Since now none of the defendants could be called to testify in court under oath, if there were any more facts to come out, they probably never would. Just two weeks earlier, Walsh had learned that the President and his lawyer, Boyden Gray, had failed for more than a year to hand over Bush’s own contemporaneous notes relating to Iran-Contra, despite repeated requests to do so. I disagreed with the pardons and could have made more of them but didn’t, for three reasons. First, the President’s pardon power is absolute under our Constitution. Second, I wanted the country to be more united, not more divided, even if the split would be to my political advantage. Finally, President Bush had given decades of service to our country, and I thought we should allow him to retire in peace, leaving the matter between him and his conscience.
On the day after Christmas, I got a pleasant surprise when it was announced that Time magazine would name me “Man of the Year,” saying that I had been given the opportunity “to preside over one of the periodic reinventions of the country—those moments when Americans dig out of their deepest problems by reimagining themselves.” When asked about the honor, I said I was flattered by it but worried about the troubled world, about getting bogged down because there was so much to do, and about whether the move to Washington would be good for Chelsea. Chelsea would do just fine, but my other concerns proved to be well founded.
Hillary, Chelsea, and I spent New Year’s in Hilton Head at Renaissance Weekend, as we had been doing every year for nearly a decade. I loved being with old friends, playing touch football on the beach with kids and a few rounds of golf with a new set of clubs Hillary had given me. I enjoyed attending the discussion panels, where I always learned things from people who talked about everything from science to politics to love. That year, I especially liked one entitled “What I’d Tell the President over a Brown Bag Lunch.”
Meanwhile, President Bush was going out in full stride. He visited our troops in Somalia, then called me to say he was headed to Russia to sign a strategic arms limitation treaty, START II, with Boris Yeltsin. I supported the treaty and said I was prepared to push its ratification in the Senate. Bush was also being helpful to me, telling other world leaders he wanted me to “succeed as President” and that they would find me “a good man to work with” on important problems.
On January 5, Hillary and I announced that we would enroll Chelsea in a private school, Sidwell Friends. Until that time, she had always been in public schools, and there were some good ones in the District of Columbia. After discussing it with Chelsea, we decided on Sidwell primarily because it guaranteed her privacy. She was about to turn thirteen, and Hillary and I wanted to give her the chance to live out her teenage years as normally as possible. She wanted that, too. On January 6, with only two weeks to go before the inauguration, and the day before my first meeting with my economic team, the Bush administration’s OMB director, Richard Darman, announced that the coming year’s budget deficit would be even higher than previously estimated. (My staff was convinced Darman had known about the larger deficit earlier and had delayed his bad-news announcement until after the election.) Regardless, now it was going to be much more difficult to juggle the competing priorities: to cut the deficit in half without weakening the fragile economic recovery in the short run; to find the right combination of spending cuts and tax increases necessary to reduce the deficit and increase spending in areas vital to our long-term economic prosperity; and to ensure more tax fairness for middle-and lower-income working people. The next day, the economic team gathered around the dining-room table in the Governor’s Mansion to discuss our dilemma and explore which policy choices would produce the most growth. According to traditional Keynesian economic theory, governments should run deficits in bad economic times and balanced budgets or surpluses in good times. Therefore, the combination of tough spending cuts and tax increases necessary to halve the deficit seemed to be the wrong medicine for the present moment. That’s why FDR, after being elected on a promise to balance the budget, abandoned deficit reduction in favor of big spending to put people back to work and stimulate the private economy. The problem with applying the traditional analysis to current conditions was that under Reagan and Bush, we had built in a large structural deficit that persisted in good times and bad. When President Reagan took office, the national debt was $1 trillion. It tripled during his eight years, thanks to the big tax cuts in 1981 and increases in spending. Under President Bush, the debt continued to increase again, by one-third, in just four years. Now it totaled $4 trillion. Annual interest payments on the debt were the third-largest item in the federal budget after defense and Social Security. The deficit was the inevitable result of so-called supply-side economics, the theory that the more you cut taxes, the more the economy will grow, with the growth producing more tax revenue at lower rates than previously had been collected at higher ones. Of course it didn’t work, and the deficits exploded throughout the recovery of the 1980s. Though supply-side theory was bad arithmetic and lousy economics, the Republicans stayed with it because of their ideological aversion to taxes, and because, in the short run, supply-side was good politics. “Spend more, tax less” sounded good and felt good, but it had put our country in a deep hole and left a cloud over our children’s future. Coupled with our large trade deficit, the budget deficit required us to import tremendous amounts of capital every year to finance our overspending. To attract that kind of money and avoid a precipitous drop in the value of the dollar, we had to keep interest rates far higher than they should have been during the economic downturn that preceded my election. Those high interest rates inhibited economic growth and amounted to a huge indirect tax on middle-class Americans who paid more for home mortgages, car payments, and all other purchases financed through borrowing.
After we sat down to work, Bob Rubin, who was running the meeting, called on Leon Panetta first. Leon said the deficit had gotten worse because tax revenues were down in the sluggish economy, while spending was up, as more people qualified for government assistance and health-care costs soared. Laura Tyson said that if current conditions continued, the economy would probably grow at a rate of 2.5 to 3 percent over the next years, not enough to lower unemployment much or to ensure a sustained recovery. Then we got down to the meat of the coconut, as Alan Blinder, another of my economic advisors, was asked to analyze whether a strong deficit-reduction package would spur growth and new jobs by bringing down interest rates, since the government wouldn’t provide as much competition with the private sector in borrowing money. Blinder said that would happen, but that the positive effects would be offset for a couple of years by the negative economic impact of less government spending or higher taxes, unless the Federal Reserve and the bond market responded to our plan by lowering interest rates substantially. Blinder thought that after so many false promises on deficit reduction over the last few years, a strong positive response by the bond market was unlikely. Larry Summers disagreed, saying that a good plan would convince the market to lower rates because there was no threat of inflation as the economy recovered. He cited the experience of some Asian countries to support his view. This was the first of many exchanges we would have about the power over the lives of ordinary Americans exercised by thirty-year-old bond traders. Often my loud complaints about this, and Bob Rubin’s retorts to them, were funny, but the issue was dead serious. With national unemployment stuck at above 7 percent, we had to do something. Tyson and Blinder seemed to be saying that, for the longterm health of the economy, we had to cut the deficit, but that doing so would slow down growth in the short term. Bentsen, Altman, Summers, and Panetta bought the bond-market argument and believed deficit reduction would accelerate economic growth. Rubin was just running the meeting, but I knew he agreed with them. So did Al Gore.