Darman's disaster - Bush's responsibility (criticism of George Bush's and Richard Darman's roles in budget reform)

Mr. Mitchell is John M. Olin Distinguished Fellow in Political Economy at the Heritage Foundation.

We face higher taxes and no spending cuts, but at least we got budget-process reform, right? Right: reform that makes it easier for Congress to undo the Reagan Revolution.

IT WAS only fitting that George Bush waited until election eve to sign into law the largest tax increase in American history. By reneging on his solemn no-new-taxes pledge, Bush had discarded his party's best political issue and paved the way for the loss of seats in both the Senate and the House. Democratic strategists are still amazed that the White House capitulated so easily and completely. Indeed, through much of the summer, many Democrats were convinced the budget summit was a trap designed to lure them into openly advocating tax increases.

After all, who would have predicted one year ago that George "Read My Lips" Bush would agree to a five-year budget deal that raised taxes by at least $170 billion, allowed spending to increase by at least $245 billion, and emasculated the Gramm-Rudman Deficit Reduction Law? Certainly not the voters. If they had been shown this package in October of 1988 and told it would become law in 1990, they would have assumed Michael Dukakis must have won the election in the meantime.

o make a bad situation even worse, the President did not get anything in exchange for breaking his pledge. When he called for "tax revenue increases" in June, he also insisted that a budget agreement include cuts in entitlement spending, a lower capital-gains tax, and reforms in the budget process. While Congress was delighted to raise taxes, the other "non-negotiable" requirements somehow never made it into the final package.

Richard Darman, director of the Office of Management and Budget (OMB), continues to claim that the new "deficit reduction" package is a good one. Much as Ronald Reagan's advisors during the 1982 TEFRA debacle insisted the President got three dollars of spending cuts for every dollar of taxes, Bush's lieutenants apparently believe that repeating something often enough makes it true. Darman, for instance, claims the agreement cuts entitlement spending by $120 billion. In fact, entitlement spending is projected to grow by more than $200 billion over the next five years. Only under the Washington definition of a cut-increasing spending at a slower rate than previously planned-are there any savings.

Even under this slippery definition of a budget cut, Darman's entitlement savings are largely phony. He counts the transfer of $5.6 billion of revenue from the Postal Service to the general budget as an entitlement cut. Increasing taxes on banks is also counted as an entitlement cut, as is the provision shifting the time when certain retirement benefits are paid to federal employees. Delaying some student-loan payments is considered an entitlement cut, while agricultural savings have been made contingent on the increasingly unlikely completion of international trade negotiations. Keeping the taxpayer subsidy for the Part B portion of Medicare at 75 per cent is considered an entitlement cut. Provisions changing direct-loan programs into guaranteed-loan programs are counted as entitlement savings, demonstrating that politicians have failed to learn from the S&L deposit-insurance scandal that off-budget spending still costs real money.

The Bad News

DARMAN claims the Administration got budget-process reform in exchange for higher taxes, and in some senses he is right. The bad news is that the changes will make it even easier for Congress to spend other people's money.

Along with the two other stooges negotiating on behalf of the Administration, Treasury Secretary Nicholas Brady and Chief of Staff John Sununu, Darman did absolutely nothing to press for a tax-limitation or balanced-budget amendment in the agreement. Nor was there any serious discussion of the line-item veto or of requiring a super-majority vote to raise taxes. Instead, the White House negotiators effectively agreed to do away with Gramm-Rudman, the only part of the budget process that has helped control federal spending over the last five years.

For all its imperfections, Gramm-Rudman did limit how fast spending could grow. Federal spending in any given year could be no higher than the sum of projected tax revenues plus the maximum allowable deficit. While Congress always used loopholes and gimmicks to increase spending by more than the formula allowed, Gramm-Rudman clearly slowed the growth rate of federal spending, which is one reason why leading Democrats such as Senate Budget Committee Chairman James Sasser (D., Tenn.) and House Ways & Means Committee Chairman Dan Rostenkowski (D., Ill.) had come out for repealing the law.

An Empty Shell

LITTLE did they realize that the Bush Administration would be so accommodating. While Gramm-Rudman technically still exists, it is an empty shell. Its heart and soul-fixed deficit targets-have been replaced by deficit targets that are automatically adjusted upward whenever economic and technical assumptions are discovered to have been too optimistic. Supporters of the budget summit neglected to point out, naturally, that almost all unforeseen increases in government spending are attributable to changes in economic and technical assumptions. The goal of a balanced budget, which had been enshrined in the Gramm-Rudman law, is now replaced by a process analogous to a donkey chasing a carrot tied to the end of a stick.

The President and others have portrayed the new annual caps on domestic, defense, and foreign-aid spending as a great breakthrough and a victory for fiscal responsibility. Once again, however, White House officials have mysteriously forgotten to mention that these spending caps" are also automatically increased every time it is discovered that the Administration's economic nd technical assumptions are wrong. Since the spending caps allow domestic spending to grow by more than 6 per cent yearly under current assumptions, skeptics may be excused for not viewing the creation of these caps as a great victory.

With regard to capital gains, the President failed to achieve a tax cut. Typically, the White House considers it a victory that the maximum effective tax rate on capital-gains income stayed at 28 per cent instead of rising to 31 per cent along with the maximum effective tax rate on regular income. It is worth noting that President Bush began the summit process insisting on a reduction in the capital-gains rate and no increase in the personal-income-tax rate and wound up losing on both fronts.

It is difficult to understand why the White House agreed to such a bad deal. According to Darman and his cronies, the President had no choice. Because the Democrats controlled Congress, he supposedly had to accept a deal that raised taxes in order to reduce the deficit. If deficit reduction had been the true goal, however, the Administration could have accepted a sequester-Gramm-Rudman's spending-control mechanism. Since a sequester would have occurred automatically in the absence of a budget agreement, the President did not need much congressional support. So long as he had enough votes to sustain his veto in either the House or the Senate, he would have won. Once a sequester took effect, the President could have used his tremendous leverage to force real entitlement and budget-process reforms in exchange for reducing the sequester's size to a more politically acceptable level.

The Administration apparently decided, however, that the federal budget was more important than the family budget, so the sequestration option was quickly dismissed in favor of cutting a deal with Congress. The effect of this fateful decision was to give Senate Majority Leader George Mitchell (D., Me.) and House Speaker Tom Foley (D., Wash.) effective veto power, since no budget could pass without their approval. Given this unilateral abandonment of political power to the legislative branch, it is no wonder the President wound up signing a bill that so closely reflected the preferences of congressional Democrats.

Since the damage has already been done for this year, rather than further post-mortems, a more productive exercise might be to analyze what the budget disaster portends for next year. Unfortunately, the outlook is grim. The same White House that meekly acquiesced to Democrats' demands, and that had earlier kowtowed to Chinese thugs, pulled no punches when it came to punishing natural allies who stood firm against taxes. The U.S. Chamber of Commerce's firm opposition to taxes-unusual in the Washington business community, which is normally more concerned with buying favors than with protecting free enterprise-motivated the White House to bully some corporations into dropping their membership in that organization.

Those Republican senators and representatives who stuck with their notax-increase pledges attracted White House anger. One Republican congressman even had his seats in the presidential box at the Kennedy Center withdrawn because he said he would vote no. On a more serious note, the White House is doing everything it can, including running a puppet candidate, to unseat National Republican Congressional Committee Chairman Guy Vander Jagt. His crime: supporting Ed Rollins, the Committee's executive director, who tried to minimize election losses by advising Republican candidates to stick to their no-tax-increase promises. [See also "The Enemy of My Enemy," p. 24.1

The White House has even purged remaining conservatives at the Republican National Committee, including Don Todd (former RNC "Man of the Year") and his team in the Opposition Research division. Bush might not be President today were it not for the evidence of Dukakis's pathetic record on taxes, crime, and values that Todd and his staff amassed, but their commitment to principle made them expendable regardless of how well they did their jobs. Speaking of the RNC, the disabling illness of Chairman Lee Atwater has been more than a personal tragedy. Many observers feel that Atwater was the one person who might, through his political acumen and personal influence, have been able to keep Bush from breaking his pledge and stumbling into a bad budget deal.

Most troubling of all, it appears that the tax-and-spend budget agreement is merely a symptom of a more fundamental opposition to conservative values and beliefs that has taken hold inside the Bush White House. If this trend goes unchallenged, George Bush may well continue to stumble down the road to Carternomics, undoing the accomplishments of Ronald Reagan. It is time for conservatives to decide whether those accomplishments are worth preserving.