Man in The Muddle

By MICHAEL DUFFY WASHINGTON

The year is 1981, the uncertain dawn of the supply-side revolution. David Stockman, Ronald Reagan's Budget Director, is standing in the White House parking lot talking with Richard Darman, a powerful presidential assistant. A crisis is at hand: frenzied Republican and Democratic lawmakers are piling additional giveaways onto Reagan's tax-cut bill. Unless they can be stopped, ( the nation will be burdened with deficits in the hundreds of billions for years to come. "I don't know which is worse," says Darman, "winning now and fixing up the budget mess later, or losing now and facing a political mess immediately."

Moments later, Darman has reached a decision: "We win it now. We fix it later."

Later is now. And as the budget debacle in Washington demonstrated, Darman still has found no way to repair the fiscal fiasco that he, as much as anyone else, helped create. Last week, after more than five months of closed-door negotiations, he watched as timorous rank-and-file House members defeated a painfully crafted deficit-cutting deal worth $500 billion over five years. For once, Darman's goals had been economically laudatory, even politically reasonable. He had wanted to solve the deficit problem by shifting the government onto a healthier diet of lower borrowing. He had envisioned an end to an era of divided, do-nothing government. And he had desired to extricate his boss, George Bush, from his crippling "no new taxes" campaign promise. The long-term strategy was obvious: even if Bush took a drubbing for raising taxes in 1990, he would put the country on a stronger economic path. That could help ensure his re-election in 1992. Darman was thinking anew: "Fix it now. Win it later."

Too clever by half. For the nearly 20 years that Darman has been shaping policy in Washington, that has been his reputation. A manipulator who could not be trusted. A hypocrite who, even as he preached against the shortsighted "now-nowism" that has afflicted American society, used ludicrously optimistic economic forecasts to delay the day of reckoning with the looming budgetary disaster. Former Senator Howard Baker even coined a word to describe his elliptical gambits: Darmanesque.

Not even Bush, who often trusts too freely, trusted him. The enmity began in 1984, when Reagan's re-election campaign was getting under way. Briefing reporters on economic policy at Reagan's Santa Barbara, Calif., ranch, Bush refused to rule out new taxes to cope with a growing budget deficit. Headlines appeared the next day, angering Reagan aides. A few days later, news stories, quoting a senior official, blasted Bush for the misstep. Bush's aides fingered Darman as the source. Bush crossed him off his A list.

Rehabilitation took five years. High as leaking was on Bush's list of unacceptable behaviors, "handling" was even higher. Bush thinks of himself as resistant to manipulation of any kind, and Darman had been perceived as one of Reagan's dexterous puppeteers. But heavy lobbying by James Baker, who with Darman formed an inseparable duo in the early Reagan years, eventually persuaded Bush to appoint Darman Budget Director. "When we went to see Bush about the OMB job," said Craig Fuller, Bush's transition co-director, "we only took one name."

From the very beginning Darman knew that taxes had to be part of any effort to rein in the deficit. Early in 1989, Darman predicted to a small circle of friends that Bush would eventually sign a bipartisan deal raising revenues, paring defense programs and slashing growth in entitlement programs such as Medicare and agriculture subsidies. Such a pact would curb short-term government borrowing and put downward pressure on long-term interest rates. "Intellectually, I believed it to be right, unequivocally," says Darman. He didn't need to hurry: unexpectedly high tax collections made such a sweeping deal unnecessary in 1989. But deep cuts required by the Gramm-Rudman- Hollings deficit-reduction law made a groundbreaking approach unavoidable in 1990.

His strategy called for both Republicans and Democrats, after hard bargaining, to sacrifice sacred cows for the good of the economy. Darman called it a "no fingerprints" deal: by agreeing to a plan simultaneously, both sides could avoid electoral reprisals. Plausible as it sounded, it overlooked the fact that the rest of the Congress has never been fond of deals cooked up behind closed doors by a handful of carefully chosen lawmakers.

The art of the deal is in the timing. Darman thought it would take months to fashion a budget pact, and pushed Bush to call a summit early in 1990. That way, in the likely event that the negotiations collapsed, President Bush would get the credit for having tried to get an agreement. "It was the right thing to do," says Darman, "and also the politically sound thing to do if the right thing didn't work out." Darman called this "multiple-contingency planning," and it is typical of his thinking. "Life is not so simple," he says. "It does not work in this world that you can go in an absolute straight line. You have to be prepared for many possible paths. Many of these things are totally outside your control."

As the budget summit began in May, Darman also sought to reincarnate himself, if only to avoid accusations of bad faith from the Democrats. He knew that forging a deal would depend on his being, as he put it, "the soul of reasonableness." The new "charmin' Darman" was immediately on display. When Senator Robert Byrd delivered a pompous lecture on the separation of powers at one session in midsummer, Darman afterward presented him with a letter brimming with praise. "He was a complete boy scout," said an incredulous Darman aide.

In contrast, White House chief of staff John Sununu made no secret of his distrust of the Democrats. When Bush convened the talks, Sununu insisted that taxes weren't "on the table." In fact they were, though the White House was loath to admit it.

Thus began a complicated shell game between Sununu and Darman: the chief of staff took a hard line with Democrats to keep Republicans on board, while the Budget Director preached a conciliatory line to keep Democrats at the table.

At times the Sununu-Darman duet sounded discordant, but it was almost always planned. Their relationship had become the most powerful axis in the White House. Each gave the other what he lacked: Sununu provided Darman with access to Bush; Darman provided Sununu, a Washington neophyte, with a knowledge of the workings of Congress, government and Washington. The two men meet each morning at 7:15 and speak by telephone 20, sometimes 30, times a day. Both possess quick, assertive minds; both have a weakness for pranks and practical jokes. And both men are fighters. But where Sununu wrestles, Darman boxes. Says a senior Administration official: "Sununu relies on his wits, on thinking off the top of his head. Darman is a planner. He's always five steps ahead of you." He adds, "The difference between Sununu and Darman is that Darman knows when he's lying to you."

In spite of the good cop-bad cop routine, the talks went nowhere. Gradually, it dawned on the White House that the Democrats were stalling -- and scoring political points as a result. By mid-June the Democrats were threatening to walk out of the talks unless the President made a public commitment to tax increases, reversing his most cherished campaign pledge -- and his most potent weapon for bashing the other party.

Thus Bush's reversal on taxes required delicate handling. By the beginning of 1990, many Administration officials openly acknowledged the need for taxes. These included Darman and Sununu, aides to each explained, though neither admitted it publicly. And Bush? No one is sure, but those closest to him suspect that the President accepted the need for a tax hike gradually, not at some specific moment. The real question was, When should the U turn take place? Wait until 1991 and the reversal could damage Bush's 1992 re-election campaign. Wait until late 1990 and it might overshadow the budget deal itself. Better, aides figured, to do it as soon as possible. Some Republican candidates might suffer, but most of the incumbents are unbeatable.

Then fate took a hand. In mid-June, the economy took a nose dive, dragging corporate profits and federal tax receipts down too. In mid-June Darman boosted his 1991 deficit estimate to $159 billion, up from $138 billion just a month before. Unless a plan for cutting almost $100 billion could be produced by Oct. 1, spending cuts required by Gramm-Rudman would force the layoff of thousands of government workers. Within days, Administration officials began to utter dire predictions. It was the perfect opportunity for a sudden conversion, and Bush took it.

The breakthrough occurred at a White House breakfast for Democratic leaders on June 26. House Speaker Tom Foley urged Bush to make a short statement that "tax increases" would be a part of any budget accord. When Bush asked Foley to suggest such a statement, one observer said, "a lot of jaws in that room dropped." Foley dictated a version off the top of his head. Darman said it would take only a few minutes to draft, and began writing. He showed the draft to Sununu, who passed it to Foley. After a few changes, Bush looked it over, called in press secretary Marlin Fitzwater, and told him to release it.

The news fell on Washington like a bomb. Bush's approval rating dropped 8 to 10 points over the next two weeks. Aroused Republicans shrieked that Bush had given away their party's only winning issue in the post-cold war era. Many White House officials agreed. "It was the biggest single mistake of his presidency," a senior official said. "We took a big political hit for it, and what did we get? Nothing."

In fact, Bush's conversion did little to bring the talks out of their coma. Darman thought that the deal might be struck by August. But the Democrats continued to procrastinate, giving away little, particularly on social programs. The Democratic stall obscured the best-kept dirty secret of the budget talks: House Republicans were no more willing than their opponents to support Darman's proposed cuts in health and retirement benefits and other ( federal entitlements. They bombarded Sununu's office with private pleas to protect special programs. They signed joint letters opposing cuts in pork- barrel programs. At one point, senior White House officials polled House G.O.P. members to see how many votes they could get for cuts of various sizes. "You know how much we raised from these guys?" a frustrated Bush aide asked in August. "To get 50% of the House Republicans to vote for a package, we can cut $4 billion, maybe $6 billion from entitlements."

In an attempt to jump-start the bargaining in late July, Darman proposed that both parties simultaneously put their offers on the table so that neither could gain a partisan advantage. But that notion fizzled. Two days before the so-called "immaculate conception" was due to take place, Senator Robert Packwood, a garrulous Oregon Republican, disclosed that Darman planned to eliminate income deductions for state and local taxes. Predictably, both Republican and Democratic Governors exploded, complaining that the idea would make it impossible to balance the budgets in their hard-pressed states. Democratic summiteers labeled the new tax a political maneuver. Within days the talks broke down. Darman later claimed to reporters that the Administration "never wanted" to eliminate the deduction.

Still, a consensus was developing: raise cigarette, gasoline and alcohol taxes, extract more revenue from the wealthy through income tax surcharges, cut domestic spending and defense. The sticking point was Bush's cherished plan to reduce the tax on capital gains. But the political temperature was rising, heated by the crisis in the Persian Gulf. The threat of war dimmed the prospects for taxes on stock-market trades or energy consumption. Rising oil prices and the specter of new inflation even moved opportunistic House Republicans led by Newt Gingrich to call for new tax cuts. "Everyone," Darman said in mid-August, "is looking for an exit."

Near the end of August, Darman drafted a speech for Bush linking the Persian Gulf crisis with the budget. Darman argued that the economic pressures caused by the Iraqi invasion made getting the deficit under control more important than ever. He envisioned reconvening the negotiators after Labor Day and cutting a deal in time for an announcement on Sept. 12, after Bush returned to Washington from a speedily arranged summit meeting with Mikhail Gorbachev.

With the deadline for the dreaded sequestration 20 days away, Darman's latest scheme proved too optimistic. When the negotiators finally sat down for 11 days at Andrews Air Force Base on Sept. 7, little was accomplished. Byrd, for example, demanded a $50 billion kitty for unspecified domestic spending. Several members -- Senators Robert Dole and Jim Sasser and Representative Silvio Conte -- often refused to work late. Air Force stewards larded buffet tables with so many roasts and desserts that, when asked what Andrews produced, one White House official replied, "expanded waistlines." When Bush gave his nationwide speech, the budget took a backseat to the gulf. Repeating his call for a cut in the capital-gains tax, the President promised not to tinker with tax rates. Bush made no concessions, but did call on Congress to sweeten the budget deal with $30 billion in tax breaks over five years.

At that, Democrats adopted a new tactic: outleak the White House. A Democratic study applauding the progressivity of the Democratic tax proposal (and pointing out the regressive quality of the White House proposal) found its way into mass circulation. "We're letting them frame the issues," said one White House official. "We're getting massacred."

Meanwhile, Darman tried a new tack. He revised his capital-gains proposal, suggesting that the rate be lowered from 19.6% to 15% in the hope of spurring a compromise with the Democrats at around 17% or 18%. The Democrats were willing, but only if Bush agreed to eliminate the "bubble," an irregularity in the income tax code that lowers the rate on earnings over $500,000 from 33% to 28%. In fear that Republicans would revolt again, Bush refused to budge on rates. At one point, Sununu discussed adjusting the tax brackets so that the lower rate would apply only to income above $500,000. This time it was Senate Democratic leader George Mitchell who said no. "That would only solve half the problem," he said. "We believe marginal rates are too low." Replied Sununu: "It's the American way."

Darman kept quiet. It was part of their routine.

When silence didn't work, Darman employed finely calibrated displays of emotion to keep the talks moving. During one debate on entitlements, Sununu exploded at House Budget Committee chairman Leon Panetta, shouting that Democratic proposals for cutting entitlements fell short of the $120 billion the White House demanded. Sununu put his feet up on the bargaining table and screamed, "Where's the other $20 billion?" Before Panetta could respond, Darman piped up, "You guys ought to know who your friends are in this thing. I'm going to recommend we ((end)) these talks." By mid-September, Mitchell's campaign to burst the bubble began to work. Opinion polls revealed that the White House's insistence on a capital-gains tax reduction, which would benefit mainly those earning more than $200,000 a year, was backfiring. Voters were again thinking of Bush as a guardian of the wealthy, an image the White House had long sought to erase. Says a Republican Party official: "It took us years to start to change the image of the G.O.P. as the party of the rich, and now they've revived that image in the public mind in a matter of weeks." To cut G.O.P. losses, Republicans urged Bush to quit the talks. Within days, JUNK THE SUMMIT buttons appeared on the lapels of House Republicans. Darman held back, arguing repeatedly that such a walkout would hurt the President more than the Democrats.

Finally, with time running out, leaders of both parties excused obstructionists like Byrd and Representatives Gingrich, Conte and Jamie Whitten, and bargaining resumed among a so-called Group of Eight. Thus some of the most influential spokesmen and powerful chairmen of both parties were ousted as the final sprint ensued. Many were angered by the slight -- and some, including Gingrich, led the House uprising that sank the pact last week.

At one point the smaller group nearly swapped a cut in capital-gains taxes for higher tax rates on the wealthy. But the bargaining broke down along old battle lines. "The issue had such symbolic intensity on both sides that progress was impossible," Darman said later. The impasse continued until Sept. 20, when Dole proposed separating the contentious capital-gains issue from questions that had already been resolved. Dole's 11th-hour move led several White House aides to surmise that Darman had put the Senator up to it. It sounded plausible: Darman had saddled up stalking horses to move another President off the mark. One curious staff member put the question to Darman directly, with Sununu standing nearby: Did you ask Dole to revolt so Bush could make a graceful exit? Darman laughed. "Let 'em think that," he said. "But we're not that smart."

Dole's defection was followed six days later by that of House Republican leader Robert Michel, who declared that a capital-gains victory was not worth trading for higher rates. "The price is too high."

In the end, the pact that Darman crafted was done in partly by his own | design. He had tried to remove the budget talks from the political arena, only to find the two inseparable. As the sequester fell, Darman's impatience with the political cowardice of elected officials rose. "It has always puzzled me that there are so many people in the House who are essentially unopposed," he mused last week. "How is it that with 350 unopposed, they have so much trouble looking at the general interest?"

Darman was typically philosophical: "Representative democracy is good for ordinary, incremental approaches to problems. We are not so good at handling large shifts. The deficit is not an ordinary problem. It is an extraordinary problem."

There was one other thing on his mind: how to fix it now.

With reporting by Dan Goodgame/Washington