by Robert Rubin
DESPITE CONSENSUS ON the broad goal of serious deficit reduction, there was no immediate agreement in Little Rock on the amount of deficit reduction or how to achieve it. At one end of the spectrum, Alice Rivlin advocated the most strenuous program of deficit reduction. Of the same general orientation, although slightly less hawkish, were Al Gore, Lloyd Bentsen, Leon Panetta, and myself. Among the others in the room that day, Bob Reich, Laura Tyson, George Stephanopoulos, and Gene Sperling suggested a more moderate position. While the hawks were focused on our plan’s credibility with markets, Gene, Bob, and George wanted to preserve more of the campaign proposals. The new, higher deficit projection the Congressional Budget Office had issued in late December 1992 had made trade-offs between credible deficit reduction and these proposals even more difficult, and everyone understood that new programs in education, job training, health care, and welfare reform would have to be substantially constrained, at best, and that the middle-class tax cut was no longer feasible.
At some point, Leon and Alice presented five options—alternative amounts of deficit reduction, ranging from merely meeting the Bush administration’s existing “baseline” deficit projection to cutting it in half over five years. Each option was combined with a commensurate level of investment. We disregarded the extremes at either end and focused on three options, all of which included significant deficit reduction. None eliminated the structural deficit over the five-year period—that was more than was practically possible, given the starting point. But we thought that health care reform’s effect on Medicare would mean further reduction and that future budgets could continue the program.
I had told Clinton this wasn’t supposed to be the “decision” meeting, merely a first airing of big issues. But as we discussed these options, he indicated support for a strong level of deficit reduction. After the inauguration, our group met in the Roosevelt Room over a period of several weeks to set the exact level of deficit reduction, priorities for allocation of budgetary resources, and the specifics of our tax proposal. Clinton remained intensely involved in the specifics. Throughout the process, his essential view—and the administration consensus—never faltered. The President adhered to a strong deficit target number despite the concerns of his political advisers, pressure from some Democrats in Congress, and the complaints of constituencies that were important to him politically. When the plan ran into serious political trouble, he persisted, and while he sometimes complained and even on occasion lost his temper about the fiscal problems he had inherited, he put tremendous energy into getting his plan passed. This was my first real experience with presidential decision making, and it left me with a respect for Clinton that has continued through the years. Like the Mexico decision, deficit reduction involved exchanging near-term political pain for the potential, not the guarantee, of long-term economic gain.
The decisions the President made in this process marked a dramatic change in fiscal policy. The opponents of that change—especially supply-side advocates who vehemently objected to including tax increases in our deficit reduction program—predicted that our program would lead to increased unemployment, higher deficits, and economic stagnation or recession, or worse. Republican Representative Dick Armey of Texas, chairman of the House Republican Conference, said the plan would be “a disaster for the performance of the economy” and warned that “no deficit reduction, no good can come of it.” His colleague from Texas, Republican Senator Phil Gramm, called it “a one-way ticket to a recession.” Instead, the country had the longest period of growth in its history, massive new private-sector job creation, low inflation, higher incomes across all income groups, increased investment and productivity growth, and lower deficits, eventually followed by surpluses. That has been a great and enduring frustration to supply-side advocates, who first predicted that our policies would cause great economic injury and then, when the opposite happened, argued that sound fiscal policy had nothing to do with economic conditions they had predicted would not occur.
Economic causation is complex and many factors contributed to the strong economy of the 1990s, but I think the evidence strongly supports the conclusion that deficit reduction was, as President Clinton said in our January 7 meeting, a threshold act. Without the policy changes ushered in by the 1993 economic plan, I don’t believe that the sustained, robust recovery of the 1990s would have occurred. In our January 7 meeting, Alan Blinder argued that without restoration of fiscal discipline, the recovery could be “choked off” by higher interest rates. A few years ago, the Congressional Budget Office put out a paper arguing that the surplus that arrived in 1998 derived one third from policy decisions and two thirds from economic growth. But in reality these factors cannot be distinguished, since the growth was, to a considerable degree, a product of the policy.
What presidents do and say can have a substantial impact on the economy. So can what they don’t do and don’t say. On the affirmative side, Clinton maintained consistent focus on fiscal soundness throughout his time in office, as part of a broad-based domestic and international economic policy agenda. On the do-no-harm side, Clinton avoided trying to “jawbone” markets and resisted politically appealing measures that might have had a negative effect. For instance, he often came under pressure to constrict the flexibility of labor markets in various ways, such as proposing plant-closing notification laws. He advocated mitigating the consequences of economic dislocation—through measures such as worker training and universal health care—rather than restricting the workings of the free market.
OUR ECONOMIC POLICY DEADLINE was February 17, the date of the President’s scheduled address to a joint session of Congress. The first draft of the speech I saw had a lot of language designed to resonate with the public but lacked a tightly reasoned discussion of our economic strategy with regard to deficit reduction and long-term interest rates. So I drafted a few short paragraphs attempting to explain our strategy with some rigor. In a speech frequently punctuated by wild applause, my neat little explanation—“It has an investment program designed to increase public and private investment in areas critical to our economic future. And it has a deficit-reduction program that will increase the savings available for the private sector to invest, will lower interest rates, will decrease the percentage of the federal budget claimed by interest payments, and decrease the risks of financial market disruptions that could adversely affect our economy”—was greeted by zero applause. So much for my future as a speechwriter, but I still thought that having a brief but serious reference point in the President’s speech could be useful in the subsequent political debate.
I assumed, as many of us did, that the economic plan, once finished, would pass in due course. After all, our party controlled Congress with a comfortable majority in both houses, and we were standing for a reestablishment of fiscal discipline long advocated by many Republicans. In February 1993, there were already indications that the plan was having an effect, even before it passed. In one of our morning briefings, I told the President that the bond market was reacting more quickly and strongly than I had anticipated. In a recovering economy, interest rates might have been expected to rise in response to improved business and consumer demand and the expectation of future demand. Yet the yield on thirty-year Treasury bonds, 7.4 percent on December 31, 1992, had actually declined, quickly falling by more than half a point to 6.83 percent on February 23, 1993. That suggested to us that the markets were beginning to believe that our deficit reduction plan would work. (By mid-August, immediately after the plan was passed, long-term rates dropped by a full percentage point to 6.37, even though recovery was continuing.)
In monthly lunches the President held in the dining room in the White House residence, corporate leaders began to speak more positively about the economy. Most who came to these sessions were Republicans and hardly sympathetic to the new administration. After spending an hour and a half with the President, however, they often said to me that they thought he was smart, understood their issues, and really liste
ned to them. Many continued to disagree with the tax piece of our plan, but as the months passed, it became clear that business leaders were gaining confidence in the country’s economic prospects. I repeated to President Clinton a bit of sage advice Bob Strauss had given to President Carter: there are many people in the business community who probably won’t ever support a Democrat for President, but he can take the energy out of their opposition with sound economic policies.
Confident that our plan was right, we put it out and moved on. As Clinton later said to me, this was a crucial tactical mistake. He should have been out talking about his economic program every day. He told me he would never again attempt a major policy initiative without an integral and forceful communication and political strategy. He also said he should have made an intense effort to frame the debate from the very beginning.
I learned through this episode that from the moment a President presents an important proposal to the nation, he has to spend time painting a picture of it his way. Otherwise, his opponents will color it their way and put him on the defensive. Our opponents went right to work casting our plan as a tax increase—a grave distortion in relation to the vast majority of taxpayers, who saw no increase in their income taxes and a gas tax estimated at only $36 a year for an average family of four. We, on the other hand, spent little time explaining how few people were affected by the tax increase or, more important, painting our own picture of the program as a restoration of fiscal discipline to create jobs, increase standards of living, and promote economic growth. Clinton subsequently came back into the debate very vigorously. But because he was largely absent from it for some time, our opponents had a big lead in creating the prism through which our economic plan was viewed. We had to fight against that prism and were never entirely successful. Senator Dianne Feinstein (D-CA) told me that when she ran for reelection in 1994, a poll showed that 42 percent of the people in California thought their income tax rates had been raised in 1993.
That’s a good example of how distortions can stick when they aren’t immediately and decisively rebutted. In reality, the income tax hike in our plan affected the top 1.2 percent of Americans and, I imagine, a somewhat similar proportion of Californians. The tax that did affect middle-income Americans—the gas tax—was tiny. I remember thinking at the time that a small energy tax could give us credibility in the markets, precisely because of the conventional wisdom that it was dangerous politically. But I hadn’t realized how that very small gas tax could be used—or, more accurately, misused—to portray our program as a middle-income tax increase. Most of my colleagues also missed it, although George Stephanopoulos and some of the other political advisers had been very concerned about precisely this point.
One political issue we faced was whether to use class-laden language to sell our program. My view was that such rhetoric was inadvisable for multiple reasons. A key episode in that debate occurred when I saw a draft of the President’s address for the joint session of Congress. I was disturbed by the tone of some of the rhetoric and went to Hillary, my office neighbor on the second floor of the West Wing, to make my point. Hillary not only agreed, she marched me down to the Roosevelt Room, where Paul Begala was working on the speech. She stood over Paul’s shoulder as he rephrased the problematic passages.
Even talking about “the rich,” it seemed to me, had an unnecessary normative connotation, suggesting that there was something wrong with having been successful financially. This objection was not an expression of class solidarity on my part; I thought that discussing tax issues in terms of who should pay was entirely appropriate and a necessary part of any serious tax debate. My only issue was the choice of language; polarizing rhetoric could undermine business confidence in President Clinton and his policies. That confidence was crucial to achieving strong economic performance. And while no political expert, I felt that the politics wouldn’t work either, because middle-income people didn’t respond well to disparagement of economic success, and such language risked alienating the economically most successful as well.
My alternative way of presenting our tax increase was to argue that the affluent had done very well in the 1980s, while middle-income people had actually lost ground. The best-off should therefore bear a substantial part of the burden of reducing the biggest negative economic legacy of that decade, namely the deficit. And in fact, the upper-income individuals whose taxes were increased seemed for the most part to take it in stride. I remember telling the President that I knew many people with large incomes, and when I went back to New York, I didn’t hear much objection. Nobody likes to have his taxes go up, but I was surprised at how little complaint there was.
In contrast to wealthy individuals, the business community did object vigorously to a 2 percent increase in corporate rates included in the original proposal. I remember in particular one visit I paid that spring to the Business Roundtable in Washington, D.C. I told these corporate leaders, quite a few of whom I knew personally from my days on Wall Street, that we were doing exactly what the group’s members had long advocated—reducing the deficit. But most of these business people believed that deficit reduction should come largely or exclusively from spending cuts, with very little, if any, increase in taxes. I argued that we had to operate within a political system in which existing programs had powerful constituencies and often served important purposes, even if most business people didn’t rate those purposes highly. As a result, there were limits on how much spending could, or should, be cut. Without help from the revenue side, powerful deficit reduction simply wouldn’t happen. We expected further spending reductions through greater efficiency, but that was a longer-term process being pursued through the Vice President’s Reinventing Government initiative and, we hoped, through reforming government health care programs.
This reaction was, in a way, typical. Business people often have unrealistic expectations of how much the outcome of a political process can—or should—resemble their ideal solution. If you offer business people 75 percent of what they want—on trade, workplace safety regulations, taxes, or whatever else—they’ll tend to focus on the 25 percent they can’t have. They may be willing to strike a bargain in the end, but they often don’t tend to recognize either the validity of objectives different from their own or the realistic political limits. And the same is generally true for interest groups of all kinds.
More surprising to me than the Business Roundtable’s response was the reaction of some in Congress who did understand the political process and who had always been strong advocates of fiscal discipline. Instead of crediting our attack on the deficit, they tended to dwell solely on the tax increases they didn’t like. In fact, the deficit reduction in our plan came half from spending cuts (including interest saved by reducing the level of national debt) and half from tax increases. In our Roosevelt Room meetings, we had struggled to maintain this principle of balance. But to many of the longtime deficit hawks in Congress, the tax increase was all that mattered. The gas tax was a particular point of contention. I remember one Democratic senator telling me that a gas tax any higher than 4.2 cents per gallon would lose his vote for the plan. Practically, that didn’t make any sense—why support a four-cent increase but not a five-cent one? The price of gas could fluctuate more than a nickel in a week of free-market movement. But politically, people were scared to death of the issue.
The first sign of serious trouble was Congress’s defeat of the President’s stimulus package in April. The stimulus package played a useful role in a deficit reduction program, because the deficit reduction measures in the budget could take quite some time to develop credibility and have an impact on the economy. Compared to the deficit reduction, the stimulus package was tiny—$16.3 billion versus $496 billion—but the stimulus provided a near-term insurance policy if the program wasn’t succeeding quickly enough, in which case Congress might lose patience with deficit reduction and reverse course. I argued that the more you cared about long-term deficit reduction, the more you should be in fav
or of the short-term stimulus package. As it turned out, we didn’t need the insurance. Economically, the defeat was relatively insignificant, but politically it was perceived as a major setback for Clinton. The President had asked for something, and Congress, controlled by his own party, had refused his request.
The defeat of the stimulus package cast some doubt on the prospects of our larger economic plan. The story of that legislative battle, culminating in a two-vote victory in the House and a fifty-fifty tie broken by the Vice President in the Senate, has been well told elsewhere. As those votes were being taken, a group of us including the President, Bentsen, McLarty, and Panetta crowded around the TV in the President’s private study off the Oval Office, unsure of how the House would vote. The next day in the Senate, the fiftieth yea was that of Bob Kerrey of Nebraska. The last holdout in such a situation has considerable power: typically someone in that position will ask for some tangible benefit for his constituents. But Kerrey wasn’t looking for anything like that. His demand was for a presidential commission to study the future of entitlement spending. We agreed and breathed an enormous sigh of relief. Had the President lost on his initial budget, not only might economic recovery have been stymied, but, as Mack McLarty said, the whole Clinton presidency might have been imperiled.
CHAPTER FIVE
White House Life
WORKING IN THE WHITE HOUSE sometimes felt surreal. With the exception of the Oval Office and a few other key spaces, such as the Vice President’s office and the Cabinet Room, much of the West Wing was cramped and shabby. Our NEC offices on the second floor were nondescript, lit with fluorescent lights and filled with ragtag office furniture that looked secondhand. But the people who met in the West Wing were the key officials of the U.S. government. I’d be having a normal discussion with some people around a conference table and it would strike me that this nice man, Warren Christopher, bore the title Secretary of State; that fellow whom I’d known for years, Lloyd Bentsen, was Secretary of the Treasury; and that bright, argumentative fellow over there was the Vice President. And what we were discussing didn’t affect just my company, but the fate of the country and the world. Every so often I’d stop and think to myself, My God, I’m sitting in the Oval Office having an argument with this guy I know, Bill Clinton, who is President of the United States.