In an Uncertain World

by Robert Rubin

  I learned a lesson from what Clinton said about balancing the budget at that meeting. Working in the White House, I had already come to understand that if you want people to listen to you, you have to express yourself in a way that connects with them. But sometimes even that isn’t enough. On some subjects, people simply won’t listen to you unless you say or do something that opens the door first—which was Clinton’s point about the balanced-budget proposal. Conversely, on some subjects, certain comments close the door, and people won’t listen to the rest of what you have to say. Thinking back to my days in New York, I was reminded of a dinner I’d been at years before with Bill Lynch, an African-American politician who had been a deputy mayor under David Dinkins. Bill had become a friend of ours when Judy had served under Mayor Dinkins—with whom she’d become friendly before he was mayor—as commissioner for protocol. Gathered around the table at the Regency Hotel were a lot of senior Wall Street figures, many of them Jewish. At that time, there was considerable controversy over whether Jesse Jackson had said something anti-Semitic. My own view was that the issue was greatly overblown and that the relationship between the Black and Jewish communities, which should have been very strong, had deteriorated around misunderstandings and unfortunate comments by some people in both communities. Lynch was terrific, smart, and interesting on a whole range of issues. Then at one point during the dinner, he cited Jesse Jackson for some proposition. He immediately recognized that with that comment the dynamic changed. He said to me afterward, “Once I said that, they stopped listening to me.” I’ve observed the same phenomenon many times in the corporate world. Often a company will deal with a public relations problem by aggressively defending its actions. But even if its actions are defensible, no one really listens if the CEO starts with the defense. People listen only if he begins by apologizing or acknowledging mistakes. That can be hard to do when he believes that he didn’t really make a mistake or that his mistake wasn’t as it was portrayed, but it may be the only way to be heard.

  Agreeing that we should have a balanced budget didn’t mean agreeing with the Republicans on their specific proposals. Throughout the year there was a series of highly publicized negotiations, though most of the early White House–congressional meetings couldn’t really be called negotiations. Pete Domenici, the chairman of the Senate Budget Committee, and John Kasich, his counterpart in the House, led the GOP forces into battle. Leon Panetta carried the banner for our side. The process started with disagreements over how many people could attend from either side, who they should be, and so on. Most of the substantive discussions, when finally addressed, were handled like a diplomatic summit meeting, at which the two sides essentially exchange talking points. The Republicans would express outrage that we weren’t tough enough in our program cutting. We would respond by expressing outrage about their deep reductions in Medicare and other social spending to fund tax cuts for the affluent. Both sides were pretty shrill. These discussions were conducted in secret, but the same people were saying the same things in public. Neither side was trying to persuade the other side of anything or to reach an accommodation.

  Even after Clinton offered some significant concessions, the two sides couldn’t reach agreement. The Republicans could have declared victory at several points—particularly after Clinton proposed a ten-year balanced budget, or after he later proposed a seven-year goal in exchange for the Republicans’ relinquishing big cuts in social spending. For some reason, they never did. The President’s demeanor in the negotiations may have contributed to his opponents’ disinclination to strike a deal. Based on the many hours I had spent watching Clinton interact with others, I could see that the Republicans were misreading him. They had the sense that he was sympathetic to their views, when I could see that he wasn’t—he was just listening intently. Clinton may also have been telegraphing his own feelings, which were that he badly wanted a deal.

  What he wasn’t making clear was his commitment to his basic principles and his willingness to veto the budget if it didn’t move a good deal closer to his position. I was afraid that once again Clinton’s body language could be misinterpreted. When we went back to the Oval Office after one of these sessions, Clinton asked me how I thought he had done. “Mr. President, I used to sit in on a lot of negotiations at Goldman Sachs,” I said. “And if you were my client and we came out of this meeting, I would say, based on the way you sounded to those people, they’re going to think they can roll over you.” Harold Ickes, who was then serving as deputy chief of staff, later told me that Clinton had repeated what I had told him. My impression was that before that the President hadn’t realized the effect he had had in those meetings.

  Gingrich and the others did misread Clinton in this way, taking his listening and his desire for a compromise as signs that he would give in on matters on which he never wavered. But in retrospect, the Republicans’ misreading of Clinton’s negotiating stance turned out to be helpful to us politically. After two government shutdowns, a threat of default on the federal government’s debt, and endless meetings with congressional leaders, Clinton found himself in a greatly improved position. He ended up getting most of what he wanted, such as protecting Medicare and Medicaid, and preventing most of what he didn’t want, such as large tax cuts favoring the best off. He did all this without ever making a deal. It’s a useful lesson in negotiation. Sometimes you’re better off not getting to yes.

  THE LARGER ISSUES and principles at stake in the Clinton-Gingrich conflict were brought dramatically to the fore in the debt limit crisis that exploded in the autumn of 1995 and got woven into the budget battle and the two government shutdowns that took place over the winter. On the surface, this conflict involved a barely comprehensible dispute about technicalities of federal debt management. But the real stakes in this fight, as intense as any I had to face in Washington, were two fundamental principles. One was the obligation to pay debt. The other permeated the larger budget battle that enveloped the debt limit crisis: What are the responsibilities and role of the federal government? As this drama unfolded in late 1995 and early 1996, I experienced what it meant not just to be criticized harshly on the basis of policy but, even more than during the Mexican crisis, what it was like to be personally vilified.

  Increasing the debt limit is a technical issue. I’ll explain the background in brief. Throughout nearly all of American history, the federal government has carried a national debt, financed by issuing Treasury bonds. This debt has risen over time. Until the First World War, Congress directly approved each new issuance of debt. But that became impractical as a way to finance the war, giving rise in 1917 to the practice of authorizing an overall “debt ceiling.” The advent of annual budgeting made the debt limit anachronistic, because now Congress would control federal spending directly through the budget process. However, the practice was never eliminated.

  Over the many decades since, congressional approval of increased ceilings—which is necessary to finance the operations of the federal government—had sometimes involved fairly contentious disputes over budgetary issues, but never to the degree of the 1995 conflict or with an expressed willingness to default. But in the spring of 1995, while we at Treasury were busy dealing with the Mexican crisis, conservatives were looking for a way to force Bill Clinton to sign their budget, with deep cuts in programs he cared about and large tax reductions favoring the most affluent. The debt limit became a lever. By attaching an increase in the debt ceiling to their bills for the 1996 budget—and refusing to authorize an increase in the debt ceiling otherwise—the President’s antagonists in Congress thought that Clinton could be forced to accept the minimalist view of government built into their proposed budget.

  The Speaker of the House, Newt Gingrich, began publicly to bring up the possibility of refusing to raise the debt limit in April 1995. He went on the ABC program This Week with David Brinkley and suggested that he and his allies might use the debt limit as a way of getting the President to sign a Republican budget bill. If the
President refused and Gingrich held firm, this course of action would prevent the Treasury Department from borrowing and thus could lead to the government’s failure to meet its obligations for the first time in the country’s history. Gingrich was suggesting a deliberate financial default by the government of the United States, which could mean the cessation not only of payment on debt instruments but also of some operations of government—from sending out Social Security checks to paying doctors at veterans’ hospitals. Clinton, Gingrich said, would then have to “decide how big a crisis he wants.”

  At the time, I didn’t think that this threat was serious. Coming from Wall Street, I thought the notion that the government of the United States would choose, as a political act, not to meet its financial obligations was outside the realm of possibility. Publicly, I said that such a default was “unthinkable.” The obligation to pay debt underlies our entire financial system and had to be maintained as a practical and moral imperative.

  For the United States to choose not to pay obligations for political reasons would undermine that imperative. Such a message was especially troubling in the context of developing countries that were making enormous sacrifices to pay their debts in order to avoid the damage to living standards that could flow from default. During the not-yet-resolved peso crisis, we were essentially saying to Mexico what we would subsequently say to a number of other countries: debt default risks creating chaotic financial conditions and loss of access to capital markets for a long time. Instead, you need to implement reforms in conjunction with IMF assistance. How could we square that message with defaulting on our own debt for political reasons?

  Moreover, a default would likely have harmed the perception of our country’s reliability as a debtor, raising the interest rates the United States would have to pay on its debt, even if only slightly—not only in the short term, but for years to come. And this damage to our credit standing could be extremely damaging when we needed it most: if we ever faced real financial duress. Moreover, diminished confidence in our society’s commitment to the moral imperative to repay debt might also raise borrowing costs for the private sector. I thought that defaulting on United States government debt, even for a brief time, would be a monumentally unwise and consequential act—so I didn’t believe Gingrich could be serious.

  My view was substantively right but seemed to be politically wrong. Gingrich and some members of his party claimed to be quite ready to court the unthinkable—default—to get Clinton to accept what he viewed as the unacceptable: their budget proposals. I underestimated the resolve of the President’s antagonists, who, over the next several months, certainly seemed to be entirely willing to use this weapon. I was even more surprised when they found a few well-known figures from Wall Street who would support the idea. One was Stanley Druckenmiller, a hedge fund manager, who took the position that the markets would ignore a default if it helped to produce a balanced budget. In September, Gingrich gave a speech to a trade group called the Public Securities Association, in which he said that his side would not back down. “I don’t care what the price is,” Gingrich said. “I don’t care if we have no executive offices and no bonds for sixty days.”

  Without an increase, the federal government would hit the debt ceiling before the end of 1995, possibly as early as October. Default and the President being forced to sign an unacceptable budget were both untenable. We needed to find a way out, rather than simply waiting and hoping that at the last minute the opposition would blink and increase the debt limit. We also faced a conundrum similar to one we had just experienced with Mexico. We had to avoid causing alarm in financial markets; but without raising an alarm, creating pressure on the President’s opponents in Congress to abandon these tactics would be difficult.

  But if default was unthinkable—something akin to nuclear war—and the Republican budget was merely horrible, shouldn’t we accept the horrible to avoid the unthinkable? I never found an entirely persuasive answer to that question. When the issue would arise in media interviews, I would deflect it by saying that this wasn’t how the legislative process was supposed to work. Something as important as the debt limit shouldn’t be held hostage to another piece of legislation or be used to coerce a President into signing something else—especially not a major policy measure such as the budget. Hostage taking is frequently practiced in legislation, but my point was that it should not extend to such fundamental matters as default. Fortunately for me, no one in the media ever persisted beyond this discussion of legislative principles to force me to explain why I would risk the unthinkable just to avoid the horrible.

  But the showdown did not unfold as our opponents expected. At first this was due to a simple misunderstanding. Republicans originally thought I had said that the debt ceiling would be reached in mid-November. In mid-October, we sent a letter to the Hill saying that the debt ceiling would be hit on October 31. The Republicans felt that I had intentionally misled them earlier. In fact, they had simply misunderstood a technical distinction about the dates that I had testified about several times. Although the debt ceiling would be hit on October 31, there was enough cash on hand for us to keep meeting obligations through mid-November.

  This misunderstanding about the timing was the first of several events that fall that undermined their legislative strategy. As a result, attacks on me that fall and winter were angry and vicious—much more than during the Mexico crisis. I had never experienced anything like this before. This began when Newt Gingrich said on TV that I was playing games and was untrustworthy. “We have no belief that the Treasury has accurate figures,” he said. “We have no belief that Rubin’s advice is anything other than politics.” Senate Majority Leader Bob Dole told reporters on Capitol Hill, “He doesn’t have a lot of credibility up here.”

  Meanwhile, we still faced the prospect of running out of cash in mid-November. It was Ed Knight, our savvy chief Treasury counsel, who suggested borrowing from federal trust funds on an unprecedented scale to postpone default. Accounting for certain government obligations—such as pension benefits for government employees, highway construction, and Social Security—is separate from the rest of the federal budget. Ed argued that we had the legal authority to borrow from these funds in order to meet other pending obligations. By doing so, we could hold off default for a few months without a debt limit increase.

  On November 12, three days before what would have been the first default by the American government in its history, we decided to borrow from the trust funds. We drew from two funds, the Civil Service Retirement Fund and a federal savings plan. We did not borrow from Social Security, in part for technical reasons and in part because it would be hard to persuade retirees that borrowing Social Security funds would not endanger their benefits. I think many on the other side were hoping that we would use Social Security funds, which would give them a chance to provoke outrage against us.

  I never viewed our actions as an attempt to protect the President, though they certainly had that effect. I was simply trying to fulfill my statutory responsibility to pay the government’s debts without causing some other unacceptable outcome. But Clinton’s opponents were infuriated, because what we did to forestall default freed the President from the vise they thought they had him in. Using the debt limit to coerce his capitulation was their strategy. Our finding a way to get cash even though we were at the debt limit pushed them into a new, more explicit strategy of closing down the government to force Clinton’s hand on the budget.

  That strategy was highly damaging to them. Antigovernment feeling was not as deeply imbedded as some conservatives thought. The American public, for the most part, did not think that shutting down the federal government, even temporarily, was a good idea. And for a variety of reasons, most people blamed Congress and not the White House for the shutdown, driving the Republican Congress’s popularity down and the President’s up.

  After we announced our decision to borrow from the trust funds, freeing the President from the threat of default as
pressure to reach an agreement, some of his opponents became even more upset. James Baker, one of my predecessors as Secretary of the Treasury, was cited in the press as saying that I could be held personally liable for the amounts borrowed from the trust funds. (I’d done well on Wall Street, but not well enough to keep the federal government running for more than a few seconds.) Bill Archer (R-TX), the chairman of the House Ways and Means Committee, said that I was provoking a “constitutional and legal crisis” and introduced a bill to stop me from using the trust funds. Congressman John Mica (R-FL) testified that our use of the trust funds’ cash made me a thief. Around that time, I remember Hillary telling me that she drew strength from seeing how I handled being vilified.

  One morning, I woke up to a Robert Novak column in The Washington Post saying that Gingrich no longer “trusted” me and would not take my phone calls. Another report quoted Gerry Solomon (R-NY), the chairman of the House Rules Committee, as saying he was interested in trying to impeach me if I borrowed any more money. In a meeting I had on Capitol Hill, a Republican congressman mentioned talk about impeachment to my face. I was concerned about the totally unjustified attacks on my integrity, but in conversations with colleagues and friends—or even in off-the-record interviews—I treated it lightly, saying that Judy wanted me back in New York and that when she heard the threat of impeachment, she called to ask me how she could testify for them.

  This harshness and personal vilification—which Washington too often resorts to when conflicts develop—can be hazardous to sensible choices. Decision makers can readily become excessively risk averse. In this environment, minor mistakes can have vast, distorting consequences. I was keenly aware that some insignificant, good-faith error that didn’t matter in any substantive way could derail our entire effort. The pursuit of fewer errors is sensible; the insistence on none at all, counterproductive. Unrelenting criticism of people in public service—and the same is true on Wall Street trading desks or in any business—may well reduce the frequency of mistakes. But it does so at a great cost—chilling the willingness of individuals to act and to take worthwhile risks.