BUDGET

The Numbers Runner

by Jeff Shear

Saturday, May 21, 1994


The senior Senator from Kentucky, Democrat Wendell H. Ford, couldn't seem to help himself. Putting aside one of his ever-present smokes at a recent hearing, the chairman of the Rules and Administration Committee began, in his tarry baritone, by saying, "The Honorable ..." He then quickly reconsidered. "Mr. Director," he sputtered. "I'm not sure I like that," he said finally. "So, Leon -- go ahead."

To a person -- aides, journalists, Members of Congress, his colleagues in the Clinton Administration -- the influential director of the Office of Management and Budget (OMB) is referred to as Leon, no title necessary, as if he were a maitre d'. Which is not to say that there's any lack of respect for 55-year-old Leon E. Panetta. Indeed, the well-regarded director is widely held to be the picture of candor and competence. Nor has such familiarity bred contempt among those who have worked closely with him. Carol Cox Wait, a former legislative director of the Senate Budget Committee, calls Panetta a "principled pragmatist, a liberal who can do the arithmetic."

Panetta's easygoing style puts the man and his office in potent contrast with the power-wielding manipulations of his immediate predecessor, Richard G. Darman. To be fair, Darman, who declined to be interviewed for this story, never enjoyed the luxury of a Republican Congress as OMB director in the Bush Administration. But where others styled the office on exclusivity, Panetta is inclusive, searching out the players and opinions he needs to meld his policies and programs and, of course, to sell his budgets.

As a House Member, Panetta was known as a pragmatist and conciliator, and as budget director he's subsumed his ego to the larger aims of the Clinton Administration. Indeed, he appears to be a natural match for a fast-food, workaholic Administration that worships on the Harvard Business School's altar of teamwork.

At the same time, those Clinton Administration traits of palaver, collegiality and compromise pose what may be the most significant challenge yet to the powers vested in the budget director's chair. Panetta finds himself navigating a narrow and tortuous path between the hovering attention of a micromanaging President, the Vice President's tinkering National Performance Review, an
over-the-shoulder-looking National Economic Council (NEC) and a restructuring document known as OMB 2000. And then, ubiquitously, there's the hulking, hobbling federal budget deficit. The questions legitimately arise as to whether power is being wrung from him, and whether a man known just as Leon can stand as the masterful fiscal force his predecessors once presumed to be.

THE BEST MEDICINE

"The President must be coming through," Panetta says as his limo lurches through a 180-degree turn, dodging the traffic snarled at the Ellipse on its way back to OMB's headquarters in the Old Executive Office Building. Over the radio, word comes of the latest economic indicators. Growth has plunged from 7 per cent in the final quarter of 1993 to just 2.6 per cent in the first quarter of 1994. Panetta seems less puzzled by the numbers than by how the markets will react. He turns to Barry J. Toiv, his longtime press aide, who's sitting in the back- seat, and says, "Bad news is good news and good news is bad news." The question now is what the new numbers, which are significantly lower than expected, will mean to Wall Street. Specifically, the concern is about the Federal Reserve Board, which has been nudging up short-term interest rates in an effort to fight against as yet unseen inflationary forces.

The conversation turns to Ford's recent hearing in the marmoreal Russell Building, from which Panetta is returning. "Jim Sasser's going to be doing a lot of testifying this year," Panetta observes, commenting pointedly on the Tennessee Democrat's stepped-up appearance schedule on the Hill in his race against Thomas A. Daschle, D-S.D., for the Majority Leader's post. Panetta and Sasser, who chairs the Budget Committee, both spoke in favor of the biennial budget package that Ford has been pushing for more than a decade.

Panetta remains a sly and engaged partner in the congressional minuet, winking across the ballroom floor from his end of Pennsylvania Avenue. Indeed, he says that his experience on the Hill is one of the chief assets he offers his boss, President Clinton. "I sometimes wonder why past budget directors have not come from Congress," he says, noting that Dave Stockman, President Reagan's first budget director, was the exception. "Congressional experience gives you a sense of where the moving parts are, and how you can advance policy."

From his car, Panetta goes directly to a staff meeting in his high-ceilinged Victorian office, where the subjects of discussion range from the Bureau of Indian Affairs to the slaughter in Rwanda. Panetta and his congressional liaison, Martha Foley, hash over matters in intricate detail. Much concern is expressed about the efforts of Rep. G.V. (Sonny) Montgomery, D-Miss., to exempt the Veterans' Affairs Department from OMB's government-wide job cuts. Although systematic, the meeting is casual, jackets not required. The laughter is regular and easy. Once more, the confusing economic figures are brought up, and Panetta repeats the comment he made in the car, "Bad news is good news and good news is bad news."

Always the eye is on the Fed.

Panetta, who sits midway at the conference table, doodles as he conducts the meeting, crisscrossing a yellow legal pad with a bright blue felt-tip marker. When he makes a point, he draws an arrow. As he lists a series of ideas, he draws stacks of parallel lines. Before long he has elaborated what appears to be a map showing the way to a flow chart posing as a visual aid. By contrast with this jumble of garishly drawn direction signals, his speech is illustrative and earthy, casual but stoked with conviction.

His authority comes from his command of the facts.

Panetta's directness was clear in a separate interview, when he talked about the importance of the savings that the Administration hopes to realize through the "reinventing government" initiatives of the National Performance Review. "These are issues you can take to Appropriations Committees and, when they say, You want to fund Head Start -- where the hell are you gonna get the money?,' you can point to these savings." Here, too, the legal pad and blue marker are at work.

There's a story that Joseph J. Minarik, OMB's associate director for economic policy, likes to tell about his boss's style of doing business. Panetta was on the House floor during the fight over amendments to the 1992 Balanced Budget Act, debating whether federal spending should be limited to a prescribed percentage of gross domestic product. In what descended into a brutal argument, Panetta branded the idea "mindless" and proceeded to shred his opponent's arguments. When it was all over, a colleague leaned over to Panetta and said, "Leon, don't you think you should have left that guy some of his toes?" The next thing Minarik recalls was the avuncular Panetta showing up across the aisle. "He had his arm around the guy and they were both laughing."

Panetta uses laughter as a tool to make points and to score them. His constant guffaws underscore his comments and have the salutary effect of drawing people in. Philip Lader, a deputy White House chief of staff who'd been Panetta's deputy for management, describes the booming belly laughs as "contagious." The description is apt. By joining in Panetta's merriment, one joins his circle, partakes of his ideas and shares in his insights.

"None of this is cosmetic," Washington lobbyist Nicholas Masters, a 19-year veteran of the House Budget Committee's staff, said. "Leon Panetta does not own a powder puff."

What emerges from this gregarious confection of congeniality and conciliation is the source of Panetta's clout in White House circles. Explaining why the NEC hasn't bled power from OMB, Gene B. Sperling, the President's deputy assistant for economic policy, points to Panetta's character. "In an Administration where the goal is passing legislation as opposed to making bold statements, power is shown by working cooperatively, not by proving to a major newspaper that you were the only person in the room with the President when a decision got made."

There are those, however, who are less sure that Panetta's office hasn't been demoted from a bridge to the White House to just one of the stepping-stones. "OMB as an institution has thrived or not based on the power of the director," Walter Williams, a professor of public affairs at the University of Washington and a specialist in government management, said. He cited the contrast between the puissant Stockman and his two successors, James C. Miller III, who was derided as "Miller Lite," and Joseph R. Wright Jr. "OMB went from a superbureau to a weak bureau and reversed back under Darman," he said. Williams believes that there is little question that the NEC and its chairman, Robert E. Rubin, have "taken over some of OMB's activities. Along with the (President's) Council of Economic Advisers, the NEC takes away from OMB as a major macroeconomic player."

Panetta seems unperturbed. "When you come out of the Congress, you know that the best way to get things done is when you're able to put something together that is supported by a lot of different factions. When I was chairman of the Budget Committee -- and I think it's still true -- the committee represented a diverse constituency.... You could basically get a feel from them and know whether you could put a package together."

Rubin's NEC, Panneta maintained, plays a similar sounding-board role: "The NEC gives me a sense of where politics are going both internally and externally." By gaining consensus with Rubin's shop, he sees himself expanding his constituency. "Between (Treasury Secretary Lloyd) Bentsen and me, we can put some options on the table. Before we lay those ideas out, we've got to be certain that we have a base within the Administration that supports the things we're doing."

Panetta cites the fight over the North American Free Trade Agreement (NAFTA) as an example of how the different parts of the fiscal process benefit from the synergies of collegiality -- a noteworthy comment because Panetta's declaration last spring that NAFTA was "dead" seemed to stun everyone from the President on down. "The greatest fear we had was that if we didn't resolve the funding thing in a bipartisan way, it could blow up on us. The key there was not to make the financing of NAFTA the issue that brought it down. Those are the traps we had to block. The NEC was the vehicle to shake some of that down."

Indeed, the NEC seems to provide Panetta with the political comforts he misses from his congressional days. "The NEC is kind of my ability to caucus with my committee members from Budget," he says, exploding in laughter. "They're my caucus."

THE LONG AND WINDING ROAD

Panetta's baby-blue wedding-cake office is dominated by a long, narrow mahogany conference table that divides the room. Antique and wobbly, it makes for some sloppy doodles. During staff meetings, Panetta sits facing a stunning series of photographs by the late Ansel Adams, once a constituent and early campaign supporter. The crisp black-and-white portraits depict the Monterey Coast of California: Big Sur, the Carmel Woods, the marina. This was Panetta's majestic, trend-setting district, which he represented for 16 years, a wonder of nature that is part Cannery Row and part Pebble Beach.

Panetta's earliest memory is of washing glasses in his immigrant father's restaurant, which served Fort Ord, a bustling boot camp during World War II. (In Italian, which Panetta still speaks fluently, his family name means "little bread.") His parents had hoped fervently that he would become a concert pianist, but sports and politics won him over in the end. Still, he recently entertained fellow Cabinet members during a retreat with his repertoire of Mozart sonatas and Chopin etudes.

Panetta said that he learned his exhausting work habits from his father, who sold the restaurant and purchased 12 rural acres in the Carmel Valley for farming. Today, Panetta refers to the land, where he makes his home away from Washington, as his "ranch." He may be the only Washington power broker who lives on a road named for his family. ("It makes it easy for me to remember my address," he jokes.) He has three grown sons, one a doctor, one a lawyer and another in law school. "I would not be surprised, ultimately, if one of the two lawyers went into politics," he said, hastening to add, however, that neither he nor his wife have encouraged them
in that direction.

The story of how Panetta, who started out as a Republican, switched parties is something of a minor legend on the east side of the Potomac, flowing as it does from the myth of Richard M. Nixon.

Although the recently mourned President received retrospective accolades for his social vision, the young Panetta fell into disfavor in 1970 because he mistakenly thought he was to enforce Nixon's programs as the director of the Office for Civil Rights in what was then the Health, Education and Welfare Department. Although Panetta officially resigned, he was in fact fired, and
later switched parties as a result.

In a display of combativeness, Panetta wrote in the foreword to Bring Us Together (Lippincott, 1971), which he co-authored with journalist Peter Gall: "What had (Nixon) done to pull white society farther away from black society? Plenty. He had actively courted the worst element of the Deep South. He had unleashed his Vice President, Spiro Agnew, to prey on the fears dividing the nation. He had lowered the priorities for social programs that benefited the poor black and poor white communities...." To this day, Panetta describes himself as a social liberal and fiscal conservative. Using a broad brush, the former Republican is the picture of a New Democrat.

Panetta said that he became interested in budget matters because "it was the one place where you could touch almost every issue."

His first taste of fiscal combat came as a legislative assistant to Sen. Thomas H. Kuchel, R-Calif., who had a seat on the Appropriations Committee. "In those years, a Senator had two LAs, one for foreign affairs and one for domestic," Panetta said. "I covered appropriations and general budget stuff."

Elected to the Budget Committee in his second term in 1979, Panetta was appointed to head a task force on budget reconciliation. Until then, there had never been a reconciliation bill, and thus no enforcement tools with which to manage spending. The recondite process instructs primarily the tax-writing and authorization committees to make the changes needed to "reconcile" laws involving expenditures and revenues with the budget resolution.

Reconciliation rose to prominence during the Reagan years. "I was immediately injected into what quickly became the major issue facing Congress," Panetta recalled. "What's more, I was one of the few guys who understood what reconciliation was."

Masters recalled that one of Panetta's greatest moments on Capitol Hill came during a fight over the spending limits provision of amendments to the 1992 Balanced Budget Act. "Panetta was at his political best. The odds against him were overwhelming. The votes were clearly in place to pass it, but he defeated it right there on the floor. He knew he couldn't demagogue. There were enough demagogues on both sides. His style was quiet persuasion."

Although Panetta had been mentioned as a potential OMB director soon after Clinton's election, the choice came as something of a surprise. During the primaries, Panetta had more often been associated with Sen. Robert Kerrey of Nebraska, and he had criticized Clinton's "Putting People First" program for its rosy budget estimates and inattention to the deficit.

"Just six or seven insiders" guided the selection process that ultimately put Panetta in charge of OMB, according to a White House source. Warren M. Christopher, who led the transition effort, had clear instructions that he was to find a team player. Although it is widely held that the President-elect and Panetta had an immediate rapport, Panetta also got a strong boost from the House leadership. At an evening affair in Arkansas soon after the election, Speaker Thomas S. Foley, D-Wash., Majority Leader Richard A. Gephardt, D-Mo., and Ways and Means chairman Dan Rostenkowski, D-Ill., cornered Clinton to push Panetta for the job.

"This Administration focused very hard on hiring people who could get along with Congress," said Panetta's deputy, Alice M. Rivlin, who was widely thought to be the front-runner for OMB director. "Leon was a terrific choice because he has a lot of savvy about the Hill, as well as very good connections. But most important, it was a good choice because he's Leon."

"HE'S A BULLDOG"

As an organization, OMB suffers from a split personality. Resources, prestige and, thus, power, flow to the budget side. Its staff is often described as an elite. The management half had been viewed as an ideological backwater during the 1980s, though powerful in an almost sinister sense because of its choke hold on regulation.

Recall the brouhaha created by then-Vice President Dan Quayle's secretive Competitiveness Council, which used OMB's Office of Information and Regulatory Affairs to enforce a moratorium on regulation.

Panetta wants to change the imbalance and secretiveness at OMB, but that won't be simple or smooth. "His reorganization plan is a big goddamn bite, and he knows it," said Masters, who helped Panetta to organize a study of OMB's management when Panetta was still in the House.

Management has not been Panetta's strong suit, although when he took aim in Congress at solving what has been a perennially intractable problem for OMB, he threw himself into the effort.

"He really didn't know anything when he started," Masters said, "as opposed to his almost bottomless pit of knowledge about the budget."

The problem for OMB is that budgetary responsibilities have overshadowed such crucial concerns as performance studies and efficiency measures, not to mention more-mundane human resource issues. Of its staff of nearly 550, only about 30-160 (depending on how you count) focus on the M side of the agency's title. In a company town that views size of staff as a measure of power, the numbers tell all.

In a 1991 statement on the House floor, Panetta left no doubt where he stood on the matter. "Today there is the sense that no one is really managing the basic government apparatus in a coherent manner or in a discernible direction," he said. He pointed to the scandal at the Housing and Urban Development Department and the savings and loan debacle as examples of what happens when OMB fails its charge.

At the time, Panetta proposed sawing OMB in two, even as Congress elevated OMB's management function as part of the 1990 Chief Financial Officers Act. Resuscitating OMB's management side has been on every Administration's to-do list since Nixon established the agency to replace the Bureau of the Budget.

Asked during his confirmation hearing whether he would follow through on his congressional proposal to divide OMB, Panetta punted. He quoted then-President-elect Clinton, " It is time to radically change the way government operates -- to shift from a top-down bureaucracy to entrepreneurial government ....' "

What exactly that answer meant didn't surface until this spring, in a document known as OMB 2000. Begun in May 1993 and completed last fall, the report sets in motion a restructuring of OMB that at its heart does just the opposite of what Panetta had proposed as chairman of the Budget Committee.

Instead of "never the twain shall meet," OMB 2000 fuses management and budget into a single function. As the report, which was signed by Panetta and Rivlin, states, "Having led this institution for over a year ... we are convinced that management is integral to budget and vice versa."

"I thought that you would never be able to integrate the two," Panetta explained. He attributes his change of view in large part to the National Performance Review. "The fact that we were stressing management, and that we were going to cut the equivalent of 272,000 full-time employees (throughout the federal government) gave us the momentum." The issue became one of how to run a smaller and less costly agency. "How do you solve that problem? You scream and bitch a lot, but you have to make it work. That's why we had to bring those two elements into one office."

Not surprisingly, OMB 2000 is encountering early skepticism. "If they think there's a serious role for the management side of OMB, they either don't understand management or they don't understand OMB," Joseph White, a management expert at the Brookings Institution, said. "The management of an agency requires an intimate understanding of how an agency functions -- its culture, its task, its workers -- in a way for which OMB examiners are entirely untrained."

In Congress, the jury still seems to be out.

"This is an area of great uncertainty," a Capitol Hill aide said. "No one can say that the restructuring is going to be a success or a disaster at this point. It smacks of some things that were tried in the past and that definitely failed."

Lader's empty seat in the deputy director for management's office created some additional concerns, although in mid-May Clinton announced his intention to nominate John A. Koskinen for the job.

"Leon had been taking a licking for not filling Lader's post," said Allen Schick, a visiting fellow at Brookings who's one of Washington's savviest observers of the budget process. "He paid a price for that." The vacancy was taken as a sign that Panetta didn't have his management team in place, with all that augured for the successful kickoff of the ballyhooed reorganization. As the president of Palmieri Co., a Washington-based asset management firm, Koskinen has a reputation for engineering business turnarounds. With OMB 2000, he will inherit a new and untried program that was designed by others.

Some, however, are more sanguine about the prospects for OMB 2000. "I believe this is going to succeed," an OMBer who worked on the project said. "Panetta and Rivlin really believe in this, and they're committed on a daily basis to drive it through."

The expectation is that if the reorganization is a success, it will begin bearing fruit in the fiscal 1996 budget process. An obvious consequence would be a heavy emphasis on program evaluation. Ostensibly, this would mean that ineffective or redundant programs would be cut or recast. Most of all, leaner times will require more emphasis on efficiency. "In an era where discretionary resources have dried up, we have to focus on management," the OMBer said.

As Masters sees it, Panetta is the key to the success of the reorganization. "What he's trying to do is needed and almost mandatory," he said. "Although I wouldn't be doing it his way, there's a lot of stations to leave from. He'll get there. He's not going to use the budget as a stick to discipline managers. He's not going to try to use management as a savings device. He'll be looking for results. He's a bulldog, and he doesn't quit after the first try."

Although ranked far below his predecessors on the Darth Vader power curve, Panetta has won his fair share of converts in the big battles, where it counts. Without having to prove his proximity to the Oval Office, he's managed to influence the political process.

On the theory that less is more, in an Administration that values powwows over power trips, Panetta has succeeded in selling his philosophy of deficit reduction. Although he is hemmed in by a micromanaging chief executive and hounded by the National Performance Review, the budget director has already made it abundantly clear that it is enough to just be Leon.

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