Once he had shifted focus, the president faced a more daunting task in bringing his party and its traditional supporters along with him. He planned to take it public, and on March 31 at 8:30 a.m. he summoned me to his private study and asked me to coordinate an anti-inflation message he would soon deliver. I began immediately, talking with Schultze and Fed Chairman Burns that day.44 He took the subject to the cabinet on April 4, a meeting at which Schultze delivered a briefing stressing the impossibility of reducing unemployment without controlling inflation—to try to do it, the first step was to impose budget discipline on all the things the government does to support prices. After he reported that the employment figures looked good, Carter warned that the “good news gives a false picture of what the economy is doing.”45 Two days later he took the message to the regular breakfast of the Democratic congressional leadership, for whom fighting inflation was a nonissue. This was the party of jobs, growth, and increased social services for Americans, the reform party of the Roosevelt coalition.
What they failed to realize, but Carter had grasped from the day he started running for president, was that the country had changed and that the party needed to adapt by becoming more fiscally prudent and moderate. He told them he did not want to get into the position of blaming a spendthrift Congress, whose budget proposals were more than $6 billion higher than his. He informed them he would be making an anti-inflation speech and warned: “Democrats have a reputation of irresponsible spending. To control this, it will mean special-interest groups who are our friends can’t get all they want. If we do this, it will take away from the Republicans one of their biggest weapons against us.” The Democratic Party barons, particularly Tip O’Neill, were visibly upset. Later that day Carter pursued the same message with the National Farmers Union, which did not want to hear it; they argued for higher federal price supports to underwrite their production costs, even if it meant stockpiling unsold grains and milk products in government warehouses at taxpayer expense. And the leaders of the machinists’ and electrical workers’ unions demanded that Carter limit imports to protect their jobs.46
That encounter set the stage for the most uncomfortable meeting I attended during four years in the Carter White House, a lunch on April 6, 1977, in the Roosevelt Room with the senior leadership of the AFL-CIO, led by its president, George Meany,47 which we later ruefully dubbed the “George Hardy memorial lunch.”
Meany was a tough, burly, bald, stern, cigar-smoking, former pipe welder from the Bronx. He and the courteous peanut farmer from Plains came from two different universes. Carter was from a nonunion state and had not mixed with union leaders—there were virtually none in Georgia—nor did he campaign at union halls or speak to their conventions. Carter later told the cabinet that he was particularly upset by Meany’s negative personal comments about him despite his efforts to honor labor’s requests.
The memorable luncheon meeting also included Mondale, Labor Secretary Marshall, Ham, Landon Butler, who was Ham’s liaison to labor, and me, along with several of Meany’s top aides.48 Carter began by warmly welcoming them to the White House with a declaration that “I am eager to work with you.… We share common goals.” He made it clear that he was eager to support laws to assist unionization by expediting decisions by the National Labor Relations Board to limit corporate barriers to unions. He promised to let union leaders review his upcoming inflation statement and made it clear he would not blame organized labor for inflation when it pushed for higher wages.
Then George Hardy, president of the Service Employees International Union, started telling dirty jokes, perhaps in the mistaken belief that this kind of union-hall bonhomie would lighten the atmosphere. The Southern Baptist president cringed visibly. The off-color language embarrassed him deeply and confirmed his small-town stereotype of labor leaders as more interested in their own position than in the workers they represented.
Meany finally turned the meeting back toward substance, arguing that the priority should be people and jobs, not fighting inflation, and that it was urgent to raise the minimum wage and index it to manufacturing wages, since it now was set to yield a salary below the poverty line. “Nothing since January 20 [inauguration day] indicates this is a priority for you,” he asserted, asking, “Why do you not consult with us on the minimum wage?”—totally ignoring that Carter had been working hard on the minimum wage bill for some time, and that we had worked closely with the AFL-CIO staff on what would become a substantial increase by the end of his first year.
Then followed a long duel of polemics, descending into personalities on all of the trade cases, with Meany accusing our negotiators of being clients of foreign countries and Blumenthal of sounding like Arthur Burns of the Fed. “There is no proof wages contribute to inflation. High interest rates and unemployment are inflationary,” Meany said in a message straight out of the 1930s.
Carter responded to Meany’s diatribe by defending himself with specific proposals he had made to increase the minimum wage and index it to manufacturing wages, albeit at a lower level than Meany and the unions wanted. He also promised to consult with labor, which Meany rebutted or brushed aside. Meany argued that companies continued to lay off workers even though profits were high, and that corporations did not pay enough taxes and had too much political influence under Carter. Union leaders who take bribes go to jail, he said, but not corporate officers. Carter shot back that he had not yet met with the Business Roundtable, and was giving labor priority; and that he was going to issue a statement on oil spills; intended to reform the tax code; and was preparing corporate antibribery legislation.
When the lunch ended, Carter muttered to me as he left for the Oval Office, “Stu, I will never do this again.” And he did not. He limited himself to meetings only with the central leadership of the AFL-CIO and their aides, although at times meeting with the presidents of affiliated unions separately. It left a permanent scar on a key element of the traditional Democratic coalition. For myself, I had never seen such disrespect before or since, not simply for Carter himself but for the office of the president of the United States. In my notes I wrote, “This was a disastrous and rancorous meeting. JC uncomfortable in relationship with Meany.”
Strauss later volunteered that neither Carter nor his Labor secretary attended the annual AFL-CIO convention in Florida, but Carter replied that he sought Meany’s advice and hated to go to labor conventions anyway.49 Carter and especially his political guru, Ham, realized that organized labor was an essential building block in the Democratic Party’s coalition. Unions were the only organization that threw thousands of workers into the get-out-the-vote ground game in key states to elect Democrats. They also had effective pro-Democratic educational programs at union locals and deployed a strong lobbying organization for key legislation in Washington.
Carter bent himself into a pretzel to try to appease Meany and labor, but it never seemed enough. Meany publicly declared that he could not think of one positive thing Carter had done as president, and was widely known to resent the fact that after waiting eight years for a Democrat in the White House, he had to deal with one from the conservative wing of the party.
Early in the administration we started to work with the AFL-CIO on issues like raising the minimum wage. While none of their workers were employed at the minimum wage, an increase would ripple upward and give them more leverage to seek raises for their better-paid unionized workers. Their major goal was legislation that would make it easier for unions to organize workers. Although Carter came from a “right to work” state where, like most Southern states, organizing unions faced huge legal hurdles, he was willing to accommodate labor. But his personal feelings are best captured by his caustic remark when Landon Butler reviewed the labor law proposal with him: “Labor Law Reform? For what is that a euphemism?”50 Ham recommended that we support labor’s broad objectives in any legislation to force them to “keep coming back for our help.” And they needed it, as public opinion and local laws drifted against the unions,
and their membership was declining as the manufacturing base of the country eroded and the economy shifted to a service-driven model.51
“NO MAGIC SOLUTIONS”
With a week remaining to draft Carter’s first anti-inflation statement, there was a dearth of original ideas, and even fewer on which we could all agree. At an EPG meeting Carter’s conflicting priorities came into painfully plain view. Blumenthal argued that the energy bill soon to be sent to Congress was inconsistent with the anti-inflation message since it was based upon higher energy prices to encourage conservation and production. Mondale told Carter he should delay the bill, but Carter predictably said we should forge ahead. We did agree that after each major wage and price increase, the Council on Wage and Price Stability could make a public statement and hold public hearings, even if labor did not like them meddling in collective-bargaining negotiations.
Carter directed me to meet with Fed chairman Burns. But although he puffed out the stale idea of an “incomes policy” of wage and price guidelines through the smoke of his ubiquitous pipe, he had no better idea than we did on how the government could usefully intervene to hold down wages or prices. Nor was the problem new to him (or to the economics profession). As far back as 1970 he had said publicly: “We are dealing with a new problem—namely, persistent inflation in the face of substantial unemployment—and the classical remedies may not work well enough or fast enough in this case.”52 Burns repeated his mantra that high government spending equaled high deficits, which produced high interest rates. I knew that he wanted Carter to reappoint him, but as he left my office, I thought that even the august chairman of the Fed had no magic bullet to fight inflation.53 But neither did Jimmy Carter, and he was the first to admit that “there are no magic solutions in the battle against inflation,” as he said when he delivered his first anti-inflation message on April 15—income tax day!54
He was remarkably candid in laying part of the blame on the changing role of the federal government in addressing costs of combating environmental pollution, improving health and safety at work, and pensions and health care for the elderly. He also pointed to the wage-price process: As individuals and businesses began to expect continued inflation, they demanded higher wages to protect themselves, creating a spiral that helped explain why slow growth, high unemployment, unused plant capacity, and inadequate consumer demand—all of which should have slowed prices—did the reverse and caused stagflation. He announced a new labor-management group chaired by labor’s George Meany and Reginald Jones, the CEO of General Electric, coordinated by former Ford Labor secretary and Harvard professor John Dunlop, to discuss how to break the vicious wage-price spiral. But it was a toothless tiger, because the AFL-CIO refused to talk about specific numbers or to agree to restrain their wage demands to catch up with inflation.55
Unlike a traditional Democrat, he emphasized the importance of spending restraint and pledged to have a balanced budget by the end of his term “in a normal economy.” But the president forcefully rejected fighting inflation through high unemployment, which he called “morally unacceptable and ineffective.” He promised: “Inflation must not be attacked by causing additional human misery.” Carter deserves credit for identifying inflation early on as a major problem, and he followed through with the various initiatives he promised. But given the underlying inflationary forces, which would only become more ferocious with the oil shock that was yet to arrive in 1979, the message was a lost opportunity, and a promise he could not keep. Yet at that time, no one inside or outside the administration was clamoring for much more. We were always one step behind with our anti-inflation weapons—and sending conflicting signals by signing a minimum wage hike, and negotiating the Humphrey-Hawkins Full Employment Bill (backed by pollster Caddell, who felt it was necessary to strengthen liberal and black support, which was “slipping”), albeit only after insisting that an inflation target be added to the unemployment goal. Finally Carter would have no choice but to do what he said we would never do, fight inflation with higher unemployment and slower growth.56
TORPEDOED BY BIG STEEL
Just six months into Carter’s presidency at the June meeting of our EPG, Schultze made what would be a fateful and incorrect judgment that the economy would need more stimulus in the following year through a second round of tax cuts in 1978.57 Our margin for economic maneuver narrowed, given the president’s strong desire for a balanced budget by the end of his term. Blumenthal said the goals should really be to reach a better balance between low inflation and low unemployment and, mixing his metaphors, avoid making “a balanced budget holy writ when we may have to eat crow.” Commerce Secretary Kreps agreed, and said a balanced budget would only be the result and not the cause of the private economy delivering good numbers for the next several years. We realized we were at an economic crossroads in trying to meet the president’s fiscal goals, so at the end of June we called another meeting, which included Ham because of its heavy political consequences. Our economic team determined that we should set the fiscal dials to achieve our growth and employment goals with a tax cut, but without achieving the president’s deeply held goal of a balanced budget, calculating that the government would be running a deficit of $25 to $35 billion at the end of 1980.58
Schultze and Blumenthal brought various painful options before the president a week later, when Carter had to face economic realities and choose his course: achieve a balanced budget regardless of whether we met our economic growth goals; achieve a balanced budget only if there was higher growth and lower unemployment by another tax cut; and achieve our growth and unemployment goals but only by sacrificing a balanced budget. Carter declared unequivocally: “I am more concerned with inflation than unemployment.” Blumenthal assured him that additional tax cuts would not appreciably boost prices, “and we can attack inflation with a rifle.” As it turned out, inflation psychology was not subject to such careful targeting, and we could only have attacked it with a sledgehammer. At that point no one thought it necessary to swing that hard.
While he pondered these unpalatable options, inflationary pressures continued. U.S. Steel announced a big price hike, and the president asked me to come to his private office to determine what we could do about it. I reminded him of President Kennedy’s famous standoff with steel. I immediately called Schultze, who urged us not to threaten antitrust action, and then I told Bosworth that the president wanted him to examine the steel industry’s costs and report by September 15 on whether the increase was justified. Bosworth said that if his council held a public hearing, there would be a confrontation, because the steel companies had terrible profit margins.59 We agreed we had no real tools to roll back prices except by encouraging foreign steel imports, which would only evoke the wrath of management, labor, and their representatives in Congress. And a meeting with the other steel companies to urge restraint would be like whistling in the wind.
After Bosworth’s economists completed their study showing that Japanese costs were lower because their steel companies had modernized and ours had not, all stakeholders—management, labor, and members of Congress—gathered on October 13 for an extraordinary meeting with the president, where each performed according to script. Ed Speer of U.S. Steel laced into the government for failing to impose quotas, tariffs, or bilateral agreements to limit foreign steel imports. Lloyd McBride of the United Steelworkers complained that 20,000 layoffs had left the industry with the lowest number of workers since 1976, and he asked the government to delay enforcing new safety and environmental regulations. Senators of both parties from steel-producing states supported management and labor. “We want a strong steel industry, and we won’t put up with unfair competition,” said John Glenn, the former astronaut and Democratic senator from Ohio.
When Carter spoke, he said sternly that he would enforce the antidumping laws designed to protect American goods from imports priced below their cost of production, but he insisted that domestic manufacturers produce steel at competitive prices.60 Anyone thinking
that Jimmy Carter lacked backbone should have seen him in action, taking on the steel industry, its union, the United Steelworkers, and the bipartisan steel-state congressional delegation. In fact, in 1980 we did put through a recovery program for the industry worth more than $2 billion in faster equipment write-offs, import relief, and other government help. I coordinated the program, and when I announced it to the nation’s leading steel manufactures in the Roosevelt Room, I told the new CEO of U.S. Steel, David Roderick, “Dave, I hope you and the industry use this extra money to modernize your plants, and not to go out and buy an oil company.” Absolutely, he assured me. Within months U.S. Steel purchased the Marathon Oil Company.
We now faced the worst of both worlds and started grasping at straws. Bob Strauss suggested that the president bring fifty prominent people to the White House every two weeks, which he said would “do wonders for investor confidence.” Carter took the first step by inviting a large, bipartisan group of business leaders to meet with him and the economic team in the Cabinet Room. Irving Shapiro of DuPont, the new chairman of the Business Roundtable, recommended a presidential speech on the economy to help restore business confidence. Walter Wriston of Citibank asked for a clear strategy to calm “stock market jitters.”
Donald Regan of Merrill Lynch (later Secretary of the Treasury and White House Chief of Staff in the Reagan administration) said the president needed to lay out his reasons for tax cuts and not just give a “quick hype for the market.” Reg Jones of General Electric suggested tax cuts for individuals and corporations. At the same time the CEOs of General Motors and JCPenney declared that business was good and public confidence was growing. Carter said there were many causes for the problems of the stock market and advanced several basic reforms in taxation he wanted to tie to tax cuts. So much for high-powered brainstorming sessions.61
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