Even after eight years of serving under Nixon and Ford and yearning for a leader of their own party, the Democratic leaders of Congress could not unite behind a Democratic president. Schultze proposed several billion dollars in job training and public service jobs for young people and veterans, but only $1 billion for the public works that are a honeypot for Congressmen to spoon out to their constituents. House Majority Leader Jim Wright immediately objected. Disingenuously he warned that his own followers would bloat the numbers, as if he had no control over them. Schultze replied that the money would end up in inefficient projects like indoor pistol ranges and marinas in obscure locations. Carter supported him by arguing that even massive public works programs do not employ enough people to jump-start the economy, and that without a cash tax rebate, the whole pump-priming exercise would not create enough jobs to reduce unemployment. Senate Majority Leader Byrd warned that the money from tax cuts would end up in people’s bank accounts instead of injecting consumer demand into the economy.
It was clear from their reactions that the congressional leaders were chagrined at having a complete program dropped unceremoniously in their laps, and they complained it was too skimpy to boost the economy. We anticipated that and had met with the president beforehand; he approved an additional amount for the package if they asked. On the spot Carter agreed to a compromise: an additional $4 billion for public works beyond the $2 billion Congress had authorized last year, but to reduce the immediate budget impact, it would be appropriated half in the current fiscal year 1977, and half in fiscal 1978.
But Carter’s fiscal conservatism came out clearly: This was not going to be the Great Society redux. He explained that he was proposing a tax cut for low- and middle-income taxpayers, but that he expected it to be paid for, first by tax reform that he would propose later in 1977, and then by higher tax revenues that would be a growth dividend from the stimulus itself. But, he warned, “I will not promise a tax cut until we have the funds to pay for it. I have always been careful to say that we are going to take these actions only as the new revenues come on stream and we meet our objective of achieving a balanced federal budget by the end of my first term.” There was silence from the Democratic leaders.24 This was not the message they expected, although it was entirely consistent with what he had been saying during the campaign.
Pressures also came from our liberal supporters, and they did not abate. The AFL-CIO lined up with the congressional leadership in demanding several billion dollars more for public works, which they knew would generate unionized construction jobs instead of the lower-paid public and youth jobs in the Carter package. We received similar complaints at a meeting on February 3 with congressional black leaders, who asked for $2 billion more to combat black teenage unemployment. Carter was clearly stung and said he consistently supported affirmative action and recited a long list of his black appointees. He told them bluntly, “Too much criticism creates needless disharmony, and hurts blacks.”25 We tried to accommodate our Democratic critics by slightly enlarging the plan.
After intensive days of deliberation, the president sent a $31.2 billion Economic Recovery Program to Congress on January 31, along with the basic outline Schultze had originally drawn. Together with the additional public works funding, there was a major expansion of public service employment by a whopping 450,000 places, job training and youth employment programs offering an additional 346,000 positions, and a $1 billion increase in federal revenue shared with hard-pressed cities and states. But at the heart of the program stood the progressive tax cuts, especially the rebate and the cash payment for the poor who paid no taxes, adding up to an injection of $11.4 billion to stimulate the economy immediately in 1977.
The plan also recommended a permanent increase in the standard deduction, which would mean that 3.7 million taxpayers would no longer pay any taxes, and tax simplification for four million more, who could take the standard deduction. In our consultations with business leaders, they were divided on whether they preferred an additional credit for investments in machinery and equipment or an income tax cut, so the plan allowed them to choose either. The recovery package was accompanied by a warning that without further stimulus, the economy would grow at an “inadequate” 4.5 to 5 percent in 1977—a level of growth for which an administration these days would sell its soul.26
At a cabinet meeting on February 20 to discuss the package, I received another task from the president, who was quickly discovering that his concept of cabinet government was allowing cabinet officers to make end runs to Congress, blurring his agenda and complicating his life. He instructed all cabinet officers to send me copies of their congressional testimony, “so it does not create confusion with my campaign statements. Stu will monitor legislation.”27 Later that day Carter told us at a staff meeting that he was going to take Evelyn Wood’s speed-reading course because of the volume of papers that reached his desk. I told him that I had taken the course between high school and college and found it the best investment I had made, aside from the cost of my marriage license for Fran. I should have told him this would be a self-inflicted burden; we were already providing summaries of decisions he needed to make, but he insisted on reading all the details in the backup material that came with them.28
* * *
The basic question remains whether the stimulus plan was a mistake and actually accelerated the underlying high inflation. Should it have been abandoned to let nature take its course and allow unemployment to move higher, in stark contrast to Democratic Party orthodoxy—and would that have slowed inflation? Most economists, including the conservative Paul McCracken, President Nixon’s top economic adviser, felt that the benefits outweighed any risk of an inflationary impact.29 Labor and the liberals simply ignored the trade-off, and constantly pushed for more spending on social and jobs programs. The AFL-CIO’s Lane Kirkland said: “There’s a big difference between having work and being plagued with rising prices, and not having work and being plagued with any prices.”30
Economic policy is one of the most challenging of all the broad-spectrum decisions presidents have to make. A president’s ability to influence the course of the huge and complex American economy is greatly exaggerated. He can affect it at the margins and set a general direction, but other decisions have far greater weight, particularly those by the Federal Reserve, but even more so those by tens of millions of consumers and companies and even the policies of our major trading partners. Economic data are released regularly for the most recent months, but often revised, making managing the economy, in Alan Greenspan’s words, like “driving a car by looking at the rear-view mirror.”31
Moreover, one quarter’s figures are rarely enough to indicate underlying trends. In fact the Ford recession was actually over when Carter took office, and figures later showed that a very strong bounce-back of 9.7 percent had taken place at the height of the campaign, although economic growth later fell into the doldrums.
“THROWING $50 BILLS OFF THE TOP OF THE WASHINGTON MONUMENT”
One element in the stimulus program began to take on a political life of its own: The $50 rebate became a lightning rod for criticism within the cabinet and in Congress. At a cabinet meeting a few weeks after the plan was sent to Congress,32 it was reported that the most popular proposal focused on youth unemployment and the rebate was the most unpopular. Senator Long belittled it as “throwing $50 bills off the top of the Washington Monument”33—which was precisely the metaphor used by its academic supporters to describe the simplicity, directness, and absence of long-term budget impact that were its principal virtues. Gradually Carter began to back away from it, while Mondale argued that it was a vital test of the president’s command of Congress, and his standing would “unravel” if they rejected it.34 Slowly but relentlessly the case for the rebate was barely discussed on its merits. Senator Byrd gave the new president a tough message about how Washington works: He brought up the hit list of objectionable water projects that the president aimed to strike from the an
nual list of pork-barrel projects for friendly members of Congress. Byrd told Carter he only had forty votes for the rebate, and “the damage from the water projects hit list is terrible. Your other battles are more important.”35
Carter’s refusal to subordinate principle to political success began to affect his overloaded legislative agenda. The vote on this once-urgent rebate had slid at least to mid-April. Twice he asked me whether I still favored it, once during a high-level meeting on energy, and again when he summoned me to his private study at 9:30 p.m. after a White House evening with wives.36 I argued that unless the economic statistics strengthened markedly, dropping the rebate would look like poor economic planning and uncertain leadership.
The rebate did not last long, and Carter paid a political price for abandoning it in a way that showed his inexperience in dealing with Congress. But in the last analysis, it was a decisive turn from emphasizing jobs during the campaign to giving the fight against inflation at least an equal priority. In hindsight, the economy was near what economists call an inflection point—a change in direction, although rarely spotted until it is past.
There seemed little inflationary risk to the tax rebate when unemployment stood at 7 percent, but he sensed it. Critics who feel Carter did not appreciate the threat of inflation early enough fail to see that after only three months in office, he took the politically risky step of reorienting the economic course on which he had pitched his campaign. The decisive moment came on April 13 in the Roosevelt Room, across the hall from the Oval Office, overlooked by portraits of the two Roosevelts, whose political skills would have been of great help at the moment. Carter convened his economic team and his political inner circle around a large oval table and opened by telling us: “The rebate is the only thing I feel queasy about since I was elected.” He took pride in having told the Democratic leadership he was not going to trade with Senator Long on sugar imports for his vote on the $50 rebate and said he had offered no deals to anyone except Massachusetts’s two senators, Kennedy and Edward Brooke, promising to keep open the army’s Fort Devens in their state. Even so, he seemed to apologize: “I feel I should not link things and horse-trade; I have never been able to do this in politics.”37
This was an amazing statement. During the presidential campaign, he had been perfectly willing to consider the political dimensions of his policies, but now he parked politics at the door of the Oval Office. The presidency is a political job, and there are precious few levers for key proposals beyond the ability to rally public opinion. Extending, maintaining, or threatening to withhold federal benefits is one of the most essential in assembling a congressional vote.
In the end, elected members of Congress must view a president’s proposals not only as sound for the nation, but for their own voters and their own political careers. Schultze, the rebate’s architect, argued that without it the recovery package would be reduced by $10 billion, leaving only $21 billion at a time of high unemployment. I had talked with Ham Jordan before the meeting to support the rebate, and his comments at the meeting were as politically cogent as ever: “The best policy will be the best politics. We were elected by the poor and middle class. If you withdraw the rebate, it will hurt your image that you care about them. I would hate to see you back off.” Only the financial community would be pleased if we pulled the rebate, he said, and if it turned out that we were wrong, the rebate would be a “self-limiting mistake,” because it applied for only one year. Worse, he emphasized, dropping the rebate would only create a backlash from labor and congressional Democrats to add other spending programs in its place that would start stimulating the economy only next year, not now.
I expressed concern about seeming to reverse a signature proposal so soon after he argued its importance, and that if the rebate had to die, it would be best to let the congressional leadership announce they lacked the votes to pass it. While the press would play this as a loss, surveys indicated the rebate was popular with the public. After Jody Powell pointed out that withdrawing the individual rebate would also mean dropping the tax cut for business, Carter broadened the debate to the question that framed the entire economic policy for the next four years, and also underscored the difficulty of simultaneously fighting high inflation and high unemployment: “Should we worry about inflation or the dormant economy?” Blumenthal and Lance argued that the rebate was not necessary, as the economy was strengthening, and would be inflationary.38
Presidents often have to change course to deal with changed circumstances. But on a high-visibility issue such as this, adopting a new position must be done with finesse. There was little of that here, and it compounded the problem. Within a few hours of the meeting, when I thought the issue was still unresolved, the wire services quoted unnamed White House sources that the president was abandoning the $50 rebate. I assume Carter told Jody to leak his decision, and the result was immediate and painful.
Hell hath no fury greater than an angry senator, and Ed Muskie, a party elder and former Democratic presidential contender, erupted like Vesuvius. As chairman of the new Senate Budget Committee, he took great pride in the process created under the new budget law and had led his committee in creating an extraordinary third budget resolution to accommodate the fiscal effects of the original stimulus package. It was only from the press leaks that he learned his careful work on behalf of the White House had been for naught. As Schultze put it later, Congress felt “you guys don’t really know what you’re doing,” even those who opposed the rebate.39 Two days later Carter gave a press conference with a series of lame explanations for dropping the rebate, including that it had been a mutual decision with Congress, which of course it was not.40 A lingering but more damaging price for the precipitous decision showed up two months later in Caddell’s poll, which reported that the public was concerned that Carter “changes his mind on issues.”41
In fact, except for the rebate, Congress passed and Carter signed into law on May 13, 1977, the balance of his Economic Recovery Program virtually intact. This injected more than $20 billion into the economy, together with $4 billion in public works for state and local government projects, an amount close to the midrange of economists’ recommendations for lowering taxes and creating jobs and new public works. But like so much of Carter’s legislation, passage was often clouded by the breadth of what he initially sought and his politically maladroit way of making a useful compromise look like a defeat.
“I AM VERY CONCERNED WITH INFLATION” (BUT BIG LABOR IS NOT)
Jimmy Carter had to live in the real world. It is impossible to be a purist in politics, particularly for a Democratic president whose base in the industrial working class undergirds his party. Whatever he did, it was never enough to satisfy them. Two Wisconsin Democrats, Senator Gaylord Nelson and Representative David Obey, threatened to attack Carter in public if he did not honor a campaign pledge to raise federal price supports for milk. American shoe manufacturers and their unions demanded that Carter impose punitive tariffs on cheap shoes imported from Asia just as he was planning to make his maiden speech on inflation. The shrinking domestic shoe industry was unable to compete in the low-price market, and imposing tariffs would only send the wrong signals to other industries.
Sure enough, we were confronted with a demand by labor leaders to limit imports of television sets from Japan and Taiwan, where efficient production and good design were decimating the American electronics industry. Next came sugar, probably the most protected commodity in America, that sold here at double the world price, thanks to powerful congressional overlords like Russell Long, whose support on broad economic measures was essential as chairman of the Senate Finance Committee. Carter’s instincts were clear and correct. “I want as little constraint on imports as possible and I am concerned with inflation,” he bluntly instructed Strauss, his trade negotiator. But this did not satisfy Muskie, whose state of Maine was home to many shoe manufacturers.42
Combating the strong inflationary pressures built into the system turned out
to be one of the most politically debilitating tasks imaginable. Rather than hand out new benefits to traditional supporters, Carter struggled against the impact of one decision after another seeking special benefits; he did the bare minimum to keep any semblance of political support. Even so, he alienated one group after another in choosing the least inflationary alternative in each decision while trying to keep at least one foot in the progressive camp—then an ankle, then a toe, until Kennedy took him on in the presidential primary. One of Carter’s solutions was to put in place the first deregulation of major industries, mainly in transport, communications, and banking, which increased competition and eventually helped lower prices and wages, but not quickly enough to help him politically.
Even with all these pressures for small, incremental steps adding to inflation, Carter stayed ahead of his advisers in recognizing its dangers and had come to the point of making a fight against inflation his major economic goal. At a senior White House staff meeting in the Oval Office on March 28, a little more than two months after his inauguration, he told us firmly that in facing pressures to raise minimum wages for workers and increase price supports for farmers, he could not align himself with these goals of the Democratic-controlled committees. He told us, “I am very concerned with inflation.… It will be devastating politically if inflation gets to 8 or 9 percent.”43 It did, and it was.
Large companies and wealthy people are well equipped to protect themselves by pricing power or political pull when the economy swerves in unexpected directions, as it did in the 1970s and again in the financial crash of 2008. Arthur Okun, who bore the scars of trying but failing to stop the financing of the Vietnam War and Great Society programs from running amok as Johnson’s chief economic adviser, had a succinct phrase to describe the social damage when inflation suddenly takes hold: “It separates the sharpies from the suckers.”
President Carter Page 36