Crafting an economic policy that actually works.

• Author: Weidenbaum, Murray
• Position: USA Yesterday

This is the second of a two-part series concerning the author's tenure in the Reagan White House, where he was chairman of the Council of Economic Advisers and one of the main architects of Reaganomics.

LOOKING BACK, the President's response to the assassination attempt by John Hinckley was a defining moment. When he was quoted as saying to his wife Nancy, "Sorry, honey, I forgot to duck," he did more to reassure a shocked nation than all of the medical reports. In view of the seriousness of the event, Reagan surely demonstrated grace under the greatest of pressure.

Simultaneously with the development of a host of government policies, important structural changes were taking place inside the Administration. Most of these actions reflected the collegial nature adopted by the Reagan White House. Some did not favor this approach. For example, former Secretary of the Treasury Donald Regan complained in his book, 'To this day I never had so much as one minute alone with Ronald Reagan." (When Regan subsequently became Chief of Staff to the President, that situation quickly changed. In retrospect, however, that was not a happy rime for Regan.) Personally, I liked a process whereby the President was presented with a variety of views, minimizing the likelihood of end runs by my colleagues in the Administration. I also thought that the meetings at which Don Regan and I both briefed the President went quite well.

A key example of the collegiate nature of decisionmaking was the institution of Cabinet Councils to replace the host of interagency committees that typically had been organized by the White House in the past. The Council of Economic Advisers was an active member of three of those cabinet-level groups---Economic Affairs, Commerce and Trade, and Natural Resources and Environment. When my schedule permitted, I also attended the meetings of the other councils (Human Resources, Food and Agriculture, and Legal Policy). Members of the CEA and our senior staff served on the working groups and task forces set up by the various councils.

The Cabinet Council system ensured that the CEA was represented in the decisionmaking apparatus that handed a host of issues--Social Security, foreign trade, regulation of financial institutions, transportation, environment, energy, agriculture, and many other areas. At key points, the President attended a Cabinet Council meeting and, at times, made a decision on the spot. At least in my time, the key role of the CEA was not to develop additional new programs, but to operate what my CEA colleague William Niskanen labeled "a damage limitation mechanism." Thus, the CEA was expected to, and predictably did, oppose every proposal to subsidize some segment of the economy, or to shield a specific industry from competition. At times, a Cabinet member proposing an additional form of government intervention in the economy would start off" by saying, "Mr. President, Murray will probably give you a different view, but..."

The effectiveness of the CEA on any specific issue depended on the cogency of our analysis, but only in part. For example, we won the battle to eliminate import restrictions on shoes, but lost the straggle to contain restrictions on imports of textiles. Was it coincidental that the Congressional delegation to the White House successfully urging textile quotas was led by Sen. Strom Thurmond (R.-S.C.), chairman of the Judiciary Committee, who was diligently working for the approval of the President's nominations to the courts? In conwast, the unsuccessful shoe delegation was chaired by a prominent Northeastern liberal Democrat, Sen. Edward Kennedy of Massachusetts.

The CEA did not win all the battles, but the proponents of additional governmental involvement in the private sector knew that they would have to do battle. In certain instances--autos and maritime, for instance--I was hampered by presidential campaign commitments to aid those two sectors of the economy. However, I found myself grudgingly admiring a sitting president who took his campaign oratory seriously.

The Cabinet Council on Economic Affairs was a forum in which I presented analyses of economic developments. Frequently, the President and Vice President (George H.W. Bush) attended, and my presentation would set off an informal discussion on economic policy generally. One Administration wag parodied a presentation of mine in the form of a fictitious memo from "Murray Weidenbomber," who talked about a "slowing up of the slowdown" and an "upturn of the downturn." I like to believe, however, that my use of "economicese" was not quite as arcane as this parody might lead people to believe, but, then again....

Meetings, of course, are the basis, and bane, of a bureaucrat's existence. Surely, a major part of the CEA chairman's time is taken up by participating in meetings with other Cabinet-level officials. Some sessions were of vital importance. Defense spending furnished a good example of mixed results. I quickly found myself waging a two-front war on the subject. Within the Administration, I was consistently on the side of moderating the planned rapid growth of the military budget, notably sticking to the five percent annual real increase advocated by Gov. Reagan in the 1980 campaign. (Of course, there were no doves in the Reagan Administration.) Yet, when faced with higher numbers from the Department of Defense, the President regularly took the position that he never would sacrifice national security for economic considerations. He tended to see the issue in either/or terms.

In public, I defended the noninflationary nature of the military spending increases projected by the Administration. I relied on the tight money policy of the Federal Reserve System (the Fed) to offset any adverse effects on the overall price level. This was a very controversial point among my fellow economists, especially those in the private sector. A bit of irony was involved. During the Vietnam War buildup in the 1960s, I earned some notoriety for identifying the inflationary impact of that rapid increase in military outlays. That inflationary impact was encouraged by the easy money policy that Pres. Lyndon Johnson had urged upon the Federal Reserve. As I noted repeatedly in 1981, the difference this time was that the Administration strongly supported the Fed's policy of monetary restraint.

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In early May, I responded to critics by also noting that the 90% capacity utilization ram in 1965 was in sharp contrast to the more modest 80% then prevailing. Similarly, the seven percent unemployment rate in 1981 was a vivid contrast to the 4.5% rate in 1965. Modesty should prevent me--but it will not--from saying that I was correct in 1965 and 1981.

As I frequently am fond of pointing out, issues of public policy usually are too complicated for a bumper sticker. For example, in one area of military policy, I found myself strongly on the side of the Secretary of Defense. In 1981, the military services were experiencing considerable difficulty in meeting their personnel requirements. Questions were raised publicly about the return of the draft. In response, the President appointed a special Committee on Military Manpower, chaired by Secretary Caspar Weinberger. As a member of the committee, I endorsed enthusiastically the proposals to maintain a voluntary military establishment by improving the compensation and living conditions of the members of the armed forces. Indeed, the President approved our recommendations and Congress quickly enacted them.

Helped by an upturn in the economy in late 1982, the recruiting and retentive problems of the military establishment quickly were solved. Although we had some tough disagreements, Weinberger and I always maintained a very cordial relationship. Many years later be served-very constructively--on a think tank task force on the defense industry that I co-chaired. I cite this experience to my students as an example of the need to focus on issues, not personalities, in public policy disputes.

There were other important dimensions to economic policy, notably monetary policy. For instance, I regularly had a private breakfast meeting with Paul Volcker, the Fed chairman, and we were in touch on many other occasions. During the Nixon Administration, we had worked together at the Treasury (I formally reported to him), so there was a large amount of mutual trust and understanding.

From the outset, we strongly agreed on the need to tighten monetary policy as the main weapon against inflation, which was running at double digits at the beginning of the Reagan Administration. Volcker and I worked up together the key monetary policy language in the Feb. 18 economic white paper issued by the White House: "... The economic scenario [of the Reagan Administration] assumes that the growth rates of money and credit are steadily reduced from the 1980 levels to one-half of those levels by 1986."

The close relationship between monetary and fiscal policy was evident in those breakfast meetings. Volcker often would begin by asking about the progress in cutting government spending. On occasion, he also would inquire about reforming burdensome government regulation. Invariably, we would discuss current monetary policy with the implicit understanding that I would use my judgment in briefing...