Why Reagan Won and Stockman Lost
Liberals and conservatives alike spend a lot of time wishing the United States did not have its present Constitution. Out of power, each group finds plenty of occasions to applaud the system of checks and balances that impede political change. In power, it is another matter. What once seemed to be wise restraints on the machinations of political schemers now seem to be perverse restrictions on the forward march of good government.
But occasionally a window of opportunity opens wide enough to permit bold change. For liberals, it has opened twice in this century: the first was in 1935 when a massive economic dislocation, solid Democratic majorities in Congress, and the emergence of a new (albeit slim) majority on the Supreme Court made it possible to lay the foundations for the modern welfare state. The second was thirty years later when the assassination of a young President, the landslide electoral victory of his successor, and the arrival of a liberal majority in both houses of Congress set the stage for a vast enlargement of the welfare state.
David A. Stockman believed that the window had opened again in 1981, this time for conservative policies that would reverse rather than expand the welfare state. He was wrong. What is puzzling is that he should ever have supposed he was right.
The 1980 elections produced no special moment in American history. An incumbent President, beset with rampant inflation, high interest rates, and foreign-policy reversals, was defeated by a rival who had, in the voters’ minds, the chief advantage of not being the incumbent. The Republican party captured the Senate and made gains in the House, but unlike in 1965 and 1935 these shifts produced no clear ideological majority that could form the basis of a new governing coalition. Little could happen against the opposition of Republicans and conservative Democrats, but little could be achieved by them acting alone, if for no other reason than that, on many issues, it was a divided coalition. Most important, public opinion, which supported the thrust of policy in 1935 and 1965, was not disposed to reverse that thrust in 1981. People wanted changes—lessened inflation, a stronger defense—but there was little demand for cuts in major welfare or environmental programs.
The Federal Reserve Board was determined to effect one of those changes. It raised interest rates (specifically, the federal funds rate and the discount rate) and watched, with grim determination, as the prime rate climbed past 18 percent and headed toward 20. Bond prices collapsed and stock prices wallowed in a sea of uncertainty. The rate of increase in consumer prices began to slow but, as a consequence of the accompanying economic slowdown, unemployment worsened. Within months after his inauguration, President Reagan’s standing in the polls had dropped precipitously as people expressed their concern about the economic decline. The President and the chairman of the Federal Reserve Board were determined to stay the course, however, and in a couple of years the worst was over: interest rates and unemployment began dropping, the stock market revived, and inflation seemed under control.
It was during these months of difficult and painful economic readjustment that David Stockman and a handful of apparently like-minded ideologues decided to remake domestic public policy. To do this in a period of general prosperity, high presidential popularity, strong public support, and a united congressional majority would have been difficult enough (the Framers had seen to that); to do it in the teeth of a recession, declining presidential popularity, the absence of popular support, and a divided Congress was impossible.
David Stockman’s book1 is an account of how they tried. It has not been well received, partly, it seems, because of its scathing references to almost all of Stockman’s former associates. Though Stockman is critical of himself as well (“wrong from the very beginning,” afflicted with “ideological hubris,” somebody who “cooked the numbers,” the author of a plan that was “fatally flawed”), official Washington is not likely to excuse the savaging of former allies just because the savager has suffered some self-inflicted wounds.
I dislike the book for that reason and another: it is wrong, it is indecent for a man to take the king’s pence and enjoy the king’s confidence and then to practice indiscriminate regicide, and to do so for profit. This is the book of a smart-aleck, seemingly devoid of any sense of honor. But the book, however distasteful, is here; what are we to make of it?
Stockman’s book tells us in infinite, frenetic detail what happened, in one man’s opinion, during two years when cuts were made in taxes and were attempted in spending. It does not tell us why it happened.
This is really quite astonishing. Here is one of the few periods in our history when people tried to govern on the basis of certain explicit intellectual theories—libertarianism, supply-side economics, and whatever—and we are scarcely told what the theories mean, how they were justified, and how a President was persuaded to act as if the theories were his.
Perhaps it is because Stockman himself is ideologically so promiscuous that no single idea is ever important or lasting enough to warrant careful study. No, promiscuous is the wrong word; until near the end of his governmental career, he was not knowingly unfaithful to whatever ideology had at the moment captured him. Serial monogamy is a better metaphor: Stockman has been the Tommy Manville of political convictions, rushing from the hotbed of one ideological marriage to the inviting embrace of another. In little more than a decade, he went from being a biblical fundamentalist, to a leftist peacenik, a neo-Marxist radical, a free-market economist, a supply-side economist, a libertarian, and a Hooverite advocate of balanced budgets.
The chase ended when access to great political power embedded him in one view. Or rather three, all seemingly consistent but each in partial contradiction to the other two.
One was welfare economics: that is, the view that one can evaluate public policies on the basis of economic efficiency and social equity. This theory is taught in almost every economics course; setting aside the graphs and equations, it can be reduced to some simple, and generally compelling, propositions. All resources have opportunity costs—use $10 million, whether as subsidies or tax breaks, for one purpose and it will not be available for some other purpose. Scarce resources should be put to their highest and best use; anything less is wasteful. Those who benefit from a program should pay for it, unless the program is intended to correct an unfair distribution of wealth, in which case those who are better off should pay more than those who are worse off. It is not enough that a program have a noble purpose or a laudable motive; to warrant a claim on resources, it should actually produce the intended effect and do so at a reasonable cost. And so on.
In 1975, Stockman published an article in the Public Interest entitled “The Social Pork Barrel.” It was a brilliant, vivid account of the many ways in which government violated the rule of efficiency (get the most out of a given dollar) and equity (those who have or gain more should pay more of the cost than those who have or gain less). It seemed to many who read it, including me, to be a manifesto for how best to reconstruct the welfare state, provided, of course, one could think of a way to do it. It was not an argument for a small government or a weak government or a government indifferent to the poor; as I read it, it was an argument for a fair and competent government. As Stockman was later to write, these views were “intended to attack weak claims, not weak clients.”
The second theory was supply-side economics. This view held that wealth creation should take precedence over wealth distribution. Indeed, without continuous wealth creation there would be no opportunity for altering wealth distribution without a fratricidal class war. To encourage wealth creation, productive and innovative energies had to be unleashed by allowing people to earn profits for taking risks. Supply-side economics required low marginal tax rates and an end to burdensome regulations.
Among supply-siders, however, there were some key, but for a long time papered-over, differences. Some believed that the Federal Reserve Board would have to maintain a tight money policy so that inflation did not produce false economic growth and require sudden and harmful imposition of very high interest rates in order to cool off the inflation. Others believed that tight money was a mistake; if the government runs a deficit as a consequence of a big tax cut, enhanced economic growth will produce more tax revenues and automatically bring the budget back into balance; the Federal Reserve Board should keep interest rates down so as not to impede this growth. Still others worried that if a tax cut caused a big deficit, the economic growth that the tax cut was intended to stimulate would never occur as public borrowing crowded out private investment.
For better or worse, supply-side economics came to be known by its most hotly debated plan, the Kemp-Roth tax cut. In Stockman’s book there is a fleeting and hearsay account of how Ronald Reagan was converted by Jack Kemp in early 1980 into a supporter of sharply reducing the highest tax rates. No details are given, apart from a brief and tantalizing reference to a phone call from Kemp to Stockman saying that Reagan had been “converted” at a meeting in California. (Here and elsewhere, Stockman tells us nothing except what he, Stockman, was thinking and doing. Processing diaries and office notes into text is, of course, the easiest way to write a book in a hurry. It is also the easiest way to confuse or mislead a reader who has no other sources to which he can turn.) Kemp and his ally, the journalist Jude Wanniski, are portrayed by Stockman as persons who claimed to believe that the tax cut would pay for itself by generating more tax revenue from more economic activity. They referred to budget-cutters as Hooverite fogeys who practiced outmoded, “root-canal” politics. Stockman describes himself as a person who did not believe this, who believed instead that government expenditures would have to be cut in order to pay for the tax reduction.
The third view was libertarianism: the theory that human liberty is the highest good and that therefore the state, as an instrument of coercion, should play a minimum role and have minimum powers. Like welfare economics, libertarianism has a distinguished pedigree: Friedrich Hayek, Milton Friedman, Robert Nozick. Libertarians believe that a minimalist state will produce good economic consequences (the smaller and weaker the state, the more the economy will operate on the basis of voluntary market transactions), but to a pure libertarian, economic efficiency is a secondary consideration, for it is the moral value of liberty, not the practical value of wealth, that ultimately justifies the creed.
To move toward the libertarian ideal, most of the welfare state and the regulatory state would have to be dismantled. Certainly the state’s powers should not be enlarged to accommodate the agenda of the religious Right: banning abortions, allowing school prayer, or restricting the teaching of Darwinism. As Stockman writes: “My soft-core Marxism had annealed into libertarianism. I didn’t believe in economic regulation and I didn’t believe in moral regulation.” Even foreign policy would be affected. Though the state has a responsibility to defend its citizens, it is a responsibility that would have to be carefully discharged, Certainly there could be no draft; the army would have to hire its soldiers just as General Motors hired its auto workers. There is almost no discussion of foreign policy in Stockman’s book, except for an account of his unsuccessful struggle to get Caspar Weinberger to agree to a slower defense build-up.
These three strands of thought can be woven together, and apparently Stockman and others did just that—for a while. But in time the tensions among the strands became so great as to tear the ideological fabric. Welfare economists are quite comfortable with a large state; they only require that it be an efficient and fair one. Libertarians are uncomfortable with a large state, however efficient or fair. Supply-side economists should not in theory object to a growth in the government’s income, provided only that the increase does not result from high tax rates. Of course, to the extent that supply-side economists are also libertarians, they will be disturbed by growing tax revenues, for that necessarily implies a growing government.
Tax legislation is a key test of the compatibility of these views. A supply-sider who only wants more wealth production will take any kind of tax cut he can get. During 1980-81, he was offered several. Representative Barber Conable (R, N.Y.) proposed an easier depreciation schedule (the “10-5-3” plan). If business can write off its investments in plant and equipment more rapidly, then there will be more investment and thus more rapid economic growth. Stockman opposed that approach. Why? He does not make his reason clear, but the following speculation can be entertained. Easing depreciation rules is a special break for business, and thus violates the welfare-economics rule of fairness. And easing such rules leaves marginal tax rates high, and thus will make it harder to shrink the size of government as libertarians want. Widening a loophole in the tax code was decried by Stockman as “Washington politics”—it would keep the machinery of government intact, stimulate business and other lobbyists, and empower Congressmen who controlled the size and timing of the loophole. Stockman wanted Washington to have less power.
Another way of reducing taxes in the future was to index the tax brackets. This meant that people, especially those with modest incomes, would not be pushed into higher tax brackets by inflation. One would think that supply-siders would have been pleased with indexing because it meant that any tax cut, such as Kemp-Roth, would remain in effect permanently and not be eroded away by future inflation. Stockman must not have been a pure supply-sider, for he opposed indexing precisely because it would ensure that the result of Kemp-Roth “would be a deep and permanent cut in the revenue base.” Having opposed easier depreciation rules because they would leave Washington politicians with too much power, Stockman opposed bracket indexing because this would leave Washington politicians with too little money (and thus, presumably, with too little power).
Someone else came up with the idea of liberalized deductions for contributions to Individual Retirement Accounts (IRA’s) and Keogh plans. Stockman opposed this. One quite natural possibility is that, by now, Stockman was caught in a tightening noose. The Kemp-Roth plan would drastically reduce government revenues. Only in some supply-side fantasy would economic growth pay for these reductions. Further cuts—easier depreciation, indexing, liberalized rules for IRA’s—would only make matters worse. Stockman, locked into a power struggle and guided by an imperfectly understood ideology, was trying to be prudent by fending off tax-break ornaments that were now being hung onto the Kemp-Roth Christmas tree. But it was a marginal sort of prudence, akin to putting styptic on a shaving cut while hemorrhaging from the femoral artery.
This philosophical confusion suggests that by the time these issues came to the fore Stockman was not pursuing a revolution so much as he was playing a game. The object of the game was to win—in this case, to win both a spending cut and a tax cut. The spending cut was determined by political considerations ($35 billion, more or less, seemed possible), and so the tax cut would have to be determined by political considerations as well (cut taxes no more than what one can afford, given the initial spending cuts and the prospect—unrealistic, at it turned out—of some future cuts). Now, there is nothing wrong with letting politics determine goals subject to the need for a balanced budget. That is politics as usual. What is wrong is dressing all this up in the apocalyptic language of a “revolution” that was “betrayed” by self-serving politicians. Stockman was a politician (albeit not a very good one) posing as a serious thinker frustrated by democratic rule.
There was, to be sure, something behind the pose—a mélange of philosophical objections, described above, to the drift of public policy. A few observers have argued that it was not so much a mélange as a plot in which the welfare economics and supply-side economics played second fiddle to the libertarianism. In this view, first articulated in 1981 by Senator Daniel Patrick Moynihan, Stockman and others had deliberately pushed through the Kemp-Roth tax cut in order to create a giant deficit that would force the government to accept massive spending cuts. Stockman’s response is ambiguous: “In truth, not six of the six hundred players in the game of fiscal governance in the spring and summer of 1981 would have willed this outcome.” Six would have willed it? Was Stockman one of the six? He does not say. He may not have known then, or recall now, whether he was among the six or the 594. Moynihan was asking, in effect, “Do you just want economic growth? Or do you really want the libertarian dream of a minimal state?” Stockman cannot or will not answer, perhaps because he had not then and cannot now sort out the tangled threads of his passionate ideology.
Ideas matter in politics, even ideas as confused or contradictory as Stockman’s. Supply-side economics went from a cocktail napkin to a tax bill in a year or two. Regulation of airline prices and bank interest rates were ideas that have been replaced by the ideas of deregulation and market competition.
Can ideas be made to matter in ways that will overcome the government’s apparent tendency to spend beyond its means? Stockman thinks not. The appendix to his book offers a gloomy picture of a fiscal policy recklessly and (probably) permanently out of kilter. In an essay published in a recent volume,2 he faults the political system itself for the persistence of big deficits.
It is not hard to see why he is pessimistic. Public opinion strongly supports Medicare and Social Security. Though savings can be made in defense spending, President Reagan is right to say that big cuts in that spending are not only unwise in terms of preparedness, they would send the wrong signal at the wrong time. The people want no cuts in spending in many broad policy areas, including health, education, law enforcement, and environmental protection. However much citizens may agree that there is waste in government and that the government as a whole spends too much, it is hard to find any support for a broad movement toward a minimal state.
Moreover, the constitutional checks and balances that James Madison believed would make it difficult for the national government to grow now make it difficult to solve the problems of excessive government growth. In 1935 and 1965 the barriers to change were lowered; after the changes, the barriers rose again to their customary heights.
But if ideas have made a difference in the past, they can make a difference in the future. Libertarianism and the minimal state, however, are not viable ideas. A large, heterogeneous, democratic nation cannot be governed on the basis of a conception of the public good that requires, for its success, that the nation be small, homogeneous, and undemocratic. Telling people who want clean air, a safe environment, fewer drug dealers, a decent retirement, and protection against catastrophic medical bills that the government ought not to do these things is wishful or suicidal politics.
The libertarian tendency of Stockman’s thought also leaves little place for foreign affairs. It is inconceivable that a government weak at home can be strong abroad. It is not merely that a great world power must have a substantial military capability (much of it necessarily wasteful); such a power must also be in a position to reward friends with foreign aid (much of it wasteful) and punish enemies with trade sanctions (many of them costly).
Indeed, the very act of governing in a republic of separated powers requires either pork-barrel projects and legislative logrolling or ending the separation of powers—that is, fundamental constitutional reform. But if the lessons of European parliamentary regimes are any guide, an America ruled on the basis of centralized rather than separated powers would have had, by 1981, a far larger welfare state than the one that Stockman attempted to pare down.
The Gramm-Rudman-Hollings deficit-reduction law is not a viable idea, either. As a kind of short-term shock therapy, it may be necessary (as one Senator who voted for it said, “It is a bad idea whose time has come”). But reducing the budget by making deep, indiscriminate, across-the-board cuts in everything from the FBI and the Coast Guard to agricultural subsidies and military spending is madness, a fiscal guillotine that reflects no conception whatsoever of what is and what is not in the public interest.
The ideas that might provide the basis for a renewed effort to sort out national policy are ones with which Stockman once flirted: fairness and effectiveness. We want programs that serve national needs, that achieve their purposes, and that are paid for either by their beneficiaries or, if their beneficiaries are poor, by the nation as a whole.
The success so far of the tax-reform bill produced by the Senate Finance Committee shows that, under the right circumstances and with determined leadership, a policy based on the principle of fairness can win out over the demands of special-interest groups. Indeed, one of the lessons of the Stockman book is how often considerations of equity shape public policy, even in the midst of such feeding frenzies as the Kemp-Roth tax bill and the Reagan spending cuts. Repeatedly, members of Congress would offer a self-serving amendment only after somebody else offered one, stating that they would hold back if there was no bidding war but insisting that they had a right to jump in once the war began.
A concern for equity is one of the central and persistent features of human life—even among politicians. There are very few other ideas of equal power. In the bidding wars he witnessed, Stockman notes that such esoteric doctrines as supply-side economics were about as relevant as love at an orgy. If ideas are to govern, they must be ideas that are closely linked to core human values. This is what Madison meant when he wrote, in the Federalist, that in the United States, “a coalition of a majority of the whole society could seldom take place on any other principles than those of justice and the general good.” He was not so naive as to suppose that no logrolling would take place. What he recognized was that logrolling itself is based on a principle: that of reciprocity.
Suppose Stockman were to relive his days in the Office of Management and Budget. He was, after all, a skilled and knowledgeable technician. What would he do differently? He might have followed the advice of Representative Robert Michel: “I think we better decide five or ten things we have to have, and go along with the committees on the rest.”
There are five or ten government programs that deserve elimination, redirection, or reduced support. Stockman gave several examples in his 1975 Public Interest essay. Each violates the principle of equity or effectiveness or both. Some claim to be for the benefit of business, some claim to be for the benefit of the poor. It is a familiar list: agricultural subsidies that produce unused food, overcapitalized farms, high prices, and soaring costs, while leaving many farmers in bankruptcy; Social-Security and Medicare benefits that go to the rich as well as the poor; equal veterans’ benefits for those who hardly served and had no injuries and for those who served heroically and suffered greatly.
Changing any is difficult; changing all is daunting. But if it was possible to cut certain tax rates, enact a (partly mythical) set of spending reductions, and increase military spending, other, more focused and defensible changes might have been equally possible.
Consider how much has already changed. In 1975, Stockman said that tax reform was virtually impossible because it would be “suicidal” to tax Social-Security benefits, eliminate the deduction for interest on consumer loans, or combine a repeal of the capital-gains exclusion with a reduction in marginal tax rates. Yet all of these things have either happened or have a high probability of happening, and the reason has been that at moments of fiscal crisis or political stalemate, politicians have found it possible, perhaps even necessary, to rally around elemental notions of fairness.
At a minimum, attacking a short hit-list of mistaken programs would have provided the opportunity for better staff work than the unbelievably sloppy or nonexistent staff work that often occurred during 1981 and 1982. Example: in a half-hour meeting, Stockman and Caspar Weinberger agreed to the rate at which the defense budget should increase, an agreement based on Stockman’s back-of-the envelope calculations that, owing to an error in picking the base year, led to a 10-percent increase rather than the 7-percent increase Stockman had intended and the President had promised. Example: the decision to reduce the incentive for Social-Security recipients to take early retirement was made in so chaotic a manner that the wrong starting date for the new program was announced, provoking understandable howls of protest from current beneficiaries. Stockman, given his agenda for doing everything at once, would have been right at home in Jimmy Carter’s White House.
Governing is not impossible, despair is premature. The economic chaos predicted by Stockman has yet to occur. The successes we have had in reducing inflation, interest rates, and unemployment are not trivial achievements. (Recall that scarcely any expert predicted these successes.) Still, we are in a painful period, when what people want from government vastly exceeds what they are willing to pay for. Politicians encouraged people to take this view and now must find a way to persuade them to take a different view. To modify and rationalize public policy will take a lot longer than it took to whoop through Congress the spending and taxing programs that got us into this fix. It will be a life’s work for some dedicated, patient, and determined people willing to stay the course. It is not a task for ambitious young zealots.