We next discussed the gasoline tax. Carter expressed the hope that increasing gasoline prices and rebating money to buyers of small cars would encourage the replacement of big cars with small ones. This is exactly what happened, but according to the law of unintended consequences, wealthier drivers bought the more fuel-efficient cars produced abroad, sold their tail-finned monsters to the poor for a pittance, and stuck them with gas-guzzling prices.
Our most contentious debate was over Schlesinger’s natural-gas plan. Realizing that it broke our campaign pledge to deregulate natural-gas prices over a five-year period, he proposed that we present it as a step toward deregulation, although prices would continue to be controlled. Despite our campaign pledge, Carter bought into this verbal manipulation, especially after Schlesinger told him he had checked with Governors Briscoe and Boren and had obtained their support for some type of cap on natural-gas prices. (This turned out to be totally untrue.) I questioned Schlesinger, but he held firm and said Boren was willing to describe it as a step toward phased deregulation. A compromise price of $1.75 per million cubic feet was more or less picked out of the air as a median between the local and interstate price levels. Schultze estimated that the natural-gas price would have to rise to $2.25 to be competitive with the price of new oil, and that would surely boost inflation.
Then the president turned to me, and asked, “Stu, you are the keeper of the campaign-pledge flame, what do you think of Jim’s proposal?” I sat in the staff seats directly behind the cabinet table, looking out to the Rose Garden, with the spring flowers and trees beautifully in bloom. I rose with my legal pad, came to the table, and reminded him of our visible and frequently repeated campaign promise to decontrol the price of new natural gas, including the letter to Governors Boren and Briscoe, essential to our election. But he backed away from his pledge, and said that was not what he meant by proposing decontrol.39 Carter stood by Schlesinger and said he wanted to emphasize that this was just the first step toward eventual deregulation. He gave Schlesinger authority to provide additional incentives for deep gas wells, as long as they really were new, and not just old ones redrilled to claim a higher price. Schlesinger later dismissed my painful reminder of the campaign promise as a mere interpretation made by “a good staff person.”40
Then, after one last reminder to the president of our promise, I conceded—in words I have regretted ever since—that if Schlesinger felt Briscoe and Boren could live with his position, and if, a
s he claimed, the Democratic leadership opposed deregulation, “I guess, Mr. President, this is one campaign promise we can violate.” That was it. Deregulation would not be in our proposal.
Had this episode occurred a few months later, I would have been more assertive and insisted that we needed to know more about how our supporters in the Southwest would react to Schlesinger’s new position, as well as a more nuanced view of the congressional reaction. But at the age of just thirty-three, with only a few summer jobs as an intern in Congress and the executive branch, a junior position in the LBJ White House, and my work as research director of the Hubert Humphrey presidential campaign on my résumé—who was I to contradict the great and brilliant James Schlesinger? He had served as a cabinet officer under two presidents, was on a first-name basis with scores of members of Congress, and was a Washington legend. Nevertheless, I gravely doubted Schlesinger’s assertions, and I soon learned that my political judgment was better than his.
I wish I had called Boren and Briscoe, but I felt that I could not challenge Schlesinger in an open meeting, or go behind his back to check with them, when we had been banned from talking outside the White House. If I had, I could have given the president a clear view of how shocked they would be at the reversal of a pledge upon which they had relied in campaigning so hard for him and delivering their critically important states. That would be the last time I deferred with barely a whimper to the judgment of a cabinet officer. I have never forgiven myself for not putting up a stronger fight.
In fact Schlesinger had not made any systematic count of the potential votes for deregulation. Early on he did consult with his two closest friends in the Congress, Scoop Jackson in the Senate and John Dingell in the House, who chaired the key congressional panels dealing with oil and gas pricing. They both passionately opposed decontrol and promised to fight against it. Schlesinger, who like Carter had a populist streak and distrusted the energy industry, did not feel the need to do any more vote counting, nor was he given the leeway by the president to do so.
President Carter Page 20