Showdown at Gucci Gulch

by Alan Murray

  James Addison Baker III had come to politics late in life. A smooth and affable man, he was a direct descendant of one of the founding fathers of Houston and was reared in the comfortable surroundings that his family’s widespread legal, banking, and corporate enterprises provided. He was sent off to prep school at the Hill School in Pennsylvania, then attended Princeton University. After Princeton, he returned home to study law at the University of Texas and to become—like his father, grandfather, and great-grandfather before him—a Texas lawyer.

  Barred by an antinepotism rule from joining the family firm—Baker & Botts—the young Baker became a partner in a closely related law firm—Andrews, Kurth, Campbell & Jones. He spent nearly two decades there, working as a well-regarded corporate lawyer, enjoying his position in the top strata of Houston society, hunting turkey and geese, and not thinking a whit about politics. He was nominally a Democrat, but until the age of forty, he stayed true to the dictum his grandfather had once given to a newspaperman who had asked the secret to a lawyer’s success: “Study hard. Work hard. And stay out of politics.”

  In 1970, George Bush, a Republican congressman from Texas and a friend of Baker’s, convinced him to become a county manager for Bush’s Senate campaign. Bush lost with a disappointing 46 percent of the vote statewide, but in Houston, where Baker was in charge, he garnered a hefty 61 percent of the vote. The experience convinced Baker that he should become the first in his family to switch to the Republican party. It also showed him that his grandfather had been wrong; he was cut out for politics.

  In 1971 and 1972, Baker served as the finance chairman for Texas Republican candidates, and during the 1972 presidential campaign he directed the effort to reelect President Nixon in fourteen Texas counties along the Gulf Coast. In the Ford administration, Baker served nine months as undersecretary of Commerce and then joined the Ford reelection campaign as a delegate hunter. Baker’s success in working for Ford helped stem the rising tide of Ronald Reagan supporters at the 1976 GOP convention and convinced Ford to make Baker his national campaign manager for the rest of the campaign. Although Ford lost the election to Jimmy Carter, Baker’s political reputation was boosted.

  In 1978, Baker made his one and only try for elective office. He ran for Texas attorney general against Democrat Mark White, who later went on to become governor. Despite the star-studded cast that came to Texas to campaign for him—including Bush, Ford, Jack Kemp, John Connally, and Ronald Reagan—Baker lost with 46 percent of the vote. Texas was still, by and large, a Democratic state.

  A year later, Baker agreed to manage Bush’s campaign for president. Baker fought hard for Bush, but he also kept in the back of his mind the possibility that his candidate might end up in the number-two spot. With characteristic caution, he avoided needlessly antagonizing front-runner Reagan. After Bush was soundly beaten and accepted the vice-presidential slot, Baker took a position in the Reagan-Bush campaign and helped Reagan prepare for his televised debates with President Carter. Two days after the election, Reagan called Baker to ask him to serve as White House chief of staff. It was a surprise to the Texas lawyer, who was not part of the “California Mafia,” those close advisers who had been with Reagan since his days in the Sacramento governor’s mansion. But the Texan’s skills had impressed the new president, and Baker gladly accepted.

  Baker’s enemies on the political right never forgot that he was George Bush’s man before he was Ronald Reagan’s, and that Bush had run in 1981 as a moderate Republican. Conservatives sniped at Baker during his four years in the White House, accusing him of being a “pragmatist,” of not being a true believer in Reagan’s cause. But Baker served the president well, winning battles that others in the White House could not.

  By the end of 1984, Baker’s authority was unchallenged. The two men who were closest to the passionate ideology of the right—Ed Meese and William Clark—had both left the White House, Clark to be secretary of the Interior, Meese to be attorney general. Baker was in command and had the complete confidence of the president. He was at the height of his power.

  But he was tired, and he was not at all optimistic about the prospects for his own success in the second term. He had engineered many tough compromises in the first term, and in the process had made many enemies. In addition, he knew that Reagan’s election vow not to raise taxes would make it impossible for him to deal with what he considered the nation’s most pressing domestic problem—the budget deficit. Better to get off the White House hot seat for a couple of years, he thought, and let somebody else take the heat. As he told a reporter for The Washington Post, “The higher the monkey climbs, the more you can see of his behind.” The time had come to let someone else go up the tree.

  In moving to the Treasury, Baker brought with him a handful of his closest aides. Margaret Tutwiler, his trusted executive assistant, became Treasury assistant secretary for public affairs and public liaison. John Rogers, White House director of administration, became assistant secretary for management. Most important, Baker brought along Richard Darman.

  In a city full of clever people with large egos, Darman was an extreme. His titles were not awe-inspiring—assistant to the president, deputy Treasury secretary—but he turned each position into an office of power and notoriety. “Brilliant” and “brash” were the words most frequently used to describe him; he was one of the most fascinating figures in the Reagan administration. A consummate Washington insider, he reveled in the twists and turns of government policy-making. Those who worked with him called him an “outstanding intellect,” a “bully,” a “first-rate strategic thinker,” and a “royal pain in the ass.” His clever ploys became so well known that Senate Majority Leader Howard Baker created a new word—Darmanesque—to describe any maneuver that is too clever by half.

  Darman became such a celebrity in the nation’s capital that his last-minute failure to attend a dinner party prompted a major diplomatic row. The party was hosted by Sondra Gotlieb, the wife of the Canadian ambassador. When the hostess learned that Darman was not going to attend, she slapped her social secretary in the face—a slap that was written about for days in both the U.S. and the Canadian press.

  Darman was born into a family of quiet, prosperous Yankee textile manufacturers who had amassed a comfortable estate and plenty of New England rectitude over three generations in the business. “We were big fish in small ponds,” Darman said. At Rivers Country Day School, he was captain of the varsity football, lacrosse, and wrestling teams. He excelled in his classes; he can still remember the names of the few teachers who gave him grades lower than an A. He was admitted to Harvard after making near-perfect scores on his Scholastic Aptitude Tests; he still frets about scoring 793 on his high school math SAT exam after having made a perfect 800 the year before.

  At Harvard, Darman again stood out. There, he met his wife, Kathleen Emmet, a Radcliffe beauty who graced the cover of Life magazine in a 1963 feature called “New Women and Radcliffe.” And there, he first saw the glory of government service when alumnus and President-elect John F. Kennedy visited the campus and his image was seared in the mind of young Darman as the model of success.

  After Harvard College came Harvard Business School and then the start of his own government career. Darman joined the Department of Health, Education, and Welfare, where he became a protégé of then-Secretary Elliot Richardson. He followed Richardson to the Defense Department and then to the Justice Department. While at Justice, Darman demonstrated his problem-solving skills by helping to negotiate the agreement that resulted in the resignation of Vice President Spiro T. Agnew in 1973. It was a tense time for the nation. The Watergate scandal was dogging President Nixon, and the investigation of Agnew for multiple charges of conspiracy, extortion, and bribery threatened to cause a constitutional crisis. The Justice Department worked out a careful compromise under which Agnew agreed to resign and avoided imprisonment by pleading no contest to a single charge of income tax evasion. It was the sort of complex maneuvering at which D
arman excelled. When Richardson resigned in protest, after refusing to fire Watergate prosecutor Archibald Cox, in the infamous “Saturday night massacre,” Darman resigned with him.

  Darman met Baker during the Ford administration, when they both did short stints at the Commerce Department. Although he played virtually no role in the election of Ronald Reagan, Darman, who was then teaching at the John F. Kennedy School of Government at Harvard, contacted Baker immediately after the election and offered his help in organizing the Reagan White House. Well aware of Darman’s talents, Baker accepted the offer. Darman carved a place for himself in the White House as the man in charge of documents, the “paper czar;” he knew that controlling the flow of paper was critical in managing the government bureaucracy. He decided which pieces of paper reached the president’s Oval Office, and he reviewed and edited the pieces that left. He made himself indispensable to the White House operation, and his stature in the administration grew accordingly.

  His reputation for prickliness also grew. Darman was full of scorn for lesser intellects and full of concern that his own intellect should be adequately recognized and appreciated. At age forty-two, he still had a bit of the overanxious schoolboy in him. As political scientist Richard Neustadt, his former colleague at the Kennedy School, put it, “Dick is about as sharp a strategic thinker as I’ve seen, but he can’t resist the temptation to say, ‘Look Ma, no hands.’ ”

  That quality grated on some of his colleagues and acquaintances, making him an inviting target for criticism. He became a whipping boy both within the administration and on Capitol Hill. While many in Washington were reluctant to criticize Baker, because of his position of power and his gentlemanly demeanor, they would freely lash out at Darman.

  One senior Republican aide in the House of Representatives described Darman this way:

  Every sort of conniving thing that came out of [the Treasury] they assumed Darman was part of, whether it was true or not. I mean, Darmanesque is a term that goes beyond whatever he does; it describes anything that is sneaky and conniving and not terribly good tax policy, and, I’m sure he got both credit and blame for things he had nothing to do with.

  While Baker was clearly his mentor in the Reagan administration, Darman bristled at being referred to as Baker’s “staff.” His sensitivity to being dubbed an aide to Baker was so well known that Deaver and another White House colleague tweaked him by having license plates put on his car that read BAKER AIDE. After Darman took his job at Treasury, Republican Representative John Duncan questioned Darman’s presence at a meeting that included no staff. Darman angrily retorted: “I am not staff. I don’t think I should have had to go through the confirmation hearings and other things in order to have people come along and suggest that the deputy secretary of the Treasury is staff.”

  Nevertheless, Baker and Darman complemented each other so neatly that it was difficult to think of one without the other. Baker was the politician and the diplomat; he was a master at dealing with people and at orchestrating compromises. But he had little time for, or interest in, complex issues of government policy. Darman, on the other hand, liked to toy with policy ideas and was the perfect back-room strategist. Like Baker, he was a savvy political operator, but he also had an extraordinary grasp of the substance of issues—a rare and valuable combination of skills. He could quickly analyze complicated topics, and he knew how to turn and twist them to gain tactical political advantages. His problems came, however, in dealing with people. Baker cared a great deal about being liked; Darman was fully accustomed to being disliked. The two men fit together so well that their names were frequently linked as if hyphenated; in Washington it was the “Baker-Darman Treasury,” an honor granted to no previous deputy secretary.

  The task of shepherding a radical tax-overhaul bill through Congress would require considerable political and intellectual acumen. Most people in Washington still doubted it could be done. If anyone could succeed at the task, if anyone could strike the compromises needed to disarm some of reform’s most powerful opponents, it was probably these two men. If tax reform was at the top of their agenda, its chances of success would be markedly improved.

  In January of 1985, however, there was still no clear sign that tax reform was at the top of anyone’s agenda. As well-known White House “pragmatists,” Baker and Darman specialized in solving problems. But tax reform did not appear to address any of the pressing economic problems that faced the administration: It did nothing to reduce the soaring budget deficit that promised to be Reagan’s most startling legacy; and it did nothing to alleviate the nation’s trade problems that threatened to undermine the Republican party in future elections.

  Furthermore, Baker and Darman both reacted with scorn when Secretary Regan brought his “ideal” tax plan to the White House in November of 1984. They thought it was a political minefield, and the events of the following weeks confirmed that judgment. The White House was flooded with complaints from constituents of various stripes, who were pleading to retain their favored tax breaks. Businessmen were outraged by the $150 billion increase in corporate taxes. Oil and gas drillers, heavy contributors to the Reagan campaign, angrily sent back the “Eagle pins” they had earned for annual contributions of $10,000 to the GOP. The Knights of Columbus launched a telephone blitz to protest the taxation of their insurance plans. Veterans paraded in protest of the taxation of their disability benefits. There seemed no end to the outcry. Treasury official McLure, who had to field many of the complaints, recalls: “I went from being a nobody to being the most disliked nobody in the country.”

  All of this noise badly battered Baker’s sensitive political antennae. Pearlman recalls going to brief the Treasury secretary-designate before his Senate confirmation: “He was very negative about the proposal, that was apparent. Much of that negativism seemed to be because he too had been deluged by these outside complainers.” The public reaction had confirmed Baker’s initial political judgment: Those who are hurt by tax reform will always scream louder than those who are helped.

  That impression deepened when Baker went to Capitol Hill for his confirmation hearing. Seated at a table, with the members of the Finance Committee spread out before him at the semicircular podium, Baker listened politely as one senator after another listed his reservations about the Treasury plan. Senator Steve Symms, Republican of Idaho, fretted about the effects on the life insurance industry; Senator David Boren, Democrat of Oklahoma, voiced concern about its effect on oil and gas exploration; Senator John Danforth, Republican of Missouri, raised questions about charitable contributions; Senator Daniel Patrick Moynihan, Democrat of New York, urged retention of the state and local deduction; and committee Chairman Bob Packwood voiced opposition to the proposed taxation of employee fringe benefits.

  The strongly pro-tax-break sentiment of the committee was summed up in a long and bizarre discourse by Democratic Senator Spark Matsunaga of Hawaii about the importance of tax preferences in promoting his state’s macadamia nut industry. An amiable Japanese-American known mostly for promoting his state’s parochial interests, Matsunaga repeated a story about his days as majority leader of the Hawaii House of Representatives:

  I was approached by a group of businessmen who wanted a special tax moratorium of eight years, in order to enable them to start a new industry—the macadamia nut industry. There was no macadamia nut industry at the time, so we went along with the businessmen and gave them a tax moratorium for eight years. That is the period required for the trees to bear fruit. Today the industry is up to $55 million and is projected to reach $240 million by 1990…. That is only at the small state level—the small state of Hawaii. Just imagine what could happen nationwide!

  It was clear that members of the Finance Committee saw the tax code as their tool for molding the economy and the society to their liking. Their philosophy of government had no room in it for a radical tax reform that would wipe away all the loopholes and incentives they had struggled to put in place. The complaints hit home with
Baker and did little to bolster his desire to press for reform.

  Baker, of course, would fight for tax overhaul if the president wanted him to, but at the beginning of 1985, it was not even clear that President Reagan was anxious for reform.

  The president gave reform a boost in his 1985 State of the Union address, making it a pillar of his plan for a “second American revolution.” “The Treasury Department has produced an excellent reform plan whose principles will guide the final proposal that we will ask you to enact,” he told the lawmakers gathered in the House chamber. “Tonight I am instructing Treasury Secretary James Baker … to begin working with congressional authors and committees for bipartisan legislation conforming to these principles.”

  But the next day, the president’s astonishing comments in an interview with The Wall Street Journal blew a huge hole in the previous night’s optimistic assessment. Asked about the 36-percent increase in corporate taxes in what had become known as the “Treasury I” proposal, the president professed shock and surprise. He first denied that the plan included such a boost in corporate taxes, then said that if it did, he doubted he could support such a move. “I would have to be convinced of the need” to increase corporate taxes, he said, suggesting that taxes on corporations are merely passed on to individuals anyway. “Someday, I would hope that we could arrive at a tax structure that would recognize that you can’t tax things, you only tax people.” The president seemed to misunderstand the very heart of the “excellent reform plan” he had praised the night before.