a million net new jobs had been created since the beginning of 1991. But
long-term interest rates were still stubbornly high. They were acting as a
brake on economic activity by driving up the costs of home mortgages and
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bond issuance. They reflected an expectation of ongoing inflation for which
investors had come to require an extra margin of interest to offset the
added uncertainty and risk.
Improve investors' expectations, I told Clinton, and long-term rates
could fall, galvanizing the demand for new homes and the appliances, furnishings,
and the gamut of consumer items associated with home ownership.
Stock values, too, would rise, as bonds became less attractive and
investors shifted into equities. Businesses would expand, creating jobs. All
told, the latter part of the 1990s could look awfully good. I was not oblivious
of the fact that 1996 would be a presidential election year. The path to
a beneficent future, I told the president-elect, was lowering the long-term
trajectory of federal budget deficits.
To my delight, Clinton seemed fully engaged. He seemed to pick up on
my sense of urgency about the deficit, and asked a lot of smart questions
that politicians usually don't ask. Our meeting, which had been scheduled
for an hour, turned into a lively discussion that went on for almost three.
We touched on a whole range of topics beyond economics—Somalia and
Bosnia and Russian history, job-training programs, education—and he asked
for my assessment of world leaders whom he hadn't yet had a chance to
meet. After a while, aides brought in lunch.
So saxophone wasn't the only thing we had in common. Here was a
fellow information hound, and like me, Clinton clearly enjoyed exploring
ideas. I walked away impressed, yet not entirely sure what I thought. Clearly,
for sheer intelligence, Bill Clinton was on a par with Richard Nixon, who,
despite his obvious flaws, was the smartest president I'd met to that point.
And either Clinton shared many of my views on the way the economic system
was evolving and on what should be done, or he was the cleverest chameleon
I'd ever encountered. I mulled all this on the airplane on my way
home. After I got back to Washington, I told a friend, "I don't know that I'd
have changed my vote, but I'm reassured."
That feeling was reinforced a week later when Clinton announced as
his senior economic team a number of familiar faces. As treasury secretary
he'd picked Lloyd Bentsen, the chairman of the Senate Finance Committee,
with Roger Altman, a very smart Wall Street investment banker, as his
deputy. As budget director he chose Leon Panetta, a California congressman
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who chaired the House Budget Committee, with economist Alice Rivlin as
his deputy. She was the only economist on the team, and her credentials
were impressive: she'd been the founding director of the Congressional
Budget Office and had been an early recipient of one of the MacArthur
Foundation's genius grants. Just as interesting was Clinton's choice of Robert
Rubin, the cochairman of Goldman Sachs, to run a new White House
council on economic policy. As the New York Times explained it, Rubin was
to act as the economic equivalent of a national security adviser: his job
would be to elicit economic ideas from Treasury, State, the budget office,
the CEA, and other departments, and weave them into policy options for
the president. What jumped out at me was that Clinton was taking a page
from John F. Kennedy's book. All of Clinton's economic-policy appointees
were fiscally conservative centrists like Doug Dillon, the Republican banker
whom Kennedy picked as treasury secretary. Choosing them made Bill
Clinton seem about as far from the classic tax-and-spend liberal as you
could get and still be a Democrat.
L
L
ike every new administration, the Clinton White House had to scramble
to pull together its first budget, due for submission to Congress by
early February. The president by all accounts did not have an easy time
dealing with the recommendations of his economic team. The full extent
of the fiscal problems confronting them was only now becoming clear: in
December the Office of Management and Budget offered a revised analysis
projecting that the government was headed toward a $360 billion deficit
in 1997—some $50 billion higher than its previous estimate. This made
it clear that to come anywhere near his goal of halving the deficit, Clinton
would have to abandon or postpone other cherished plans, such as the
middle-class tax cut and the "investments" in training and jobs.
I kept tabs on the budget-making process mainly through Lloyd Bentsen.
The new treasury secretary had first caught my attention in the 1976
primaries—Jimmy Carter ultimately beat him for the Democratic nomination,
but I thought Bentsen had looked like a president and acted like one.
Courtly, gray-haired, and sophisticated, he was a former World War II B-24
bomber pilot who'd served four terms in the Senate, where he had a well
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THE AGE OF TURBULENCE
earned reputation for good judgment and for quietly getting things done.
Andrea and I had known Bentsen and his impressive wife, B.A., socially for
some time. I was not surprised to find him a pleasure to work with, even
when we disagreed.
Bentsen and the others on the economic team were careful to acknowledge
the Fed's boundaries. In fact, their decision not to comment publicly
on monetary policy was a big break from the past, and helped us and them
by bolstering our independence. When he and Panetta came to brief me in
mid-January on the evolving budget plan, they avoided asking for an endorsement
or even an opinion. I simply indicated that I understood, and we
left it at that. In fact, I thought the plan noninflationary and testified to that
effect in Congress in late January.
Bentsen asked me to weigh in with the president just once—the day
after I'd first testified in favor of their overall approach. (I had steered clear
of commenting on the details of Clinton's program.) As the team crunched
the numbers and the budget took shape, Clinton found himself faced with
a choice that was increasingly stark. Either he could opt for a package of
spending programs that would fulfill some of his campaign promises, or he
could opt for a deficit-cutting plan, whose success would depend on impressing
the financial markets and that would pay off chiefly in the longer
term. There was no in-between—we couldn't afford both. This dilemma
had opened a rift in the White House staff, some of whom privately ridiculed
the deficit-cutting approach as a sellout to Wall Street. That's why
Bentsen asked me to the White House—to reemphasize the urgency of
budget reform.
We met the president in the Oval Office on the morning of January 28;
Bob Rubin joined us. Clinton was all business, so I got straight to the point.
I focused on the danger of not confronting the deficit right away, playing
out for him how, in that instance, the decade was apt to unfold. Because
of the end of the cold war, I told him, "defense spending will come down
over the next few years and that will mask a lot of problems. But by 1996
or 1997, the deficits will be hard for the public to ignore. You can see it in
the data." And I outlined for him how the mandated outlays for Social Security
and other social benefits were scheduled to increase, which would
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cause deficit gaps to open further. "So the debt rises markedly into the
twenty-first century, and the interest on the debt rises, threatening a spiral
of rising deficits. Unless it's aborted, that could lead to a financial crisis," I
said. As we finished, Clinton, unsurprisingly, looked grim.
Though I hadn't put it in so many words, the hard truth was that Reagan
had borrowed from Clinton, and Clinton was having to pay it back.
There was no reason to feel sorry for Clinton—these very problems were
what had enabled him to defeat George Bush. But I was impressed that he
did not seem to be trying to fudge reality to the extent politicians ordinarily
do. He was forcing himself to live in the real world on the economic
outlook and monetary policy. His subsequent decision to go ahead and
fight for the deficit cuts was an act of political courage. It would have been
very easy to go the other way. Not many people would have been the wiser
for a year or two or even three.
I took one other step to help the deficit hawks—I advised Bentsen on
how deeply I thought the deficit would have to be cut in order to convince
Wall Street and thereby bring down long-term interest rates. "Not less than
$130 billion a year by 1997" was his shorthand description of what I said.
Actually the advice I gave him was more complex. I sketched out a range
of possibilities, with a probability attached to each—all the while carefully
emphasizing that the substance and credibility of the program would be
more important than the numbers. But I understood when he finally said,
"You know I can't work with something this complicated." The figure he
extracted made its way to the president and had a powerful effect. Within
the White House, $130 billion became known as the "magic number" that
the deficit cuts had to hit.
The budget was major news when it finally appeared. "Clinton Plan to
Remake the Economy Seeks to Tax Energy and Big Incomes" was the banner
headline of the New York Times the morning after Clinton's speech.
"Ambitious Program Aims at a 4-Year Deficit Cut of $500 Billion." USA Today
declared "A Battle Launched" and described Clinton's proposals as "a
five-year package of pain." The media coverage focused mainly on whom
the cuts would hit (every constituency except poor households—the plan
put burdens on the rich, the middle class, retirees, and business). Interest
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ingly, the public reaction was initially favorable: polls showed Americans
unexpectedly receptive to the idea of making a sacrifice to put the nation's
house in order.
Most new presidents get a honeymoon from Congress, but Clinton got
a trench war. Despite the budget plan's initial popularity a majority of
congresspeople hated it—not surprisingly, since it aimed at abstract, distant
goals and offered no new highway projects, weapons programs, or other lucrative
goodies to bring home to constituents. I think Clinton was jolted by
the degree of resistance. Republicans rejected the budget outright and
many Democrats rebelled, and the debates dragged on well into the spring.
Even though Democrats held a 258-177 majority in the House, there was
serious question whether the budget would pass—and its prospects in the
Senate looked even worse. The conflict extended to within the White
House, where key people were still pushing for an agenda less compatible
with Wall Street. One was Clinton adviser James Carville, who famously
wisecracked, "I used to think if there was reincarnation, I wanted to come
back as the president or the pope or a .400 baseball hitter. But now I want
to come back as the bond market. You can intimidate everybody." The discord,
which was widely reported in the media, made Clinton look weak,
and his initial popularity melted away. By late spring his approval rating
sank to an abysmal 28 percent.
The president was in a funk when I saw him again on June 9. The
House had finally passed his budget two weeks earlier—by a single vote.
And the fight had only begun in the Senate. I'd gotten a call from David
Gergen, Clinton's counselor. "He's distressed," he said, and asked if I could
come buck the president up. I'd known Gergen for twenty years, as an adviser
to Nixon, Ford, and Reagan. Clinton had recruited him partly because
he was a balanced, nonneurotic Washington pro, and partly because he was
Republican—the president was hoping to solidify his image as a centrist.
When I went to the Oval Office that morning, you could see that people
were under strain. Word had it that they'd been working pretty much
around the clock, even Bentsen, who was seventy-two. (Andrea confirmed
this; she was now NBC's chief White House correspondent.) They'd been
going back and forth with Congress, trying to get the numbers to work, and
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doubtless felt as if they were up against an impossible problem. The president
himself seemed subdued. It wasn't hard to imagine why. He was
spending his political capital, yet the budget for which he'd sacrificed so
much was in peril.
I encouraged him as best I could. I told him that his plan was our best
chance in forty years to get stable long-term growth. I tried to get him to
see that the strategy was on track, was working—long-term rates were already
trending down, I showed him. The very fact that he'd come out and
recognized that the deficit had to be addressed was a very important plus.
But I also warned that it wouldn't be easy. Indeed, Clinton had to fight,
arm-twist, and horse-trade for another two months to push his budget
through the Senate. As in the House, it passed by a single vote—this time a
tiebreaker by Vice President Gore.
Clinton impressed me again that fall by fighting for the ratification of
NAFTA. The treaty, negotiated under President Bush, was designed primarily
to phase out tariffs and other trade barriers between Mexico and the
United States, though it also included Canada. Labor unions hated it, and
so did most Democrats, as well as some conservatives; few Congress watchers
thought it had a prayer. But Clinton argued, in effect, that you cannot
stop the world from turning; like it or not, America was increasingly part of
