Bob Reich missed the meeting but sent me a memo the next day, arguing that while the debt was a higher percentage of the gross domestic product than it should be, investment in education, training, and non-defense research and development were all at a much lower percentage of GDP than in the preReagan years, and underinvestment was hurting the economy as much as the big deficits. He said the goal should not be to cut the deficit in half but to return it, and investments, to the percentage of GDP they had been before the Reagan-Bush years. He argued that the investments would increase productivity, growth, and employment, enabling us to reduce the deficit, but if we went for deficit reduction only, a stagnant economy with anemic revenues couldn’t cut it in half anyway. I think Gene Sperling pretty much agreed with Reich.
While I was mulling it all over, we moved on to a discussion about how to achieve the deficit reduction we needed. In my campaign plan, Putting People First, I had proposed more than $140 billion in budget cuts. With the deficit numbers higher, we would have to cut more to reach my goal of halving the deficit in four years. That led to the first of many discussions of what should be cut. For example, you could save a lot by reducing the cost-of-living allowances, called COLAs, on Social Security, but as Hillary pointed out, almost half of all Americans over sixty-five relied on Social Security to live above the poverty line; the COLA cut would hurt them. We didn’t have to make final decisions, and couldn’t without discussing it with congressional leaders, but it was obvious that, whatever we ultimately decided, it wouldn’t be easy.
In the campaign, in addition to the budget cuts, I had also proposed raising a comparable amount in new revenues, all from wealthy individuals and corporations. Now, to cut the deficit in half we would have to raise more revenues, too. And we would almost certainly have to scrap the broad-based middle-class tax cut, though I was still determined to cut taxes for working families earning about $30,000 a year or less by doubling the Earned Income Tax Credit. Those people’s incomes had been losing ground for twenty years, and they needed the help; moreover, we had to make lower-income jobs more attractive than public assistance if we were to be successful in moving people from welfare to work. Lloyd Bentsen went over the list of possible tax increases, saying that any tax would be hard to pass and the most important thing was to prevail. If our plan failed in Congress, it could endanger my presidency. Bentsen said we should present a number of options to Congress, so that if I failed to pass one or two, I could still claim success and avoid being crippled politically.
After the tax presentation, Roger Altman and Larry Summers argued for a short-term stimulus package to go with the deficit-reduction plan. They recommended about $20 billion of spending and business-tax reductions that at best would give the economy a boost, and at the least would prevent it from sliding back into a recession, which they thought was about a 20 percent possibility. Then Gene Sperling made a presentation of options for new investments, arguing for the most expensive one, about $90 billion, which would meet all my campaign commitments immediately.
After the presentations, I decided the deficit hawks were right. If we didn’t get the deficit down substantially, interest rates would remain high, preventing a sustained, strong economic recovery. Al Gore strongly agreed. But, as we discussed how much deficit reduction we needed, I was concerned about the short-term drag that Laura Tyson and Alan Blinder predicted—and Roger Altman and Gene Sperling feared—might occur. After nearly six hours, we were headed in the deficit-reduction direction. Clearly, economic policy making, at least in this environment, was not science, and if it was art, it had to be beautiful in the eyes of the beholders in the bond market.
A week later, we held a second meeting in which I abandoned the middle-class tax cuts; agreed to look at savings in Social Security, Medicare, and Medicaid; and supported Al Gore’s suggestion of a broadbased energy tax, called a BTU tax, on the heat content of energy at the wholesale level. Al said that while the BTU tax would be controversial in states that produced coal, oil, and natural gas, it would fall on all sectors of the economy, lessening the burden on ordinary consumers, and would promote energy conservation, something we badly needed more of.
For several hours more, we again debated how much deficit reduction we had to try for, beginning five years out and working back to the present. Gore took a hard line, saying if we went for the biggest possible reduction, we’d get credit for courage and create a new reality, making it possible to do previously unthinkable things, like requiring Social Security beneficiaries above a certain income level to pay income tax on their benefits. Rivlin agreed with him. Blinder said it might work if the Fed and the bond market believed us. Tyson and Altman were skeptical about avoiding short-term economic contractions. Sperling and Reich, who was present at this meeting, held out for more investments. So did Stan Greenberg, Mandy Grunwald, and Paul Begala, who weren’t part of the meetings and were afraid I was sacrificing everything I believed in under the influence of people who weren’t part of our campaign and didn’t care about the ordinary Americans who had elected me. In late November, Stan had sent me a memo saying my honeymoon with voters would be short-lived unless I moved quickly to address the problem of jobs and declining incomes. Sixty percent of those who said their finances had worsened in 1992, about a third of the electorate, had voted for me. He thought I could lose them with this plan. George Stephanopoulos, who sat in on the meetings, had to try to explain to Stan and his allies that the deficit was killing the economy, and that if we didn’t fix it, there would be no economic recovery and no tax revenues to spend on education, middle-class tax cuts, or anything else. Bentsen and Panetta wanted as much deficit reduction as we could pass in Congress, an amount less than Gore and Rivlin advocated, but still a lot. Rubin, as moderator, was again keeping his own counsel, but I sensed he was with Bentsen and Panetta. After hearing everyone out, so was I.
At some point, I asked Bentsen how much we’d have to reduce the deficit to rally the bond market. He said about $140 billion in the fifth year, with a five-year total of $500 billion. I decided to go with the $500 billion figure, but even with new spending cuts and revenue increases, we still might not be able to meet the target of cutting the deficit in half by the end of my first term. It all depended on the rate of growth.
Because of the possibility that our strategy would produce a short-term slowdown, we searched for ways to promote more growth. I met with executives of the Big Three automakers and Owen Bieber, president of the United Auto Workers, who said that while Japanese cars had almost 30 percent of the American market, Japan was still largely closed to American cars and auto-parts suppliers. I asked Mickey Kantor to find a way to open the Japanese market more. Representatives of the fast-growing biotechnology industry told me that our research-and-development tax credit should be extended and made refundable for young firms, which often didn’t make enough money to claim the full credit under current law. They also wanted stronger protection for their patents against unfair competition, and modifications in and acceleration of the product-approval process of the Food and Drug Administration. I told the team to analyze their proposals and make a recommendation. Finally, I authorized the development of the $20 billion one-shot stimulus proposal to increase economic activity in the short run. I hated to give up the middle-class tax cut, but with the deficit numbers worse, there was no choice. If our strategy worked, the middle class would see direct benefits worth far more than a tax cut—in the form of lower home mortgages and lower interest rates on things like car payments, credit card purchases, and student loans. We also wouldn’t be able to increase spending as much as I had proposed in the campaign, at least at first. But if deficit reduction brought interest rates down and growth up, tax revenues would increase, and I could still meet my investment objectives over four years. That was a big “if.”