President Carter

by Stuart E. Eizenstat

  Ultimately all elected representatives are accountable, and many political careers have been ended by a recorded vote in the public instead of the provincial interest. The energy conferees met in an open forum in front of a standing-room-only crowd. One reporter likened it to the Mad Hatter’s tea party in Alice in Wonderland.35 To me it was more like a Gilbert and Sullivan comic opera, except that it was no laughing matter. Of course the senior members arranged in characteristic form to meet in private for serious negotiations, whereupon the full House of Representatives voted overwhelmingly against the private meetings. Having run through their public performance, the conferees continued meeting in private after Lud Ashley pointed out that these gatherings were informal and did not violate House rules.

  Pressure mounted for a deal before Carter would attend the annual Group of Seven Summit of Industrial Nations in July to discuss energy and the world economy. By the end of March, Moore and his congressional lobbyists felt we could wait no longer to involve the president. So on April 11 the president met in the White House with the leading energy conferees, urging a compromise. Ashley, the leading House negotiator, warned ominously: “If this is not resolved this week, I will end negotiations.”36

  Several days later, on April 20, a dozen of the forty-three conferees met for thirteen consecutive hours in two small third-floor rooms in the Capitol, equidistant from the Senate and House chambers, until 3:30 a.m. the following day, on natural-gas pricing, which had taken on near-theological dimensions. Schlesinger worked with them tirelessly, jacket off and tie undone, pushing them at every stage, proposing new compromises, and serving as a delivery service for proposals and counterproposals from one side of the Capitol to the other. They doggedly returned at 11:00 a.m. the next morning for another two-hour session, and at 1:25 p.m. there was a burst of applause. It was as if a new pope had been elected, minus the white smoke. I can remember the elation in the White House: The president was going to win, and with a deregulation proposal much like his 1976 campaign pledge.

  But no, he wasn’t: It was no sale among the full complement of House conferees. A handful of liberals damned it as a sellout to the oil and gas industry, while two congressmen from the oil patch feared that somehow the deal would extend federal controls on gas into their unregulated states. This time the White House was no longer supine. Ham had brought in Anne Wexler as public liaison to mobilize outside support; she was a seasoned Connecticut politician who had run Carter’s Washington campaign office with her husband, Joe Duffy. Anyone who questioned whether the Carter White House, now two years into the presidency, had its act together, needed to look no further than this operation, as it reached out to key individuals and groups for the balance of the Carter term to support his initiatives. The president, as I put it in my private note, “goes political.” He told the cabinet to work with Ham and Frank Moore to put energy on the top of their agenda.37

  But at a Sunday-afternoon meeting in his study, while he complimented me for making his job easier, he expressed exasperation that “it is almost impossible to get my points across with the negative press.”38 A reinvigorated White House lobbying team managed to quiet the fears of the oil-patch congressmen. Finally, on May 24, the dam broke. The House conferees narrowly voted for a compromise. Now the unimaginable happened: Defeat was snatched from the jaws of victory by an embarrassing process of entropy during the period from May 24 to July 31. It took that long for the staff and its lawyers to convert the complex compromise into legal language for a bill on which the Senate and House could vote.

  Politics is part of nature and like nature abhors a vacuum. Interest groups used the delay to try to destroy the hard-won compromise. The same odd partners that had made it so difficult to achieve a consensus made common cause against the Conference Report—the Chamber of Commerce, the AFL-CIO, and the Consumer Federation of America, which normally do not agree on the time of day, joined to try to kill it. When the conferees read the final language, defections began almost immediately. Members claimed it did not represent what they had agreed to in May. Three of the thirteen House votes reversed their positions on totally opposite readings of the bill. The situation was as bad in the Senate, where four conferees who had approved the May 24 compromise now opposed it.

  None of their reasons were new, and the process devolved into a theater of the absurd. On June 7, when presenting the staff’s detailed language on an obscure provision defining an “essential agricultural user” as one who produced animal feed using natural gas, Senator Metzenbaum argued that this would protect producers of dog and cat food, which was hardly in the national interest. Informed by the staff that this provision applied to essential agriculture such as beef production, Metzenbaum still insisted that dog- and cat-food producers did not deserve such special protection. What about food for Alaskan huskies? asked Senator John Durkin of New Hampshire. Not to be outdone, Senator Clifford Hansen of Wyoming exclaimed that because of their importance, the food of sheepdogs should also be excluded. The House conference chairman, Harley Staggers, provoked gales of laughter when he told Metzenbaum he opposed his amendment because there were too many dog and cat owners in his district. Such was the nature of the parting gift from the Congress of the United States to the president as he prepared to negotiate at the highest level with the nation’s economic partners at the Group of Seven Summit of Industrial Nations.39

  9

  ENERGY AND THE DOLLAR AT THE BONN SUMMIT

  Diplomacy at the highest level directly intruded on our domestic troubles with energy reform. At the 1978 summit, the goal was a grand bargain to help stabilize and relaunch the industrial world’s economy toward recovery from the oil shocks of the first part of the decade. This year the summit was to be held in Bonn, Germany, in mid-July under the chairmanship of West Germany’s tough chancellor, Helmut Schmidt, an experienced and respected former finance and defense minister known at home as Der Macher—someone who could get things done. Since the first oil shock in 1973, the Germans had drastically reduced energy usage by conservation. The French had long ago taken another road to conserving oil through a national program of nuclear energy that would eventually supply more than three-quarters of their electric power.

  Americans had the world’s largest appetite for energy and as such were the drivers of world oil prices; our closest allies urgently wanted to know what we were doing to conserve. The United States paid foreign producers in dollars for crude oil imports, and this sent our foreign accounts deeply into the red. In only two years our current accounts had switched from plus to minus by $30 billion. The law of supply and demand applies to currencies as well as goods, so the prospect of an endless flood of dollars circulating around the world affected their value. As the dollar dropped, imported goods became more expensive and boosted domestic inflation. This chain of financial events added a threating international dimension that increasingly overshadowed our deadlocked domestic energy debate.

  As the U.S. currency declined dramatically, the German and Japanese central banks had to mop up the flood of cheap dollars or watch their own currencies skyrocket and price their exports out of world markets. Our allies blamed one thing for this spiral: subsidized low U.S. oil prices that encouraged energy profligacy and in turn drew in more OPEC oil. From 1972 to 1977, the cost of U.S. oil imports climbed ninefold from $5 billion to $45 billion. The contrast with the other industrialized countries was dramatic: Their oil imports had actually declined. Treasury Secretary Blumenthal was most concerned in expressing to the president that our increasing dependence on foreign oil was accelerating the slide of the dollar.1

  Nowhere was the institution of the annual summit written into any national law or treaty. It developed after 1971, when Nixon cut the link between the dollar and gold that had served as the financial foundation of postwar stability. The system was devised in 1944 by the wartime Allies at a resort hotel in Bretton Woods, New Hampshire, but was beginning to unravel after almost thirty years of unparalleled prosperity. Liberal-m
inded statesmen felt the need for a forum to coordinate the economic policies of the world’s principal trading countries. From secluded meetings of finance ministers, it quickly evolved into a traveling jamboree of the leaders of the seven leading industrial democracies, representing three-quarters of the world’s economic output, with the world’s press in tow. In the early weeks of his administration, with only a few months to prepare for his first summit in London in 1977, Carter sent Mondale to Bonn and Tokyo, backed by senior specialists in international economics, to persuade both countries to join the United States as “locomotives” stimulating their own and in turn the international economy. They argued this could be done with only minimal inflation, but this fell on deaf ears with Schmidt, whose thinking was shaped by Germany’s traditional fear of inflation and an economic orthodoxy that persists to this day.

  Conventional economic wisdom in Germany still holds that inflation causes unemployment rather than helping add jobs by stimulating the economy. The German chancellor, who had presided over his country’s continuing postwar prosperity, also resented being lectured by what he considered inexperienced American academics. Schmidt had also openly supported Ford against Carter in the 1976 election. He told the visiting Americans, “We owe a lot to Bill Simon”—Ford’s hard-money, free-market treasury secretary from Wall Street. To which Mondale shot back: “Yes, we owe Bill Simon everything. Without him we wouldn’t have won the election.”2

  The Mondale mission was not an auspicious start. The G7’s first attempt to coordinate its policies got under way at the London summit, and the U.S. fielded an experienced team of economic policymakers, all followers of the intellectual father of Bretton Woods, the great British economist John Maynard Keynes. The G7 summits brought out the best in Carter, even humor. He joked that swashbuckling trade negotiator Bob Strauss, who was negotiating tariffs on shoes in London, had been spotted at a swanky London club, and had left only his shoes after the performance.3

  What Bonn wanted from Washington was not a class in Economics 101 but action to raise U.S. oil prices to the world levels that the others were paying. Until that happened, European commitments to juice their economies and Japanese pledges to do the same and open the country to foreign goods and investment were barely worth the paper they were written on in the final communiqué. The three so-called locomotive countries committed themselves to specific growth targets between 5 and 6 percent, but only America came close to its target, and as German and Japanese trade surpluses mounted, the dollar continued to drop, and mutual finger-pointing increased.

  Carter knew he had to try again at the Bonn summit of 1978, or America’s role as the world’s only growth engine would cause severe distortions to our economy. He had hoped to have his energy program passed into law before the two-day meeting in Bonn on July 16–17. Carter tried to force congressional action by arguing he would be embarrassed and the reputation of the United States diminished if he had to go to Bonn empty-handed, and more practically, that the dollar would continue to plummet. He warned senators in a letter that each percentage point that the dollar declined added one-tenth of one percent to the consumer price index. An energy bill, he argued, would boost the value of the dollar by cutting oil imports and reducing our current account deficit.

  French president Valéry Giscard d’Estaing weighed in just before the summit with a warning directed straight at the congressional conferees: “At the present time, an important reduction in [U.S.] oil imports is the precondition for an improvement in the world economy.” This sentiment, somewhat exaggerated as it was, offered Carter another avenue to argue for completion of his energy bill: American leadership and the health of the global economy. It also turned Tip O’Neill’s famous adage that “all politics is local” on its head: Domestic politics took second place to obligations imposed by global economic forces. But Congress ignored the international dimension and left him with one hand tied behind his back. Meanwhile the dollar fell to record lows, but Congress did not see any connection to its own dilatory behavior. The American team had attempted to obtain leverage at the London summit to pressure Congress to act; now the leverage would be turned against us. We would now have to adjust our own policies to the realities in the rest of the world. That was the essential meaning of policy coordination at the summit, but our members of Congress tend to shrug off the interests of other countries when they impinge on our own.4

  Carter thus took on another challenge of changing attitudes at home, but this time he had a strategy. From the very first, he knew that Schmidt would be key. So just before his own inauguration, Carter phoned the German chancellor to emphasize that he sought cooperation and consensus with Germany. In office, he appointed Henry Owen as his personal representative to the group of senior officials who prepared the agenda and negotiated what each government was prepared to agree. This group was known as the Sherpas, after the legendary native guides to the summits of the Himalayan mountains. Owen first met Carter through the Trilateral Commission and was director of foreign-policy studies at the Brookings Institution when he joined the government. His white hair and grandfatherly demeanor belied a mind and manner of speech of great precision, and altogether he was the ideal choice because he also was fluent in French and German. Carter’s principal opponent, said Owen, was Schmidt—“the only leader who didn’t respect him.” So Carter’s and Owen’s strategy had to be based on surrounding and isolating this difficult and egotistical man who was deeply skeptical about the upstart former Georgia governor who was telling Germany to abandon its prudent values of thrift and to print money.5

  Alone among the G7 countries, and to the great anger of the Europeans and Japan, the United States still supplied about two-thirds of its energy needs from domestic sources—and at prices that were controlled by a complex system to protect the American consumer from the full effects of OPEC’s huge price increases. This system, developed (ironically) in the conservative, free-market Republican Nixon administration, encouraged consumption at artificially low prices and thus greater dependence on imported oil. By contrast the Europeans and Japan had allowed their domestic oil prices to rise to the world price level effectively set by OPEC.

  * * *

  Carter’s energy plan was stalled in Congress, but he was not the only major player with tight political constraints at home. They also pinched Schmidt, proud, sometimes petulant, but always brilliant; his European partner Giscard d’Estaing, tall and lean, balding, and with the imperious carriage of a French nobleman (which he actually was not); the cautious Japanese prime minister, Takeo Fukuda; James Callaghan, the large-framed British prime minister, whose sparkling personality earned him the nickname “Sunny Jim,” but belied his country’s condition as the sick man of Europe after the collapse of the pound only two years before. Schmidt, the leader of the Social Democratic Party, labored under Germany’s historical fear of the Weimar Republic inflation that discredited its democracy and helped pave the way for the rise of Hitler.

  His coalition partner, Economics Minister Count Otto von Lambsdorff, leader of the probusiness, market-oriented Free Democratic Party, was an even more outspoken champion of economic orthodoxy. (Twenty-five years later Lambsdorff was my negotiating partner during the Clinton administration for a $5 billion Holocaust agreement with Germany). The general view of the German economic institutes was 180 degrees different from the Carter administration’s reigning Keynesian theory of stimulating a lagging economy with deficit spending. It is important to recognize that early in the administration, there was a broad consensus among mainstream economists of both parties as well as business and organized labor that a stimulus package was essential even though Carter’s instincts were entirely more conservative and his aim was achieving a balanced budget.

  As Bonn approached, it became clear that Germany and Japan would badly miss the targets to which they had committed in London the previous year. This posed a dilemma for Schmidt as the host. German growth in mid-1977 was an anemic 1.2 percent. At his home
in Hamburg, he had told a small group of advisers he would be blamiert (shamed) in front of the fellow G7 leaders he would be hosting. He therefore laid the groundwork for a new stimulus package, mostly tax cuts, that passed the Bundestag in the autumn of 1977. But even in the following summit year of 1978, German growth reached only half of his London pledge of 5 percent, while U.S. GDP grew 5.5 percent for 1977, the only country to come even close to its target. In fact the United States was in a sweet spot: Unemployment dropped to a three-year low of 6.4 percent, and inflation in the second half of 1977 moderated to 4.5 percent. (If only this could have been frozen for the next three years, this book might be discussing a second term for Carter in the White House.)

  Owen and his fellow Sherpas met several times to try to reach agreement in three areas before the summit began: economic stimulus, U.S. oil prices, and global trade talks. Divisions between the United States and Germany were so sharp that when Blumenthal visited Bonn in February, he suggested Carter might skip the summit entirely unless there was some prior agreement for Germany to stimulate its economy. Schmidt certainly knew this was a bluff, but still privately promised Blumenthal that Germany would move “if you do your part” on energy prices. Though Callaghan worried that a deal only between Germany and America would have dangerous implications for the global economy as well as his own reelection, he then took on the role of honest broker between Schmidt and Carter. Callaghan first suggested what moving parts were needed to mesh together in this complex global game.6 He visited Bonn and Washington in mid-March to sell a deal on German economic growth in return for raising American oil prices to world levels.

  He delivered the message to the president and then met with Owen and Richard Cooper, the State Department’s brilliant undersecretary for economic affairs and former Yale provost. Callaghan, he recalled, emphasized that “of course the Germans must expand, and of course the Japanese have to expand, but you Americans have to put something into the pot. You’ve got to give Schmidt something he can carry away.” That something was of course an end to federal price controls on crude oil.7