Treasury’s Baker Being Called ‘Mr. Fix-It’

Last December, a few days after House Republicans had temporarily derailed the tax overhaul measure backed by the White House, President Reagan himself went to Congress to change some Republican minds. But when his effort fell a few votes short, it was Treasury Secretary James A. Baker III who began working the phones frantically to get the bill back on track.

“Baker just kept chasing votes right down to the wire until it was clear he had nailed down more than enough to win,” recalled Rep. Bill Gradison (R-Ohio).

Baker, who is completing his first year at the Treasury Department after serving as White House chief of staff during Reagan’s first term, had once again demonstrated his influence on Congress.

‘President Can Deliver’

“Had it not been turned around, (the Administration) would not have looked good,” Baker said in a recent interview. “But it was turned around. The President can still deliver.”

The triumph, however, came with a cost. Along with various private concessions, Reagan also agreed to write House Republicans a highly publicized letter promising to veto the bill as passed by the House unless it was substantially modified in the Senate before reaching his desk.

And that raises a larger question about Baker’s influence over much of the Administration’s economic policy: Is he willing to accept almost any stopgap measure to avoid defeat, even if the problems may prove far more intractable later?

“Jim Baker is Mr. Fix-It,” said Larry Kudlow, a former Reagan Administration official who heads Rodman & Renshaw Economics here. “That has both pluses and minuses, but it is a reputation that will plague him for a long time to come.”

Not Shy About Assignment

Baker has not been shy about his new assignment. Since replacing Donald T. Regan as Treasury secretary last February, he has moved to reduce the value of the dollar, prop up Third World debtors, foster less restrictive monetary policy at the Federal Reserve and keep the tax revision effort alive. Most economic and political analysts give him and his deputy, Richard G. Darman, much of the credit for the Administration’s recent economic policy achievements.

“When Don Regan was there, Treasury thought the free market could solve all their problems,” said conservative political analyst Kevin Phillips. “Under Baker, you can detect some organized thought behind a long-term strategy aimed at coming up with a new trade policy and accepting the need for some new kinds of taxes.”

But, even as Baker has moved away from the Treasury’s free-market approach to every economic issue, some critics argue that many of his initiatives do not seriously confront the underlying problems that continue to plague U.S. international and domestic economic policy.

“Most administrations have a tendency to postpone difficult choices,” said Herbert Stein of the American Enterprise Institute, former chief economic adviser to President Richard M. Nixon. “But I’m afraid that most of the recent economic decisions of this Administration will only exacerbate the problems in the future. I’m worried that we’re laying the foundation right now for a revival of inflation as the only way out of the situation.”

Stunning Shifts

Since Baker and Darman have taken over at the Treasury, the Administration’s approach to international economic issues has undergone a number of stunning shifts.

With former Undersecretary Beryl W. Sprinkel leading the charge during the first Reagan Administration, Treasury officials opposed any intervention in foreign currency markets. And, in support of the traditional International Monetary Fund approach to the international debt crisis, they recommended that debtor nations institute drastic economic austerity programs to generate trade surpluses and sustain interest payments to major banks.

Baker turned that around in the course of two months. Last September, he orchestrated a dramatic agreement at New York’s Plaza Hotel among finance officials of the top five Western industrial nations to take several steps designed to force the value of the dollar to fall. The announcement succeeded beyond expectations in driving down the U.S. currency, which should eventually help shrink the nation’s ballooning trade deficit.

Sprinkel, who moved to the White House a year ago as chairman of the President’s Council of Economic Advisers when Regan took Baker’s old job as chief of staff, opposed that approach. Baker defused his opposition by simply keeping him in the dark about his plans.

Reversal of Policy

And during the October meeting of the IMF in South Korea, Baker reversed previous Treasury policy by proposing a new growth-oriented plan for 15 major Third World debtors. He recommended that commercial banks and international lending institutions ante up an additional $29 billion over the next three years in return for action by the debtor nations, which already owe a staggering $437 billion, to turn over inefficient state-owned industries to private enterprise and to adopt growth-oriented domestic policies that depend more on free markets and less on government intervention.

Reaction to the “Baker Plan” was overwhelmingly positive at first. Several Latin American leaders initially embraced it. Bankers publicly praised the “belated dawning of recognition inside the Administration that the Third World countries were being strangled by their own debts,” as a senior official at a top West Coast bank put it.

Since then, however, concrete achievements have been slow in coming.

Although Treasury officials insist that there should be a breakthrough soon, no nation has yet reached agreement on a debt plan with its lenders.

Collision Called Inevitable

The new strategy has at least helped avoid a brewing confrontation between Third World debtors and their lenders. But some critics argue that a collision will remain inevitable unless the Administration acknowledges that most Latin American and African debtors are weighted down by a debt burden that is simply too heavy to hold out hope of relief.

“Ultimately, the banks are going to have to accept writing off some of their losses in the Third World,” said Michael Barker, whose economic newsletter, Politics and Markets, dealt with the foreign debt issue in detail last year. “Putting it off a few years means that it will be that much more painful for everybody when it finally happens.”

Baker dismisses such criticism as politically impractical and potentially dangerous. Writing off the debt is “not an alternative,” he insisted. “It’s an admission of defeat.

“Sure, we can say what you ought to do is just write that debt off. But at the same time, you run the serious risk of writing off those fledgling democracies and putting a severe strain on our banking system. So I say that solution is no solution at all.”

Although the Third World debt plan has yet to show specific results, the effort to lower the value of the dollar has already produced large dividends for the Administration. By taking the steam out of the rising protectionist mood in Congress last fall, the agreement took the pressure off the White House to go along with measures that could threaten international trade and dampen world economic growth.

Return of Protectionism?

The trade deficit will continue to grow for a while because of anomalies that initially exaggerate the size of the trade gap after a currency decline. As a result, Baker admitted, “there’s a good chance we’ll see a revival of protectionist sentiment come late spring.”

Nonetheless, most analysts are convinced, as congressional scholar Norman Ornstein of the American Enterprise Institute put it, that Treasury’s well-timed move last fall was the key reason that “protectionist fever has passed its peak.”

On the domestic front, a few economists remain worried that the Administration’s support for the Fed’s relatively easy monetary policy, combined with a decline in the dollar that will push up the price of imports, may rekindle long-dormant inflationary embers.

“I detect an unease on Wall Street that Baker cannot be trusted on inflation,” Kudlow said. “They’re worried that if (Fed Chairman Paul A.) Volcker leaves, there will be nobody to restrain the advocates of loose money at Treasury.”

Baker’s greatest challenge may be in keeping the Administration’s tax revision plan alive in the Senate, where he will sorely miss House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who proved a firm and essential ally last year.

“This is an issue that stirs the emotions,” a senior Administration official said. “It hits people where they hurt, it hits them in the pocketbook.”