TIME: Almanac 1993/TIME Almanac 1993.iso/time/101590/1015106.000

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                                                                                NATION, Page 40

COVER STORIES

Man in the Muddle


Dick Darman helped create the budget mess, but he can't find a
way to solve it

By MICHAEL DUFFY/WASHINGTON -- With reporting by Dan Goodgame/
Washington


    The year is 1981, the uncertain dawn of the supply-side
revolution. David Stockman, Ronald Reagan's Budget Director,
is standing in the White House parking lot talking with Richard
Darman, a powerful presidential assistant. A crisis is at hand:
frenzied Republican and Democratic lawmakers are piling
additional giveaways onto Reagan's tax-cut bill. Unless they
can be stopped, the nation will be burdened with deficits in
the hundreds of billions for years to come. "I don't know which
is worse," says Darman, "winning now and fixing up the budget
mess later, or losing now and facing a political mess
immediately."

    Moments later, Darman has reached a decision: "We win it
now. We fix it later."

    Later is now. And as the budget debacle in Washington
demonstrated, Darman still has found no way to repair the
fiscal fiasco that he, as much as anyone else, helped create.
Last week, after more than five months of closed-door
negotiations, he watched as timorous rank-and-file House
members defeated a painfully crafted deficit-cutting deal worth

been economically laudatory, even politically reasonable. He
had wanted to solve the deficit problem by shifting the
government onto a healthier diet of lower borrowing. He had
envisioned an end to an era of divided, do-nothing government.
And he had desired to extricate his boss, George Bush, from his
crippling "no new taxes" campaign promise. The long-term
strategy was obvious: even if Bush took a drubbing for raising
taxes in 1990, he would put the country on a stronger economic
path. That could help ensure his re-election in 1992. Darman
was thinking anew: "Fix it now. Win it later."

    Too clever by half. For the nearly 20 years that Darman has
been shaping policy in Washington, that has been his
reputation. A manipulator who could not be trusted. A hypocrite
who, even as he preached against the shortsighted "now-nowism"
that has afflicted American society, used ludicrously
optimistic economic forecasts to delay the day of reckoning
with the looming budgetary disaster. Former Senator Howard
Baker even coined a word to describe his elliptical gambits:
Darmanesque.

    Not even Bush, who often trusts too freely, trusted him. The
enmity began in 1984, when Reagan's re-election campaign was
getting under way. Briefing reporters on economic policy at
Reagan's Santa Barbara, Calif., ranch, Bush refused to rule out
new taxes to cope with a growing budget deficit. Headlines
appeared the next day, angering Reagan aides. A few days later,
news stories, quoting a senior official, blasted Bush for the
misstep. Bush's aides fingered Darman as the source. Bush
crossed him off his A list.

    Rehabilitation took five years. High as leaking was on
Bush's list of unacceptable behaviors, "handling" was even
higher. Bush thinks of himself as resistant to manipulation of
any kind, and Darman had been perceived as one of Reagan's
dexterous puppeteers. But heavy lobbying by James Baker, who
with Darman formed an inseparable duo in the early Reagan
years, eventually persuaded Bush to appoint Darman Budget
Director. "When we went to see Bush about the OMB job," said
Craig Fuller, Bush's transition co-director, "we only took one
name."

    From the very beginning Darman knew that taxes had to be
part of any effort to rein in the deficit. Early in 1989,
Darman predicted to a small circle of friends that Bush would
eventually sign a bipartisan deal raising revenues, paring
defense programs and slashing growth in entitlement programs
such as Medicare and agriculture subsidies. Such a pact would
curb short-term government borrowing and put downward pressure
on long-term interest rates. "Intellectually, I believed it to
be right, unequivocally," says Darman. He didn't need to hurry:
unexpectedly high tax collections made such a sweeping deal
unnecessary in 1989. But deep cuts required by the
Gramm-Rudman-Hollings deficit-reduction law made a
groundbreaking approach unavoidable in 1990.

    His strategy called for both Republicans and Democrats,
after hard bargaining, to sacrifice sacred cows for the good
of the economy. Darman called it a "no fingerprints" deal: by
agreeing to a plan simultaneously, both sides could avoid
electoral reprisals. Plausible as it sounded, it overlooked the
fact that the rest of the Congress has never been fond of deals
cooked up behind closed doors by a handful of carefully chosen
lawmakers.

    The art of the deal is in the timing. Darman thought it
would take months to fashion a budget pact, and pushed Bush to
call a summit early in 1990. That way, in the likely event that
the negotiations collapsed, President Bush would get the credit
for having tried to get an agreement. "It was the right thing
to do," says Darman, "and also the politically sound thing to
do if the right thing didn't work out." Darman called this
"multiple-contingency planning," and it is typical of his
thinking. "Life is not so simple," he says. "It does not work
in this world that you can go in an absolute straight line. You
have to be prepared for many possible paths. Many of these
things are totally outside your control."

    As the budget summit began in May, Darman also sought to
reincarnate himself, if only to avoid accusations of bad faith
from the Democrats. He knew that forging a deal would depend
on his being, as he put it, "the soul of reasonableness." The
new "charmin' Darman" was immediately on display. When Senator
Robert Byrd delivered a pompous lecture on the separation of
powers at one session in midsummer, Darman afterward presented
him with a letter brimming with praise. "He was a complete boy
scout," said an incredulous Darman aide.

    In contrast, White House chief of staff John Sununu made no
secret of his distrust of the Democrats. When Bush convened the
talks, Sununu insisted that taxes weren't "on the table." In
fact they were, though the White House was loath to admit it.

    Thus began a complicated shell game between Sununu and
Darman: the chief of staff took a hard line with Democrats to
keep Republicans on board, while the Budget Director preached
a conciliatory line to keep Democrats at the table.

    At times the Sununu-Darman duet sounded discordant, but it
was almost always planned. Their relationship had become the
most powerful axis in the White House. Each gave the other what
he lacked: Sununu provided Darman with access to Bush; Darman
provided Sununu, a Washington neophyte, with a knowledge of the
workings of Congress, government and Washington. The two men
meet each morning at 7:15 and speak by telephone 20, sometimes
30, times a day. Both possess quick, assertive minds; both have
a weakness for pranks and practical jokes. And both men are
fighters. But where Sununu wrestles, Darman boxes. Says a
senior Administration official: "Sununu relies on his wits, on
thinking off the top of his head. Darman is a planner. He's
always five steps ahead of you." He adds, "The difference
between Sununu and Darman is that Darman knows when he's lying
to you."

    In spite of the good cop-bad cop routine, the talks went
nowhere. Gradually, it dawned on the White House that the
Democrats were stalling -- and scoring political points as a
result. By mid-June the Democrats were threatening to walk out
of the talks unless the President made a public commitment to
tax increases, reversing his most cherished campaign pledge --
and his most potent weapon for bashing the other party.

    Thus Bush's reversal on taxes required delicate handling.
By the beginning of 1990, many Administration officials openly
acknowledged the need for taxes. These included Darman and
Sununu, aides to each explained, though neither admitted it
publicly. And Bush? No one is sure, but those closest to him
suspect that the President accepted the need for a tax hike
gradually, not at some specific moment. The real question was,
When should the U turn take place? Wait until 1991 and the
reversal could damage Bush's 1992 re-election campaign. Wait
until late 1990 and it might overshadow the budget deal itself.
Better, aides figured, to do it as soon as possible. Some
Republican candidates might suffer, but most of the incumbents
are unbeatable.

    Then fate took a hand. In mid-June, the economy took a nose
dive, dragging corporate profits and federal tax receipts down
too. In mid-June Darman boosted his 1991 deficit estimate to
$159 billion,  up from $138 billion just a month before. Unless
a plan for cutting almost $100 billion could be produced by
Oct. 1, spending cuts required by Gramm-Rudman would force the
layoff of thousands of government workers. Within days,
Administration officials began to utter dire predictions. It
was the perfect opportunity for a sudden conversion, and Bush
took it.

    The breakthrough occurred at a White House breakfast for
Democratic leaders on June 26. House Speaker Tom Foley urged
Bush to make a short statement that "tax increases" would be
a part of any budget accord. When Bush asked Foley to suggest
such a statement, one observer said, "a lot of jaws in that
room dropped." Foley dictated a version off the top of his
head. Darman said it would take only a few minutes to draft,
and began writing. He showed the draft to Sununu, who passed
it to Foley. After a few changes, Bush looked it over, called
in press secretary Marlin Fitzwater, and told him to release
it.

    The news fell on Washington like a bomb. Bush's approval
rating dropped 8 to 10 points over the next two weeks. Aroused
Republicans shrieked that Bush had given away their party's
only winning issue in the post-cold war era. Many White House
officials agreed. "It was the biggest single mistake of his
presidency," a senior official said. "We took a big political
hit for it, and what did we get? Nothing."

    In fact, Bush's conversion did little to bring the talks out
of their coma. Darman thought that the deal might be struck by
August. But the Democrats continued to procrastinate, giving
away little, particularly on social programs. The Democratic
stall obscured the best-kept dirty secret of the budget talks:
House Republicans were no more willing than their opponents to
support Darman's proposed cuts in health and retirement
benefits and other federal entitlements. They bombarded
Sununu's office with private pleas to protect special programs.
They signed joint letters opposing cuts in pork-barrel
programs. At one point, senior White House officials polled
House G.O.P. members to see how many votes they could get for
cuts of various sizes. "You know how much we raised from these
guys?" a frustrated Bush aide asked in August. "To get 50% of
the House Republicans to vote for a package, we can cut $4
billion, maybe $6 billion from entitlements."

    In an attempt to jump-start the bargaining in late July,
Darman proposed that both parties simultaneously put their
offers on the table so that neither could gain a partisan
advantage. But that notion fizzled. Two days before the
so-called "immaculate conception" was due to take place,
Senator Robert Packwood, a garrulous Oregon Republican,
disclosed that Darman planned to eliminate income deductions for
state and local taxes. Predictably, both Republican and
Democratic Governors exploded, complaining that the idea would
make it impossible to balance the budgets in their hard-pressed
states. Democratic summiteers labeled the new tax a political
maneuver. Within days the talks broke down. Darman later
claimed to reporters that the Administration "never wanted" to
eliminate the deduction.

    Still, a consensus was developing: raise cigarette, gasoline
and alcohol taxes, extract more revenue from the wealthy
through income tax surcharges, cut domestic spending and
defense. The sticking point was Bush's cherished plan to reduce
the tax on capital gains. But the political temperature was
rising, heated by the crisis in the Persian Gulf. The threat
of war dimmed the prospects for taxes on stock-market trades
or energy consumption. Rising oil prices and the specter of new
inflation even moved opportunistic House Republicans led by
Newt Gingrich to call for new tax cuts. "Everyone," Darman said
in mid-August, "is looking for an exit."

    Near the end of August, Darman drafted a speech for Bush
linking the Persian Gulf crisis with the budget. Darman argued
that the economic pressures caused by the Iraqi invasion made
getting the deficit under control more important than ever. He
envisioned reconvening the negotiators after Labor Day and
cutting a deal in time for an announcement on Sept. 12, after
Bush returned to Washington from a speedily arranged summit
meeting with Mikhail Gorbachev.

    With the deadline for the dreaded sequestration 20 days
away, Darman's latest scheme proved too optimistic. When the
negotiators finally sat down for 11 days at Andrews Air Force
Base on Sept. 7, little was accomplished. Byrd, for example,
demanded a $50 billion kitty for unspecified domestic spending.
Several members -- Senators Robert Dole and Jim Sasser and
Representative Silvio Conte -- often refused to work late. Air
Force stewards larded buffet tables with so many roasts and
desserts that, when asked what Andrews produced, one White
House official replied, "expanded waistlines." When Bush gave
his nationwide speech, the budget took a backseat to the gulf.
Repeating his call for a cut in the capital-gains tax, the
President promised not to tinker with tax rates. Bush made no
concessions, but did call on Congress to sweeten the budget
deal with $30 billion in tax breaks over five years.

    At that, Democrats adopted a new tactic: outleak the White
House. A Democratic study applauding the progressivity of the
Democratic tax proposal (and pointing out the regressive
quality of the White House proposal) found its way into mass
circulation. "We're letting them frame the issues," said one
White House official. "We're getting massacred."

    Meanwhile, Darman tried a new tack. He revised his
capital-gains proposal, suggesting that the rate be lowered
from 19.6% to 15% in the hope of spurring a compromise with the
Democrats at around 17% or 18%. The Democrats were willing, but
only if Bush agreed to eliminate the "bubble," an irregularity
in the income tax code that lowers the rate on earnings over
$500,000 from 33% to 28%. In fear that  Republicans would revolt
again, Bush refused to budge on rates. At one point, Sununu
discussed adjusting the tax brackets so that the lower rate
would apply only to income above $500,000. This time it was
Senate Democratic leader George Mitchell who said no. "That
would only solve half the problem," he said. "We believe
marginal rates are too low." Replied Sununu: "It's the American
way."

    Darman kept quiet. It was part of their routine.

    When silence didn't work, Darman employed finely calibrated
displays of emotion to keep the talks moving. During one debate
on entitlements, Sununu exploded at House Budget Committee
chairman Leon Panetta, shouting that Democratic proposals for
cutting entitlements fell short of the $120 billion the White
House demanded. Sununu put his feet up on the bargaining table
and screamed, "Where's the other $20 billion?" Before Panetta
could respond, Darman piped up, "You guys ought to know who
your friends are in this thing. I'm going to recommend we [end]
these talks." By mid-September, Mitchell's campaign to burst
the bubble began to work. Opinion polls revealed that the White
House's insistence on a capital-gains tax reduction, which
would benefit mainly those earning more than $200,000 a year,
was backfiring. Voters were again thinking of Bush as a
guardian of the wealthy, an image the White House had long
sought to erase. Says a Republican Party official: "It took us
years to start to change the image of the G.O.P. as the party
of the rich, and now they've revived that image in the public
mind in a matter of weeks." To cut G.O.P. losses, Republicans
urged Bush to quit the talks. Within days, JUNK THE SUMMIT
buttons appeared on the lapels of House Republicans. Darman
held back, arguing repeatedly that such a walkout would hurt
the President more than the Democrats.

    Finally, with time running out, leaders of both parties
excused obstructionists like Byrd and Representatives Gingrich,
Conte and Jamie Whitten, and bargaining resumed among a
so-called Group of Eight. Thus some of the most influential
spokesmen and powerful chairmen of both parties were ousted as
the final sprint ensued. Many were angered by the slight -- and
some, including Gingrich, led the House uprising that sank the
pact last week.

    At one point the smaller group nearly swapped a cut in
capital-gains taxes for higher tax rates on the wealthy. But
the bargaining broke down along old battle lines. "The issue
had such symbolic intensity on both sides that progress was
impossible," Darman said later. The impasse continued until
Sept. 20, when Dole proposed separating the contentious
capital-gains issue from questions that had already been
resolved. Dole's 11th-hour move led several White House aides
to surmise that Darman had put the Senator up to it. It sounded
plausible: Darman had saddled up stalking horses to move
another President off the mark. One curious staff member put
the question to Darman directly, with Sununu standing nearby:
Did you ask Dole to revolt so Bush could make a graceful exit?
Darman laughed. "Let 'em think that," he said. "But we're not
that smart."

    Dole's defection was followed six days later by that of
House Republican leader Robert Michel, who declared that a
capital-gains victory was not worth trading for higher rates.
"The price is too high."

    In the end, the pact that Darman crafted was done in partly
by his own design. He had tried to remove the budget talks from
the political arena, only to find the two inseparable. As the
sequester fell, Darman's impatience with the political
cowardice of elected officials rose. "It has always puzzled me
that there are so many people in the House who are essentially
unopposed," he mused last week. "How is it that with 350
unopposed, they have so much trouble looking at the general
interest?"

    Darman was typically philosophical: "Representative
democracy is good for ordinary, incremental approaches to
problems. We are not so good at handling large shifts. The
deficit is not an ordinary problem. It is an extraordinary
problem."

    There was one other thing on his mind: how to fix it now.