In an Uncertain World (17 page)

   

I FLEW TO Washington on a Sunday night with a few suits and a bunch of books and checked into a suite at the Jefferson Hotel. Leaving home gave me a strange, hollow kind of feeling. Judy had no enthusiasm for living in Washington, and our plan was for her to come down one night a week and for me to return on the weekends. We had little idea of how soon I'd move back to New York. For twenty-six years, my two abodes had been my office at Goldman Sachs and my apartment uptown. Now I was stepping into a largely unknown world, moving from an established position as co–senior partner of Goldman Sachs & Company to a job that had never before existed in a world that was new to me in many ways.

My most immediate problem was choosing a staff that could put the concept of the NEC into practice. My first hire was Sylvia Mathews, who had been Gene's deputy on the campaign. I had started talking to Sylvia on media matters when I couldn't get Gene on the phone and had found her well informed and exceedingly adept at crafting comments. A former Rhodes Scholar and consultant for McKinsey & Company, Sylvia came from a small town in West Virginia and had the accent to prove it. In a short while, Sylvia, with her strong organizational skills, became the NEC's de facto chief of staff, organizing me and everything we were doing.

Next, on the recommendation of Vera Murray, Bob Strauss's Washington-savvy executive assistant, whom I had known and respected for twenty years, I met Linda McLaughlin. Linda, who had been working at the World Bank and had long experience in public-sector institutions, became the NEC's second employee. She was my secretary, scheduler, and all-purpose administrator and turned out to be indefatigable, effective, and consistently good-humored in an environment that often could strain anyone's patience.

Following Stu Eizenstat's advice, I decided the NEC should have two co-deputies, with one taking primary responsibility for domestic issues and the other for international ones. I approached Bo Cutter about becoming the international deputy. Bo had an excellent reputation for his intellect and good sense and four years of experience—in President Carter's OMB—with governmental process. I was also interested in hiring Gene Sperling on the domestic side because he knew the issues, knew all the Clinton people, had strong political and message capabilities, and had been extremely effective during the campaign. I wound up with enormous respect for Gene, but at the time I still had some qualms. With his penchant for calling meetings at one in the morning (returning calls sometime thereafter) and an office piled high with paper, his habits could be viewed as a bit chaotic. On the other hand, his work seemed highly disciplined. I couldn't figure out what he was all about. So I called a few people who knew Gene or had worked with him in the past, including then New York governor Mario Cuomo and Guido Calabresi, the dean of the Yale Law School. Both recommended him highly, though Guido did mention that Gene had spent part of his law school career living in his car. (Gene claims this was just a joke about the messiness of his backseat.) Gene and Sylvia both stayed with Clinton through two terms, in a variety of capacities. Over that time, Sylvia developed great substantive expertise and Gene became skilled at process as well as economic issues. Over the course of the eight years, they were two of the brightest stars in the administration.

With Bo, Gene, Sylvia, and Linda on board, we went about hiring a professional staff. Bo's analysis of NEC subject areas suggested we needed a professional staff of approximately two dozen people. We were already interviewing applicants for those positions when Harold Ickes, who was helping to run the transition and would later become deputy chief of staff at the White House, called to say that we could have no more than twelve people. I told Harold I didn't think the NEC could work with so few people, but he said the administration was hemmed in by a Clinton campaign promise to cut the White House staff by 25 percent and twelve was it, period.

After conferring with Bo and others, I called Mack McLarty, the incoming chief of staff. I had only recently met Mack, but I told him that the NEC wouldn't work without an adequate staff, which I judged to be at least twenty people. If the budget was too constrained to provide that many positions, they should give up on the idea of the NEC and find another way to coordinate economic policy. That was a bleak moment for me. I had given up a major position on Wall Street, which was irreversible, and I was on the verge of winding up with nothing at all.

Mack didn't have any immediate solution. But the next day, he called to say they'd make room for more staff people—not as many as I wanted, but enough to make the NEC work. I subsequently heard from Ken Brody, a Goldman partner who was an important early Clinton backer, that Mack had called him to ask what to do about me. Ken told Mack I probably meant what I said. Ken was right. I believe strongly in trying to reach a reasonable accommodation in the face of disagreement, but I also believe in not crossing what I view as fundamental lines and accepting the possible consequences that may ensue. I didn't think the NEC could work without adequate staff, and I wasn't going to do what didn't seem to me to make sense.

A similar episode occurred later in the first term, after I had moved to the Treasury Department and was negotiating with OMB about the size of our budget. I understood the need for budget cuts but felt that if our funding fell below a certain level we could not run the department effectively. My position was that if our budget had to go below that level, I would understand the budgetary exigencies, but the administration would have to find a Secretary who felt comfortable running the department under those conditions. When others sense your willingness to walk away, your hand is strengthened, and in this instance we received our minimum acceptable level. Afterward, Sylvia and Larry Summers said that they were trying to understand how I had managed the negotiation. “For that to work,” Sylvia said, “you must be prepared to die.” As Sylvia pointed out, my stance had been effective precisely because I hadn't been negotiating but stating my commitment to a fundamental position.

   

WE WERE SUPPOSED TO BE developing an economic plan—but I had no idea what a presidential economic plan was or how to assemble it. I consulted Leon Panetta, who had been chairman of the House Budget Committee, who said we had to present the President-elect with a budget, which sounded right. So Leon drew up budget options, and we focused on framing them as alternative fiscal and programmatic paths for Clinton at an all-day meeting to be held on January 7 at the governor's mansion in Little Rock. Everything became focused around this meeting.

Making a budget raises every question about how to allocate the resources of the federal government—what new programs to fund, which old ones to reshape or terminate, what deserves more or less, and—very important—who should pay. The budget also brought us face-to-face with what rapidly emerged as the essential question: how to balance all of Clinton's potentially costly proposals—universal health insurance, welfare reform, a middle-class tax cut, education and job training programs—with the reality of an unsound and worsening fiscal situation. Obviously all of these proposals could not be fully implemented during the first year while we were simultaneously trying to accomplish significant deficit reduction, working toward Clinton's campaign pledge to cut the deficit in half in four years. I sent a memo to the President-elect to prepare him for the meeting, saying that he could not significantly reduce the deficit and do all that he had proposed during the campaign.

We divided up the presentation among the various economic officials. Leon was responsible for the budget; Lloyd Bentsen for taxes; Laura D'Andrea Tyson, the incoming head of the Council of Economic Advisers (CEA), for the economic outlook and the impact of various policy options. My role would be to keep the meeting on track. But how to do that? This would be the President-elect's first working experience with his incoming cabinet members and their first experience working together in his presence. The economic plan was due only weeks after the inauguration, and we had five hours to cover an enormous amount of material. When the two of us met beforehand in a small dining room, I told Clinton he should pose whatever questions he wanted but that we needed to keep the meeting moving along. He laughed and patted me on the shoulder, promising to “be good.”

George Stephanopoulos, who for some reason I had never met during the campaign, stopped me on the way into the meeting and said that the President-elect was in a real bind. If Clinton decided on a significant deficit reduction target, he couldn't follow through on his middle-class tax cut and various domestic proposals. George said the President-elect couldn't be expected to make such a momentous decision in this first meeting and moreover wasn't likely to. I couldn't tell whether George didn't want Clinton to make such a momentous choice that day or simply didn't want me to get upset when it didn't happen.

In any case, George was wrong. What I remember best about that meeting was that after less than an hour, as Leon and Alice Rivlin were laying out the details of the worsening deficit, Clinton stopped the discussion and said, “I get it.” Deficit reduction, he said, had become the “threshold” issue. “I know it won't be easy,” he continued. “But I was elected to deal with the economy and this is what we need to do to get the economy back on track.” I've since felt that Clinton might already have had that view coming into the meeting, so quickly and decisively did he state this position.

The rest of the session substantiated Clinton's view. An intellectual framework was provided by Laura Tyson; Alan Blinder, a Princeton economist who was to be Laura's deputy at the Council of Economic Advisers; and Larry Summers, the chief economist at the World Bank who was slated to become undersecretary for international affairs at Treasury. The three of them explained that according to the familiar laws of Keynesian economics, cutting the deficit by reducing government spending or increasing taxes should slow the economy. But this time the situation might be different, because the growing deficit had been keeping interest rates high, a phenomenon I referred to as a deficit premium. Then and in many subsequent meetings, we debated just how much effect deficits have on the bond-market interest rates that drive the economy. There was a great deal of uncertainty on this issue. As one input, Alan Greenspan had told a number of us that, citing the published deficit impact model of the Federal Reserve Board's staff, he projected a reduction of
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of one percentage point in long-term interest rates for each $10 billion in annual deficit reduction, with GDP then around $6.6 trillion. (As an aside, that translates into a reduction in bond-market interest rates of 0.66 percent for every 1 percent of GDP of deficit reduction.) Clearly, the Fed's actions would be one important factor, among others, in determining market interest rates, and knowing Greenspan's views helped us gauge his likely reaction to our fiscal choices.

Interest-rate effects are only part of the argument for fiscal soundness—an analysis I'll lay out more fully later—but they were our focus at that moment. Bondholders were demanding a higher return, based both on the longer-term fiscal outlook and on the risk that the politics of reestablishing fiscal discipline would be too difficult and that, instead, our political system would attempt to shrink the real value of the debt through inflation. We thought that lowering the deficit and bringing down long-term interest rates should have an expansionary effect that would more than offset the contractionary Keynesian effect and that, conversely, the expansionary effects of continued large deficits would be more than offset by the adverse impact on interest rates. In Japan, Europe, and the Middle East, as well as in the United States, investors would increase their demand for dollar-denominated bonds if they believed that a sound fiscal pattern was going to be reestablished. And lower interest rates should spur consumers to spend and businesses to invest. This seemed our best strategy for stimulating the economy and promoting a strong, sustainable recovery at a time of pervasive uncertainty, with business and consumer confidence still soft, unemployment above 7 percent, and the resumption of growth tentative.

Many people might have been surprised to see a group of Democrats sitting around a table in Arkansas talking about the international bond market. And that our focus was the international bond market rather than just the U.S. market was a sign of how far the globalization of financial markets had already come by 1993. I think historians looking back on this period some decades hence are likely to see the Clinton administration as deeply engaged with global integration, the emergence of new technologies, and the spread of market-based economics. I don't know what they'll call this era, but I think they may draw the conclusion that Bill Clinton was the first American President with a deep understanding of how these issues were reshaping our economy, our country, and the world.

My role in the meeting was to make sure that all views got a fair airing, but I also made my own opinions plain. For us to achieve those lower interest rates that Laura, Alan, and Larry were talking about, financial markets would have to believe that the administration was serious about deficit reduction. More than a decade of promises that hadn't materialized had led to an understandable skepticism. I was concerned that creating credibility with financial markets might take longer than one would hope. I remember saying that there was nothing scientific about how much deficit reduction would have credibility and create a real economic impact. In a $6.6 trillion economy, a few billion dollars more or less—a small fraction of 1 percent of GDP—shouldn't make a big difference. But I'd learned on Wall Street that relatively small differences in absolute amounts could make a big difference in market psychology: the difference between a bid for a block of stock at $34
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and a bid for the same stock at $35 could be a lot more than 12.5 cents. Or, as my former partner at Goldman Sachs Bob Mnuchin used to say, we were better off paying someone $250,000 than paying him $240,000, because the psychological impact of earning a quarter of a million dollars was greater to the individual than the financial impact of another $10,000 to the firm. The difference between small amounts of deficit reduction over a five-year period was like that—minor in economic terms but potentially great in terms of the market's reaction.