CHAPTER SIX

Confidence and Credibility

IN AUGUST 1994, LLOYD BENTSEN called to tell me that he was planning to resign as Treasury Secretary after the midterm election in November. “I haven’t told this to anybody else,” he said. Lloyd explained that he was telling me because he was afraid I might be thinking about leaving the administration as well. If I went to the President with my resignation first, it would make it harder for him to go. Lloyd said he was going to recommend that I take his place at Treasury.

The only person I told about Lloyd’s call was Judy. She had mixed reactions. She was pleased that I might have the opportunity to do something I wanted to do. But she had been hoping that after two years in the administration, I might leave and rejoin her in New York full-time. She was also afraid that the job of Treasury Secretary would impose a new kind of formality on our lives. Judy wanted to know if I’d still be able to walk down Park Avenue in an old pair of khakis. I said that whatever happened, I had no intention of changing because I had the job of Treasury Secretary.

Some weeks thereafter, the President asked me to come to his office. He told me what I already knew—that Lloyd was leaving and had suggested that I be named as his replacement. Clinton said something that indicated that he was inclined to take the recommendation—but not without some concern about my leaving the job I was in. He said he felt the National Economic Council had worked well in a White House that continued to face problems of process and organization. For that reason, he had mixed feelings about sending me elsewhere. “You’ll be over there, and I’ll still be stuck here in the White House,” he said somewhat ruefully.

Shortly thereafter, Leon Panetta, who had only just succeeded Mack as chief of staff, had me over to his office. He said that if I moved to the Treasury, it would leave a problem at the White House, but that he thought the choice would be mine. I responded that I wasn’t so sure about that, since the President hadn’t yet offered me the job. I was encouraged that Leon thought it would be up to me, but I wasn’t going to say I wanted the job until I was certain it was being offered. Instead, I told Leon that I had to think about my own life and what I wanted to do next.

The situation remained ambiguous for a long while. A number of people who knew Lloyd was leaving assumed that I would replace him. But weeks and then more weeks went by and for some reason nothing happened. I never found out if the delay was because Clinton was considering other candidates for the Treasury job, deciding what to do about the NEC after I moved, trying to figure out how to get me to stay where I was, or simply dealing with more pressing matters. The President may also have been avoiding an issue that he wasn’t eager to face. Eventually, Leon called to tell me that the President wanted me to take the job and that was that. Clinton himself never formally offered me the position. Erskine Bowles, Leon’s then deputy and later White House chief of staff himself, used to joke some years later that if things kept going well for me as Treasury Secretary, maybe one day the President would offer me the job.

I did have a variety of concerns about becoming Treasury Secretary. I had learned in my two years at the White House that, while the substance of the issues was most important, presenting positions in a way that was clear and precise and would also resonate with the public was also critical. At the NEC, I’d noticed that those who were really skillful at framing issues often didn’t just have a gift for communication. They were people such as George Stephanopoulos, Gene Sperling, and Sylvia Mathews, who also understood policy and were able to think several chess moves ahead, anticipating the likely reaction to a comment and the possible reactions to that reaction.

One of my biggest worries in moving to Treasury was how to find that quality of advice about communications and political strategy away from the White House. To be fair to the NEC, I had said I wasn’t going to take anyone but Sylvia with me to Treasury. But that meant I would have to build an entirely new team. I was especially concerned about how I was going to function effectively without Gene, the person I relied on most heavily in those areas. As it turned out, Treasury had a number of people with strong political and communication skills combined with policy expertise. But I didn’t know that before I got there.

When I discussed this problem with Leon, he suggested that I take along David Dreyer from the White House communications office because he was unusually bright and had an especially good feel for framing issues. With his beard, ponytail, diamond-stud earring, and American flag necktie (usually worn with a denim shirt), David was not your typical Treasury official. What’s more, he had a reputation as being one of the more liberal members of President Clinton’s political team. I once gave Alan Greenspan a good fright by introducing David—who was dressed even more outlandishly than usual that day—as a close adviser of mine. The chairman stared at David as if he were a visitor from another planet.

I found that Treasury was different from the White House in all sorts of ways. At one level, my role, while broad, was more defined. I was the head of an immense enterprise that, while obviously answerable to the President, also functioned in many respects as a freestanding subsidiary, with established statutory responsibilities. These included supervision of (though with varying degrees of authority over) large agencies, including the Internal Revenue Service, the Customs Service, the Bureau of Engraving and Printing, the Secret Service, and the Bureau of Alcohol, Tobacco and Firearms. Much more central to the life of the Secretary, Treasury also has several big policy shops. International Affairs deals with international economic policy and with representing the United States at the IMF, World Bank, and other multilateral institutions. Domestic Finance handles debt management, oversight of bank and regulatory functions, and much else. Tax Policy is central to any administration’s economic strategy. The Economic Policy Group provides analysis on a broad range of issues. All told, I was now in charge of 160,000 employees.

In another sense, though, my position as head of a cabinet department was much more exposed and precarious. At the NEC, I had been one member of a group of people who helped to formulate and advocate the administration’s economic policies. Now I was publicly and politically accountable in a way I hadn’t been at the NEC. Because of his extensive knowledge and deep involvement, Bill Clinton remained the real leader of his own economic team—as well as being the decision maker with the ultimate responsibility. That notwithstanding, I was now also in some measure the personification of the administration’s economic policies. That meant that if the performance of the U.S. economy deteriorated in any way in terms of inflation, unemployment, productivity, trade, or the strength of the dollar, I would be viewed as in some sense responsible—certainly for the policy response and probably to some extent for the problem as well. It also meant that those who objected to the administration’s economic policies now saw me as the personal expression of them, not just as a part of a White House process that devised them. In short, I was now in the line of political fire in a way I hadn’t previously been and hadn’t really recognized as part of the Treasury Secretary’s job until it became mine. And just when I took that job, the fire became a good deal more intense, thanks to the Mexican crisis.

The experience of serving as Treasury Secretary brought me closer to two related concepts that had already become central to my Washington experience: confidence and credibility. At the NEC, I focused on confidence and credibility as they related to the President and his policies. My first job at the NEC had been to assist in designing an economic plan that would lead to the kind of business, consumer, and financial market confidence that were necessary for Bill Clinton to succeed in his economic goals. I also helped advise him on ways to increase—and avoid diminishing—his public credibility as an economic policy maker and leader. An administration’s policies are by far the most important determinant of its economic credibility. But how an administration speaks about economic issues, both in tone and in substance, affects its reputation with businesses, consumers, and markets as well. And that reputation is important. If an administration is viewed as generally sensible on economic matters, that contributes to confidence. If, on the other hand, an administration is viewed as not sensible economically, that diminishes confidence.

At Treasury, I retained those same responsibilities as part of the President’s economic team. But I had a new role as well. The most important factor in an administration’s economic credibility is what the President does and says. But how the Treasury Secretary handles himself in office is also meaningful. As the administration’s lead economic spokesman—a role long enshrined in practice—I had direct, as well as indirect, responsibility for furthering confidence in the U.S. economy. That meant that my credibility now mattered for more than personal reasons. And, as I quickly discovered, my credibility was at constant risk from substantive mistakes or careless words—or even from carefully crafted words that people didn’t relate to in the way I had anticipated. I also faced the new hazard of what were sometimes harsh personal attacks as an inherent part of my new job.

There was a critically important paradox at the heart of my new role, one that unfortunately is not always well understood. At one level, confidence and credibility are issues of perception—perceptions about how strong economic conditions are, how well an administration is handling economic policy, how successful the President is in his job, and how effective the Treasury Secretary is in his. But to say they are perceptions does not mean that they’re based on illusions or that they can be manipulated for any length of time. While economic confidence and an administration’s economic credibility might at times and in certain ways diverge from reality, they are ultimately grounded in reality. For that reason, pursuing confidence and credibility as goals in themselves is largely futile. Trying to create an impression of economic strength will almost surely backfire. Public relations efforts or attempts to “jawbone” the economy or markets don’t change the underlying realities. They only diminish the credibility of anyone who tries—whether a President or a Treasury Secretary—and erode his ability to instill confidence.

In other words, while confidence and credibility were constant concerns, they weren’t objectives that someone in my position could pursue explicitly. Ultimately, confidence would come from the policies we pursued. And managing the politics well would be critical to what we could accomplish in an era of Republican control of the legislature.

   

THE STRUGGLES THAT PLAYED OUT in the course of 1995 and early 1996 between President Clinton and the new majority in Congress were about issues of great and fundamental importance: What functions should government perform? How large a role should government play in society? How much should the government help the poor? In retrospect, what was happening in those days is much clearer. Bill Clinton was in the midst of turning back a powerful antigovernment effort by the victors in 1994 congressional elections. At the time, however, it just felt like bitter fighting over everything.

Internally, the Clinton administration continued to face a conflict over how to respond to the Republicans. On one side was the argument that we needed to be more populist, to energize the Democratic Party’s base. That view was best exemplified by Secretary of Labor Robert Reich, who was now speaking publicly about the need to cut what he termed “corporate welfare.” I shared the view that public subsidies for profit-making enterprises, many of which were embedded in the tax code, were often wasteful and unjustified. But I also thought that using the term “corporate welfare” was inflammatory and could adversely affect how the President was seen and, as a consequence, the economy itself. In addition, I had sat in on enough discussions about swing voters to feel that this crucial section of the electorate reacted badly to anything that sounded like class warfare. President Clinton had gone a long way toward countering the old stereotype of Democrats as being antibusiness. To a surprising degree, he had gained the confidence of the business community and financial markets. Using language that sounded hostile to business could undermine that confidence, harming both the economy and the administration.

On top of these substantive and political disagreements, there was a process issue. Throughout the first two years of Clinton’s first term, Reich had been an especially good team player inside the administration. As someone who had a close personal relationship with Clinton going back to their days together at Oxford, he could easily have gone around the NEC process. As far as I could see, he never did that. But now he was venturing into new rhetorical and substantive territory on his own, without any internal debate. To me, that seemed inconsistent with our understanding. Our agreed-upon process was that if people on the economic team differed and couldn’t work out their dispute on their own, they should take the issue to the President, through an NEC process, for him to decide. Then we could all publicly support whatever the decision was. What Bob was now doing left me, as someone who strongly disagreed with him, in a troubling position. If he alone spoke about these issues, he would appear to represent the administration’s position. But if I spoke on the other side, it would look as though the administration were divided. Process can be a fragile thing; I couldn’t do what Bob was doing without creating a mess. After some discussion, Bob—who, like the rest of us, was very supportive of our all working as an economic team—agreed not to use that kind of language. We agreed to conduct a public conference on the related issue of corporate best practices.

Around the time this was going on, debates inside the White House began to be affected by the invisible hand of Dick Morris. In the spring of 1995, people at the White House were stunned to discover that the President had created an entirely separate advisory team led by Morris, a pollster and political consultant who had worked for him in Arkansas. Though I didn’t have much interaction with him, I thought some of Morris’s perspectives, such as his focus on swing voters, made sense politically. But the problem once again was the need for a regular process. It made sense for the President to solicit views from whomever he found helpful. But there should have been a way to do that without circumventing the regular structure of the White House, which created all sorts of problems.

In April 1995, an act of domestic terrorism in Oklahoma City killed 168 people, including 18 Treasury Department employees and members of Treasury Department employees’ families. I flew to Oklahoma City with the President and others in the administration to meet with the families of victims and attend a memorial service. President Clinton’s words at that service movingly expressed the feelings of people throughout the country. I had groped for words when meeting with victims’ families, so I not only appreciated but greatly respected the President’s ability to comfort these families and the country at a time of shock and tragedy. Political analysts said that these terrible events—and President Clinton’s response to them—did much to revive public respect for government in our society and were something of a turning point in the President’s standing with the American people.

Clinton’s political turnaround unfolded through the budget battle that culminated in two government shutdowns. I remember that at the outset of that conflict, George Stephanopoulos told me, as we were leaving a meeting in the Cabinet Room, that we were going to attack the Republicans over their proposed Medicare cuts. George said that Gingrich had made a big mistake by proposing drastic reductions in Medicare, and we were going to ride that mistake through to the 1996 election. Gene Sperling had described George as a political genius, but it seemed to me that George was just being ridiculous. That Medicare cuts could become the organizing principle of a presidential campaign seemed almost inconceivable. I remember laughing with Larry Summers about how small and insufficient that approach seemed.

I was, of course, wrong. Government spending in the abstract might not be popular, but specific programs resonated with people. The attempt to cut Medicare by $270 billion and reduce taxes by a similar amount, in a way that primarily favored the affluent, was an issue with special political force. The Clinton administration had learned a few things since 1993, when the Republicans had been so successful at casting deficit reduction as what it was not, a tax increase on middle-income people. This time, my colleagues weren’t going to stand by while our opponents created the prism through which our policies were viewed. The President told me that in 1993 we had “left the field.” In 1995, we stayed and played hard. Of course, there was much more at stake in the budget conflict than just Medicare, and the President cared passionately about many of these issues. “Medicare is the thing that matters politically,” he said at one of our Cabinet Room meetings, alluding to the powerful lobbies that protected this health care program for the elderly. “But I’m not going to let them gut Medicaid just because no one cares about a program for poor people.”

The President’s defense of Medicare and his opposition to tax cuts aimed primarily at the affluent was only part of the reason he bounced back and won reelection in 1996. Another important aspect of his political recovery was that he was at last coming to be seen as a centrist. The prevailing view in the media was that this represented a change from his first two years in office. My view was that Clinton remained the centrist that he’d been all along, as evidenced by our original deficit reduction plan, his support for NAFTA, and a host of other issues. Although his health care reform was often touted as a big-government program, Clinton had proposed a private-sector solution—albeit with a significant government role—as opposed to government provision of health care. In 1995 and 1996, however, the President communicated this orientation more deliberately and effectively. The change in perception makes an important point that goes well beyond Washington politics. The President’s policy choices remained on a largely consistent track, but it was only after the first two years that the perception of what he was doing began to accord with that reality.

In 1995, we put out a budget that continued deficit reduction as a proportion of GDP, but with a stable actual deficit number. Our congressional opponents kept hammering away at our budget’s failure to balance. I remember that when I testified before the Senate Finance Committee, several of the Republicans on the committee wanted me to acknowledge that our proposed budget would mean $200 billion deficits “as far as the eye can see.” I wouldn’t describe the ongoing deficit in dollar terms because that could be used to argue—incorrectly—that we were not committed to deficit reduction. Instead, I responded by pointing out that our proposal would continue to reduce the deficit as a share of GDP. But the reality was that I was in a holding pattern I couldn’t acknowledge. Our strategy was to put out a budget while at the same time we were working on additional spending cuts that would lead to much lower deficit numbers. In this detailed and painstaking work, we were lucky to have the help of one of the unsung heroes of the federal government, Alan Cohen, an indefatigable, disheveled Treasury staffer who had perhaps the greatest knowledge of and passion for the federal budget process of anyone in government. But we had not wanted to put in the cuts Alan helped us find in our original budget submission for fear that the Republicans would “pocket” them and then seek additional cuts that we objected to in negotiating a final budget. And so, for some time, we continued to work on developing what would be our real budget, but without any decision at that point on whether it had to go to absolute balance. In May, the congressional Republicans introduced their proposal to cut taxes, paid for with Medicare and Medicaid reductions, in a budget that went to balance.

From early on, President Clinton sensed that the persistence of a deficit, even a small one, created a major political problem for him. In our regular meetings in the Roosevelt Room and the Cabinet Room on the 1996 budget, he kept asking, “Shouldn’t I come up with a balanced budget?” All of his economic advisers, myself included, responded that he shouldn’t, because there wasn’t any real economic difference between small deficits that continued to decline as a share of GDP and actual balance. We had successfully addressed the deficit problem in 1993 and intended to continue reducing the deficit. Going all the way to a truly balanced budget would require additional program reductions that would serve little economic purpose.

It was in a meeting in the Cabinet Room sometime in May that Clinton finally said to us, “If I’m going to get heard on anything else, I first have to show a balanced budget. Once I do that, I can talk about progressive programs. But if I don’t show a balanced budget, they’ll never listen to me about progressive programs.” Basically, I knew what he was saying was right. We advisers were all sitting there telling him there was no economic difference between a few billion dollars and zero, which is true as an analytical point. But there was a much bigger point, the one Clinton was making: if we wanted to talk about spending money on education and programs for the inner city, people weren’t going to listen to us unless we talked about those programs in the context of a balanced budget. The President realized that while fiscal responsibility was not itself politically resonant, balancing the federal government’s books did resonate and was a goal that voters could relate to and rally around. In that meeting, the President was pretty much alone in what really was an extraordinarily perceptive insight about what was needed to make his agenda work with the public. And I later realized that without the politically resonant goal of a balanced budget, fiscal responsibility itself becomes much harder to establish and maintain.

Clinton’s point was an extension of the one I remembered him making in early 1993 at that initial Little Rock meeting about the economic plan. At the time, deficit reduction had been what he called a “threshold issue” to get the economy moving—a precondition for everything else he hoped to do. Now, a balanced budget had become a threshold issue, because it was a precondition for getting people to listen to us and hence for doing almost everything else the administration cared about. Proposing to balance the budget may also have been the only feasible way to defeat the pernicious idea of adding a balanced-budget amendment to the Constitution. Such an amendment would violate all known wisdom about economic policy. It could compel the federal government to cut spending or raise taxes in a recession, substituting “procyclical” policies (which would cause the economy to contract even more) for the “countercyclical” ones that a recession ordinarily calls for. Even after our decision to support a balanced budget, the amendment failed by only a single vote in the Senate in 1995, and it might well have passed if we hadn’t persuaded people that Social Security benefits could be endangered by the spending cuts the amendment might at times require.

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

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

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

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

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

   

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And you can never eliminate errors, even among the best-intentioned, most capable people. Due simply to oversight in the midst of managing complex matters, we discovered at one point that we had miscalculated some numbers. The difference wasn’t substantively significant, but the political effect could have been immense. In another instance, we said that the Federal Reserve, which acts as agent for the Treasury in sending out checks, could not distinguish among different types of government payments. This would have meant that in the case of default, the government would have no ability to, say, withhold payments to defense contractors while continuing to send Social Security checks. But then we found out that may not have been entirely accurate.

I remember going out to dinner with Judy in Washington and agonizing over our quandary about whether we could send out Social Security checks in case of default. I thought the issue could blow up, and I told Judy that I might have to step down: “We made this assertion that we now realize may have been wrong.” After talking it over with Judy, I went to Leon and told him about what had happened. “I don’t know how we screwed this up,” I told him, “but we did.”

Leon agreed that it was a serious problem. Our opponents weren’t going to view anything as an honest slip-up. I remember Pat Griffin, the White House legislative counsel, saying to me, in a not altogether joking way, that I might want to leave town for a while. In fact, our assertion was based on what Federal Reserve Board officials had initially told us and was probably right for practical purposes, although later the Fed’s computer people said that, with sufficient notice, they might have been able to control who got paid. Thus, we may have somewhat overstated the case. In any event, there were no established legal criteria for prioritizing payments, so that actually having to do this would have been chaotic and rife with uncertainty, to say the least.

Neither of these relatively insubstantial mistakes became a public issue. If they had, the handling of the debt limit crisis and, in an environment in which my credibility was already being attacked, my position as Treasury Secretary might have been at serious risk. Or to put the matter differently, on such a highly charged, contentious issue, human error, which is inevitable, can readily be interpreted in the worst possible way and have a vastly disproportionate effect. The debt ceiling controversy remained highly unpleasant for several months. Our opponents continued to challenge my ethics and truthfulness. My concern was partly personal and partly professional. I didn’t like having my integrity questioned with no justification. But the bigger concern was that if I came to be seen as not credible, it would be very difficult to function effectively as Treasury Secretary.

We continued to borrow from different trust funds, but by late January we had no more running room. Come March 1, we would not be able to send out $30 billion in checks due to Social Security recipients and military retirees. But before we got to that point, several things happened that reinforced our position and helped to bring the matter to a conclusion. Our opponents began to hear from some of their constituents in the financial community who didn’t think a default—whether to retirees, contractors, or debt holders—was such a great idea. And then, fortuitously, Moody’s, the bond-rating agency, issued a warning that the AAA status of federal government bonds could be at risk, which Standard & Poor’s had done earlier. That made our expressions of concern about the consequences of a default more convincing—although some Republicans still didn’t believe a default was imminent until Alan Greenspan told them privately that our projections were right.

The larger factor may have been a sea change in politics and public opinion. After the government shutdowns in November and December proved immensely unpopular, the idea of default became so politically charged that few people wanted to be associated with it any longer. A number of congressmen—including Charles Rangel (D-NY), Steny Hoyer (D-MD), Sandy Levin (D-MI), and Robert Matsui (D-CA)—had been actively making the case against default in the public domain. In addition, the media had become more focused on the consequences of default and had begun to examine the issue more critically. At some point, our opponents simply stopped fighting and, in a retreat with several stages, increased the debt limit. When all was over, I was surprised that the Republicans who had said such awful things about me didn’t seem to retain any of their anger. I remember running into Gingrich a while after that and he said something about how they had been a little rough on me during the debt limit thing, but that’s just how the game is played in Washington.

Gingrich was very friendly and so was I. But even after a few years in Washington, I couldn’t relate to the idea that you shouldn’t take it personally when someone calls you a liar and a thief. The propensity to convert policy and political disagreement into personalized assault can have consequences for decision making. Having some measure of psychological independence may have made it easier to make decisions that involved substantial risk. (Of course, financial independence may have also helped.) That my sense of self didn’t come from my job meant that I could more readily take the chance of failing.