I knew I’d catch some flak on this decision," said George Bush, every inch the embattled leader. “The arrows have been flying–front, back, sideways. But that’s what I get paid for . . . I’ve got to do what I think is right.”
He sounded fine, and won some plaudits for courage. But the bold stance was at least partly an exercise in damage control: the White House–and especially chief of staff John H. Sununu–had drastically underestimated the firestorm that erupted when the president abandoned his read-my-lips pledge and admitted the need for new taxes in a budget deal with Congress. READ MY LIPS: I LIED, said the New York Post’s banner headline. For three days, while Democrats gloated and right-wing Republicans raged at the flip-flop, Bush himself had hunkered down in silence. Now, in the White House press room, he was facing the toughest questioning of his presidency.
Bush was visibly subdued at the start, and he stumbled several times in his bland opening statement. But as the reporters badgered away–Why the change? Had he lied?–their tone was more bantering than hostile, and the president grew relaxed and confident. Things had changed since he made his vow in 1988, he said; the economy was slower and the budget deficit worse “than any of us visualized” back then. He compared himself to Abraham Lincoln (“I’ll think anew”) and to Ronald Reagan, who had raised taxes in 1982 and 1983 and won re-election anyway. When the budget deal with Congress was completed, he said, he would “ask the people for support,” and he would get it. Would his turnaround hurt his credibility? “No, not in the long run.”
In the short run, however, the president had plainly launched on his biggest gamble yet. What it brought him for openers was an incipient revolt in his own party, the prospect of weeks or months of tough budget bargaining with no sure outcome, a leap into uncharted shoals of economic theory and the prospect of Republican losses in this fall’s congressional elections. “He’s starting to act like a president,” approved chairman Dan Rostenkowski of the House Ways and Means Committee. But that was a Democrat speaking–and a good many Republicans in Congress suspected darkly that Bush was willing to put their jobs at I risk this fall to improve his own chances in I 1992. “I don’t want to use the word ‘betrayed’,” said Wyoming Sen. Malcolm Wallop, chairman of the Republican Steering Committee. “But people feel they are victims of some ill-conceived actions . . . Whatever their intentions, this has been touted as ‘Bush’s big lie’.”
As Bush himself saw it, he had little choice but to switch his stand. Thanks partly to the savings and loan disaster, the budget deficit was spiraling out of control. Forecast at just $124 billion only last January, it now looked to reach $232 billion for fiscal 1991–and if it weren’t for the surplus in the social-security trust fund, the true deficit would be $305 billion . Under the Gramm-Rudman-Hollings Act, the deficit had to be trimmed by fully $100 billion to avoid forced spending cuts that would “sequester” funds from programs I across the board. In past years the bullet fired by the act had been mostly dodged by phony spending cuts and wildly optimistic revenue estimates. But this year Congress and the administration were set for a facedown: both vowed there would be no smoke-and-mirrors solution.
Weeks ago Bush had signaled his willingness to go along with a tax hike by saying that there were “no preconditions” in the summit talks with Congress to work out a broad budget deal. But Sununu let slip that the White House planned to blame the Democrats for any such increase, so they refused to take any initiative until Bush made his flip-fiop unmistakable. Meanwhile, the October deadline for the draconian sequestration of funds was looming closer, and Bush and his advisers feared the cuts would create havoc and possibly recession. “The economy couldn’t handle [that], and nobody would stand for it,” said a senior aide. “We’d be blamed for closing down the government.”
Sununu and budget director Richard Darman warned Bush two weeks ago that the talks were stymied; if he didn’t make a new move, the forced spending cuts were inevitable. Adding to the pressure, Bush could expect heavy criticism from his allies at next week’s economic summit in Houston if there was no progress on the budget. So, at a breakfast with congressional leaders, the deal was cut. After an hour of dickering, a three-paragraph statement was handed out to the press. Bush won a few points: he stipulated that he still wanted a capital-gains-tax cut, reductions in both domestic and military spending and reforms in the budget process. But he said “it is clear to me” that “tax-revenue increases” would also be needed.
Under wraps: It was Sununu’s misplaced bet that that phrase would be vague enough to give the president “wiggle room” to deny that his stance had changed. In theory, a growing economy could produce revenue increases without higher rates. Some congressional Republicans even tried to make that argument. But Bush stayed under wraps, and his spokesman Marlin Fitzwater was attempting to be Delphic. Asked if the president had broken his pledge, he responded: “Are you crazy?” Pressed further, he said: “We feel he said the right thing then. He’s saying the right thing now.” Meanwhile, Democrats were calmly claiming victory. “George Bush has announced that he is raising taxes,” said New Jersey Rep. Robert G. Torricelli. “The charade is finally over.”
And the GOP right, visibly seething, was conceding the point. David Keene, chairman of the American Conservative Union, accused Bush of “selling out.” There was outraged talk that the president could face a conservative challenge for the 1992 nomination. More immediately, Bush plainly had an uphill fight to get a majority of his own party to go along. Pennsylvania Congressman Robert S. Walker got 90 Republican colleagues to sign a letter to the president: “We were stunned . . . A tax increase is unacceptable.” A similar letter was circulating among GOP senators. Insult was added to injury. A parade of challengers for Democratic congressional seats, granted photo opportunities with the president, walked out of the White House and made videotapes boasting how they had told him he was wrong.
Even with Bush on the record for a tax boost, the budget negotiations faced a long and thorny path. Democrats, savoring their victory, now want to begin undoing the tax cuts of the Reagan years, which they see as overwhelmingly favoring the rich. In a letter to Speaker Thomas S. Foley, 134 House Democrats warned that they would not support any “further burden on [middle-class] families rather than the very wealthy”-and by implication, that they would fight Bush’s capital-gains-tax cut. Republicans were just as adamant that the so called income-tax bubble, which keeps the very rich from paying income taxes totaling more than 28 percent, should be preserved. There were hints that those two items might be a trade-off, but that was far from sure. And the two sides were nowhere near agreement on military spending, cuts in social programs or reduced “entitlements” in such things as social security and farm subsidies.
Major cuts: Bush’s team had its own priorities–and some division in the ranks. Most administration aides, and probably most Republicans in Congress, still argue for balancing the budget by cutting spending, with the stress on domestic programs. They agree that if any tax increases are to be made, they should look as little as possible like what they are. Thus the GOP would resist any move on income-tax rates, but would grudgingly consider “sin taxes” on alcohol and cigarettes and possibly even an energy tax. Darman has visions of a grand compromise–what he calls the “big fix” that would bring budget policy to a long-range equilibrium for years to come. As he sees it, any such fix would mean not only higher taxes, but major cuts in entitlements and defense spending.
Darman has a reputation in Congress as something of a glib trickster: after all, he helped designed the" Reagan tax cuts that created the present problems. “He starts the fire and then rushes in with the extinguisher,” says a Democratic aide. GOP consultant Eddie Mahe is equally scathing, calling Darman “a double agent, whose loyalty is to policy or process and not to George Bush.” But somewhat surprisingly, House Speaker Foley and Senate Majority Leader George Mitchell show signs of hankering for the big fix. Their outline of such a plan is breathtaking: a deficit reduction of $500 billion to $600 billion over five years and a balanced budget by 1995, without counting the huge and growing social-security surpluses. Both Mitchell and Foley would like to be seen as statesmen. “There is a ‘googoo,’ good-government point to be made here,” says a strategic House Democratic aide. “We’re beyond the point of doing a smoke-and-mirrors budget. We assume that what impelled [Bush] to give ground on taxes is a feeling that the numbers are spinning out of control.” And now that Bush has made his concession, Mitchell and Foley are ready to match ace for ace. Bush “has a right to demand of us that we give up some of our treasures,” says the aide.
That may or may not be smart politics. “It’s the fiscal equivalent of lemmings,” says Kevin Phillips, the conservative thinker whose new book foreseeing a populist renaissance is the talk of Capitol Hill (page 19). “To the extent they bail [Bush] out, I don’t see what Mitchell and Foley get out of it except another pen” at the bill-signing ceremony. But the spirit of compromise is clearly at work. The Democrats seem ready to concede major treasures indeed–perhaps even that high-income retirees might be taxed on a greater portion of social-security benefits. For his part, Bush, whose childhood nickname was “Have Half,” always prefers conciliation to a fight, and apparently thinks he can overcome his right-wing opposition with the prospect of a healthier economy in the future.
‘Russian roulette’? But the economic gamble may be the riskiest bet of all. In time-tested Keynesian theory, a major tax increase when the economy is soft can be a formula for recession. Bush’s bet is based on the opposing notion: that cutting the deficit will produce a drop in interest rates big enough to offset the loss of spending power and spur renewed expansion in time for the 1992 campaign. Some traditional economists, like Robert Giordano of Goldman, Sachs & Co., think Bush is “playing Russian roulette with the American economy.” Others, like George Perry of the Brookings Institution, say the gamble is worth taking, if only to get the deficit under control. In this view, Bush would be risking a short-term economic pinch to save future generations the burden of paying for present extravagances. Bush wouldn’t reject the image of a steward of the future, but aides say his thinking is almost surely more pragmatic: whatever the hazards of cutting back, the Gramm-Rudman-Hollings cuts would make things worse.
The game isn’t over. Despite Bush’s concession, the budget negotiations could still come to nothing. Ideally, the summiteers could reach an agreement by July 15, the date when a “snapshot” of the economy must be taken to set the target figures for sequestration. The next working deadline is Aug. 4, when Congress is due to recess for the summer. But if that goes by, the machinery of forced spending cuts will crank into motion in October, slicing indiscriminately across the board. That risks a serious backlash in a public already restive: Republican pollster Richard Wirthlin finds 56 percent of his sampling saying the country is seriously off track. Nobody can be sure who would lose most in such a case. In one scenario, voters might blame the mess on Bush and the Republicans; in another, there could be a general move to throw all the rascals out.
It’s even possible that Congress might deal with the budget after the election has come and gone, in a lame-duck special session when it could be easier to do the right thing. Whatever both sides say, nobody who knows the record can flatly rule out another smoke-and-mirrors resolution. But even the cynics acknowledge that such a dodge looks less likely all the time. Whatever happens, as Bush warned, “tough decisions must be made. " The bullet had finally arrived. Congress could either bite it or stand up to get shot.
The official estimate of the fiscal 1991 budget deficit, huge as it is, is just the beginning Adding the S&L bailout and:deducting the social-security surplus from revenues almost doubles the red ink. Official deficit $164 billion RTC spending (S&L bailout) $68 billion Social-security surplus $73 billion Real deficit (total) $305 billion
