Turkey And Trimmings

By Jacob V. Lamar Jr

In the dark days after last month's stock-market crash, there was one glimmer of hope: the calamity would shock Washington out of its derelict disregard of the deficit and force some courageous budget decisions on Congress and the White House. With great fanfare and high expectations, a "domestic summit" was convened. President Reagan agreed to drop his reflexive opposition to any taxes. Congressional leaders made so many declarations about the need for cooperation that they began to sound almost sincere. Partisan quarrels would be set aside. Now was the time for bold action.

After four intensive weeks, the talks ended last Friday with a fizzle. Yes, the conferees managed to patch together a shaky agreement, one that purports to reduce the deficit by $30 billion next year and $46 billion more the year after. But as the President and congressional leaders announced the plan, a strange air of anticlimax pervaded the White House briefing room. "This agreement is probably not the best deal that could be made," said Reagan, "but it is a good, solid beginning." House Speaker Jim Wright struck a conciliatory note: "Everybody gives some, nobody gets everything he wants." Later New Mexico's Pete Domenici, a seasoned veteran of the Reagan era's most bruising budget battles, fairly sighed with resignation: "What we have done is what can be done."

Almost as significant, however, was what was not done. The spending cuts were actually far less than those mandated by the automatic Gramm-Rudman- Hollings ax, which was temporarily activated last Friday pending enactment of the new compromise. Some of the other savings came from selling off federal assets and various financial sleights of hand. And the summiteers squandered a once-in-a-lifetime opportunity -- a major financial crisis during a nonelection year -- to confront the biggest sacred cow of all: Social Security. Few dared even to whisper those words.

The summiteers instead proposed tax increases of $9 billion for fiscal 1988, which began Oct. 1, and $14 billion for the following year. The compromise calls for a $5 billion cut from the defense budget in the current fiscal year, $8.2 billion more in 1989. Medicare, farm price supports and student loans would be trimmed by $4 billion this year and nearly $6 billion next year. But there was little in the way of specifics. The conferees did not spell out where the new tax burden was going to fall. Nor did they decide which nondefense discretionary programs were going to lose $6 billion over the next two years. Congressional leaders will have to deal with the devil in those details.

A good many lawmakers were left cold by the compromise. Liberal Democrats complained that the Pentagon reductions were not deep enough (they are less than half of what they would be under Gramm-Rudman). Republicans griped that the package relied too much on taxes. Several critics said the $30.2 billion in estimated savings for fiscal 1988 will hardly make a dent in the deficit for that year, which Congress projects will be $179.9 billion. Senator Bob Packwood, an Oregon Republican, called the budget package a "miserable little pittance." Congressman Newt Gingrich was even more acerbic in his appraisal. "It's a perfect summit deal for Thanksgiving vacation," said the Georgia Republican. "These leaders labored and produced the largest turkey of them all."

Most politicians, however, were relieved simply by the fact that an agreement had been reached at all. As late as Thursday night, the negotiations seemed doomed. House Republicans, angered by the new taxes in the package, were threatening to oppose the deal. Democrats said they would not approve the compromise without G.O.P. support. Said House Budget Committee Chairman William Gray: "I'm not going to ask Democrats to jump off a cliff while Republicans wave at us."

But a failure to forge a compromise would have been a major signal of total impotence in Washington's corridors of power. Indeed, symbolism was the order of the day: showing the jittery financial community that Washington could take action was just as important as coming up with a viable package of taxes and budget trimmings.

Even after the summiteers emerged with their compromise on Friday afternoon, the President proceeded to trigger the $23 billion of across-the-board cuts required by Gramm-Rudman. Congress, however, has until mid-December to incorporate the new deal into law before the full weight of the Gramm-Rudman ax falls. Thus congressional leaders will be forced to iron out swiftly the details of the summit compromise and to muster the votes for the requisite tax hikes and spending reductions.

Throughout the week, the stock market bobbed skittishly as Wall Street tried to gauge the progress of the budget negotiations. When it looked as if the talks were going to break down on Thursday, the Dow Jones industrial average plummeted nearly 44 points. The following morning, the market opened down an additional 33 points. But after the summiteers agreed on a plan, the Dow closed up 18 points. Said Reagan at the press conference announcing the compromise: "Today we're sending the right message at the right time."

Perhaps. While the market may have been buoyed by the settlement, losers still outnumbered gainers on the New York Stock Exchange last Friday, and the Dow was only 10% above its Oct. 19 abyss. Many Wall Streeters regarded the budget plan as too little too late. "We would have been better off if the talks hadn't even happened," declared John Paulus, a managing director and chief economist at Morgan Stanley. "The difficulty in reaching an agreement shows a lack of determination, a lack of discipline and a lack of leadership in Washington." Steven Einhorn, portfolio strategist at Goldman Sachs, was equally unimpressed. "They went down to the wire, then delivered what the market expected anyway," said Einhorn. "Washington took four weeks to make cuts, and we aren't even sure if the cuts are good ones. About all you can say is 'Thank God they could negotiate something.' "

Participants cited several reasons for the summit's tortured negotiations and uninspired outcome. Among the key factors:

-- The sessions were usually formless discussions among the 19 summiteers. They tried to decide matters by consensus. "It was like a meeting of Quakers," said Congressman Pat Williams, a Montana Democrat. "There were no votes down there. We just talked until we agreed. If people had good exceptions to proposals, then they weren't agreed to."

-- The Administration persistently refused to give ground on defense-spending cuts. The Republicans opened the bidding by offering Pentagon reductions totaling $4 billion. The Democrats countered with a suggestion for a $6.3 billion cut. At one point, a compromise of around $5.3 billion was in the works. But the final figure was closer to Reagan's liking: $4.9 billion. "We were constantly fighting over the defense numbers," said one participant. "Every inch was a battle." Many Democratic summiteers were annoyed that the new Secretary of Defense Frank Carlucci sat in on many of the early sessions, looking out for the Pentagon's interests.

-- The conferees resorted to some dubious accounting tricks to reach their $30 billion goal. Consider the truth-in-pizza labeling plan. Under this provision, manufacturers of frozen pizzas will be required to inform consumers whether their pies are made with real cheese. The designers of the plan expect that pizzamakers who use ersatz products will be forced to switch to the real thing. The result will be an increase in the demand for cheese. The Federal Government, in turn, will have to buy back less cheese from dairy farmers. Estimated budget savings of this cheesy scheme: $29 million over three years.

Perhaps the greatest failure of the summiteers was their unwillingness to deal with the major entitlement and Government pension programs, such as Social Security, which accounts for 20% of federal outlays. Various ideas were floated, including setting a limit on cost of living adjustments, delaying them for a few months or taxing Social Security benefits for wealthy recipients. Peter Peterson, a former Commerce Secretary and one-time head of the old Lehman Bros. Kuhn Loeb investment house, said that by limiting Social Security COLAs to 2%, the summiteers could have saved the Government $150 billion by the year 2000. "It would have meant $3 a week less" for Social Security recipients, said Peterson. "I don't believe that millions of nonpoor elderly, with pensions and all the other things, would have objected to that difference." But Ronald Reagan set the tone at the outset by announcing that everything except Social Security would be on the table. "When we talk about it in those meetings, we don't say 'Social Security,' " Senator Robert Dole told reporters. "We say 'the unmentionable.' "

The political queasiness over Social Security was one of the few things that were truly bipartisan. "Ninety percent of us think something's got to be done," said one participant. "But nobody wanted to get mowed down first." Finally California Democratic Congressman Leon Panetta last week presented a proposal that included a three-month freeze on COLAs for all Government pensions and Social Security recipients. Though Senate Republicans liked the idea, their Democratic colleagues balked. "There was no stomach among Democrats for cutting Social Security," said an aide. "The view was 'It looks easy, but it's bad policy and bad politics.' "

Not that the Republicans were particularly eager to risk alienating elderly voters. One G.O.P. Congressman recalled the "brutal, bloody beating" House Republicans suffered after then Speaker Tip O'Neill publicly blamed them for agreeing to slash Social Security benefits in 1981. The G.O.P. subsequently lost 26 seats in the '82 election. Congressman Gingrich pointed out that in 1985 Republican Senators went out on a limb and supported a COLA freeze. The following year, the G.O.P. lost control of the Senate. This time around, they were not taking any chances. Said Republican Congresswoman Lynn Martin of Illinois: "We're dumb, but we're not stupid."

If Congress passes the new package, Washington will probably avoid any further action on the deficit until after the 1988 election. But the summiteers' unwillingness to confront the sacred cows, and their lack of gumption by relying on certain ephemeral cuts, could come back to haunt them -- perhaps in the form of a continued financial crisis. Blame for this failure of political will belongs not just to the Administration and not just to Congress. As long as the American public makes it politically suicidal to restrain the growth of entitlements or to touch favorite spending programs or to raise the taxes necessary to pay for them, then its leaders are likely to remain no more than feckless followers.

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With reporting by Michael Duffy and Richard Hornik/Washington