CHAPTER FOUR
A Political Education
ON DECEMBER 10, 1992, I FLEW to Little Rock for the announcement of the first members of President Clinton’s economic team. The group included me as director of what was to be the new National Economic Council, Lloyd Bentsen as Treasury Secretary, Roger Altman as deputy secretary of the Treasury, Leon Panetta as director of the Office of Management and Budget, and Alice Rivlin as Panetta’s OMB deputy. Before we walked out for the press conference, Gene Sperling warmed us up with some practice questions. When he got to me, Gene asked, in a very serious tone, “How can a wealthy guy from Wall Street possibly relate to the problems of working Americans? Aren’t you just totally unsuited to understanding the problems of ordinary people?”
“Well, I think you’ve got a good point,” I deadpanned. Everyone broke up.
“Bob, you and I are going to have to keep a lighter touch around here,” the President-elect said, laughing.
Clinton’s comment made an important point that many of us would lose sight of from time to time under the pressures of the next several years. The prospect of all we had to do weighed heavily on our shoulders, especially at that moment, when we were just beginning. It’s right to be serious about serious matters—but you also need an ability to escape the intensity. People deal with stress in different ways. My own steam valve was that existential sense I’ve described. I was highly focused on the policy issues we faced and the problem of making the NEC work. But I also tried at the same time to maintain a sense of perspective. I had to call upon that perspective with some frequency as I figured out my new job. My most urgent assignment during the transition was organizing the decision-making process around the President’s economic program. It would involve making critically important choices, and we needed the best process possible.
The catch was that I had no idea what to do. I had experience with financial markets and management, but I didn’t know the first thing about process inside a presidential administration. I had no idea how a body like the NEC might be made to function, who I would need on my staff, or what kinds of difficulties I might encounter. I’d never heard of a “decision memo.” Put bluntly, I didn’t have the foggiest notion how to conduct myself in the White House. I figured that once you got to your new office, you’d call your family and say, “I’m here in the West Wing!” But what were you supposed to do after that? Many of the biggest government programs were barely familiar to me. I’d heard of Medicare, but I couldn’t have explained it. In the NEC transition meetings we held at the Washington office of the accounting firm Coopers & Lybrand, people were talking about “discretionary caps,” “pay-as-you-go rules,” “CBO scoring,” and something called the “unified budget.” At times it felt like being in a foreign country with people speaking another language.
As I had done at Goldman Sachs, when I showed up for my first day of work not knowing what an arbitrageur did, I started writing down questions. How had other Presidents coordinated economic policy? What had worked and what hadn’t? What would make this new body succeed or fail? How could we get cabinet members and senior White House staff to buy into the NEC process? What should my substantive role be? I had other questions about how to function in Washington. How could I be seen to have authority without behaving in an authoritarian manner? How could I follow my inclination to maintain a low profile but deal effectively with the media? How should I allocate my time? How could I do my job and still have time to think?
Legal pad in hand, I made the rounds and interviewed people. A few, such as Bob Strauss, I already knew well. Others, such as Brent Scowcroft, who had been national security advisor to Ronald Reagan and George Bush, I didn’t know at all. What they had in common was knowing a lot about life and work in the White House. While some of the advice didn’t work for me, my semi-legible notes from those conversations make an interesting primer on the ways of Washington. As much as I would have to learn from my own mistakes in subsequent years, I’m lucky to have been able to begin by learning from other people’s.
Bowman Cutter, who had worked as Jimmy Carter’s chief deputy director of OMB and who would become one of my two NEC deputies, told me to expect constant infighting. Bo’s experience had been that vendettas in the White House were continual and that getting something done often meant battling the cabinet agencies. He said that intergovernment networking would be essential in my job and warned that even if I got along with other top-level people, turf wars among more junior officials could cause serious problems.
Stu Eizenstat, who had been Carter’s chief domestic policy adviser, warned me about the potential frustrations of managing my time. He said I’d need to make twenty-five or thirty calls a day, which meant learning to be efficient on the telephone. I should always return calls from members of Congress and the cabinet first, on the same day if possible. In terms of managing my own team, he suggested that the time blocked out for weekly staff meetings should be inviolable.
Others had useful advice on dealing with the press. Roger Porter, who had been the assistant to the President for economic and domestic policy in the Bush administration, told me he had arrived thinking that White House staff should maintain a low profile in dealing with reporters. Over time, he began to feel that invisibility could make someone in his position less effective. Porter was unsure whether he had found the right balance. This conversation left me wondering how I could deal with the press without having a higher public profile than I felt comfortable with. Jody Powell, who had been Carter’s press secretary, suggested I spend time talking to reporters on background instead of for quotation. That would keep me out of the limelight, save me from gaffes, avoid offending the journalists I chose not to talk to, and enable me to help advance our views and to create a sense of my relevance. Jody said that departing officials such as Scowcroft, Secretary of State James Baker, and Secretary of Defense Dick Cheney were good models for media relations. Scowcroft, in particular, had never sought attention, yet everyone knew he had been a major presence in the Bush White House.
Ken Duberstein, who had been Ronald Reagan’s chief of staff, advised me on a staff person’s relations with the President. He suggested that I always be in the room whenever the chief of staff spoke to the President about economic policy and also that I shouldn’t go to see the President unless I had something substantive to say to him. At the same time, I should make sure to meet with the President regularly. Ken also gave me a sense of what my working life in Washington might be like. He said I should plan on a twelve-hour day, with an additional hour and a half of reading time at home at night. I should expect to work at least half a day on Saturdays but should try to avoid working on Sundays. And remember, he said as I left, the White House operator can find you wherever you are. Scowcroft made the workload sound even more overwhelming. He said he worked ninety-hour weeks and went jogging at midnight. I found all this alarming, because I knew I couldn’t live that way. I need at least seven and a half hours of sleep a night, and time to read and relax.
Jim Johnson, my friend from the Mondale campaign, told me what a decision memo was and gave me advice about how to prepare one for the President. Jim said that such documents shouldn’t be long or frequent and should always be channeled through the chief of staff. He also said that the staff person who prepared the memo should be in on any meetings with the President about the decision.
I also went to see Kirk O’Donnell, a highly respected Democratic political hand whose death at a young age in 1998 was a great personal tragedy and a heavy loss for the party. Kirk, a big, ruddy-faced Boston Irishman who had politics in his bones, told me he thought the Clinton administration would succeed or fail as a result of how it approached the economy in its first nine months. He also offered me some practical wisdom about Washington: I should cultivate relationships with six or eight key congressional figures who would serve as advocates for me on Capitol Hill. He also said I should operate on the assumption that anything I told anyone, even in a social setting, would be repeated. (This was, if anything, an understatement. I got to the point where I felt that if I talked to myself, it would leak.) Kirk also told me I needed someone to “watch my back.” I said I was probably going to hire Gene Sperling. O’Donnell, who had worked with Gene on the Dukakis campaign, said I’d be okay, since Gene had immense political savvy as well as valuable relationships in the press corps.
My job didn’t require congressional confirmation, but I took the opportunity nevertheless to pay a couple of courtesy calls in the Senate. When I visited New York’s senior senator, Democrat Daniel Patrick Moynihan, he offered a bit of historical perspective. Anything truly important in Washington took thirty-five years to accomplish, he said. Obviously Moynihan was speaking figuratively, but he was also making a useful point about the difficulty of making major changes through the political system—a lesson we would learn for ourselves when trying to reform health care.
If I’d been more attuned to Washington, I think I might have picked up the question that some of these people had about whether the NEC was likely to be successful. Six months later, Walter Mondale told me that when he’d first heard I had taken the job, he’d had his doubts: the other top people in the new administration, he’d felt, could see the NEC as threatening their own authority and direct access to the Oval Office. I did worry about some of these obstacles, but I didn’t dwell on them, perhaps because I didn’t understand that much about how government worked. Had I fully understood the pitfalls, I almost surely would still have taken the job, but with more trepidation.
As I considered all the advice I’d received, I realized I had two intertwined challenges. The first was to make the NEC an effective White House process. The second was to work with the President and the rest of the economic team to make sound and sensible economic policy decisions. Concentrating my mind on both issues was the President’s directive to have an economic recovery program ready for public release within a month after his inauguration on January 20. Gene Sperling likes to remind me that when I was unable to convince him and others to skip the President’s swearing-in, I called a meeting about the budget for 2:00 X that day.
The NEC did have one indispensable asset: the President’s intention to use it. From the start, Bill Clinton signaled clearly to the members of his economic team that he wanted to use this instrument to harmonize their efforts and coordinate policy. I remember Clinton commenting during my “job interview” in Little Rock on the harsh observations that were attributed to President Bush’s budget director, Richard Darman, about some of his colleagues in a Bob Woodward series published in The Washington Post shortly before the election. Clinton thought that the Bush team’s “frenzied strife” had greatly undermined his predecessor’s effectiveness in dealing with economic issues.
By contrast, Clinton thought that Bush’s effectiveness in foreign policy had been due in some fair measure to successful coordination by the National Security Council. Through the NSC, Scowcroft, Baker, and Cheney had successfully worked out their overlapping roles in foreign policy and military affairs, and had functioned as a team. The President-elect wanted the NEC to do the same for economic policy, which lacked an institutional mechanism for coordination. Different administrations had tried different approaches. When economic policy had been run from the White House, cabinet officials had often proved uncooperative. When the Treasury Secretary had assumed a coordinating role, he had often run into conflict with the other cabinet officials.
Clinton appeared to have a vision of good process that resembled the way Steve and I had functioned at Goldman Sachs. As a decision maker, Clinton wanted his aides and advisers to present him with the widest possible range of views and alternatives. He liked to encounter those views not just in memo form, but actually to hear people on his team discuss and debate the options in front of him. Clinton felt that live debate best enabled a decision maker to test and sharpen various options. Moreover, people sometimes persuade one another by discussing their differences, or generate new ideas. My experience in Washington strongly reinforced my view that good process makes good policy. And a fair, open process is more likely to result in participants buying into decisions with which they may differ.
I knew the NEC wouldn’t work for five minutes if I tried to be autocratic. Although Clinton wanted economic issues to be presented to him through the NEC, I couldn’t simply announce that I was in charge and declare myself the President’s gatekeeper—and that would not have been in my nature in any case. I had to think of the other members of the economic team as my clients; they had to feel better off having the NEC than not having it. At times they might have preferred to go to the President directly on the issues they had primary responsibility for. But the advantage, which I think everyone came to see rather quickly, was that they would be at the table when all economic issues were discussed, and decisions on their issues, once made, would be far less subject to attack or reversal within the administration. To work, the NEC had to serve as an honest broker, summarizing everyone’s positions and always presenting all sides of an issue fairly. In addition, I had as much right to express my views as anyone else did, but not to give disproportionate weight to my own opinions. So I would wear two hats—one as the neutral manager of a process, the other as a substantive participant. And I would have to clarify which hat I was wearing at any given time. The process had to be run with an integrity that won and maintained the trust of the other participants, or it wouldn’t work.
I FLEW TO Washington on a Sunday night with a few suits and a bunch of books and checked into a suite at the Jefferson Hotel. Leaving home gave me a strange, hollow kind of feeling. Judy had no enthusiasm for living in Washington, and our plan was for her to come down one night a week and for me to return on the weekends. We had little idea of how soon I’d move back to New York. For twenty-six years, my two abodes had been my office at Goldman Sachs and my apartment uptown. Now I was stepping into a largely unknown world, moving from an established position as co–senior partner of Goldman Sachs & Company to a job that had never before existed in a world that was new to me in many ways.
My most immediate problem was choosing a staff that could put the concept of the NEC into practice. My first hire was Sylvia Mathews, who had been Gene’s deputy on the campaign. I had started talking to Sylvia on media matters when I couldn’t get Gene on the phone and had found her well informed and exceedingly adept at crafting comments. A former Rhodes Scholar and consultant for McKinsey & Company, Sylvia came from a small town in West Virginia and had the accent to prove it. In a short while, Sylvia, with her strong organizational skills, became the NEC’s de facto chief of staff, organizing me and everything we were doing.
Next, on the recommendation of Vera Murray, Bob Strauss’s Washington-savvy executive assistant, whom I had known and respected for twenty years, I met Linda McLaughlin. Linda, who had been working at the World Bank and had long experience in public-sector institutions, became the NEC’s second employee. She was my secretary, scheduler, and all-purpose administrator and turned out to be indefatigable, effective, and consistently good-humored in an environment that often could strain anyone’s patience.
Following Stu Eizenstat’s advice, I decided the NEC should have two co-deputies, with one taking primary responsibility for domestic issues and the other for international ones. I approached Bo Cutter about becoming the international deputy. Bo had an excellent reputation for his intellect and good sense and four years of experience—in President Carter’s OMB—with governmental process. I was also interested in hiring Gene Sperling on the domestic side because he knew the issues, knew all the Clinton people, had strong political and message capabilities, and had been extremely effective during the campaign. I wound up with enormous respect for Gene, but at the time I still had some qualms. With his penchant for calling meetings at one in the morning (returning calls sometime thereafter) and an office piled high with paper, his habits could be viewed as a bit chaotic. On the other hand, his work seemed highly disciplined. I couldn’t figure out what he was all about. So I called a few people who knew Gene or had worked with him in the past, including then New York governor Mario Cuomo and Guido Calabresi, the dean of the Yale Law School. Both recommended him highly, though Guido did mention that Gene had spent part of his law school career living in his car. (Gene claims this was just a joke about the messiness of his backseat.) Gene and Sylvia both stayed with Clinton through two terms, in a variety of capacities. Over that time, Sylvia developed great substantive expertise and Gene became skilled at process as well as economic issues. Over the course of the eight years, they were two of the brightest stars in the administration.
With Bo, Gene, Sylvia, and Linda on board, we went about hiring a professional staff. Bo’s analysis of NEC subject areas suggested we needed a professional staff of approximately two dozen people. We were already interviewing applicants for those positions when Harold Ickes, who was helping to run the transition and would later become deputy chief of staff at the White House, called to say that we could have no more than twelve people. I told Harold I didn’t think the NEC could work with so few people, but he said the administration was hemmed in by a Clinton campaign promise to cut the White House staff by 25 percent and twelve was it, period.
After conferring with Bo and others, I called Mack McLarty, the incoming chief of staff. I had only recently met Mack, but I told him that the NEC wouldn’t work without an adequate staff, which I judged to be at least twenty people. If the budget was too constrained to provide that many positions, they should give up on the idea of the NEC and find another way to coordinate economic policy. That was a bleak moment for me. I had given up a major position on Wall Street, which was irreversible, and I was on the verge of winding up with nothing at all.
Mack didn’t have any immediate solution. But the next day, he called to say they’d make room for more staff people—not as many as I wanted, but enough to make the NEC work. I subsequently heard from Ken Brody, a Goldman partner who was an important early Clinton backer, that Mack had called him to ask what to do about me. Ken told Mack I probably meant what I said. Ken was right. I believe strongly in trying to reach a reasonable accommodation in the face of disagreement, but I also believe in not crossing what I view as fundamental lines and accepting the possible consequences that may ensue. I didn’t think the NEC could work without adequate staff, and I wasn’t going to do what didn’t seem to me to make sense.
A similar episode occurred later in the first term, after I had moved to the Treasury Department and was negotiating with OMB about the size of our budget. I understood the need for budget cuts but felt that if our funding fell below a certain level we could not run the department effectively. My position was that if our budget had to go below that level, I would understand the budgetary exigencies, but the administration would have to find a Secretary who felt comfortable running the department under those conditions. When others sense your willingness to walk away, your hand is strengthened, and in this instance we received our minimum acceptable level. Afterward, Sylvia and Larry Summers said that they were trying to understand how I had managed the negotiation. “For that to work,” Sylvia said, “you must be prepared to die.” As Sylvia pointed out, my stance had been effective precisely because I hadn’t been negotiating but stating my commitment to a fundamental position.
WE WERE SUPPOSED TO BE developing an economic plan—but I had no idea what a presidential economic plan was or how to assemble it. I consulted Leon Panetta, who had been chairman of the House Budget Committee, who said we had to present the President-elect with a budget, which sounded right. So Leon drew up budget options, and we focused on framing them as alternative fiscal and programmatic paths for Clinton at an all-day meeting to be held on January 7 at the governor’s mansion in Little Rock. Everything became focused around this meeting.
Making a budget raises every question about how to allocate the resources of the federal government—what new programs to fund, which old ones to reshape or terminate, what deserves more or less, and—very important—who should pay. The budget also brought us face-to-face with what rapidly emerged as the essential question: how to balance all of Clinton’s potentially costly proposals—universal health insurance, welfare reform, a middle-class tax cut, education and job training programs—with the reality of an unsound and worsening fiscal situation. Obviously all of these proposals could not be fully implemented during the first year while we were simultaneously trying to accomplish significant deficit reduction, working toward Clinton’s campaign pledge to cut the deficit in half in four years. I sent a memo to the President-elect to prepare him for the meeting, saying that he could not significantly reduce the deficit and do all that he had proposed during the campaign.
We divided up the presentation among the various economic officials. Leon was responsible for the budget; Lloyd Bentsen for taxes; Laura D’Andrea Tyson, the incoming head of the Council of Economic Advisers (CEA), for the economic outlook and the impact of various policy options. My role would be to keep the meeting on track. But how to do that? This would be the President-elect’s first working experience with his incoming cabinet members and their first experience working together in his presence. The economic plan was due only weeks after the inauguration, and we had five hours to cover an enormous amount of material. When the two of us met beforehand in a small dining room, I told Clinton he should pose whatever questions he wanted but that we needed to keep the meeting moving along. He laughed and patted me on the shoulder, promising to “be good.”
George Stephanopoulos, who for some reason I had never met during the campaign, stopped me on the way into the meeting and said that the President-elect was in a real bind. If Clinton decided on a significant deficit reduction target, he couldn’t follow through on his middle-class tax cut and various domestic proposals. George said the President-elect couldn’t be expected to make such a momentous decision in this first meeting and moreover wasn’t likely to. I couldn’t tell whether George didn’t want Clinton to make such a momentous choice that day or simply didn’t want me to get upset when it didn’t happen.
In any case, George was wrong. What I remember best about that meeting was that after less than an hour, as Leon and Alice Rivlin were laying out the details of the worsening deficit, Clinton stopped the discussion and said, “I get it.” Deficit reduction, he said, had become the “threshold” issue. “I know it won’t be easy,” he continued. “But I was elected to deal with the economy and this is what we need to do to get the economy back on track.” I’ve since felt that Clinton might already have had that view coming into the meeting, so quickly and decisively did he state this position.
The rest of the session substantiated Clinton’s view. An intellectual framework was provided by Laura Tyson; Alan Blinder, a Princeton economist who was to be Laura’s deputy at the Council of Economic Advisers; and Larry Summers, the chief economist at the World Bank who was slated to become undersecretary for international affairs at Treasury. The three of them explained that according to the familiar laws of Keynesian economics, cutting the deficit by reducing government spending or increasing taxes should slow the economy. But this time the situation might be different, because the growing deficit had been keeping interest rates high, a phenomenon I referred to as a deficit premium. Then and in many subsequent meetings, we debated just how much effect deficits have on the bond-market interest rates that drive the economy. There was a great deal of uncertainty on this issue. As one input, Alan Greenspan had told a number of us that, citing the published deficit impact model of the Federal Reserve Board’s staff, he projected a reduction of 1⁄10 of one percentage point in long-term interest rates for each $10 billion in annual deficit reduction, with GDP then around $6.6 trillion. (As an aside, that translates into a reduction in bond-market interest rates of 0.66 percent for every 1 percent of GDP of deficit reduction.) Clearly, the Fed’s actions would be one important factor, among others, in determining market interest rates, and knowing Greenspan’s views helped us gauge his likely reaction to our fiscal choices.
Interest-rate effects are only part of the argument for fiscal soundness—an analysis I’ll lay out more fully later—but they were our focus at that moment. Bondholders were demanding a higher return, based both on the longer-term fiscal outlook and on the risk that the politics of reestablishing fiscal discipline would be too difficult and that, instead, our political system would attempt to shrink the real value of the debt through inflation. We thought that lowering the deficit and bringing down long-term interest rates should have an expansionary effect that would more than offset the contractionary Keynesian effect and that, conversely, the expansionary effects of continued large deficits would be more than offset by the adverse impact on interest rates. In Japan, Europe, and the Middle East, as well as in the United States, investors would increase their demand for dollar-denominated bonds if they believed that a sound fiscal pattern was going to be reestablished. And lower interest rates should spur consumers to spend and businesses to invest. This seemed our best strategy for stimulating the economy and promoting a strong, sustainable recovery at a time of pervasive uncertainty, with business and consumer confidence still soft, unemployment above 7 percent, and the resumption of growth tentative.
Many people might have been surprised to see a group of Democrats sitting around a table in Arkansas talking about the international bond market. And that our focus was the international bond market rather than just the U.S. market was a sign of how far the globalization of financial markets had already come by 1993. I think historians looking back on this period some decades hence are likely to see the Clinton administration as deeply engaged with global integration, the emergence of new technologies, and the spread of market-based economics. I don’t know what they’ll call this era, but I think they may draw the conclusion that Bill Clinton was the first American President with a deep understanding of how these issues were reshaping our economy, our country, and the world.
My role in the meeting was to make sure that all views got a fair airing, but I also made my own opinions plain. For us to achieve those lower interest rates that Laura, Alan, and Larry were talking about, financial markets would have to believe that the administration was serious about deficit reduction. More than a decade of promises that hadn’t materialized had led to an understandable skepticism. I was concerned that creating credibility with financial markets might take longer than one would hope. I remember saying that there was nothing scientific about how much deficit reduction would have credibility and create a real economic impact. In a $6.6 trillion economy, a few billion dollars more or less—a small fraction of 1 percent of GDP—shouldn’t make a big difference. But I’d learned on Wall Street that relatively small differences in absolute amounts could make a big difference in market psychology: the difference between a bid for a block of stock at $347/8 and a bid for the same stock at $35 could be a lot more than 12.5 cents. Or, as my former partner at Goldman Sachs Bob Mnuchin used to say, we were better off paying someone $250,000 than paying him $240,000, because the psychological impact of earning a quarter of a million dollars was greater to the individual than the financial impact of another $10,000 to the firm. The difference between small amounts of deficit reduction over a five-year period was like that—minor in economic terms but potentially great in terms of the market’s reaction.
In retrospect, the effect of the Clinton economic plan on business and consumer confidence may have been even more important than the effect on interest rates. In important ways, the deficit had become a symbol of the government’s inability to manage its own affairs—and of our society’s inability to cope with economic challenges more generally, such as our global competitiveness, then much in question. The view that fiscal discipline was being restored contributed to lower interest rates and increased confidence, and that led to more spending and investment, which in turn led to job creation, lower unemployment rates, and increased productivity. Some have argued that the productivity surge of the 1990s was merely a delayed reaction to the new digital technologies that arrived in the 1980s. But that view overlooks what happened in Europe and Japan, where the same access to new technology failed to result in a similar sustained productivity surge, probably because businesses didn’t invest in technology to the same degree. That paucity of investment may well have been due to the structural rigidities in the labor and capital markets of Europe and Japan, but even with the flexible economy of the United States, investment, and therefore productivity, probably would not have surged as they did without that increased confidence as well as lower interest rates.
In an economic boom, as in a decline, cause and effect can become difficult to distinguish. The restoration of business and consumer confidence, combined with lower interest rates, created a virtuous circle, a positive feedback loop. Deficit reduction contributed to economic growth, which, through increased government revenues, contributed to further deficit reduction, which in turn led to more growth, and so on. The fiscal effect of the plan was thus a function both of our policy measures and of the growth those policies fed. We didn’t design the plan around the potential effect on the stock market, as we had with the bond market, but in fact a similar phenomenon occurred as improved fiscal and economic conditions contributed to a rising stock market, which in turn fed back into deficit reduction and the economy.
While I don’t think any of us fully foresaw the impact that restoring fiscal discipline would have on economic confidence, everyone in that room in Little Rock accepted the argument about what a credible plan was likely to do for interest rates. Contrary to some subsequent reports, everyone agreed that a serious deficit reduction program was absolutely necessary. I remember Lloyd Bentsen, the incoming Treasury Secretary, arguing persuasively that we had to do the tough things in the first months, when credibility was highest. Once we were in the White House, some political advisers—such as Paul Begala, James Carville, Stan Greenberg, and Mandy Grunwald—expressed serious concerns about the politics of our program. James Carville even took to calling me “Nick”—referring to Nick Brady, Bush’s Treasury Secretary—because of my concern with the bond market (though James always said this with a twinkle in his eye, and I still smile when I remember that nickname). They felt that deficit reduction had no political constituency and that the President’s political interests would be better served by following through on the middle-class tax cut and other campaign proposals. And in fact, in one sense their concerns turned out to be well warranted. In the longer run, there is no question in my mind that this program was right not only economically but also politically, because it was essential to the strong economy that helped reelect Clinton in 1996. But the economic benefits were not felt on a sustained basis by the time of the 1994 midterm election, and had we listened more to the concerns of the political advisers, we might have focused better on framing our deficit reduction message in a more politically effective way.
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 listened 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 favor 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.