Anatomy of a Fumble

By DAN GOODGAME

HE ALWAYS PUBLICLY STOOD behind them, but he seldom led them anywhere. For nearly four years, George Bush's economic advisers squabbled and struggled with little positive guidance and woeful political results. Last week Bush gave them their most unequivocal direction so far: he showed them the door. As a political sacrifice play, the beleaguered President put out the word that in a second term he would replace his economic team, including Treasury Secretary Nicholas Brady, Budget Director Richard Darman and chief economist Michael Boskin. To fill the void, Bush said he would appoint chief of staff James Baker as domestic policy boss.

Bush was belatedly struggling to show that he is capable of change, and to mount the defense that his weak economic performance has been the result of bad advice. To be sure, his advisers admit mistakes, particularly in failing (as did most economists) to see that the recession that began in 1990 would fester longer than the average downturn.

But the record makes clear that Bush's economic missteps were less the fault of his advisers than of his own political strategy and economic philosophy, which held that even in the midst of recession, Washington should, in his words, "let the economy right itself." He believed that any attempt at economic stimulation, beyond his proposed tax breaks for certain businesses and investors, would push up interest rates and "make things worse."

The paradox is that Bush undermined his most important goal of all: getting re-elected. Any President who wants a second term needs to have a healthy economy by election year -- or give the public a good reason why not. But Bush's belated and halfhearted attempts to spur economic recovery, and his failure to explain and defend his decisions, largely account for his low standing in the polls. This approach can be seen in several key episodes:

THE "SLIDE-BY BUDGET"

As soon as George Bush won the presidency in 1988, he began planning how and when he would violate his most memorable campaign promise, "Read my lips: no new taxes." Even as he unveiled that pledge in August 1988, Bush knew -- and was reminded by Darman -- that he, like Ronald Reagan, would end up raising taxes to avoid cutting popular middle-class spending programs. In preinaugural interviews, Bush pretended that he was only just discovering the economic time bombs represented by the federal budget deficit and the national debt. "I've started going into the numbers, finally," Bush told TIME in January 1989, "and they're enormous."

Brady, who sometimes seemed unschooled in public finance but had had long experience as head of an old-line investment firm, regularly expressed disdain for excessive public and private debt. Darman, meanwhile, was pressing for a "grand compromise" by which Bush and the Congress would agree to a package of spending restraints and tax hikes to bring the red ink gradually under control.

Bush and chief of staff John Sununu, however, were reluctant to see the Administration immediately tied down in the partisan bickering that would precede any serious budget deal. They wanted first to pass a minimal package of "kinder, gentler" legislation, including the Clean Air Act and the Americans with Disabilities Act. These measures would burden U.S. businesses with an estimated $30 billion a year in regulatory costs, but that mattered less to Bush than immediately winning some trophy legislation.

Bush thus agreed with congressional leaders on a two-step process. A painless first-year plan, initialed in April 1989 and dubbed the "slide-by budget," used an array of clever bookkeeping devices to let Bush keep his no- new-taxes pledge without making serious spending cuts. In Step 2, the White House and Congress were to begin talks quickly on the "grand compromise." But Bush and Sununu were so pleased at their success in papering over the deficit issue that the tough second-stage talks kept getting postponed.

YES, NEW TAXES

Advisers of many stripes told Bush that before he broke his tax pledge, he must tell Americans why it was necessary and worthwhile. But all along, Bush shied away from the rhetorical cover that Ronald Reagan often used to ennoble his compromises.

A frontal assault on the nation's toughest economic woes, Bush knew, would be politically unpopular. It would put at risk the second term that was Bush's primary goal, and it would distract him from opportunities to establish his reputation in foreign policy. Better to win the second term, Bush told his top advisers, then tackle the deficit. All he wanted in the meantime was a multiyear deal that would relieve him of the annual agony of a budget battle. And for that he was willing to at least fudge his no-tax pledge.

Bush was not, as he later put it, "forced" to break his no-tax pledge. He could instead have laid out specific spending cuts -- in military bases, weapons contracts, Medicare, tax loopholes. But he and his aides judged that such cuts would provoke an even louder outcry than would new taxes. To avert a budget crisis, Bush formally agreed in June to negotiate an agreement that would include "tax revenue increases." The New York Post's front page captured the prevailing reaction of Bush's critics with a headline that screamed, READ MY LIPS: I LIED.

In short order, Saddam Hussein invaded Kuwait, oil prices streaked upward and the economy, already weak, stopped growing. Darman and others believed that the gulf crisis could provide an excuse for a budget deal that raised taxes, but Bush declined to link the two events for fear that distaste for new taxes might undercut support for his first priority: his gulf policy.

When the budget deal was reached in October, Bush at first defended the tax increases -- on gasoline, alcohol and top incomes -- as necessary to avert financial "chaos" and to win limits on federal spending from Congress. But Republican candidates, who were then embroiled in tough midterm elections, shunned the deal. Soon Bush was blowing hot and cold. He would call the deal "balanced and fair" in one speech, then would say that it made him "gag." This waffling infuriated Darman and puzzled Baker; both men reminded colleagues that Reagan had raised taxes repeatedly but always presented his compromises as great victories. Bush, instead, got the blame for raising taxes and little credit for the new, prudent controls on federal spending.

THE BIG GAMBLE

At this point, less than halfway through the President's term, Bush and Sununu viewed their legislative work as done. The Clean Air Act and other legislative priorities had been passed. Sununu told a group of conservative leaders that henceforth "the battles we fight will focus on preventing things from taking place," that is, on vetoing bills passed by Democrats. "In fact, if Congress wants to come together, adjourn and leave, it's all right with us. We don't need them."

In retrospect, this marked a breathtaking gamble. Bush and his economic advisers were betting that the recession, now four months old, would "right itself" without any fiscal help from the President or the Congress. The White House assumed that the recession would last only two or three quarters, then would be followed by vigorous growth, in keeping with the pattern of other postwar slumps. Brady had his staff prepare an analysis that purported to show that such stimulative measures as tax cuts and spending increases during most postwar recessions had come too late to do any good. Instead, he said, they fueled inflation and higher interest rates. When asked in early 1991 what would pull the economy up from recession, Brady shrugged and replied, "The tide goes out. The tide comes in."

The President and his men also assumed that after the February 1991 victory over Iraq, America's pride in its soldiers and high-tech weapons would translate somehow into renewed consumer and business confidence. The economy did post an uptick shortly after the war ended, which helped persuade Bush to reject the advice, mostly from activist Republicans outside the circle of his top advisers, that he should use the leverage of his record-high approval ratings to lay out an ambitious domestic agenda.

THE CHILL SETS IN

In the second half of 1991, Brady and Sununu convinced Bush that he should boost consumer confidence by accentuating the positive. Inflation and interest rates were low and, as Bush often noted, "this is a good time to buy a home." (Although, as Commerce Secretary Robert Mosbacher admitted in a TV interview, "It's a rotten time to sell one.")

But at a September campaign fund-raising dinner in Los Angeles, angry corporate leaders told the President that the economy was in much worse shape than his advisers were telling him. Back in Washington, at a state dinner for King Hassan II of Morocco, Bush got another earful from Paul Lego, the chief executive of Westinghouse. Kenneth Dam, the chief lobbyist for IBM, gave Bush advance warning that the computer giant was planning huge staff cuts.

Meanwhile, Bush saw his approval ratings dip to new lows. Swing voters assembled in G.O.P. focus groups complained that Bush's happy talk about the economy made him seem out of touch. Some also contrasted Bush's energetic conduct of foreign policy with his fecklessness at home.

Bush called a series of Cabinet-level meetings of his Economic Policy Council, attended by a dozen Cabinet secretaries and other top advisers. They put forth several ideas for boosting the economy, but Brady and Sununu shot them down as economically unnecessary or politically risky. Frustrated, Housing Secretary Jack Kemp warned, "Mr. President, the American people will forgive us if we try a program and it fails, but they will not forgive us if we don't try."

Boskin increasingly clashed with Sununu over the President's sunny pronouncements on the economy. Sununu kept Boskin away from Bush until November 1991, when the economist threatened to resign in protest. Granted an audience, Boskin told the President that the economy was not recovering as quickly as it had from previous recessions because it was struggling under unprecedented burdens, including the huge debts left over from the Reagan era. Among the new hardships were the steep regulatory costs of the Clean Air Act and the Americans with Disabilities Act. Boskin later bluntly told Bush that he was unlikely in 1992 to see a recovery as strong as Reagan had enjoyed in 1984, or Ford in 1976. Unemployment probably would not decline by much, and might even get worse.

BOSKIN'S BOLD PLAN

In December 1991, Boskin began to argue that the economy might need a traditional boost, through new tax cuts and spending, of some $50 billion to $75 billion. He challenged the conventional argument that such stimulus would be superfluous in an economy with such a big annual deficit. When the cost of interest on the national debt was subtracted, he reasoned, federal fiscal policy was no better than neutral in its impact on the economy, while fiscal policy was contractionary among states and cities that were raising taxes and cutting spending. Bush and his other advisers, however, showed no enthusiasm for Boskin's proposal, preferring to rely on interest-rate cuts promised by the Fed.

CAMPAIGN ECONOMICS

Instead of a stimulus package, or a serious deficit-reduction plan, Bush in his January 1992 State of the Union address proposed a grab bag of tax breaks for favored investors and industries including real estate. Bush's proposals fell flat with Congress and the public, in part because of their tardiness: 17 months after the recession had begun. His poll ratings continued to slide. And when Pat Buchanan made headway against Bush in the Republican primaries by chiding the President for his turnabout on taxes, Bush repudiated the breaking of his tax pledge in 1990 as "a mistake." This was yet another refusal by the President to sell the public on the need for sacrifice and compromise.

It was not so much that Bush regretted the substance of what he had done. Mostly, he admitted, he regretted the political "flak" he was getting for the move. Nor did Bush wish he had done more to cut spending instead of raising taxes; running against Buchanan, Bush now posed as the defender of Social Security and Medicare subsidies.

As unemployment continued to rise in 1992, many Republicans called for the heads of Brady and Darman, whom conservatives held responsible for the breaking of the tax pledge. But Bush defended them. Activist Republicans also called in July and August for Bush to demonstrate powerfully the shift in his attention from foreign affairs to the domestic economy by declaring at that point that Baker would serve as economic czar in a second term. But until last week, Bush deferred to Baker's preference for returning to the State Department.

The replacement of his economic team might have been seen as a dramatic change if Bush had announced it at about the time of the Republican Convention. But by making the decision only three weeks before the election, one campaign official opined, "we only look desperate." In the end, Bush had | failed not only to maintain the growing economy that Americans expect but had failed on his own terms: politically. By trying to wait until his second term to address the tough economic issues facing the country, Bush has made it far less likely that he will see that second term.

With reporting by Michael Duffy/Washington