Baker’s Goal: Economic Calm in Rest of Term

James A. Baker III is sitting in his comfortable, ornate office on the third floor of the Treasury building, contemplating his remaining months on the job. His computer terminal, usually alive with up-to-the-second developments in the financial markets, is turned off. Baker’s mind is on the November election--and the new Administration that will take over in January.

The Treasury secretary, Washington’s consummate politician, has it all figured out: If the Republicans win in November, the new President can use his first 100 days to cut a deal with the Democratic-controlled Congress on how to pare the federal budget deficit. If the Democrats win, it’s their problem; whatever happens to the economy after Jan. 20 won’t be on Baker’s watch.

Baker may be the Administration official most responsible for the nation’s economic well-being, but his mission now is to make sure that no new economic shocks erupt to jolt the prospects for a GOP victory in November. And, intimates say, it wouldn’t hurt to help keep the political climate ripe for a bipartisan budget agreement if a Republican--particularly his longtime friend, Vice President George Bush--emerged the winner.

“Jim is doing his best to make sure the economy stays in good shape,” says a former White House staff member who now is close to the Bush campaign.

That view of his task may tell more about Baker than all the debt of the U.S. Treasury. Whatever the Treasury secretary’s long-run responsibilities, this particular Treasury secretary, who has received generally high marks for his performance over the last three years, is above all a master of the immediate political deal.

“Baker strictly relies on day-to-day tactics designed to reach short-term objectives,” says Larry Kudlow, chief economist at the Wall Street investment firm of Bear, Stearns & Co. and a former Reagan Administration budget official. “Sometimes it works and sometimes it backfires.”

As some who are less-than-total admirers of his record have suggested, Baker’s approach to his job--a whirlwind of activity aimed at beating problems into submission--sometimes resembles that of all too many modern corporate executives: focusing on the short-term bottom line rather than the long haul.

Faulted on Basic Policy

“Sure, Baker has been a lot more activist on the surface,” a senior European economic official says. “But he doesn’t have an underlying policy.”

For all that, Baker is exuding confidence about the economy. “I really believe,” he asserted in an interview, “that the United States is making the adjustment . . . to an export-driven expansion with a minimum degree of dislocation.”

The job of keeping the lid on will not be easy. Although the financial markets are quiet enough these days to let Baker give his computer screen a rest, there is still a genuine risk that they could plunge into another tailspin like the one Oct. 19. The trade deficit is coming down, but the progress until very recently has been painfully slow. And Congress threatens to pass a protectionist trade bill that could wreak havoc with the dollar and with America’s trading partners.

Dazzled Critics

Still, Baker has pulled off even more spectacular feats in the past. Taking office in early 1985 after four years of laissez-faire economic policies under Donald T. Regan, he dazzled the Administration’s critics with a burst of activism that included a sweeping liberal-style tax reform bill, an international effort to cut the U.S. trade deficit by devaluing the dollar and a major new proposal for defusing the Third World debt crisis.

He has also been at the center of developing a more aggressive U.S. trade policy, preparing a scheme to coordinate the major industrial nations’ economic policies and, most recently, instituting a trailblazing free-trade agreement with Canada.

But for all the coruscating maneuvers, there have been some missteps along the way. Wall Street has complained that Baker has shown too little understanding of financial markets.

His surprise criticism of West Germany for refusing to stimulate its economy, for instance, was one of several factors in unsettling investors around the globe just before the Oct. 19 stock market meltdown. A few months earlier, a similar Baker slip sent the dollar falling so rapidly that the Fed had to intervene in the currency markets to rescue it.

Some market analysts, speaking with hindsight, now criticize Baker’s dogged adherence to stabilizing currency rates between last February and the October crash. They say hewing to the Louvre accord that Baker reached in Paris a year ago with economic officials from other leading industrial democracies forced the Federal Reserve to allow interest rates to nudge higher, helping to bring on the crash.

Many fault him as well for his failure to tackle more seriously the nation’s most pressing economic policy problem--the outsized federal budget deficit.

‘Carried It for 4 Years’

“Reagan’s first term delivered the budget problem,” says Henry Nau, a former National Security Council staff member and now an economist at George Washington University. “Baker has simply carried it for four years and is going to pass it on to his successor. His legacy has been to preserve the problem.”

Baker disputes all of these points, and so do some neutral analysts.

The Treasury secretary “has been unfairly judged by the financial community,” asserts Alan Stoga, international economics specialist for Kissinger Associates, a New York consulting firm. The Reagan Administration’s failure to tackle the budget deficit “is a political issue that should be laid at the President’s door rather than the secretary’s,” Stoga asserts.

As for the other problems, Stoga says Baker at least proposed solutions. “Implementing them,” he concedes, “was another thing.”

Baker, 57, who was White House chief of staff during Reagan’s first term, is one of four pragmatic Republican traditionalists who are primarily responsible for running the government during Ronald Reagan’s final year in office. The others, who like Baker served in the Administration of President Gerald R. Ford, are Secretary of State George P. Shultz, Defense Secretary Frank C. Carlucci and Federal Reserve Board Chairman Alan S. Greenspan.

Ironic Twist

Their emergence at the head of the pack is perhaps the ultimate irony of the Administration: All four were lambasted by Reaganites in the early 1980s as insufficiently conservative to serve the President well.

For many Democrats as well as Republicans in Washington, Baker is also the most astute and successful political operative in the Capital.

“Ronald Reagan is lucky to have Jim Baker at his side,” says Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, who frequently has negotiated with Baker on tax and trade issues. “He’s always made this President look good.”

But Rostenkowski can’t resist getting in a dig as well. “We’re both politicians,” he says. “The only difference is I admit I’m a politician. Jim Baker thinks he’s a statesman.”

Rostenkowski’s comments would have come as a shock to Baker’s father and grandfather, who like Baker were lawyers but unlike him eschewed politics. Consider the 1941 Houston Press interview with his grandfather that the secretary proudly keeps framed in his Treasury Department hideaway. Its headline reads: “Work Hard, Study Hard and Keep Out of Politics, Says James A. Baker.”

Helps Bush in Senate Bid

Until he was 40, Jim Baker did just that. A direct descendant of one of the founding fathers of modern-day Houston, Baker enjoyed his life as an upper-crust, Texas Establishment lawyer until George Bush, a friend and tennis partner, persuaded him to leave the Democratic Party and help Bush in his losing 1970 campaign for a Senate seat.

To a few close friends, mainly from the Ford Administration or his boyhood days in Texas, “Jimmy” Baker is a relaxed, fun-loving man--a ceaseless teaser and occasional prankster who comes as close to being a good ol’ boy as an $800 suit will allow. Former Democratic National Committee Chairman Robert S. Strauss, a fellow Texan and close friend who frequently has gone turkey hunting with him, describes Baker as a crack shot and an A-1 hunting partner. “He drinks a little whiskey, chews a little tobacco, tells a few stories,” Strauss says.

Baker is also superb at mimicking wild-turkey calls--a talent that some say comes in handy in Washington. “He has a great ability to communicate with turkeys,” says Preston Moore, a cousin and boyhood companion. “He and I have been in turkey blinds where the hen has come and almost peeped in the blind.”

On weekends, even when he is at the office, Baker likes to hark back to his Texas roots--at least what’s left of them after an Eastern prep school and Princeton education. He wears casual corduroys or jeans, propping on the table the cowboy boots he keeps in his closet during the week and spitting Red Man tobacco juice into a plastic cup carefully positioned nearby.

Tex-Mex Meals

Treasury staffers have learned to expect that at least one of the prepared-from-scratch meals on the long overseas flights aboard Baker’s Air Force-provided plane will be Tex-Mex. (Baker shuns boots and cowboy hats aloft and instead ambles about the cabin in a bright green or purple jogging outfit.)

The secretary displays a touch of irreverence about his job as well. A hand-embroidered pillow, given to him by a friend of his wife, Susan, rests conspicuously on his office sofa. Its legend: “When you’re up to your ass in alligators, it is difficult to remember that your original purpose was to drain the swamp.”

And there was the time during a tour of a remote Saudi Arabian desert when Baker, while secretly struggling to put together last February’s agreement to stabilize the dollar, joked to a handful of reporters: “Want to see a free-fall of the dollar? I’ve got four quarters I can drop down this well.”

But the Jim Baker that most of Washington knows is both cautious and flexible, a highly skilled insider with an uncanny talent for sizing up a problem and negotiating a politically acceptable solution.

‘They Were Acrobats’

During the battles in 1986 to keep the tax reform bill alive in the Senate, recalls William Diefenderfer, former top aide to Senate Finance Committee Chairman Bob Packwood (R-Ore.), Baker had only one goal: “To get a bill that the President could take credit for. Baker and (Deputy Treasury Secretary Richard) Darman were so flexible they were acrobats.”

Baker plays his cards close to his vest and knows just when to pop his ace-in-the-hole to get the most political impact. Indeed, Baker’s initiatives as Treasury secretary all have been sprung as surprises--to the point where he occasionally has been hard-pressed to think up fresh ones to meet public expectations that he is the master of the financial markets rather than vice versa.

Sometimes the secrecy has left even Cabinet members in the dark. Baker’s plans for the 1985 Plaza Hotel agreement to drive down the value of the dollar, for example, were held so closely that neither the late Commerce Secretary Malcolm Baldrige nor chief trade negotiator Clayton K. Yeutter knew the details until the Treasury made them public.

But for all the fancy footwork, Baker’s twists and turns remain basically consistent with the conservative, market-oriented economic approach that Ronald Reagan brought to Washington. Indeed, Darman, who served as Baker’s deputy secretary and alter ego during his first two years as Treasury secretary, concedes that Baker has sought to achieve mostly “incremental” changes from previous policy.

Forte Is Solving Problems

“He is more of a mediator, consensus builder,” Darman says. “Problem-solving is his forte.”

As a skilled Washington operative, Baker has made a point of consolidating power. Shortly after switching jobs with Regan, he folded economic decision-making authority into a new Cabinet-level Economic Policy Council, thus eliminating the spate of rival policy groups within the Administration that had produced chaos on trade and other issues during Reagan’s first term.

Today, through the EPC, Baker runs all the Administration’s economic policies--spending issues, tax questions and trade--with a steel hand. Exchange-rate questions and issues involving global debt, traditionally the Treasury’s own preserve, are not even on the EPC’s agenda.

“There’s no such thing as a vote on any issue,” an officer below Cabinet rank says. “Baker just announces what the decision is and that’s all there is to it.”

Last September, Baker abruptly brushed Yeutter aside to take over negotiation of the then-foundering U.S.-Canadian free-trade agreement.

Quickly Muzzles Sprinkel

And, in December, when White House chief economist Beryl W. Sprinkel publicly questioned the pre-Christmas currency stabilization pact worked out by Baker and foreign finance ministers, the secretary quickly muzzled Sprinkel. Now, when asked about the Administration’s currency-intervention actions, Sprinkel replies cryptically that he will voice his opinions only after he leaves the White House.

Some critics contend that Baker missed a golden opportunity during last fall’s budget negotiations with congressional leaders to take advantage of concern over the stock market crash to forge a more substantive deficit-cutting arrangement than the 2-year, $76-billion package that emerged from the monthlong talks. But insiders insist that he and current White House Chief of Staff Howard H. Baker Jr. probably got as good a deal as possible.

Rep. Leon E. Panetta (D-Monterey) says Baker and House Majority Leader Thomas S. Foley (D-Wash.) were determined to find a compromise, even though other congressional leaders were trying to promote their more narrow causes. “Under the circumstances,” Panetta says, “with (White House Budget Director James C. Miller III) constantly being a thorn in the side, Baker did the best he could in working out a politically acceptable solution.”

Off to Good Start

It’s still too early to tell whether Baker can pull off his next, possibly most difficult challenge--keeping everything from unraveling before the election. So far, he is off to a good start: The financial markets are in what Fed Chairman Greenspan calls “equilibrium,” and the trade bill is moving away from strict protectionism as it grinds through the congressional mill.

Still, all sides concede that the situation is fragile and could change abruptly. If it does, no doubt Jim Baker will be keeping his computer on long into the night--hoping that it will flash a return of calm to the economy before the election results come on the screen.