BREAKDOWN

By NANCY GIBBS

SOMETIMES THE TURNING POINT in a war comes not from a battlefield victory but from a private surrender of faith. It happens when leaders discover that they care less about what they hope to win than about what they stand to lose. And so last week, as a blizzard shut down the government they had just reopened, President Clinton and the Republican leaders of Congress were still saying that it was in America's interest to reach a budget deal, that they weren't very far apart, that they had everything to gain by making peace and much to lose by fighting on, that the markets would shriek if the talks ruptured. And yet there came a moment when they all quietly reached the same conclusion. To varying degrees, they all wanted a deal, they all needed a deal, and without a miracle, they probably weren't going to get a deal. This is the story of why not.

The latest, perhaps final, chapter of the yearlong budget battle was written a week ago Saturday at a restaurant near the Treasury Department. For days Newt Gingrich had been stewing over how to make his best and final offer to Clinton. The Speaker had fought all year for the principle of a seven-year balanced budget; now he hoped to prove once and for all that he is capable of governing, not just breaking windows and upsetting the furniture in the House. So he sat with his advisers at the Old Ebbitt Grill on 15th Street, scribbling notes, picking at appetizers and searching for some magic mix of spending cuts, entitlement reductions, tax cuts and policy changes that could win an overwhelming majority of Republicans in Congress and still get the President's signature.

That same day the President, for his part, finally delivered what he had promised weeks ago: a seven-year plan that had the Congressional Budget Office seal of approval: the numbers were real this time, no sunny assumptions about economic growth. Clinton actually borrowed it from Senate minority leader Tom Daschle, who had been trying to sell a compromise for weeks. When Daschle first unveiled his plan in December, hardly anyone noticed. But by last week, with his poll numbers drooping, Clinton needed a credible proposal, fast. A top Daschle aide, John Hilley (soon to join the White House as its congressional liaison), kept CBO staff members working overtime trying to figure out how to squeeze in at least a teeny tax cut, which Clinton had promised. When Hilley had trouble getting the help he needed at CBO, it was actually Gingrich's staff that turned up the pressure on the exhausted number crunchers. This was because the Republicans also needed Clinton to endorse a CBO-approved plan, so they could claim they had got at least something out of him in return for what they considered their big cave-in, the agreement to reopen the government.

In the process, they were handing Clinton a weapon he could turn against them. The debate would no longer be about who had a serious plan but about who had a better one. Polls continued to show that a large majority of voters hated the G.O.P. Medicare proposals and thought they were designed mainly to make room for lavish tax cuts for rich Republican allies. This put Clinton in a neat position. If Gingrich and Senate majority leader Robert Dole accepted his terms, he could take credit for balancing the budget without shredding the safety net. If they rejected it, he could campaign for the rest of the year against a party that hates old people, children and breathable air.

So now it was the Republicans' turn again. Working at a long table in the smoking section, Gingrich and House Budget chairman John Kasich agreed on an offer that reduced Medicare growth $168 billion, adopted the conservative "Blue Dog" Democrats' proposed savings of $85 billion on Medicaid, split the difference with Clinton on tax cuts at $177 billion and embraced the Senate's version of welfare reform, which 40 Democrats had voted for and Clinton had blessed, at least initially. They still held fast to the notion of transforming entitlements like Medicaid into block grants to the states. Gingrich figured that the proposal, when made public, would cost about 40 hard-line Republican votes in the House but would make up the difference among moderate Democrats. "The proposal had to have the imprimatur of bipartisanship," said a participant in the session.

But as Gingrich and company prepared to set off for the White House that night, they got their first inkling that Clinton's crew was not in a conciliatory mood. In earlier budget summits, Gingrich, Dole and House majority leader Dick Armey had faced off against Clinton, Gore, Daschle, House minority leader Dick Gephardt and White House chief of staff Leon Panetta. Gephardt and Gore, who both have their eye on the presidential race in 2000, had come to be known among the Republicans as "the chaperons," as in "We could have gone further, but the chaperons were watching." This time the Republicans wanted to bring along the Budget chairmen, Kasich and Pete Domenici; for one thing, it would even up the players on each side, and more important, they were the best guys with numbers. But to the Republicans' fury, Gore vetoed the idea, and to their amazement, Clinton went along. That meant that during the key session, Gingrich, Armey and Dole would have to leave the room to consult with their colleagues. As they headed down Pennsylvania Avenue under darkening skies, the forecast was for a crippling snow. Like many in the city, no one in their group knew how bad the storms would be.

At the Oval Office session that evening, Gingrich presented the proposal he had cooked up at the restaurant, and argued that he had come a long way. But then came what looks like a defining moment in the talks, and in the whole bare-knuckle brawl. The Speaker warned that he would not allow a bill to come to a floor vote if he could not expect to win 200 Republican votes, out of 236 total. He had two reasons for drawing that line: first, he is determined that any balanced-budget plan have a distinctly Republican stamp; and second, he wants to be Speaker for a long, long time, which means he needs the support of his troops--and they weren't willing to compromise much more.

The Democratic reply to Gingrich came from Daschle, who said in essence that if the Republicans were going to play that game, he would not accept anything that could not win 40 of 46 Democratic votes in the Senate. On its face that seemed reasonable enough: Why should Democratic leaders endorse a deal that many of their members hated, in order to help the Speaker hold his coalition intact? On the other hand, the Republicans don't need 40 Democratic votes to pass a deal in the Senate; a handful will do. Dole leaned over to Daschle and remarked, in a trademark aside, "We only need seven, Tom."

But Gingrich was flabbergasted. Everyone in the room knew that there was no such plan, no possible compromise that would look equally juicy to the vast majority of revolutionary House Republicans and of entrenched Senate Democrats. He was already miserable at sacrificing even 15% of his Republicans, since those most likely to vote against his compromise plan would be some of the true believers who got him elected Speaker in the first place. Clinton and the Democrats, Gingrich concluded, were still behaving as if they controlled the Congress, as if this budget deal would be their handiwork rather than his.

In the end it was Dole who stepped in, reprising his role as designated grownup. He suggested that what everyone should aim for was a deal that would be acceptable to a majority on each side, rather than requiring virtual unanimity on one side or the other. In other words, build a deal from the center out. This would be just fine with Clinton. A moderate agreement would allow him to launch his presidential campaign with the claim that he is just as good as Dole at getting things done, but not as old, and just as visionary and fiscally rigorous as Gingrich, but not as weird.

"It was at that moment," said a Gingrich adviser, "that they realized that this was simply not doable." Everyone at the table was haunted in some way by the 1990 budget deal, when the roles were reversed and George Bush faced off against a Democratic Congress. When Bush unveiled his first compromise, one furious young Republican denounced his President, stormed out of the talks and split the party in half. Bush's approval ratings plunged 20 points in six weeks. He got his budget through, but two years later he was retired from office, and four years later his young nemesis had become Speaker of the House.

By the next day, the sky had fallen and there were no meetings; by Monday there was talk of giving up. Gephardt couldn't dig out of his exurban home in Herndon, Virginia, to make it to the White House. On Tuesday, worried that the talks were indeed about to collapse, Clinton without warning put on the table without warning a new proposal. Panetta listed once more the 10 major areas of dispute and suggested that each side "win" three and declare a draw on the other four. For dessert, the White House this time offered an even higher tax cut, but insisted that there was no more room to give on Medicare.

At this point everyone needed a breather. Clinton was heading for Bosnia, Gingrich and Dole for the campaign trail, so they agreed to call a "recess" and go home and do some new math. The White House was adamant that the stalemate be portrayed as a pause, not a breakdown, but the conspiracy of silence only lasted about a day and a half. Gingrich said on Wednesday the balanced budget was as good as dead. The markets, spooked on Tuesday, hollered on Wednesday, as the Dow dropped 164 points in two days and the bond market shimmied in distress. Clinton decided he had to do something, so he called a press conference and made the wiliest pitch yet. "We could balance the budget in about 15 minutes," he said. "In order to do that, some of the differences between me and the Congress over some of these issues will have to be taken out of that budget agreement and deferred for the election. But that's what elections are for." In other words, make ends meet by stripping from the plan the two things Democrats dislike most, the tax cuts and the Medicare and Medicaid reductions, and let the voters decide on those in November. It was a neat bit of jujitsu: Clinton became the defender of a responsibly balanced budget while portraying the churlish G.O.P. as so obsessed with ideological purity that it couldn't accept victory gracefully.

Responding to the President minutes later, Gingrich appeared before the cameras, complete with easel and charts, and denounced Clinton's offer with such shrillness that even some faithful allies couldn't bear to watch. The White House loved every minute of it. "Did you see the mad professor?" asked Clinton aide George Stephanopoulos. And as long as the public perceives Gingrich as the tough guy, which the President is artfully trying to harden into spoiler, the White House figures it has a good basis for a '96 election battle fought on Clinton's preferred ground--Medicare, Medicaid, education and the environment.

For now, the short-term imperatives work against a budget settlement. Dole has by his own admission a lot of "catching up" to do on the campaign trail, where he is being hounded by Phil Gramm for political insider trading. Gingrich is being pecked to death by his freshmen. Clinton is still bargaining from weakness, since many lawmakers in his party think he has betrayed them once too often for them to fall in line behind him now. If there is any hope left, it may lie with the Blue Dogs, a small group of conservative Democrats who have felt alienated from the liberal House leadership and disillusioned by their President. They often joke that their only membership requirement is a bad attitude.

Though there are only 21 of them, they are being stroked, wooed and courted by all sides till they blush. They even have talks going with the various factions of the House Republican freshman class--a dialogue that California Democrat Gary Condit describes as "very enlightening to us. They're not as rigid as they're portrayed to be." As the White House negotiations broke down, Armey announced that the Republican leadership was ready to turn to Plan B. The scheme: if they couldn't cut a deal with Clinton, they would turn to the Blue Dogs to come up with a budget that could pass over the President's veto and render him irrelevant. The Republicans' latest offer--embracing the Blue Dogs' Medicare and Medicaid numbers--signaled that the G.O.P. leaders were serious about that strategy. "We've learned a lot about pressure and leverage this year," says Condit. But the goal, he adds, is not to bypass the President. "If we can create some movement from the bottom up, it may be that we can nudge them all out of a ditch."

Dole and Daschle, both Senators with long experience in the trenches, will do what they can to rescue any bill that looks viable. They even discussed the possibility of treating any budget agreement as if it were a "reconciliation bill." That means debate would be limited and opponents of the plan could not filibuster in the Senate, making it a lot easier for the measure to be approved. What many Democrats will have to decide is whether they can stomach a compromise far less fair than they would like, on the grounds that it still might be the best first step for the country as a whole. When it comes to imposing discipline on their spending, America's politicians will never learn to do it well if they never do it at all.

--Reported by Michael Duffy, J.F.O. McAllister and Karen Tumulty/Washington

With reporting by MICHAEL DUFFY, J.F.O. MCALLISTER AND KAREN TUMULTY/WASHINGTON