A diary of official Washington in the midst of an economic crisis
A diary of official Washington in the midst of an economic crisis
Washington is a city at the center of its own universe. It moves to its own rhythms, according to its own imperatives, toward its own reality. Events do occasionally imping, as in the case of elections, wars, and catastrophes, but only rarely, and then only to the degree that they figure into some preexisting Washington agenda.
To some, the stock market crash of this past October looked to be an event of such moment that Washington would be forced to bend to realities outside its control. The instant analysis was that it was Washington that was most responsible for the loss of a trillion dollars in national net worth -- Washington with its persistent budget deficit, Washington that had never come up with a trade policy, Washington that, in the throes of deregulation, let the equity markets fall into the hands of monopolizers and speculators. How would Washington respond to the challenge?
October 29. It is 10 days after Black Monday and 58 years to the day since the great crash of 1929. Although today's newspapers are full of parallels between that earlier crisis and this one, the sense of collective shock and fear has already begun to dissipate.
On this day, the House passes by one vote, 206 to 205, a budget bill that would commit Congress to increasing federal taxes by $12 billion per year. Included in the package is a new provision to deny corporations the customary tax deduction for interest on loans taken to finance corporate takeovers. Wall Street interests have already succeeded in convincing a press hungry to find culprits that the mere consideration of the tax change was a principal cause of the market decline. Congressman Dan Rostenkowski of Illinois, chairman of the House's tax-writing committee, concedes today that maybe this is one provision that could be further reviewed as the budget measure makes its way through the Senate. It is one of many signs that Washington still prefers to respond to the demands of interest groups rather than to the demands of a sound economy.
Two other things are noteworthy about this House action.
The first is how little enthusiasm even a Democratic House has for raising broad-based taxes. In addition to the antitakeover tax, this budget bill would raise revenue from Kuwaitis for the privilege of having their tankers escorted in the Persian Gulf, extend the federal tax on telephone service, and close a few loopholes enjoyed by Defense contractors and owners of million-dollar houses. Tax rates, however, both for individuals and corporations, would remain unchanged. No hard choices here.
Actually, the process by which this bill is passed seems to attract more attention than its content. Speaker Jim Wright has held open the voting on the bill beyond the usual 15 minutes -- long enough for his aides to locate Jim Chapman, a fellow Texas Democrat who relies on the Speaker for campaign help, and hustle him onto the House floor. As Chapman switches his vote from nay to yea, the one-vote margin of defeat is turned into a one-vote margin of victory for the new Speaker, who promptly gavels the vote closed. So upset are some members over Wright's cheap parliamentary stunt that the House chamber erupts into boos and catcalls. An editorial in the November 2 Washington Post calls the episode a "feast for cynics."
It is easy to be cynical about Jim Wright. "He used the crash as an opportunity to further his agenda," one business lobbyist explains after the day's events. "He wants to attack the deficit by raising revenue to prove that the Reagan tax cuts were wrong -- and that he was right."
Meanwhile, at the other end of Pennsylvania Avenue, Beryl Sprinkel, chairman of the president's three-member Council of Economic Advisors, quietly withdraws his resignation and is elevated to Cabinet rank. Sprinkel will now have a chair in the Cabinet Room with a brass market on the back engraved with his name. It is doubtful, however, that he will have any more influence on the President, whose economics remain firmly grounded in supply-side fantasy.
October 30. The crash has sparked a series of hastily called hearings in Congress, most of which seem designed to create the impression that Washington is on top of the crisis. On this day, the Joint Economic Committee, which has no power to report legislation, has convened in the Dirksen Senate Office Building to examine the long-term costs of soaring U.S. trade deficits. It was the trade deficit figures from August that seemed to stampede the Wall Street bulls into retreat earlier in the month.
Chairing the hearing is Senator Paul Sarbanes of Maryland, a former Rhodes scholar respected among his colleagues for being thoughtful and serious. Opposite him at the witness table is Anthony Solomon, who has been a powerful player on the financial scene, as undersecretary of the Treasury in the Carter Administration, president of the Federal Reserve Bank of New York, and now chairman of a Wall Street investment house, S.G. Warburg (U.S.A.) Inc.
"You people have quite a problem on your hands," Solomon says of the $156-billion annual trade deficit. "We have had banana-republic economic policies. [Now,] you have a clear responsibility to get that [trade] deficit down."
Solomon, no protectionist, sees a fundamental international imbalance generating much of the trade imbalance. Some of our biggest and richest trading partners, most notably Japan and Germany, refuse to stimulate their economies in ways that would increase purchases of U.S. goods and services. Solomon suggests we coax their cooperation by threatening to reduce the $280 billion a year spent by the Pentagon that goes, directly or indirectly, toward defending our allies. The suggestion echoes something that one hears so frequently in Washington now: that the most profound implication of America's financial decline may be a radical reordering of military and political alliances.
Before long, the conversation turns from international issues and the trade deficit to the federal budget deficit, which is Washington's newest numbers game. How much reduction will be needed, Sarbanes asks, before Wall Street is satisfied? Will the $23 billion in cuts required by Gramm-Rudman be sufficient? Solomon thinks not, and essentially ups the ante to $50 billion. It is an extraordinary exchange -- the investment banker, undoubtedly fresh from some unproductive paper shuffling on Wall Street, dictating budget policy to a U.S. senator whose interest seems to be focused on placating the investment community rather than on dealing fundamentally with what ails the American economy.
November 1. For the past two weeks, the Sunday papers have been filled with ominous economic news and analysis, and on each of the succeeding Mondays, the stock market has taken a dive. Today's editions augur for a third bad Monday.
Running off the front page of the Sunday Post is a story by political reporter Haynes Johnson, reporting from New York City. Johnson quotes Arthur Levitt Jr., chairman of the American Stock Exchange, who says that the stock market crash is the result of "the first global election" in which the world has given "a very significant massive vote of no confidence in our Congress and in our administration."
Johnson seems to concur with Wall Street that "Washington doesn't seem capable of putting aside political partisanship in the moment of great national stress. . . ." While the Democratic Congress and the Republican President continue to blame each other for the economic mess, the country has the distinct impression that both are culpable.
November 2. Monday, and the stock market starts the day down 21 points in moderate trading.
At the Capitol, the black limousines arrive in an almost steady stream, bringing in Administration officials to negotiate with congressional leaders at the budget summit. They meet under the crystal chandelier in the House Ways and Means Committee room, while dozens of reporters loiter in the hallways outside, hungry for any word of progress. This day the tidbit of news that percolates through the closed doors concerns the "2% solution" -- a limit on cost-of-living increases for those receiving such government entitlements as Social Security, veterans' benefits, civil service and military pensions. These are the political untouchables of the federal budget, largely middle-class expenditures that would be the logical area for budget cutting. But while everyone knows that this is where serious work must begin, nobody in Washington wants to volunteer to lead the charge. In his time, former budget director David Stockman tried to focus attention on the entitlement issue, only to find himself something of a pariah. More recently, Bruce Babbitt, the former Arizona governor, has made "means testing" of entitlement benefits a centerpiece of his Presidential campaign, but it is not lost on people in Washington that Babbitt now finds himself last among the Democratic candidates in national polls.
The stock market ends the day up 20.56 points.
November 3. Election Day. You would think that, if nothing else, the market crash might have stirred up a lackluster Presidential campaign. But if anything, the candidates seem to be tripping over each other to avoid dealing with it. Certainly that is the impression you get if you are plugged into the new Presidential Campaign Hotline, an entrepreneurial venture that provides a daily electronic newsletter to any political junkie or journalist with a personal computer and $250 a month.
Ron Rosenblith, one of the founders of the hot line, says that if the election starts to center on economic fears and worries about a recession, the Democrats will prosper politically. He mentions Babbitt in particular -- also Senator Paul Simon of Illinois, whose Midwest populism might appeal to the old FDR coalition.
Among Republicans, Rosenblith sees Vice-President George Bush and Congressman Jack Kemp as the losers from market instability and any continuing economic crisis. In a more interesting position, he says, is Robert Dole, who as Senate Republican leader might enjoy the political benefits of taking a lead role in resolving the budget impasse. If such a compromise involves higher taxes, however, Dole might be forced to sacrifice support from Reaganite conservatives who tend to dominate Republican primaries. "He may be caught in a Catch-22," says Rosenblith.
November 4. The big event of the day is the appearance on Capitol Hill of the most prominent of the Presidential noncandidates, New York governor Mario Cuomo. He is greeted like a visiting potentate, with much verbal bowing and scraping from members of Congress. His entourage includes Peter Peterson, a former Secretary of Commerce and investment banker who has become something of a professional Cassandra when it comes to the American economy, and James Robinson III, chairman of American Express Co.
The crash has given urgency to something Cuomo wants very badly -- legislation to establish a "national economic commission." The nation's governors have unanimously endorsed Cuomo's proposals, as have 80 members of Congress. The idea is to cobble together a kind of financial Manhattan Project, a brain trust of the best and brightest from government, industry, finance, and academia. The nonpartisan commission would examine the economic problems facing the country and devise a strategy of recovery. Then, just after next November's election, the commission would present its plan to the newly elected President and Congress and dare them to reject it.
What drives Cuomo's belief in the plan is his conviction that our economic troubles are so dangerous, so complicated, and so divisive that there is no way Congress can deal with them coherently. "They are, even separately, extremely difficult to deal with economically," he tells the House Subcommittee on Economic Stabilization. "They are also, even separately, extremely difficult to deal with politically. . . . [And yet] they cannot be dealt with separately because they interconnect so profoundly with all the others. It makes no sense to believe that politics as usual can cope with them."
Cuomo's testimony is eloquent and inspiring. But his message ought to be profoundly depressing to his congressional audience. For what he is saying, in effect, is that the people who now hold office in Washington are incapable of governing in times of crisis, and that it is time to turn the reins over to somebody else. It is hardly a ringing endorsement for a constitutional system whose 200th anniversary was celebrated with such fanfare just a month and a half earlier.
This political conundrum is even more acute for the conservatives of the Reagan Administration. They have committed government to doing nothing, or doing less, just when common sense seems to be telling people that government should be doing more.
David Ruder knows the problem. Until a few months ago, he was an academic champion of free markets. Today, as the new chairman of the Securities and Exchange Commission, he is appearing before an anxious Senate Banking Committee that wants to put the blame for at least some of the market crash on inadequate oversight by the SEC. Ruder is forced to embarrass his President somewhat by admitting to the committee that he had spoken with Reagan only once since Black Monday -- and then only to receive a Saturday morning telephone call in which the President congratulated the SEC for its performance during a tough week. According to Democrat Donald Riegle Jr., of Michigan, a member of the committee, that news is yet another sign of "a serious problem of Presidential disengagement." Under questioning from Riegle and others, Ruder concedes that programmed trading might have made markets more volatile and that small investors might not have been fairly treated during the height of the market crash. A full investigation into these matters, however, would not be possible, Ruder says, unless his budget were increased.
Meanwhile, at the White House, Reagan hopes to counteract the charge of Presidential disengagement by meeting with the panel he has appointed to investigate the market crash. The commission is to be headed by investment banker Nicholas Brady with members John Opel of IBM, James Cotting of Navistar International, Robert Kirby, chairman of Capital Guardian Trust, and Howard M. Stein, chairman of Dreyfus. Noticeably absent from the commission is anyone representing the point of view of midsize growth companies. It is an oversight that emphasizes just how far the stock market has deviated from its original purpose, which was to be the source of equity capital for growing companies.
November 5. In the wake of Black Monday, the Board of Governors of the Federal Reserve System is said to be "pumping liquidity" into the nation's financial system to stave off capital shortages that might result in having too few buyers for stocks and bonds. In my mind, I picture some sort of war room deep within the Fed's fortress-like headquarters on Constitution Avenue, where pinstriped money managers dispatch armored trucks loaded with freshly minted greenbacks.
"Sorry to disappoing you, but we don't have anything like that," explains Joseph Coyne, the Fed's public-affairs man, when I called hoping to gain entry to capitalism's nerve center. "Such a war room doesn't exist."
What does exist, says Coyne, is the office of Federal Reserve chairman Alan Greenspan, where, on such days as October 19, Greenspan might gather his vice-chairman, several of the Fed's division directors, the general counsel, and even his public-affairs man. And should they determine that liquidity is needed, they would instruct officials at the Federal Reserve Bank of New York to go into the marketplace and buy up some T-bills and other Treasury securities from the Fed's member banks. The money these banks receive for their securities is then added to their reserves, which increases their potential for making loans, say, to investors and brokerage firms that find themselves in a cash crunch. By such methods liquidity is produced and a panic avoided.
You might ask just where the Fed gets all this money that it uses to go out and buy up all those hundreds of millions of T-bills. Essentially, it just prints it. If it prints enough of it, of course, it runs the risk of triggering a new round of inflation. If it prints too little, it runs the risks of triggering a recession. Such are some of the conflicting pressures of this crisis.
November 6. The debt crisis has spawned a new cottage industry in Washington. Popping up around town are various lobbying outfits that have taken up the cause of fiscal sanity. Perhaps the best known and most successful is the Citizens for a Sound Economy (CSE), which in only three years has attracted 250,000 dues-paying members across the country. CSE's director of tax and budget policy is a a young economist named Dan Mitchell, and he is not optimistic that Washington is up to this latest crisis.
"Federal spending has increased from $591 billion per year in 1980 to just over $1 trillion today," he explains. "That's a 70% rise during a period when the consumer price index went up just about 35% -- so spending was double what it had to be to keep up with inflation. For fiscal year 1988, the so-called baseline for the budget is $1.08 trillion, up $70 billion. These baselines are the problem. There is no zero-based budgeting or justifying every dollar you spend. They say, 'Let's start by assuming we are going to increase spending by $70 billion.' And that is what they measure all these cuts against. They will never actually cut the budget -- although the average guy in the street probably thinks they will. They just get a smaller increase."
November 9. Ground zero for the national debt lies in two bland granite buildings in downtown Washington. They are called, appropriately, the Bureau of the Public Debt, one of 11 bureaus within the Treasury. And at last count, the bureau was overseeing some $2.38 trillion in outstanding debt.
Keeping track of the national indebtedness requires 2,000 people and more than $200 million each year. Half the staff is here in Washington, the rest in Parkersburg, W. Va., where the big computers are. In Parkersburg, the Bureau of the Public Debt is the fourth largest employer in town, and employees there say proudly that they work "at the debt."
Some handy statistics help to keep all this debt in proper perspective. The national debt amounts to $10,000 for every man, woman, and child in the United States, and is rising at the rate of $1.70 per day. In 1986, interest on that debt -- just the interest, mind you -- was $800 per person, or some $190 billion in total. That expense accounts for about one-fifth of the federal budget -- nearly as big now as outlays for the giant Social Security system, including Medicare and disability pensions.
Today is Monday, which is auction day at the Treasury. I go down to the bureau hoping to view the event, expecting to see traders and investment bankers bidding up or down a few basis points at a time. In fact, there is no event. What there are are computers talking to one another. As the 1 p.m. auction closing time approaches, investment banking houses send runners down to the nearest Federal Reserve Bank with their bids indicating how much debt they are willing to underwrite and what rate of interest they are willing to settle for. At 1:00 p.m. the Federal Reserve Bank's computers tabulate all the bids, arranging them from lowest interest rate to highest, and ship the lists to Washington, where the Bureau of the Public Debt accepts as many as is necessary to meet that week's borrowing requirement. This week, the requirement is $6.4 billion, which is added almost effortlessly to the monstrous debt.
November 10. I visit with John Motley, the lobbyist for the National Federation of Independent Business (NFIB). Motley has never been known for taking the long view. The stock market crash, he allows, is a bad thing, but one consequence has been that a variety of union-backed legislation making its way through Congress -- mandated health benefits, a higher minimum wage, restrictions on plant closings -- seems to have been derailed by the economic crisis. Opposing these measures has topped the NFIB's agenda this year, and Motley seems almost pleased by the turn of events.
November 11. Veterans Day. A freak November storm drops a foot of snow on the nation's capital Official Washington is shut down. The President proposes that the Veterans Administration be upgraded to Cabinet status. It is a pure interest-group ploy that nobody takes seriously except the veterans' organizations on whose behalf it was proposed. Along the snowy Potomac, it is politics as usual.