Exit the Whiz Kid

By Jacob V. Lamar Jr.

Even by the standards of fiscal debates, last week's White House meeting between Ronald Reagan and congressional budget negotiators was unusually tense. The legislators, brought together to work out a compromise, traded charges of stubbornness and irresponsibility. Republicans were dismayed when Reagan caved in to Democratic pressure and rescinded their hard-won limits on Social Security increases. The President, usually a model of affability, blew up when the subject of taxes arose. "Damn it," he cried, slamming down his pencil, "I can't listen to all this." In the midst of the imbroglio sat one remarkably serene and smiling figure: David Stockman, Director of the Office of Management and Budget, the straight-shooting point man of the Reagan Revolution. He could afford to be calm. After more than four years of sound and fury, he had just announced his departure from Government for the far more lucrative realm of Wall Street.

The resignation, to take effect at the end of this month, was not unexpected. Indeed, the real surprise may be not that Stockman left but that he lasted so long. Particularly after his rival Donald Regan became White House chief of staff last January, Stockman's days were numbered. Yet unfortunately for the White House, the announcement coincided with the climax of negotiations on the budget for fiscal 1986. "The timing was very awkward," said one official. "It added a complication at a very delicate moment." It came during a week in which Reagan threw in the towel on restraining middle-class entitlements such as Social Security and Medicare, leaving Congressmen groping with illusory savings and phony numbers (see following story) in their efforts to pretend to cut the deficit.

With Stockman's departure the President is losing the man most responsible for translating into reality his vision of a shrunken domestic role for the Federal Government and the last powerful crusader for drastic measures to reduce the deficit. Stockman combined an instinctive feel for fiscal policy, an unmatched understanding of budgetary fine print and a sharp sense of legislative tactics. His gutsy advocacy of severe cuts in politically sacred programs, ranging from school lunches to farm subsidies to military pensions, was often labeled draconian and infuriated members of both parties. Also unsettling, particularly to the President, was the blunt and brilliant Budget Director's penchant for candor, which arose from his loyalty to what he considered to be the truth, as embodied in facts and figures, rather than to ideological nostrums.

But time and again Stockman's mastery of his job compensated for the controversy he caused, and the announcement of his departure was the cue for a bipartisan chorus of praise. "He was the only one who really knew the numbers," said Congressman Tony Coelho, a California Democrat. New Mexico Republican Pete Domenici, chairman of the Senate Budget Committee, called him "the most effective OMB Director we've ever had."[*] Even the Washington Post's editorialists, often critical of Stockman's cuts, commended him "for a kind of intellectual and moral integrity that is rarely found in national public life." Stockman was bemused by the shower of accolades. "I never knew I had so many well-wishers until I decided to leave," he quipped. "Now I know why they write obituaries."

The cruel irony of Stockman's term in office is that the Budget Director who, perhaps more than any other, wanted to scale down the Government is leaving behind the biggest deficit in U.S. history. Stockman has seen the deficit grow from $58 billion in 1981 to considerably more than $200 billion this year. Although some economists say that the importance of the deficit figure is overrated, most express a real concern that it now equals approximately 5.5% of the gross national product, up from 2% in 1981. The debt racked up by the budgets Stockman has overseen equals that accumulated under all previous Administrations. Even though the amount going to domestic programs will be sharply reduced in real terms, Government spending has gone up 25% since Reagan took office and now accounts for 24% of the total economy. "The truth has sort of caught up with him," said one of Stockman's few harsh critics, Democratic Senator Ernest Hollings of South Carolina. "Stockman was too clever for the country. He was misleading at almost every turn with those blooming figures." Pennsylvania's Republican Senator John Heinz offered a slightly more charitable assessment: "Stockman won a lot of battles, but he lost the war."

Despite Stockman's public support of Reaganomics, in private he doubted that the President's edicts forbidding new taxes or cuts in military spending and his political timidity in tackling Social Security left room for a responsible fiscal policy. Those doubts first surfaced in the Atlantic in December 1981, when Stockman denigrated the supply-side faith that tax cuts could increase Government revenues through added growth (see box).

Stockman's frustration with politics and his growing pessimism about the economy undoubtedly contributed to his decision to leave Government service. Two months ago, the Budget Director, whose first child Rachel was born in May, received an offer from the Wall Street firm of Salomon Brothers that was hard to refuse. As one of Salomon's managing directors, Stockman stands to make more than $700,000 a year in salary and bonuses, in contrast with the $75,000 he earns at OMB. When he told Regan about the offer ten days ago, the chief of staff, who made a few dollars on Wall Street himself as chairman of Merrill Lynch & Co., urged him to take it.

While Stockman has no experience in corporate finance or security trading, his reputation as a workaholic numbers cruncher with an unsurpassed knowledge of Government financing was enough to satisfy his new employer. Said John Gutfreund, chief executive of Phibro-Salomon Inc.: "He's young, he's smart, there are new worlds for him to conquer." Before he joins the firm in November, Stockman has told friends, he plans to write a tell-all book. That could bring in an additional $1 million.

According to one White House official, Regan will act as "a search party of one" in choosing a replacement. Regan, who served as Treasury Secretary during the President's first term, will probably select a less independent figure to run OMB, one who would allow the chief of staff considerable control over the budget. Thus the front runners for the post, Secretary of Commerce Malcolm Baldrige and former Transportation Secretary Drew Lewis, may lose to a less well-known candidate like White House Domestic Policy Adviser John Svahn.

Whoever is tapped will be hard put to become as powerful a player as was the once obscure, two-term Michigan Congressman and former Harvard Divinity School student. After the 1980 election, Stockman was so little known in the Reagan camp that he was not invited to the President-elect's major planning sessions in Los Angeles. But Congressman Jack Kemp of New York, then a mentor of Stockman's, brought along a memo his protege had written called "Avoiding a G.O.P. Economic Dunkirk" and recommended him as Budget Director.

Concerned that Reagan's 1981 tax cut could exacerbate rather than cure the looming deficits, Stockman began to fall away from supply-side theology and line up with such pragmatists as former Chief of Staff James Baker and his assistant Richard Darman, now Secretary and Deputy Secretary of the Treasury. Together they battled to scale back increases in defense spending, with little success until this year. Though they helped enact a few "revenue-enhancing" measures, they could not persuade the President to consider more serious tax increases.

Stockman's apostasy enraged such ardent supply-siders as Kemp and former Assistant Treasury Secretary Paul Craig Roberts. "The Democrats and liberals grew to like Stockman," fumes Roberts, "because they knew that they only had to wait long enough for him to give up spending cuts and persuade the President to raise taxes. The only ones who were taken in were simpleminded conservatives, including the President, who thought Stockman was really serious about budget cutting."

As the President began his second term, Stockman had the air of weariness that comes from too many losing struggles. Yet he kept at it, arguing that 1985 was the only chance to put aside the political posturing and make major cuts before the opportunity was lost. "Dave is the only one still going at the old man," said a top Reagan adviser earlier this year.

But Reagan was in no mood to embark on another crusade, nor were his top aides, many of whom were busy changing jobs. Instead of working out a budget package with the Senate's Republican leadership, they frittered away an opportunity to deal with the deficit monster. During the campaign, Reagan boxed himself in by opposing any Social Security adjustments, and just four months ago proclaimed that vetoing any new taxes would "make my day." The budget that he submitted in February had no chance of approval even by the Senate, much less the Democratic-controlled House.

By late spring both the Senate and House had passed their own budget resolutions recommending $56 billion in deficit reductions. But where the House cut military spending, Republican Senators bravely went out on a limb to approve instead a freeze on cost of living adjustments (COLAS) for Social Security and other retirement and entitlement programs.

The deadlock lingered into last week, when lawmakers returned to hot, muggy Washington after a ten-day Fourth of July break. "We're pretty much split down the middle," House Minority Leader Robert Michel said of the impasse. By then Reagan was ready to get back into the fray. Last Tuesday evening he held a reception for congressional leaders of both parties under the oak tree in the Rose Garden. It was at this "Oak Tree meeting" that the President surprised his guests by simply backing down on Social Security, agreeing to dispense with the COLA freeze.

He also compromised on military spending, giving the Pentagon "authority" to spend up to $302.5 billion but a funding outlay of only $267.1 billion in fiscal 1986. That means the Pentagon can contract for more major weapons to be paid for later but will have to cut back on current cash outlays.

The following morning, Reagan summoned all 28 Senate and House budget negotiators for the meeting at the White House where tempers flared. According to Democratic Congressman Thomas Downey of New York, House Budget Committee Chairman William Gray complained to Reagan about a radio address he had delivered criticizing the Democrats' budget proposal as "phony." Said Gray: "Look, it doesn't do either of us any good to describe our plans this way." The President was riled, but he did not actually throw down his pencil until two Senators, Republican Slade Gorton and Democrat Lawton Chiles, started to talk about the need for tax increases. Said Reagan: "You can't show me a time in history when a major tax cut did not result in greater revenue."

This historical pronouncement was accompanied by some typical Reagan anecdotage, including a rambling story about a federal program for the maintenance of cattle ponds. Some years ago, when one of the ponds on Reagan's ranch was being repaired by his own workmen, he recounted, "these Department of Agriculture guys showed up and said, 'Send these guys home. The Government would pay for it.' " Reagan, who said that he ended up paying for the repairs himself, told the story with great verve, though some at the meeting wondered what relevance it had to the current fiscal crisis.

Such tales certainly did little to assuage the chagrin, even anger, that the Republicans felt about the President's undercutting them on the Social Security freeze. New Mexico's Domenici, who was not invited to the Oak Tree reception even though he chairs the Senate Budget Committee, called it "a terrible blow." Said another Senate source: "It was the Oak Tree meeting where they sawed off the limb Pete Domenici was on." Senate Majority Leader Robert Dole said the arrangement amounted to "surrendering to the deficit." Growled Iowa's Charles Grassley, one of 22 Republican Senators up for re-election next year: "The President, if he can't support us, ought to keep his mouth shut."

House Democrats gloated over Reagan's Social Security compromise. "The Senate is basically saying, 'All this we put together is for naught,' " said Tony Coelho. "They've chosen the House budget to work with." The question was, could either the House or Senate version be revised under the framework established at the Oak Tree meeting to achieve $50 billion in deficit reductions, which both sides still say is their goal? Domenici professed "great skepticism."

For this framework to succeed will take some serious whittling in the only area still left open: the much reduced domestic spending programs. House Speaker Tip O'Neill says that items to be considered include the Small Business Administration, Amtrak and revenue sharing. Further cuts will not be easy, nor are they likely to come close to replacing the $28.6 billion over three years that would be saved by freezes on Social Security, other entitlements and Government pensions. At best, any compromise that finally emerges will be only the smallest of down payments toward cutting the deficit.

The task will be even more difficult now that the man most dedicated to the cause will no longer be involved. Stockman was the last of the pragmatic group at the White House that placed top priority on the deficit danger. Yet despite his intense zeal on the subject, he was able to discuss it with a sense of humor last week. "I would like to take the deficit with me," cracked Stockman at one of the White House meetings, "but at Salomon Brothers we finance half of it anyway." --By Jacob V. Lamar Jr. Reported by Sam Allis and Christopher Redman/Washington

[*] The OMB was created by President Nixon in 1970. The first director was George Shultz. He was succeeded in 1972 by Caspar Weinberger. Before that there was the Bureau of the Budget, set up in 1921 by President Warren G. Harding. Its first director was Charles G. Dawes.

With reporting by Reported by Sam Allis, Christopher Redman/Washington