Bush: Eating His Words

If there was ever going to be a deficit-cutting agreement, said House Speaker Thomas Foley in the 7:30 a.m. breakfast meeting at the White House last Tuesday, then the President had to make “some kind of public commitment.”

“Like what?” asked George Bush. “What would make you satisfied?”

Foley was prepared; he and fellow Democrats George Mitchell and Richard Gephardt, the Senate and House majority leaders, had worked out a presentation in advance. After an hour of discussion, Budget Director Richard Darman wrote out a draft of a formal statement in longhand.

The Democrats left the room to caucus, then returned to ask for some changes. Where Darman had written “it is clear that . . .” the Democrats demanded a change to “it is clear to me” — meaning Bush, meaning he would have to stand behind the proposals that followed.

O.K., what proposals? Democrats wanted to use the dread T word somewhere in the statement, but their counterparts preferred something fuzzier. Everyone concurred on “increased tax revenues” in the wan hope, on the White House side, that this compromise might put a fig leaf over what was being said.

At 9 a.m. the statement was ready. But the Democrats were suspicious that Bush and aides might delay or re-edit it. Though Foley later denied it, White House officials said the Democrats insisted it be issued then and there, before they left the White House. Bush summoned press secretary Marlin Fitzwater, who handed the statement to an aide, who typed “The White House” at its head and posted it on the wall of the pressroom.

Then, in the President’s words, “the arrows ((began)) flying, front, back, sideways.” Try as Bush loyalists might to say it wasn’t so, it was immediately clear that the President had repudiated the central pledge of his 1988 campaign — “Read my lips: no new taxes” — a pledge he should never have made, since it has hamstrung economic policy throughout his presidency. Republican candidates screamed in fear that they had lost a potentially crucial issue for the fall congressional elections. Democratic congressional leaders kept a promise not to gloat; they gravely commended the President’s statesmanship. But lower-ranking Democrats could not hide their glee that at last they could silence G.O.P. gibes that they belong to the high-tax party.

“I can’t say I didn’t expect to hear some campaign words played back to me, and it’s been fairly intense,” Bush remarked at a press conference Friday. Under repeated taunting, however, he compared himself with Abraham Lincoln, who had once said, “We must think anew.” Even then, Bush turned down what amounted to a dare to say, in so many words, “We have to raise taxes.” Nonetheless, he gave a rationale for accepting a boost: new revenues, said Bush, are a necessary part of any compromise package to cut the budget deficit, and a lower deficit in turn is essential to bring down interest rates and get the economy moving at something better than its current snail’s pace. “In the long run,” he added, the flip-flop will not hurt his credibility “because what people are interested in are jobs, economic growth. People know this deficit is bad. People know that we are going to have to take some action.” Some Republicans nonetheless grumbled that Bush was improving his prospects in the 1992 election at the expense of theirs this fall.

All of which is premature. It is by no means certain that congressional leaders and Administration officials participating in the so-called budget summit talks can come up with the $50 billion deficit-reduction package, divided approximately half and half between tax boosts and spending cuts, that seems to be their goal. For one thing, Bush’s agreement to tax increases is conditioned on cuts in spending for entitlement programs — those that provide benefits automatically to people meeting certain standards set by law. Social Security, Medicare and farm subsidies are examples. Democrats traditionally have been as horrified by that idea as Republicans have been by the thought of tax boosts.

Carrying out their part of a prospective deal, Democrats did begin proposing some entitlement cuts in summit meetings following the eat-my-lips announcement. House Budget Committee chairman Leon Panetta suggested Medicare and farm-subsidy cuts of an unspecified nature totaling $5.7 billion. Talk also circulated about a temporary freeze in cost of living adjustments to Social Security pensions and about subjecting perhaps 85% of the Social Security income of well-off retired people to income tax, rather than 50% as at present. Still, it is unclear whether the Democrats can produce sufficient entitlement reductions or the Republicans deep enough cuts in military outlays — another essential part of a package deal — to satisfy the other side.

Even if both sides come through, they have barely begun to discuss which taxes to raise how much. One of the few certainties is that there will be no general increase in income tax rates; that, in the White House view, would be too blatant a violation of Bush’s read-my-lips pledge. There is a strong chance, however, of an increase in the tax rate on the highest incomes, roughly $163,000 or more on a joint return, in exchange for Bush’s cherished ! cut in the capital-gains tax. Though his aides denied it, White House chief of staff John Sununu told some Republican legislators that such a trade is in the works. Another good bet is an increase in so-called cats and dogs: user fees and excise taxes, particularly the “sin taxes” on cigarettes and liquor. More problematic is an increase in taxes on energy — maybe gasoline, maybe imported oil, maybe all forms of fuel consumption. While grudgingly accepting the necessity of higher taxes in general, voters in polls have consistently rejected a gasoline tax.

Washington cynics would not be surprised if the budgeteers agree only on the least unpopular spending cuts and tax boosts, producing a package of an inadequate $30 billion. And some Republican legislators are threatening to vote against any deal that contains tax boosts, even one backed by their President. Nose counters are already writing off the votes of Republican incumbents facing tough electoral challenges, and of those from states that would be hit hardest by cuts in spending.

Time is another factor. An agreement of some sort, if only a framework, must be struck in about five weeks, before the August congressional recess. Even then, the key votes will come in the fall, amid all the pressures of the election campaign. Generally, House incumbents of both parties have such a high re-election rate that few analysts expect the composition of the lower chamber to change much, whatever happens to taxes. Republicans, however, have had high hopes of reducing or even eliminating the 55-to-45 Democratic edge in the Senate by picking up shaky Democratic seats in such states as Illinois, Iowa, Michigan and Rhode Island. But those prospects hinge at least in part on retaining what many Republicans consider a “defining issue.”

The economic impact of a deficit cut is uncertain. Deficits have been slowly strangling growth by forcing Government to borrow a disproportionate share of domestic savings — and foreign savings too. Moreover, to attract foreign buyers of Government securities, the Federal Reserve has been forced to keep interest rates even higher than market forces might push them. In the long run, a slash in the deficit ought to spur growth by making more loan money available, at a lower interest cost, to finance business investment and consumer spending.

In the short run, though, higher taxes and less federal spending traditionally weaken the economy by pulling out spending money. And an economy growing at an annual rate of only 1%, which some economists expect for the second quarter, cannot stand much weakening. Without compensating moves by the Federal Reserve to increase the money supply and lower interest rates, a $50 billion slash could tip the economy into recession. The timing is tricky; the Fed is reluctant to move until a budget-reducing deal is struck, lest any loosening merely spur inflation. Yet if it waits, the loosening may take effect too late to offset a deficit slash.

Why then did Bush back off his read-my-lips promise, knowing the derision he would face? Fundamentally he had no choice; the no-new-taxes pledge had become untenable. His economic counselors were increasingly troubled by the effects of continued high deficits. One financial industry official reports that Council of Economic Advisers chairman Michael Boskin, whom he talked to recently, “is really worried that the recovery might end.” It became obvious that deficits are getting worse rather than better. At his press conference, Bush noted that “we now estimate a deficit of over $150 billion in fiscal 1991, not counting the cost of the savings and loan cleanup,” vs. an estimate of $100 billion last January.

Nor could Bush talk the Democrats into a budget-cutting deal that did not include tax boosts. Darman made one last halfhearted try two weeks ago, presenting to the budget summit a reworked version of the Administration’s original proposed budget that he said would reduce the red ink by $50 billion. Democrats called it a gimmicked-up proposal that would not save anything near that amount. Senate Budget Committee chairman Jim Sasser and Georgia Democrat Wyche Fowler threatened to walk out of the budget talks.

Such a breakdown would have been disastrous for Bush politically. It would have guaranteed a rawhiding at the economic summit of the noncommunist world’s seven strongest financial powers, convening in Houston next week; the other six have long been critical of U.S. failure to control its deficits anyway. And it would have torpedoed a highly favorable agreement with Japan, announced last week, that is supposed to help reduce the U.S. trade deficit.

Darman and Treasury Secretary Nicholas Brady then began sounding out Democratic congressional leaders about how badly they would beat up on Bush if he agreed to some tax boosts. A flurry of weekend phone calls to the White House from Foley, Mitchell, Gephardt and Panetta apparently assured the President that the leaders would not gloat publicly. Finally, at a White House meeting last Monday, Republican congressional powers told the President the budget deadlock could be broken only by an agreement on some kind of tax rise. That set up the climactic breakfast the next day.

So did the Democrats push the President into breaking his tax pledge? Yes, but both they and Bush were recognizing reality. It has long been obvious that spending cuts alone cannot reduce the deficit as much as is required. It was obvious in 1988 too. Bush should never have voiced his pledge, he should never have made it the focus of his campaign, and he should have backed off from it long before he did. But in budget deliberations, as in other walks of life, better late than never.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Nigel Holmes

CAPTION: Taxes

Revenues