<p>Cornered by the deficit, Bush proclaims his own brand of
"thinking anew" and signs on to the T word. But who will be
paying what?
</p>
<p>By George J. Church--Reported by Michael Duffy, Richard Hornik
and Nancy Traver/Washington
</p>
<p> If there was ever going to be a deficit-cutting agreement,
said House Speaker Thomas Foley in the 7:30 a.m. breakfast
meeting at the White House last Tuesday, then the President had
to make "some kind of public commitment."
</p>
<p> "Like what?" asked George Bush. "What would make you
satisfied?"
</p>
<p> Foley was prepared; he and fellow Democrats George Mitchell
and Richard Gephardt, the Senate and House majority leaders,
had worked out a presentation in advance. After an hour of
discussion, Budget Director Richard Darman wrote out a draft
of a formal statement in longhand.
</p>
<p> The Democrats left the room to caucus, then returned to ask
for some changes. Where Darman had written "it is clear that..." the Democrats demanded a change to "it is clear to me"--meaning Bush, meaning he would have to stand behind the
proposals that followed.
</p>
<p> O.K., what proposals? Democrats wanted to use the dread T
word somewhere in the statement, but their counterparts
preferred something fuzzier. Everyone concurred on "increased
tax revenues" in the wan hope, on the White House side, that
this compromise might put a fig leaf over what was being said.
</p>
<p> At 9 a.m. the statement was ready. But the Democrats were
suspicious that Bush and aides might delay or re-edit it.
Though Foley later denied it, White House officials said the
Democrats insisted it be issued then and there, before they
left the White House. Bush summoned press secretary Marlin
Fitzwater, who handed the statement to an aide, who typed "The
White House" at its head and posted it on the wall of the
pressroom.
</p>
<p> Then, in the President's words, "the arrows [began] flying,
front, back, sideways." Try as Bush loyalists might to say it
wasn't so, it was immediately clear that the President had
repudiated the central pledge of his 1988 campaign--"Read my
lips: no new taxes"--a pledge he should never have made,
since it has hamstrung economic policy throughout his
presidency. Republican candidates screamed in fear that they
had lost a potentially crucial issue for the fall congressional
elections. Democratic congressional leaders kept a promise not
to gloat; they gravely commended the President's statesmanship.
But lower-ranking Democrats could not hide their glee that at
last they could silence G.O.P. gibes that they belong to the
high-tax party.
</p>
<p> "I can't say I didn't expect to hear some campaign words
played back to me, and it's been fairly intense," Bush remarked
at a press conference Friday. Under repeated taunting, however,
he compared himself with Abraham Lincoln, who had once said,
"We must think anew." Even then, Bush turned down what amounted
to a dare to say, in so many words, "We have to raise taxes."
Nonetheless, he gave a rationale for accepting a boost: new
revenues, said Bush, are a necessary part of any compromise
package to cut the budget deficit, and a lower deficit in turn
is essential to bring down interest rates and get the economy
moving at something better than its current snail's pace. "In
the long run," he added, the flip-flop will not hurt his
credibility "because what people are interested in are jobs,
economic growth. People know this deficit is bad. People know
that we are going to have to take some action." Some
Republicans nonetheless grumbled that Bush was improving his
prospects in the 1992 election at the expense of theirs this
fall.
</p>
<p> All of which is premature. It is by no means certain that
congressional leaders and Administration officials
participating in the so-called budget summit talks can come up
with the $50 billion deficit-reduction package, divided
approximately half and half between tax boosts and spending
cuts, that seems to be their goal. For one thing, Bush's
agreement to tax increases is conditioned on cuts in spending
for entitlement programs--those that provide benefits
automatically to people meeting certain standards set by law.
Social Security, Medicare and farm subsidies are examples.
Democrats traditionally have been as horrified by that idea as
Republicans have been by the thought of tax boosts.
</p>
<p> Carrying out their part of a prospective deal, Democrats did
begin proposing some entitlement cuts in summit meetings
following the eat-my-lips announcement. House Budget Committee
chairman Leon Panetta suggested Medicare and farm-subsidy cuts
of an unspecified nature totaling $5.7 billion. Talk also
circulated about a temporary freeze in cost of living
adjustments to Social Security pensions and about subjecting
perhaps 85% of the Social Security income of well-off retired
people to income tax, rather than 50% as at present. Still, it
is unclear whether the Democrats can produce sufficient
entitlement reductions or the Republicans deep enough cuts in
military outlays--another essential part of a package deal--to satisfy the other side.
</p>
<p> Even if both sides come through, they have barely begun to
discuss which taxes to raise how much. One of the few
certainties is that there will be no general increase in income
tax rates; that, in the White House view, would be too blatant
a violation of Bush's read-my-lips pledge. There is a strong
chance, however, of an increase in the tax rate on the highest
incomes, roughly $163,000 or more on a joint return, in
exchange for Bush's cherished cut in the capital-gains tax.
Though his aides denied it, White House chief of staff John
Sununu told some Republican legislators that such a trade is in
the works. Another good bet is an increase in so-called cats
and dogs: user fees and excise taxes, particularly the "sin
taxes" on cigarettes and liquor. More problematic is an
increase in taxes on energy--maybe gasoline, maybe imported
oil, maybe all forms of fuel consumption. While grudgingly
accepting the necessity of higher taxes in general, voters in
polls have consistently rejected a gasoline tax.
</p>
<p> Washington cynics would not be surprised if the budgeteers
agree only on the least unpopular spending cuts and tax boosts,
producing a package of an inadequate $30 billion. And some
Republican legislators are threatening to vote against any deal
that contains tax boosts, even one backed by their President.
Nose counters are already writing off the votes of Republican
incumbents facing tough electoral challenges, and of those from
states that would be hit hardest by cuts in spending.
</p>
<p> Time is another factor. An agreement of some sort, if only
a framework, must be struck in about five weeks, before the
August congressional recess. Even then, the key votes will come
in the fall, amid all the pressures of the election campaign.
Generally, House incumbents of both parties have such a high
re-election rate that few analysts expect the composition of
the lower chamber to change much, whatever happens to taxes.
Republicans, however, have had high hopes of reducing or even
eliminating the 55-to-45 Democratic edge in the Senate by
picking up shaky Democratic seats in such states as Illinois,
Iowa, Michigan and Rhode Island. But those prospects hinge at
least in part on retaining what many Republicans consider a
"defining issue."
</p>
<p> The economic impact of a deficit cut is uncertain. Deficits
have been slowly strangling growth by forcing Government to
borrow a disproportionate share of domestic savings--and
foreign savings too. Moreover, to attract foreign buyers of
Government securities, the Federal Reserve has been forced to
keep interest rates even higher than market forces might push
them. In the long run, a slash in the deficit ought to spur
growth by making more loan money available, at a lower interest
cost, to finance business investment and consumer spending.
</p>
<p> In the short run, though, higher taxes and less federal
spending traditionally weaken the economy by pulling out
spending money. And an economy growing at an annual rate of
only 1%, which some economists expect for the second quarter,
cannot stand much weakening. Without compensating moves by the
Federal Reserve to increase the money supply and lower interest
rates, a $50 billion slash could tip the economy into
recession. The timing is tricky; the Fed is reluctant to move
until a budget-reducing deal is struck, lest any loosening
merely spur inflation. Yet if it waits, the loosening may take
effect too late to offset a deficit slash.
</p>
<p> Why then did Bush back off his read-my-lips promise, knowing
the derision he would face? Fundamentally he had no choice; the
no-new-taxes pledge had become untenable. His economic
counselors were increasingly troubled by the effects of
continued high deficits. One financial industry official
reports that Council of Economic Advisers chairman Michael
Boskin, whom he talked to recently, "is really worried that the
recovery might end." It became obvious that deficits are getting
worse rather than better. At his press conference, Bush noted
that "we now estimate a deficit of over $150 billion in fiscal
1991, not counting the cost of the savings and loan cleanup,"
vs. an estimate of $100 billion last January.
</p>
<p> Nor could Bush talk the Democrats into a budget-cutting deal
that did not include tax boosts. Darman made one last
halfhearted try two weeks ago, presenting to the budget summit
a reworked version of the Administration's original proposed
budget that he said would reduce the red ink by $50 billion.
Democrats called it a gimmicked-up proposal that would not save
anything near that amount. Senate Budget Committee chairman Jim
Sasser and Georgia Democrat Wyche Fowler threatened to walk out
of the budget talks.
</p>
<p> Such a breakdown would have been disastrous for Bush
politically. It would have guaranteed a rawhiding at the
economic summit of the noncommunist world's seven strongest
financial powers, convening in Houston next week; the other six
have long been critical of U.S. failure to control its deficits
anyway. And it would have torpedoed a highly favorable
agreement with Japan, announced last week, that is supposed to
help reduce the U.S. trade deficit.
</p>
<p> Darman and Treasury Secretary Nicholas Brady then began
sounding out Democratic congressional leaders about how badly
they would beat up on Bush if he agreed to some tax boosts. A
flurry of weekend phone calls to the White House from Foley,
Mitchell, Gephardt and Panetta apparently assured the President
that the leaders would not gloat publicly. Finally, at a White
House meeting last Monday, Republican congressional powers told
the President the budget deadlock could be broken only by an
agreement on some kind of tax rise. That set up the climactic
breakfast the next day.
</p>
<p> So did the Democrats push the President into breaking his
tax pledge? Yes, but both they and Bush were recognizing
reality. It has long been obvious that spending cuts alone
cannot reduce the deficit as much as is required. It was
obvious in 1988 too. Bush should never have voiced his pledge,
he should never have made it the focus of his campaign, and he
should have backed off from it long before he did. But in
budget deliberations, as in other walks of life, better late
