DEFICIT DARMAN’S GAMBIT : Bad Politics, but Worse Economics : The budget director fears that high interest rates will put Bush’s popularity and GOP fortunes in a tailspin. Thus Rostenkowski to the rescue.

Dan Rostenkowski, the genial chairman of the House Ways and Means Committee, is being played like a violin by Bush Budget Director Richard Darman, with a gullible press providing soothing background music.

Last week, Rostenkowski offered a surprise deficit-reduction package, proposing a relatively regressive set of tax increases and modest defense cuts, coupled with a freeze on most social spending. Amazingly, the White House, in the person of Darman, replied that this was a reasonable starting point for discussions, despite Bush’s read-my-lips pledge.

Though the networks and the print press reported these events as a fortuitous breakthrough, the gambit and response were of course choreographed. Here is what is really going on:

Darman is worried that the Bush Administration is losing control of both global interest rates and Federal Reserve Chairman Alan Greenspan.

As Japan becomes more internationalized, yen interest rates become subject to global market forces and move upwards. This unnerves the Japanese. In late February, a public disagreement over interest rates between the Finance Ministry and the Bank of Japan spooked the Tokyo stock exchange.

On the other side of the world, West Germany suddenly finds its currency under pressure, too. Germany is the effective central banker of the European Community, which is strain enough. Now, Chancellor Helmut Kohl is trying to buy the loyalty of the East Germans by offering to exchange their relatively worthless savings in ostmarks for West German deutschemarks, one-for-one. That puts the mark under even more inflationary pressure.

All of this raises worldwide interest rates, and leads Fed Chairman Greenspan to raise U.S. interest rates defensively. The Bush Administration has been pressing Greenspan to ease up, but to no avail. The report, two weeks ago, that Bush might not reappoint the Fed chairman in 1991 was also a choreographed leak, intended to bring Greenspan to heel. It failed.

Against this background, Darman is suddenly alarmed that the world economy, the President’s popularity and Republican electoral fortunes for 1990 could follow one another into a tailspin. So he concocted a characteristic ploy.

First, leave the door open just a crack to a tax increase, as long as a leading Democrat moves first. Second, signal Rostenkowski that an initiative would be welcomed and that the world economy hinges on Rosty’s leadership and willingness to compromise. Third, signal Greenspan that if a deficit-reduction deal can be had, interest rates could be eased at home and abroad. Fourth, armed with a real doomsday script and the prospect of major concessions from congressional Democrats, Greenspan and Japanese creditors persuade George Bush to pucker his famous lips. Vintage Darman.

Rostenkowski, already frustrated with the budget impasse and wanting to take the initiative, offered a truly awful deficit-reduction package, at least from the point of view of any self-respecting Democrat. The package begins by having the Democrats slaughter the one sacred cow that makes them truly popular with the electorate--Social Security. Then it adds some regressive ‘sin tax’ increases, which fall heaviest on working and poor people. Finally, it does add a new 33% top bracket on the income tax, but this is the one part that Bush will reject in any eventual compromise.

Despite its favorable press notices, this plan is bad politics predicated on worse economics. Bush, with an 85% approval rating, is the sitting President. If he can’t control his Federal Reserve chairman and the economy really is on the brink of a recession (in an election year), it is Bush who has everything to lose. The Democrats, on the other hand, have everything to gain by bargaining hard and not giving away the store in their opening offer.

If Bush really wants a deficit-reduction deal, let him agree to raise the taxes of the the top 5% of households who got most of the tax relief of the ‘80s. Let him embrace a real peace dividend, instead of having the feckless Democrats begin by freezing Social Security pensions.

Moreover, as a matter of economics, most of the tight-money pressures on the world scene are unrelated to the U.S. budget deficit. Except in the mind of Alan Greenspan, the budget deficit, already down to a mild 2.5% of GNP, has little to do with rising global interest rates. Sacrificing Democratic principles to cut the deficit will do little to solve the real problem, except to the extent that it helps Darman manipulate Greenspan.

Before other Democrats repair to Rostenkowski’s banner, they should rethink the politics and the economics. But that will require leadership and political smarts at least equal to Darman’s.