The Summit That Failed

By Ed Magnuson

As the economy continues to stumble, the budget talks break down

The diplomatic negotiations had dragged on for five long weeks, featuring secret meetings at carefully guarded locations, as second-echelon officials delicately probed for areas of possible compromise. Finally, both sides agreed that the moment for deadline was nigh, and a summit session of the two leaders was arranged. Three hours later, it broke up in an impasse, marking the onset of a new political war.

The central figures in that untidy scenario were Washington's two prideful old Irishmen, Ronald Reagan and House Speaker Tip O'Neill, and their failure to agree abruptly ended efforts to find a bipartisan alternative to the President's deficit-laden budget for fiscal 1983. The collapse of the talks raised questions for which no one last week had any ready answers:

>Can Congress, with its houses divided, produce an alternative budget that is both economically sound and acceptable to the White House?

> How will the breakdown in talks affect a recessionary economy staggered by high interest rates and an unemployment rate that this week threatens to exceed the postwar record of 9%?

> Will enough of the politicians involved in the budget crisis have the courage to make tough, responsible decisions in what promises to be a bitter election year?

Defending his position, the President wasted no time in turning to his most effective political weapon. The day after that inconclusive and sometimes acrimonious summit meeting with Speaker O'Neill, Reagan took to prime-time TV to urge Americans to tell Congress that "this is no time for politics as usual--that you too want an end to runaway taxes, spending, Government debt and high interest rates." Although he bogged down slightly while reeling off a slew of figures and his red marker pen failed him as he tried to make a point with a chart, the President smoothly presented his central argument. The Democrats, he said, "want more and more spending and more and more taxes," while "I believe we should have less spending, less taxes and more prosperity."

If the differences were that simple, of course, there would be no valid argument. Still, the President had a point when he said that he had been willing to make substantial changes in the budget he had first proposed last February. He said that he had sought a cut of $101 billion in spending over three years. He was willing to limit those reductions, which Democrats claim would severely hurt the poor, to $60 billion. When Democrats suggested at the final bargaining session that the nondefense cuts be held to only $35 billion, Reagan said that he offered to split the difference at $48 billion. "And that was rejected," he declared. "The meeting was over." The impasse was actually far more complicated, but the President had indeed taken steps to "go an extra mile" to reach a compromise.

"Our goal must be a balanced budget," said Reagan, "and our budget would have set us on that road." That was hard to square with huge deficit estimates that even Reagan seemed to accept. Without any modification, his economic program of increased spending on defense and two more years of income tax cuts would lead to staggering deficits: $182 billion in 1983, $216 billion in 1984 and $233 billion in 1985. Nonetheless, the President urged Congress to approve a constitutional amendment requiring the Federal Government to operate with a balanced budget (see box). Said he: "We have tried the carrot, and it failed."

The Democrats demanded, and got, TV time to rebut the President. They wisely refrained from pitting the deeply lined face of O'Neill, 69, and his oldtime political-pro rhetoric against the more polished Reagan, 71. The Speaker chose as his surrogate Representative Richard Boiling, 65, of Missouri, who had attended all 13 closed-door meetings with White House advisers, Cabinet members and congressional leaders. Boiling, who is not seeking reelection, after 17 terms in the House, spoke off the cuff.

"The problems in America are not Republican," he said. "They're not Democrat. They're American." Boiling, whose delivery was dull, nevertheless effectively argued that the President's economic program was not working and was opposed not only by House Democrats but by many members of the Republican-controlled Senate. He charged that Reagan's tax cuts were "geared to the benefit of the rich" and that proposed trims on social programs hurt the middle class and the poor.

The two conflicting speeches echoed the basic differences that caused the extraordinary three-hour meeting between Reagan and O'Neill to flare into anger, then fizzle into failure. In an adroit maneuver designed to emphasize his flexibility, Reagan volunteered to meet O'Neill in the President's Room, an ornate rococo ceremonial enclave near the Senate floor.

Before the meeting, Reagan's advisers warned that the Democrats would try to gut his 1983 tax cut. "You know," the President replied, "the world is full of rabbits, when what we need are a few tigers." Reagan had asked to meet with only O'Neill and Senate Majority Leader Howard Baker. The Speaker insisted that Boiling be present. Fine, Reagan agreed, but then White House Chief of Staff James Baker, who had represented the President at all the previous meetings, should take part too. As each party raised the ante, the group grew to eleven. After agreeing to sit beside Reagan for pictures, O'Neill objected to remaining there for the meeting and moved to the opposite side of the table with his fellow Democrats.

Reagan opened the session with an off-color joke about two Irish housewives; its point was that he and O'Neill should not get into a fight based on misunderstandings. But they seemed to understand each other all too well. As Howard Baker played moderator, running through the range of compromise options that had been discussed by emissaries from both sides, emotions began to rise. O'Neill looked at Reagan and said bluntly, "Your program has failed, and you should take the lead in admitting it." Snapped Reagan: "It has not failed at all. It hasn't even started yet."

At one point, there seemed to be only a $3 billion difference between the Republicans and Democrats on spending for social programs. Reagan argued that this margin was slight. "It may not seem like a lot of money, Mr. President," grumbled Boiling, "but it means a lot in terms of human suffering." Erupted an angry Reagan: "My program hasn't hurt anybody. No one has been thrown out in the snow to die."

When it was suggested that the President delay by three months his 10% tax cut for 1983, Reagan commented: "You're making me crap a pineapple." House Majority Leader Jim Wright pushed harder, urging him to halve the tax cut to 5%. Reagan complained that he was being asked to substitute a cactus for the pineapple.

Democrat Wright displayed a chart showing that Reagan's tax cut disproportionately helped the rich. Presidential Counsellor Edwin Meese, supported by the President, retorted that everyone benefited equally from a 10% rate cut. But both men were corrected by Treasury Secretary Donald Regan, who admitted that a 10% cut in the tax rates benefits those in the higher tax brackets more than those in low ones. The most sensitive issue involved delaying or putting a lid on the cost of living allowances (COLA) under various federal retirement programs, most notably Social Security. Both Reagan and O'Neill knew that the COLA issue was a key to any major budget savings, but neither wanted to be the first to raise it in an election year. During the preliminary negotiations, both the Office of Management and Budget and Missouri's Boiling suggested reducing or delaying COLA adjustments for Social Security. But the President recalls all too well how badly he was burned last year when he tried to cut benefits more drastically. When the topic finally surfaced, Reagan declared that he would take no responsibility for suggesting cuts in Social Security; the idea came from Senate Republicans, he said, not the White House. Snapped O'Neill, who has loudly and publicly assailed any tampering with Social Security: "That's the end of that. That's off the table."

Howard Baker made one final try at compromise. He suggested that a three-month delay in Reagan's 10% tax cut be coupled with a similar delay in granting the 1983 COLA benefits. Reagan's senatorial friend Paul Laxalt argued for the compromise, but the President demurred. Reagan, however, did agree to consider the twin delays as part of a compromise package. Now it was the Democrats' turn to respond. O'Neill leaned toward Boiling and asked, "Dick?" Replied Boiling: "We just can't take that." By Boiling's count, Reagan was offering to trade a $7 billion budget savings in delaying the tax cut for a $16.6 billion savings in COLA. That, O'Neill said later, was like "giving an apple for an orchard."

Neither side wanted to be the first to break up the meeting. Eventually O'Neill said to Reagan, "I think we're all waiting for you to get up." Jim Baker had a better idea. "Let's all get up together," he suggested. The meeting ended with laughs, handshakes and another of Reagan's mildly risque jokes.

Afterward, all parties agreed that "basic philosophical differences" had been responsible for the breakdown. Democrats came away convinced that the President sincerely believes his economic policy is not only succeeding but is fair to everyone. Recalled Boiling: "He was friendly, persuasive, forceful, completely committed to his program and absolutely sure he wasn't hurting anybody." The Democrats consider the President's attitude naive and even a little frightening.

The Republican participants, on the other hand, felt that Reagan had demonstrated his willingness to compromise and that the Democrats really did not have a constructive counterplan. White House aides felt that the President had handled the situation deftly enough to make the Democrats share the blame for the budget deadlock. "The perception now is that the President is fair, equitable and reasonable," claimed one of Reagan's aides.

Complaining that O'Neill had displayed "no give whatsoever," the President met with five Republican leaders from the Hill to plan future strategy sessions. Reagan said he would "consult with responsible members of the Democratic Party in the Congress to make this a truly bipartisan effort." But the only Democrat he approached was House Budget Committee Chairman Jim Jones, whom the President praised for acting responsibly throughout the budget talks.

To get support in the House for any budget that reflects his compromise proposals, Reagan must attract more Democrats than the 40 conservative "Boll Weevils" who helped him pass last year's tax and budget cuts. Reason: a number of the moderate "Gypsy Moth" Republicans from the Northeast and Midwest, wary of both deficits and further trims in social spending, are not likely to back him as solidly this year.

Meanwhile, Speaker O'Neill vowed to let Republicans in the Senate shape a budget proposal before the House takes action. O'Neill also threatened to call a vote on Reagan's original budget, claiming, "The President complained to us yesterday that his budget had not been taken up." Washington Congressman Thomas Foley, the Democratic whip, had no doubt how that vote would go. "If we withdrew every Democrat from the chamber and permitted only Republicans to vote," he predicted, "the President's budget would be resoundingly defeated."

Such partisan gamesmanship will not solve the budget problem. The alternative most likely to be considered in the Republican-run Senate will probably be similar to what Reagan had been willing to accept before the talks broke down, but with somewhat larger cuts in defense spending and no infringements at all on Social Security benefits. If such a bill did reach the House, Democrats might well try to scuttle Reagan's cherished 10% tax cut, and a veto could follow. "I think the President will have to veto a major piece of legislation just to settle this question once and for all," warned a Reagan aide.

That, of course, would only prolong the uncertainty in money markets and among businessmen. The key to an upturn is widely viewed to be a reduction in interest rates. While the prime rate has indeed dropped from a Carter presidency high of 21.5% to a current 16.5%, as the President proudly noted on TV, the rates most borrowers pay remain far too high to allow for anything more than a temporary respite after the July tax cut goes into effect.

"It's great to play politics," said Treasury Secretary Regan last week, trying to put the budget impasse into perspective. "But we have the nation's economic health at stake. Talk about kids playing with matches, what we have here is a good deal more serious." That is true -- and it is time for the "kids" in both the White House and the Congress to put away the matches before they wind up burning everyone. -- By Ed Magnuson Reported by Douglas Brew and Evan Thomas /Washington

With reporting by Douglas Brew, Evan Thomas/Washington

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