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                                                                                THE ECONOMY, Page 32

Anatomy of a Fumble


Bush tries to blame his economic performance on bad advice,
but the fault lies more with his own political strategy and
his instinct to let the recession fix itself

By DAN GOODGAME -- With reporting by Michael Duffy/Washington


    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 corleaders 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.