Miller Time: An Interview with James C. Miller III

Reagan's budget boss speaks out


Lest anyone think that Jimmy "national malaise" Carter accurately represents the level of economic sophistication among native Georgians, James C. Miller III can set them straight. As Reagan's director of the Office of Management and Budget for three years, Georgia-born-and-raised Miller was one of the principal accoucheurs of budget cuts that (at least temporarily) reduced the deficit and slowed the growth of federal spending. Miller is quick to admit that Reagan's cuts are only a short-term salve. He'd like to see institutional changes making it harder for the government to go on spending sprees.

Miller's thinking reflects his training in the "public choice" school of economics under Nobel Prize winner James M. Buchanan. The central insight of public choice analysis is that incentives—personal costs and benefits—influence individuals' choices as much in the political arena as in the market. This conclusion leads public choice adherents to skepticism about the ability of governments to do good. These notions are not limited to spending issues. In 1968, Miller and some of his fellow graduate students edited and published Why the Draft?, which sold over 35,000 copies.

Miller's decidedly out-of-the-mainstream views did not keep him out of government. He has worked on the inside in various capacities since the Nixon administration and served as chairman of the Federal Trade Commission before going to OMB—thus challenging by example the critics of public choice who charge that its thrust will destroy the sense of public spirit that can draw good people to government. As Miller points out, however, good people are not as reliable as good rules.

Miller has now returned to private life, where he can be even freer with his comments. He is a senior fellow at the Center for Study of Public Choice at Virginia's George Mason University and chairman of Citizens for a Sound Economy, a Washington think tank. Citizen Miller will no doubt continue, like a nagging conscience, to point out the errors of the government's ways.

Contributing Editor Tom Bethell cornered Miller in his office in Washington.

Reason: Can Bush stand by his pledge not to raise taxes?

Miller: I think he wants to hold the line on taxes. So the real question is, will he be able to hold the line? And I think it depends on several things. Number one, I think it depends on how markets react.

Reason: Why are the people in markets so dumb as to think that the solution to the nation's problems is to raise taxes?

Miller: I really don't know. Bear in mind two things. Number one, most members of Congress want to raise taxes. They want to be in the business of doling out goodies—siphoning off the common pool, and all of that. I know this for a fact in talking with members of Congress. Those who publicly declare against the tax increase will sit down within the closed doors of their offices and talk about how we can raise taxes and get somebody else to take the heat. And those bipartisan negotiations that I sat in on at Capitol Hill—whenever people talk about a tax increase, eyes light up all around the table. They talk about it. They want it. They truly want it.

Number two, even the holdouts are under tremendous pressure from the leadership of Congress. The leadership will try to pull them off of the no-tax pledge. But the question is whether President Bush can maintain the strength to sustain a veto. If he sees it evaporating, I think he will deal. He will be forced to deal, and I will not count this as his reversing himself on the no-tax pledge. I just count this as trying to get the best deal he can. At this moment I think it is still about 60 to 40 that he will be able to hold.

Reason: Why do you think Reagan accomplished so little in reducing the size and scope of the federal government?

Miller: He didn't accomplish little, he accomplished much. He attenuated the rate of growth in total spending at a time when, for demographic reasons, you would anticipate total spending growing. One of my proudest accomplishments was that I went to OMB and got the largest deficit reduction ever in the history of the United States. The '86 deficit was $221 billion. The '87 deficit was $150 billion. At my recommendation—and it was also his gut instinct—the president said to Congress, no, no, a thousand times no, I will not raise taxes, I will not accept excessive spending, I will not approve appropriations bills with larded-up pork in them, I will not approve spending that's on the wrong priorities, and so forth. And real spending in fiscal '87, that is, inflation-adjusted spending, fell for the first time in 20 years. Then we had the market crash and the president was compelled to negotiate with the congressional leadership.

Reason: Do you think anything should have been done differently? What were the administration's biggest mistakes?

Miller: Anytime you are the chief executive officer of a company, much less the chief executive of the United States government, you will make mistakes. I wish to goodness that the president had had some kind of system where he knew what was allegedly going on with the situation in Iran. That cost us immeasurably in terms of our ability to get things done on Capitol Hill. I wish we'd had an opportunity to see in advance the recession coming and encourage the Federal Reserve not to hit the brakes so hard in the early, very early 1981 period. There are lots of mistakes like that the administration made.

But if you look at the things that the president promised…You'll find promises to lower the crime rate. He did that. To restore our military strength. He did that. To restore our respect abroad. We did that. To encourage democracy around the globe. We did that. To lower the rate of inflation. We did that. Lower interest rates. We did that. To reduce the deficit. We didn't do that—if you look at the big ten promises, that's got to be the big standout failure.

Now if I'd been counseling him back then and knew then what I know now, I would have said, "Mr. President, unless Congress changes its collective decisionmaking rules, you're not going to get that reduction in the deficit." The deficits may rise and they may fall, but you're going to get them.

But this should have been a predictable defeat. You cannot rely on members of Congress to change the rules that would force them into behavior that they don't like. You've got to put the pressure on from the outside.

Reason: What form can this pressure take?

Miller: The pressure that I think is most likely to be decisive is to sign up a few more states calling for a constitutional convention to enact a balanced-budget amendment to the Constitution. Already 32 states have called for it. You need 34. I have no doubt whatsoever that if you get the 33rd state, Congress will cave. The last Congress—and it will be reintroduced this time—had in the House of Representatives a balanced-budget amendment. It doesn't have any teeth, but it has more cosponsors than a majority of the members of the House. But the leadership won't let it be voted on.

Reason: It seems to me there is a potential problem in a balanced-budget amendment. If the thing gets passed it could lock in the present size of government, and at that point it will be impossible ever in the future to have a tax cut.

Miller: Let me hasten to add that my version of the balanced-budget amendment incorporates a limitation on the size of government. You could design a balanced-budget amendment and a limitation on the size of government, whether it's 25 percent of GNP, or 23 percent, or 21 percent—pick a number. And then you get around that only by a super-majority vote of both houses in Congress on concurrence of the president, and that expires after one year. That is to say, you can't just declare an emergency one time and have that last forever.

Reason: You talk about Congress's "collective decisionmaking rules." What are those rules right now?

Miller: What I'm talking about is the set of research that is known as public choice. You look at the institutional arrangements and the incentives that individual congressmen and senators have that cause them to vote in certain ways. Many people subscribe to the so-called Good Man theory of government, which says that if you get a bad outcome, then what you should do is get the right people in there. If you get perennial deficits, or if you get overspending, if you get too-high taxes or too-low taxes, or insufficient spending or whatever, it's because you don't have the right people in there. A public choice scholar would say that if you have the wrong outcome it's not so much because the people are wrong. It's that the incentives are wrong. So you have to change the institutional arrangements to make the outcome better. Given the current arrangements with PAC money, with the enormous advantage the incumbent has because of the franking privilege [free use of the mails] and for visibility on television, etc., it's extremely difficult to change people. It's very difficult to change the people. So I'm saying we ought to change the institutions.

Now, institutional changes that change incentives are things like the Gramm-Rudman law, which makes spending a zero-sum game. If you are going to increase spending, the deficit must remain at a certain level. So you either have to increase taxes or you have to cut spending somewhere else. If you had a balanced-budget amendment to the Constitution, it would mean not only would the deficit be zero, but within that zero deficit you would be making those Gramm-Rudman choices. You couldn't change the targets, as Congress has done with Gramm-Rudman on one occasion and could do again. If you have a line-item veto, you may find that while members of Congress are incapable of restraining their avarice, a president who is elected to represent all the people could make those choices for them. And he would have much greater incentive to weed out the low-priority spending than the individual congressmen who are going to be judged on whether they bring home the bacon or not.

Reason: I keep thinking of the federal budget in terms of the metaphor or analogy of a common pool, that you've got a trillion-dollar common pot.

Miller: And everybody wants to get their fair share. And the sum total is greater than a trillion dollars.

Reason: You've got 535 people who've got sort of siphoning privileges, who can pull out of this common pot and give it back to their constituents. Which means that the congressman who goes to Washington, who is a fiscal conservative, and says he is not going to spend that money—"I'm going to be very restrained"—he just leaves more for everybody else.

Miller: That's exactly right. Doesn't accomplish limiting the total pot very much. He just goes home without his share.

Reason: You were quoted in a column in the Wall Street Journal by Paul Gigot. He was talking about the automatic cuts that can take effect through Gramm-Rudman—a sequestration. He said that last year Congress threatened Reagan with a sequester, they went eyeball to eyeball, and Reagan blinked. You are essentially quoted as saying Reagan blinked. This article suggests that Darman is going to say publicly that the Bush administration will accept a sequester. He'll say to Congress, "All right, you go ahead and do it. That's fine with us." Do you think he will do that? And is it a good strategy?

Miller: Yes. I think he will do that, and it's a good strategy. Gramm-Rudman was a brilliant idea. It's just that Congress fashioned it in such a way that half the cuts come out of the defense budget and half come out of domestic spending while most of the goodies—Social Security and all of the health stuff—are exempt. And so when it comes to the question of getting the deficit down, and members of Congress say, "Okay, if you won't cooperate with us with our tax increase, or with our priority of spending…if you don't quit threatening to veto all these appropriations bills, we'll just have a sequester." Ronald Reagan could not countenance having a big cut come out of defense, and at that point he would go along. The difference is that I don't think George Bush has that kind of marker out there, that kind of commitment. And the Democrats know that. Therefore they probably won't try to play it as a trump card.

Reason: I was looking at the administration's budget figures for the next few years. Why do they keep growing? Why does the administration keep saying these figures are going to get slightly bigger?

Miller: You mean the total spending figures? The reason is partly a conceding that despite what you'd like to have happen, many of these programs are inevitably going to remain. Even in President Reagan's last budget, which eliminates 80-something programs, there are lots of other programs that are going to remain and to grow. The major reason, however, that the numbers keep growing is because of entitlement programs and the shift in the demographics—especially in Social Security and Medicare. We have in Social Security and in Medicare both basically a Ponzi scheme where the base is shrinking and the top is getting heavy. And this means that you're going to constantly have expansions in total payments. By the year 2030 or so you're going to have in my judgment something I'm very concerned about: a terrible intergenerational conflict when, if we don't change the present system, the Social Security trust fund is going to be full of IOUs on current generations—that is working generations—to pay older people, who have paid into the Social Security trust fund, but all the money will have been spent by the politicians.

Reason: What is the true budget deficit right now, accounting for all contingent liabilities, pensions, loan guarantees, S&L bailouts, and so on? Is it really higher?

Miller: It is much higher. It is certainly intellectually defensible to define the budget deficit as the difference between the money that the government receives and the money that the government pays out. And whether it is the Postal Service, Social Security, or the highway trust fund, whatever, these are all government entities. Now on that basis, the deficit is what the deficit is reported to be. It is by the estimate in President Reagan's last budget $92.5 billion.

But you've got about a $60-billion Social Security surplus for this year that's in that budget. So instead of being $92 billion, the deficit is really more like $152 billion. What I think you ought to do with the Social Security surplus is, you ought to tell the trustees not to invest in government securities but to invest in real assets—private bonds and private debts, not equity. If you invest in equity you own the firm. Stay away from that. But invest in real assets. Then the deficit number would be the true deficit.

Reason: What about other hidden promises to pay out in the future?

Miller: Without question we don't register them. Let me give you an example. When the government guarantees a loan, if that loan is not repaid the government is stuck. Now, no business, you know, would receive the same bond rating regardless of how many notes the company had cosigned. No individual would be appraised in terms of net value without some adjustment for that kind of contingent liabilities. Yet we do it in the government. What I recommended to Congress for two straight years was to take these guarantees and immediately go to the private market to reinsure. The amount that you had to pay in the private market to insure the loan that was guaranteed is the accurate measure of the subsidy that's involved. But Congress said no. Well, of course they said no. They don't want people to understand that that liability is costly.

Reason: What about the political viability of selling government assets: the Postal Service, federal land, Amtrak?

Miller: I believe that privatization is an idea whose time has come. But to actually implement it is going to take a long gestation period. If the government were a really first-rate investment firm, it might make sense to hang on to some prime commercial properties. But the federal government is absolutely terrible at decisionmaking on holding assets. So those ought to be sold. Some commercial operations like the Federal National Mortgage Association, the Federal Housing Administration, and other financial guarantees should be transferred to the private sector. We ought to privatize the U.S. Postal Service. There is no reason why the Postal Service should remain part of the federal government. The constitution of the United States authorizes, but does not mandate, that there be a U.S. postal service.

Reason: David Stockman said when he was in Congress, and he kept thinking about how you cut back government and so on, everything led back to OMB. There's the place you have to be. Then he got there and clearly he really didn't succeed. So OMB may not be the place to be.

Miller: There's no agency that has quite the power that OMB has. OMB has enormous power mainly to stop things. We could stop a lot things in Congress by threatening veto or compromising out or pulling people off by promising to do something for them in another way.

Reason: Why do reporters accord more credibility to the Congressional Budget Office than to OMB? Nonpartisan—they always call it nonpartisan, or bipartisan.

Miller: Well, number one, I think it goes back to the Atlantic article and Stockman's book. That's number one. Number two, at the margin OMB's forecasts have been a little more optimistic than CBO's, and they perceived that as being in the interest of the administration. The truth of the matter is that two out of the three years the economy performed better than we said. Number three, it is technically bipartisan in that it is hired by both parties, but what infuriates me is how Congress has manipulated the CBO. Congress pressures CBO in ways to come out with numbers that are just outrageous. Even when they have CBO make estimates of the cost of things, many times they will dictate the assumptions that go into that. Now if the president of the United States told me in estimating the cost of this housing bill to assume such and such and such, I might accept that with great perplexity the first time. The second time I might be very aggravated. The third time I quit. But they do that, the CBO, all the time. And the media never pick up on it.

Reason: You got your start in public policy with a book critical of the military draft. Do you think we're likely to see a restoration of the draft anytime in the next few years?

Miller: I do not think we will see compulsory service in the next few years. I'm concerned about these proposals for alternative service. We will see proposals for doing things like, if you receive federal money you must offer 18 months of service in some kind of national youth corps or something like that. Two things about that. One, it's sort of a foot in the door back toward conscription, and I oppose it. And secondly, these kinds of programs are notoriously inefficient, and I oppose them for that reason.

Reason: What you are saying reminds me of the changes in the welfare system toward a system of workfare. How do you feel about that?

Miller: I think that's a good idea. Because the reverse of welfare is to get off of welfare. To provide people with the incentives to change their circumstances from one of dependence to one of independence is quite good. But it's another thing to force essentially free labor in exchange for some federal subsidies.

Reason: Do you think that this workfare change is going to be effective?

Miller: It was so watered-down it will not be nearly so effective as what the president earlier proposed.

Reason: Is there anything we can do to improve defense procurement, or at least minimize problems?

Miller: Yes and no. Number one, we need to have some procurement reforms. The rest of the Packard commission's recommendations need to be implemented. That takes Congress to do that. Number two, we need to implement two-year, and preferably four-year, budgets for the military. Just as a rough estimate, we can probably save $10 billion a year if we had four-year budgets rather than one-year budgets. If we have the predictability of end-funding, we could save money. And finally, we ought to say that the defense budget is too important and should be placed off limits for pork spending. I mean, I was out at an air force base six months ago. We were going down the tarmac and I saw a bunch of these ugly-looking planes with big engines out the side that look like they've never been off the ground. Those are the planes that Alfonse D'Amato held up the continuing resolution for, to force them to be put in the budget two years ago. The Defense Department didn't want them, but since they are made out in Long Island he wanted them in the budget. I mean it's just absolutely atrocious behavior. We ought to put the defense budget off limits.

Reason: One final question. In addition to reducing the deficit, what do you think were the Reagan administration's major accomplishments?

Miller: In the international sphere, his best accomplishment was an understanding with the Soviet Union based on strength. And that, I think, is the basis for what could be a long-term, very productive relationship with the Soviet Union that may mean several things. One, that we will not constantly be on the defensive and be subjected to uncertainty and anxiety. Number two, we may see some real reductions in our cost of maintaining a national defense. Not now, but in the future. Thirdly and very importantly, we may see some betterment of lives and freedom of people behind the Iron Curtain.

On domestic issues, we've obviously had restoration of economic growth after a sharp downturn that no one really anticipated in 1981 and '82. We've had the longest peacetime expansion in the nation's history. We've had substantial reduction in rates of inflation and in nominal interest rates. We've had substantial rises in per capita and per family income. We have an enormous number of new jobs created. Unemployment has fallen to a 14-year low. So I think the economy is a howling success, and as I see it there is every reason to believe this can continue for the foreseeable future.

But Ronald Reagan's major accomplishment was restoring people's optimism and faith and self-confidence in the country. We had gone through a terrible time with Vietnam, a terrible time with Watergate, a terrible time with the failed presidency of Jimmy Carter. We had reason to question as a country our ability to govern ourselves, to establish goals for ourselves, to succeed. And I think he rekindled in people the notion that if we're not invincible, certainly we have as good a chance as anybody else. We have things to be proud of.