Leon Panetta Interview: Conversations with History; Institute of International Studies, UC Berkeley

Leadership, Values, and the Changing Political Scene: Conversation with Leon Panetta, former member of the legislature and officer of the executive branch; 5/22/00 by Harry Kreisler.
Photo by Jane Scherr

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The Budget: Problems and Process

In your distinguished career in government service you've accomplished a lot, and in an hour we can't obviously cover all of that. But the big issue that you grappled with, both in the Congress and in the White House, was the budget. And I thought we might talk about that as a way to show how you applied your values in an institutional setting, and in the end made a change. What exactly was that horrific problem of the budget, which, since we now seem to be over that hump in many respects, we want to forget about? Tell us about that problem.

The problem, fundamentally, was one of a growing deficit, which began, probably, with the Johnson approach that thought we could fight a war and have "guns and butter" at the same time. He was advancing a lot of programs, and the country could not afford that. [The deficits] continued, and at the time that I was elected to Congress in 1976, the budget deficit was probably somewhere in the vicinity of $25 billion to $50 billion. Then, in the early part of the Reagan administration, when a significant tax cut was enacted at the same time that defense spending went up and at the same time that entitlement programs were also expanding in cost, what you had was a growing federal deficit that by the end of the eighties approached almost $300 billion, and we were looking at $500 billion, $600 billion annual deficits. As you ran these high annual deficits, you added to the national debt. The national debt charges interest on that debt which the public has to pay, and we were developing huge interest payments. So the consequence of running these high deficits was that,

  1. it was using very important resources simply for paying the interest on the debt, and we were passing on that obligation to our children;
  2. it was depressing the private marketplace because the federal government had to borrow that money to pay its own debts, so it was reducing capital that otherwise would be available for the private sector; and,
  3. interest rates were extraordinarily high because obviously the federal government was in competition with other private capital.
So for all of those reasons, our economy could not be strong as long as we were running those size deficits. That was the economic problem that confronted the country.

The political problem was that both Democrats and Republicans talked about reducing this deficit, but neither wanted an approach to touch their favorite programs. The Republicans said they would balance the budget, but they did not want to raise taxes, and they did not want to cut defense. The Democrats, on the other hand, said, "We want to balance the budget, but we don't want to cut domestic programs, we don't want to reduce any entitlement programs. What we want to do is reduce defense and raise taxes." So the very areas that had to be part of a solution were the areas that both parties staked out as holy territory that couldn't be touched. That created the dilemma as to how to reduce the deficit if both parties won't agree.

In your role as Chair of the House Budget Committee, what became your main task? You obviously identified the problem. Then how did you go about making the changes, taking the steps that began to convert the people so you got the votes?

It was a gradual process of trying to make clear to both sides that there was a very important stake involved in coming to agreement on some kind of budget package. For the Republicans who argued fiscal responsibility, that gradually as the Cold War began to diminish one could make the argument that, "Wait a minute, we don't need the kind of defense expenditures that you're talking about. We can find some savings in this area. It is not going to jeopardize our national security." And the other argument was, "If you want to cut taxes and that's what you're interested in as a party, then don't add it to the deficit. Tell us where you're going to find savings to support cutting taxes."

That same discipline was applied to the Democrats, which was, "You want to reduce the deficit, you want to balance the budget, you want to protect programs for people as I do. But if you want to develop new programs, if you want to develop new entitlement benefits, then just tell us how you're going to pay for it. What programs are you going to cut, what taxes are you going to raise?" We put that discipline actually into the law, in the 1990 budget agreement -- it's called the "Pay-Go Principle" -- which basically said, "You want a new program or you want to cut taxes, you want to do anything that adds to the deficit, tell us how you're going to pay for it." That discipline helped a great deal, because both sides couldn't come up with ways to pay for their favorite programs.

Secondly, we put caps on discretionary spending, we set a level on discretionary spending in both defense and domestic. We set a level that said, "You cannot go above that, and if you go above that then we're going to cut everything across the board." That discipline was also put into place in the 1990 agreement, and people began to abide by that as well. So those two disciplines basically helped us a great deal in establishing the fundamental framework for being able to balance the budget.

The other thing that happened was that I sat down with President-Elect Clinton in Arkansas. He was talking to me about the budget and, I guess, probably checking me out to see if I was willing to become Director of the Office of Management and Budget. We talked a long time about the deficit, and, frankly, the campaign in '92. Ross Perot had made the deficit a major issue of that campaign, which helped a great deal, ultimately, in trying to confront it, because the American people became convinced that this had to be dealt with. So I talked to the president-elect, and said, "Let me tell you what four years earlier I told President-Elect Bush: If you don't confront this deficit issue, it will eat you alive, it will take away any resources that you want [available] to do the things you want to do to establish your legacy as president." President-Elect Clinton got this real fast. He said, "If I don't deal with this issue, I'm going to have nothing available to deal with education, or the environment, or research and development, or all of the areas that I care about in the society." And I think that, perhaps more than anything, convinced him that he would have to take on this issue. And that was an important step.

As you talk about this process in the context of our discussion about the values you acquired back in Monterey, I hear some of that resonating, basically, because it sounds to me like you had the tough job of pointing out that the [spending spree] had to come to an end.

Well, I'm a believer in that -- and I guess it comes from a couple areas. One, Edmund Burke made the point when he was in Parliament that people elected him to exercise his conscience, and that if he betrayed his conscience he betrayed his people. And I'm a believer in that philosophy, I think people elect you to exercise your conscience as to what you think is right or wrong.

Secondly [is the question of] leadership. Leadership is what our system of government is all about. Our forefathers created this magnificent system of three separate but equal branches of government, but it's a perfect formula for gridlock unless you've got people who are willing to lead. They believed that that leadership would be there. They believed that a wise and virtuous people would elect wise and virtuous leaders. But leadership demands risks. I think one of the problems in politics today is that leaders don't want to take those risks. I have learned, at least through what I had seen my family go through, what I had seen other people, whether it's in war or whether it's in politics, that leadership demands that you take those risks. Having those values developed for me, both in the army and with my parents, it gave me the courage to try to confront the deficit issue.

You had the opportunity to see it, as we used to say in the sixties, "from both sides now." You worked hard at this process in the Congress, and then you moved over to the Clinton administration as head of OMB. What are the differences? What did you learn about this problem that you saw differently in one place and in the other? Did you see the problem clearer in one place? Were you able to deal with it better in another place?

That's a big question, and it involves the whole issue of what constitutes power in the executive branch, what constitutes power in the congressional branch or the legislative branch. In the legislative branch, when you've got 435 members of the House and 100 members of the Senate, power by its very nature is dispersed, there is no centralized power. Everybody, through their own ego and through their own representation, makes decisions based on what they think is right or wrong. When the Congress came to the budget process, when they first passed the budget resolution, they passed it not because they cared about establishing a budget process or budget discipline, [but] because they felt that I was trying to limit President Nixon's impoundment authority, which is really the purpose of that law. It's called the "Budget and Impoundment Act."

This was where the president could choose not to spend money.

That's right. The president could basically impound money and choose not to spend it. Well, the Congress resented that Nixon tried to do that, and so they tried to then limit his ability to impound money. But they thought, "How can we limit the president's ability to impound?" Because he's arguing, "Look, these guys are out of control. I'm the only power here than can try to save money for the people." So the Congress felt, "The only way we can pass a restriction of the president's ability to impound is to discipline ourselves in a budget process." So that's why they passed it. They were never really that committed to the budget process. The institution was basically one in which everybody brought home pork to their district. They were able to spend money -- that was the nature of the appropriations process, was to spend money. It was counter everything that they wanted to do.

So a challenge for a chairman of a budget committee is, how do you take a system in which their basic nature is to try to take money and spend, and then try to discipline it? The only way you can do that is if you show that the politics of the country is against them, and that ultimately they've got to do something to deal with that. Not easy. There were some good chairmen who felt that it was in the national interest to do the right thing, and it was easier to work with them. But there were other chairmen whom you had to show that politics was against them.

You're referring to chairmen of other committees.

Chairmen of other committees. You had to show them that the politics was against them, and that they had to do the right thing. And, frankly, what happened was I began to win votes, and when you win votes on budget discipline, that more than anything convinces people that they've got to come along or they're going to lose their own programs. So that's one approach on the Hill, which is basically a kind of hard-nosed legislative, "do you have the votes or don't you have the votes?" kind of approach.

Panetta in the Oval Office with President Clinton. The executive branch is very different. It is centralized power in the executive branch: the president makes the decisions. When we developed a budget plan, and this was -- I mean, talk about the difference between working on the Hill, where you had to work every chairman, work every member, work all of the votes you needed! There, we sat in the Roosevelt Room with the President of the United States, Secretary of the Treasury, the Economic Advisor, a few other advisors, and we developed a budget. And that budget applied to every cabinet member. The cabinet members really didn't even have that much planning with the budget. We developed the budget there in the Roosevelt Room. We said, "This is the president's budget, and this is what you will do."

So the process in the executive branch is much more centralized in terms of power. You still have to make those decisions, and then take them to Capitol Hill, and ultimately win those battles. But internally, the executive branch has a much, much more efficient way to budget than on Capitol Hill.

But what you're describing during this early phase of the Clinton administration required, on the one hand, courage, because in a way, when you say you were telling your Cabinet officers to cut back, you are talking about the potential voters for the Democratic Party.

Sure, sure.

So tell us a little about that. Was it surprising that such a tremendous act of courage was taken, or was it just the nature of the situation?

One of the reasons I decided to become Director of the Office of Management and Budget is that I knew as Chairman of the Budget Committee I could continue this process of kind of fighting the executive branch and ultimately moving step by step to try to reduce the deficit, but I was convinced in the discussions I had with the president that he was committed to taking this on. Panetta and Laura D'Andrea Tyson in the Oval Office with Clinton. Now, President Clinton is no political slouch. He was concerned about the politics of doing this, and he understood the price that could be paid. He understood that if you take on programs like Medicare or Medicaid, or if you raise taxes, that there is going to be a political price that's going to have to be paid. And he worried about that. He worried about it. But at the same time, he also knew that if he took those steps, and if it resulted in a strong economy, and if it produced more resources for him to be able to do the kinds of things he wanted to do to help families in this country, that it would be worth it. So the dilemma was, "Can I reverse this process in the economy fast enough so I don't have to pay a heavy political price?" He was willing to take that gamble. And it was a gamble. He was willing to take that risk. I think he was convinced because the economic team was so unified on this, saying to the president, "You've got to take this issue on, you've got to make these decisions for the sake of the country." And he believed that, and I think he believed that that was the right thing to do. But the political side of him always wondered whether or not he would pay a heavy price.

And as it turned out, he did pay a heavy price. I think he always considered that one of the reasons he lost the Democratic Congress in '94 -- along with other issues: health care and gun control -- was the vote on the budget and the fact that this was a very tough vote for members. We only won it by one vote in the House, we won it with the vice president's vote in the Senate, so it was a very close vote. I think the president always was convinced that he had paid a political price, but that he had done the right thing.

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