Has Economic Gun at His Head : Bush Must Move Quickly on Budget, Deficit Issues

Four years ago, when he ran for reelection, President Reagan declared it was “morning in America” again. For President-elect George Bush, it is now the morning after.

As a result, almost the first thing Bush will do when he takes office on Jan. 20 is to make a move Reagan resisted throughout his presidency: launch right-from-the-start, direct negotiations with Congress on ways to trim the federal budget and rein in the deficit.

“If we don’t start a budget summit on the day after the inauguration, it will be the day after that,” Robert Mosbacher, Bush’s campaign finance chief and close Texas friend, said with only a bit of hyperbole.

Bush must act quickly, his aides acknowledge, because he enters the Oval Office with the economic equivalent of a gun at his head: Failure to make rapid, visible progress against the deficit could end up causing a rise in interest rates and could ultimately push the country into a recession--with potentially painful consequences for millions of Americans and for the political fortunes of the new President.

As Republicans and Democrats both realize, serious economic tailspins are the stuff of which one-term presidencies are made. Indeed, Sen. Sam Nunn (D-Ga.) told friends last year that he was not running for President because he expected Reagan’s successor to be dragged down by an economic disaster.

“Someone will have to be Herbert Hoover,” Nunn mused privately, “before there can be another Franklin Roosevelt.”

Calling a meeting with congressional Democrats, however, is the easy part. The tough question for Bush is what to talk about.

Candidate Bush vowed to oppose any explicit tax hike and promises to avoid cuts in defense and Social Security. “Bush’s mandate, above all else, is to hold back a tax increase,” said Deborah Steelman, who was in charge of domestic issues for the Bush campaign. “To renege on that would be political suicide.”

Congress Wants Compromise

However, congressional leaders are equally adamant that no budget deal is possible with the White House unless Bush compromises on taxes. “Spending cuts alone can’t solve the problem,” House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) warned. “You have to talk about revenues.”

That leaves little room to maneuver and no time to lose, as those close to Bush acknowledge.

“He will take charge early and develop a high profile very quickly,” Bush adviser Steelman predicted. “By the August (congressional) recess, he needs to have something to show for his efforts.”

Bush aides are worried, though, that global investors and foreign leaders do not yet realize how long and difficult the process that Bush faces is likely to be.

“If you are looking for a magic bullet,” Steelman added, “it’s just not there.”

If Bush should suffer only a modest, relatively brief recession early in his term, it would probably not be devastating to his reelection chances. Reagan easily survived a deep recession in his first two years in office.

Bush thus far lacks Reagan’s deep emotional bond with the voters, however; and the longer it takes to resolve the nation’s budget impasse, the more likely he is to be confronted with an eroding economy. And a slump in the domestic economy, which would probably manifest itself in a revival of inflation, could bring on a global financial panic as investors lost confidence in Bush’s ability to maintain U.S. economic stability.

“It’s sort of like the oil filter commercial,” said Michael Barker, a former economics expert for the moderate Democratic Leadership Council. “You can pay now or pay later, but it will cost a lot less if you pay the price early.”

Fed Has Single Weapon

Federal Reserve Chairman Alan Greenspan, who has known Bush for years, is expected to tell the President-elect that his highest priority must be to put the deficit challenge behind him. Greenspan will argue that the Fed must not be forced to battle alone against inflationary pressures because its only weapon is higher and higher interest rates--which can indeed choke off price increases, but only by choking the entire economy.

Steeply rising interest rates almost certainly would lead to a recession during Bush’s first term, perhaps in 1990 or 1991. And only by cutting through the Gordian knot of the budget, Greenspan believes, will Bush gain a freer hand for himself to address other pressing domestic and foreign issues.

“The new President is going to start out with his hands tied until he solves the budget puzzle,” said Carol Cox, head of the Committee for a Responsible Federal Budget. “It’s not really an economic problem. It’s a political problem.”

Bush, whether intentionally or not, hinted at one possible way out of a budget standoff during his press conference the day after winning the election. In displaying some flexibility on taxes, he suggested that such backdoor revenue increases as the new surtax on high-income elderly people to finance Medicare coverage of catastrophic health care costs might be acceptable.

“Some charge that was a tax increase,” said the President-elect. “I don’t think it was.”

Yet Bush, by repeating his “read my lips” pledge against any new tax increases so vigorously during the campaign, may have locked himself into an almost impossible position.

Beyond hoping that his proposed “flexible freeze” on spending will do the trick, Bush did not outline a clear plan during his campaign for putting the nation’s fiscal house back in order. As a result, he is likely to find it awesomely difficult to lead on the issue in the face of expected hostility from congressional Democrats.

“Bush painted himself into a corner,” said Rep. William H. Gray III (D-Pa.), the outgoing chairman of the House Budget Committee. “Even if he wanted to reverse himself, I don’t see politically how he can pull it off.” The result, Gray contended, is likely to be “an early confrontation on budget priorities and a tremendous potential for gridlock.”

Facing both Congress and the new Administration is the ticking time bomb of the Gramm-Rudman budget law, which will require an estimated $25 billion to $35 billion in specific budget savings for fiscal 1990, which begins next Oct. 1.

The law sets a deficit target of $100 billion for the 1990 fiscal year. If the White House and Congress fail to agree by early next fall on a plan to reach that goal, the law will trigger automatic spending cuts that will hit defense and domestic spending equally hard.

Gramm-Rudman Changes

Congress could relax the Gramm-Rudman strictures next year. But the law has a strong core of supporters who, although not necessarily a majority, probably have enough strength to prevent lawmakers from moving away from the targets.

Some analysts believe the only thing that might break the budgetary stalemate between Bush and Congress is some sort of financial crisis. One possibility has already raised fears in currency markets: a loss of international confidence in the U.S. dollar, which would force the Federal Reserve to jack up interest rates.

“I don’t think the U.S. economy is facing a long-run dollar problem, but a short-term crisis of confidence is a real possibility,” said Harald Malmgren, a leading international trade specialist here. “What the world is waiting to hear from Bush are just the things the electorate never demanded of him during the campaign.”

The problem with counting on a financial crisis to force significant action on the deficit is that a timely crisis may not occur. Even Harvard economist Benjamin Friedman, who argues that Reagan achieved a “false prosperity built on borrowing from the future,” concedes that “there is nothing . . . that says some big blowout will occur. That’s what makes it all the more worrisome.”

Moreover, those who are now demanding harsh measures to bring the deficit under control have probably damaged their own cause by repeatedly warning that disaster was imminent if the budget gap were not closed. They have gained a reputation as “Chicken Littles,” a label that has rubbed off on those who have merely warned that the deficit would gradually erode U.S. economic power.

Rep. Leon E. Panetta (D-Monterey), who is expected to become chairman of the House Budget Committee next year, hopes that “you don’t have to wait for a crisis,” such as last year’s 500-point stock market crash, to act on the budget.

He acknowledges that the first reaction of many Democrats in Congress is likely to be a backlash against Bush’s budget proposals because of the Republican campaign’s promises not to raise taxes, cut defense or touch Social Security. But he is counting on an eventual change of heart among congressional Democrats.

“Political vengeance might be the first reaction,” he says, “but it wouldn’t last.”

He is also counting on a change of heart inside the Bush Administration. To forge a compromise, Panetta believes that GOP pragmatists such as James A. Baker III, Reagan’s former Treasury secretary and Bush’s choice as secretary of state, must take the lead in influencing the incoming President’s thinking.

Bush May ‘Stand on His Own’

“If Jim Baker and others . . . who know the realities predominate, I think an effort will be made to reach a compromise with Congress,” Panetta said. “The other possibility is that (Bush) will have to stand by the promises he made in the campaign. In that case, he’d have to stand on his own. I don’t see any way he can do that in light of the present budget conditions.”

But many Bush advisers, including Baker, argue that any give from the new Administration on taxes would only expose Bush to criticism as a weak leader and encourage congressional Democrats to run wild with new domestic spending programs.

When asked a few days before the election whether all proposals for higher taxes, not just increases in income taxes, were equally taboo, Baker told an audience at the National Press Club: “Read my lips: all proposals.”

Baker said that he had learned in his eight years in the Reagan Administration that “any time we raise revenues, the Congress will find a way to spend that money on new programs. It’s just as simple as that.”

And Steelman, the Bush campaign adviser, said she hopes Bush will use the veto to block efforts by congressional Democrats to overturn his budget policies.

End to Deficit Mandated

Unfortunately for Bush, Gramm-Rudman requires elimination of the deficit entirely over the next four years, and it may prove practically impossible to do that through spending restraint alone. His “flexible freeze” may have worked as a campaign slogan, but it ignores the underlying realities of the federal budget.

Even if future economic growth meets Bush’s relatively optimistic forecast, holding federal spending increases to the rate of inflation would require harsh cuts in such popular programs as Medicare, which is expected to grow by more than 12% a year over the next five years as the elderly population grows. If the rise in Medicare costs cannot be slowed significantly, other programs will have to be slashed instead.

And additional spending will be required. The federal government, for instance, will need to find perhaps as much as $100 billion over a period of years to bail out bankrupt savings and loan institutions, along with additional billions to repair the nation’s aging nuclear weapons facilities.

Moreover, few economists accept Bush’s assertion that his approach would quickly lead to a sharp decline of 2 percentage points in interest rates. In Bush’s arithmetic, that is supposed to generate nearly half of all the budget savings by 1993, because it would mean massive savings in interest payments on the national debt.

Until recently, some Wall Street and Washington savants had been hoping that the blue-ribbon commission established by Congress in the wake of last October’s stock market crash would provide “political cover” against flak from special interest groups that might suffer damage from a deficit agreement between the White House and Congress.

But the sharply divided 12-member bipartisan panel, headed by Democrat Robert S. Strauss and Republican Drew Lewis, is currently in disarray, and it has abandoned its earlier plan to issue recommendations by Dec. 21.

Instead, leaders of the panel are planning to delay any report until next March at the earliest, when, said William E. Brock III, a former top Reagan Cabinet official, “it might be too late and will probably be irrelevant.”

Bush has never put much stock in the budget panel, known formally as the National Economic Commission. Some of his advisers are recommending that Bush, who may name two more commission members, appoint GOP presidential also-ran Jack Kemp and Chamber of Commerce chief economist Richard Rahn to ensure that the group does not recommend a tax increase.

Litmus Test for Bush

Bush’s “selection of new (commission) members is a critical litmus test,” said Stuart Butler, director of domestic policy studies for the conservative Heritage Foundation. “If he chooses two less resolute individuals (than Kemp or Rahn), he will breathe new life into the tax hike lobby. . . . And Bush would lose the initiative on budget policy, and his Administration immediately would be thrown on the defensive.”

At the moment, it is impossible to foresee exactly how Bush will try to escape the possible budget debacle that awaits him early in his Administration.

“George Bush hasn’t yet convinced us that he has a passion for anything but becoming President,” said Stephen Hess, a student of presidential leadership at the Brookings Institution here. “He has displayed an instinct for avoiding difficult choices in his career so far, but that won’t be possible much longer.”