It was January 1983, and Jim Baker and I were in the third-floor residence of the White House, briefing the President.

"You're telling me this trigger tax is actually going to happen, aren't you?" The President sounded crushed.

"Yes," I answered, "I don't see how it can be avoided."

"Oh darn, oh darn. It just can't be. I never thought it would come to this." Slowly he took out his pen and scratched "RR" on the paper I had brought to him. His 1984 budget was thus approved, calling for a tax increase of $50 billion per year, on top of the large tax increase he had approved just a few months earlier. I had never seen him look so utterly dejected.

Ordinarily, Ronald Reagan was an incorrigible optimist. One of his favorite stories was the one about the two boys getting their Christmas presents. The first boy was a pessimist, the second an optimist. The pessimist gets a roomful of toys. He's miserable, because he's sure there's some catch involved. The optimist gets a roomful of horse manure. He's delighted. He digs around in the room for hours on end. With all that horse manure, he figured there just had to be a pony in there somewhere!

Well, I had just unloaded several tons of horse manure into the Cabinet Room, and it appeared that Ronald Reagan had finally given up looking for the pony. God knows he tried. But now even he understood that major tax increases were needed to restore the Treasury's depleted coffers. Over the previous two months I had given him evidence upon evidence that if we didn't impose this trigger tax, the already frightening deficit would soar to $277 billion by 1986. As it stood now, we would accumulate $1.4 trillion in red ink over five years.

Yet up to now he had stoutly resisted any further tax increase, no matter what the evidence. In his mind, the three-year $100 billion tax increase (TEFRA) that Bob Dole and the College of Cardinals had insisted upon the summer before would be the absolute limit of his retreat. He had accepted that only with great reluctance, as a quid pro quo for additional congressional spending cuts.

But even that had not been enough. Over 1982, as the economy plunged deeper into recession and inflation continued to collapse, our rosy scenario looked less and less rosy. The structural deficit turned out not to be $150 billion, as we had thought during the November 1981 debate, but nearly double that. By the end of 1982, the fiscal situation was an utter, mind-numbing catastrophe.

To convince the President it really was as bad as I was saying, I invented a multiple-choice budget quiz. The regular budget briefs weren't doing the job. I thought this might be the way.

The quiz divided the entire budget up into about 50 spending components and gave him three spending-cut choices on each, ranging from a nick to a heavy whack. Next to each choice was a description of what the impact of the cut would be (how many people would be thrown out into the snow), and of its political prospects (e.g., "previously defeated 27-2 in committee").

The President took the quiz in November 1982. During several long sessions in the Cabinet Room we had gone though all 50 budget components. The quiz allowed him systematically to look at the whole $900 billion budget, to see it brick-by-brick. It also allowed him to get his hands dirty, maybe even bloody, with the practical chore of nitty-gritty cutting. Once the President went through it, he would understand that the budget was not a matter of too many bureaucrats and filing cabinets, but a politically explosive, vast, complex network of subsidies, grants and entitlements. He would see that to cut COLAs by $14 billion meant taking $1,263 a year out of the pockets of 36 million Social Security recipients and several million more military and civilian retirees.

The President enjoyed the quiz immensely. He sat there day after day with his pencil. He listened to his senior staff and the economic team discuss the relevant policy and political ramifications, then announced his choice and marked the appropriate box.

And rarely chose to make a whack. They were mostly nicks. "Yes," he would say, "we can't go that far." Or, "No, we better go for the moderate option or there will be a drumbeat from the opposition."

The last session was on a Friday afternoon. I could tell the President was delighted about having endured the ordeal. It had occasioned a number of anecdotes about the federal monster and he had happily dispensed them to the group assembled at the cabinet table.

When we told him what his grade was early the next week, he was not so pleased. He had flunked the exam. After making all his cuts the five-year deficit remained at a staggering $800 billion.

I went into the meeting in which I would present the President with his grade, thinking, "Well, the moment of truth has finally come." But not yet. I still did not understand how determined the President was to find his pony.

I made sure that his report card highlighted all the positive aspects of the cuts he had made, but it also showed the negative ones, too. Such as the fact that the remaining deficits meant the government would need to borrow over half of the nation's net private savings over the next four years. Such as the fact that under his budget, the total national debt would reach 2 trillion dollars by 1988.ip,1

When the discussion turned to taxes, his fist came down squarely on the table.

"I don't want to hear any more talk about taxes," he insisted. "The problem is deficit spending!"

It is difficult politely to correct the President of the United States when he has blatantly contradicted himself. The $800 billion worth of deficits were the result of the spending he didn't want to cut.

Several days later Dick Darman (deputy chief of staff at the White House) and I were sitting on his office couch wringing our hands, when he suddenly got up and darted for a pad of paper lying on his desk.

"Don't get offended now," he began, "but you might as well know it. When you sit there going over the deficit projections, the man's eyes glaze over. He tunes out completely because he doesn't fully appreciate that the pony is already built into the numbers."

Darman meant that the President did not think in terms of more than one year at a time. He looked only at the current year's deficit numbers and wrote them off as attributable to the recession. He just didn't believe in the over $250 billion figure for the out-years, because he thought the coming economic recovery would drastically shrink the deficit numbers by 1987 or 1988. Never mind that the briefing book already showed that these numbers were based on a booming recovery beginning in 1983 and lasting through the end of the decade.

"The economic assumptions are all right there," I protested to Darman.

"But they're on a different page than the budget numbers," said Darman. "He doesn't make the connection." He sketched furiously on his pad. When he finished, I saw what he was up to, and was chagrined I hadn't thought of it myself.

His sketch showed a chart done in the exaggerated manner of the political cartoonist. At the center were big red bars showing the deficits rising year after year. Off to the side were black bars showing unemployment declining year after year. The President would see his pony (economic recovery and optimism) and the deficits on the same page. It would be impossible to miss the point.

I took the chart in to the next meeting in the Cabinet Room. The President just stared at the first page and turned it. But the next page showed the same point: the spending bar was at 24.5 percent of GNP and the revenue bar with existing taxes was at 18.9 percent of GNP. He turned the page again, and saw the same point again. The deficit bar for 1986 absorbed 72 percent of net private savings, "crowding out investment and economic growth."

And when he turned the page again, there it was again: a bar for the CETA boondoggle under Carter at $9 billion; but the bar for the 1983 enacted budget was only $3.7 billion, meaning we didn't have much left to cut. By contrast, a few pages further the bar for Social Security and retirement programs was $212 billion, or 50 times as high; and basically we had no hope for savings except for the minor trimmings that Jim Baker's bipartisan Social Security Commission was still heatedly debating.

After going through all the pages, the President sat at the cabinet table, staring at the paper, looking concussed. No one in the room seemed to have the nerve to bring up the tax increase issue yet again, and I was weary of being the only person who would. I'd been sure Darman's graphs would finally cause the President to say, "Yes, we do need more revenue." But now there was an awkward silence.

Edwin Meese finally spoke up with the usual solution. "We'll have to go back to the drawing board over Thanksgiving," he said. "And then we'll see where we are in December after the Cabinet comes in with their ideas for new budget savings."

Back to the drawing board! We had all -- the President included -- just spent a full week chained to the drawing board and we still had come out $899 billion in the red.

Over the holidays the President played golf with George Shultz, who by now had replaced the General (Alexander Haig) as Secretary of State. I did not know at exactly which point in their game Shultz mentioned the notion of a flat tax to the President, but the sand trap suggests itself as the perfect setting.

A flat tax would turn the revenue code upside down, slashing rates and eliminating every single deduction, credit, loophole and shelter. But the way Shultz presented it, it sounded like a born-again Laffer curve. The former University of Chicago economics professor told the President that a low-rate tax that treated all income the same way would eliminate the waste and inefficiency caused by tax loopholes. That, in turn, would cause the economy to grow faster and the revenues to increase.

By the 18th hole the President was convinced this was a way to reduce the deficit without increasing taxes. He passed on Shultz's idea to Meese and Don Regan (Secretary of the Treasury), and soon everyone around the White House was talking flat tax. As an economic policy matter, the flat tax is the closest thing to perfection I'd ever seen. But there was one rather major problem with Shultz's brainchild: It would do nothing to reduce the deficit.

Yet to the President, the proposal seemed to indicate that his beloved pony might be lurking down there beneath the manure after all.

"No," he said, "the flat tax is something we could go for. It wouldn't be a new tax, it would be a lower tax."

The usual heads started nodding, and I saw what was coming; another back-to-the-drawing-board session. It was now only a matter of days before the budget had to go to the printer, and somehow this fuzzball of a flat tax was supposed to sop up $1.1 trillion of red ink.

Martin Feldstein, the Harvard economist,sw,-2 sk,2 ld,10 had by now replaced Murray Weidenbaum as chairman of the Council of Economic Advisors. When he caught up with me after the meeting, he looked a little shocked. Poor Marty was new to this sort of "thinking."

"They don't actually believe this mumbo jumbo, do they?" he asked, in the hope I might reassure him that he had not signed on for duty in a lunatic ward.

Later Darman and (Jim) Baker (White House chief of staff) started to get worried that "flat tax" had a politically dangerous implication to it. They were right, it did. It meant we were fixing to cancel the mortgage deduction and tax the welfare checks of blind people. So Shultz's original flat tax idea was packed off to Siberia, in this case a "deep study mode" at Treasury with a view to "broadening, simplifying and reforming the income tax."

My $50 billion "thing" was officially rechristened a "contingency tax," which would be put in the budget as a "modified magic asterisk." It would reduce the deficit -- on paper, that is. Meanwhile the White House would propose no legislation to enact it until Congress had first approved the entire pathetic sum of additional spending cuts we were sending it. In that improbable event, we would then recommend a combination of income surtax and a tax on crude oil so as to raise the $50 billion in revenue.

That day in January as Jim Baker and I sat in the residence, I explained to the President that the conditions which would forestall the tax increase just weren't going to happen. When he reluctantly scratched his initials at the bottom of the budget, I was sure that he had at last given up his search for the pony.

Once again, I was wrong. It took a magnificent episode of sheer bungling by the California Reaganaut trio of Ed Meese, Cap Weinberger and Bill Clark to do it, but soon we were back digging in the manure looking for that pony again.

When the President's 1984 budget was released on January 31, 1983, I thought we had finally succeeded. The White House was now sending Congress the unmistakable signal that we were trying everything we could to fight the deficit. We had proposed about $95 billion in 1986 deficit reduction, consisting of $50 billion in contingency tax revenues, $35 billion in domestic cuts and $10 billion in defense savings.

That was a powerful inducement to get the politicians to play a serious game of budget Ping-Pong with us. After a lot of negotiations, mixing and matching, we would end up with a deficit reduction package of $100 billion, including a major tax increase that was sure to be triggered.

So far, so good. But I had not taken into account Cap Weinberger's intractability, and he was now about to give the term a resonance it had not enjoyed since the stonewall days of Watergate.

When Weinberger and I had made our calculations on my pocket calculator many moons ago, we had come up with a 1986 defense budget of $367 billion. That figure, of course, had assumed an average inflation rate of 7 to 8 percent annually. But inflation was now running at under 4 percent, so I was simply going to ask Cap to give the difference back, lest the Pentagon reap a windfall budget increase from the miscalculation. It would not affect defense's "real" growth at all, obviously.

Informed of this, Weinberger turned to the President and launched into a speech I had heard before. A feeling of heaviness came over me.

I recalled another meeting two years earlier where Weinberger and I were presented our Defense Department proposals to the President.

Weinberger went first, and had he come prepared! The Pentagon's graphics display department had obviously been working overtime. Madison Avenue ad agencies can be pretty slick, but I doubt they could match what DOD had cooked up for this meeting.

Weinberger launched gleefully into his presentation. He talked and pointed, as an aide changed the charts on the easel. There were so many of them the aide worked up a pretty good sweat by the time the show was over.

One of the real eye stoppers was a chart showing an overlay of a Soviet tank factory on top of a map of Washington, D.C. It covered the whole Mall, from the Capitol to the Lincoln Memorial and then some. The arsenal of Marxist-Leninism was larger than the heart of the capital of the free world! Great pitch -- only I wasn't proposing to cut a single tank out of this budget.

Still another chart compared the Soviets' two new strategic bombers, the Backfire, which was already deployed, and a new giant bomber in development. Our side of the chart showed the aging U.S. B-52.

"Sir, our planes are older than their pilots," Weinberger reminded the President. The President nodded. But I wasn't cutting bombers either.

His briefing was a masterpiece of obfuscation. Incredibly, Weinberger had also brought with him a blowup cartoon. It showed three soldiers. One was a pygmy who carried no rifle. He represented the Carter budget. The second was a four-eyed wimp who looked like Woody Allen, carrying a tiny rifle. That was -- me? -- the OMB defense budget. Finally, there was G.I. Joe himself, 190 pounds of fighting man, all decked out in helmet and flak jacket and pointing an M-60 machine gun menacingly at -- me again? This imposing warrior represented, yes, the Department of Defense budget plan.

It was so intellectually disreputable, so demeaning, that I could hardly bring myself to believe that a Harvard-educated Cabinet officer could have brought this to the President of the United States. Did he think the White House was on Sesame Street?

. . . This time, Weinberger began his speech with, "Sir, you're the Commander-in-Chief and we will manage with any figure you give us. But you should be aware there would be a serious risk in making any cuts."

I couldn't believe I was hearing this. How was an unneeded inflation allowance supposed to stop Soviet tanks? But the President did not grasp the difference between constant dollars and current (inflated) dollars. Weinberger and I engaged in our usual pushing and shoving and by the end of it I managed to get back $11 billion. That brought the 1986 defense figure down to a mere $356 billion.

It also brought down the roof on Capitol Hill. With inflation so dramatically down, the Pentagon only needed $340 billion to buy what we had earlier assumed would cost $367 billion. Thus facing unprecedented deficits, we had actually managed to increase the defense budget in constant dollars.

By March, Pete Domenici and the Senate Budget Committee had given the Pentagon a 12 percent real increase in both 1981 and 1982, and one of 8 percent in 1983. For 1984-86, Domenici's Committee was drawing the line at 5 percent. It was perfectly reasonable. After adjusting for inflation, the Pentagon would still be receiving 95 percent of its original 1986 defense budget. This could hardly be called "gutting defense."

Enter the President's new director of the National Security Council, William "Judge" Clark.

He proceeded to get the President stirred up about Weinberger's no-longer-needed inflation allowance, and then, without bothering to inform those to whom the budget was more than a passing concern, Clark had the President call Domenici and insist that he not do anything about his budget plan for several weeks. A nationwide TV address was then scheduled -- so the President could take his case for a strong defense to the American people.

"The boss is going to lay it on the line," Clark began telling everyone around the White House. "Those Republican senators will be back on the team by Easter." He also hinted that there would be a "little surprise" in the speech that would leave all those defense cutters on the Hill swooning and gasping with admiration.

On the night of March 23, amid great speculation, the President gave his big speech on defense.

The big surprise Judge Clark had been telling everyone about came in the last few minutes, when the President unveiled his Strategic Defense Initiative, the space-based anti-missile defense system that shortly became known as "Star Wars."

Whatever its merits, "Star Wars" was rather dramatically beside the immediate point. We were about to take the 1984-88 defense budget to Capitol Hill, and now the President had, in a fairly spectacular way, taken the debate over Congress's head -- all the way to outer space.

Domenici was livid. The entire Senate Budget Committee was livid. They had accommodated the White House so as to give the President time to rally the nation behind a larger defense budget figure, which Domenici was perfectly willing to entertain as long as someone would rustle up the necessary votes on his Committee. Instead, Clark's surprise had opened up an instant, raging debate over strategic weapons doctrine in such a way as to rupture a 20-year-long consensus on strategic deterrence policy.

After Easter, there were no more votes for the administration's defense budget among the Senate Budget Committee Republicans than there had been before. Howard Baker now smelled a good-sized collision coming between the Budget Committee and the White House, so we began to promote what became known as the "Howard Baker compromise."

On the surface, it seemed plausible enough; what it brought about was near-insanity. It called for real defense growth of 7.5 percent in 1984 and a slightly lower rate of increase in the out-years. Being approximately halfway between our requested 11 percent and the Senate Budget Committee's 5 percent, it was the natural point of compromise.

Howard Baker scrambled about trying to find takers.

Howard Baker (in April 1983) met with the President privately and warned him, flat out, that his 7.5 percent compromise was going to be looking pretty good a few months from now, compared with what a hopping mad Senate might do on its own. Reluctantly, the President told Jim Baker and Clark that he would go along with the Baker compromise if Cap Weinberger would agree to it.

That same morning I got a message from Domenici saying that his Committee had run out of patience. They were going to vote out his $100 billion per year deficit reduction plan -- including the 5 percent defense growth -- by the end of the day unless they heard the President had publicly endorsed Howard Baker's compromise.

I immediately alerted Jim Baker and Judge Clark that we had to get Weinberger to sign off on the compromise right away. Around noon I went over to Clark's office in the basement of the West Wing. All he had to do was find Weinberger.

Clark could not raise the Secretary of Defense. Finally he left an "urgent" message at the Pentagon requesting an "immediate" return call.

Had he explained just how urgent it was? I demanded. Yes, he'd explained. If his message had been any more urgent, Cap might have thought he was calling about a surprise nuclear attack.

The clock kept ticking . . . 2:00 p.m., 3:00 p.m., 4:00 p.m. . . . and still no return call from the Secretary of Defense to the National Security Advisor. Incredible, I thought. What if it were a surprise attack?

We finally got word that Weinberger had been found -- not by the multi-billion-dollar ultra-secure defense communications system. No, a White House secretary had spotted him sitting serenely in the Oval Office anteroom waiting for a scheduled photo session with a group of military academy cadets, right next to the jelly bean jar. Clark was brought up to talk to Weinberger, who then agreed to step into the Oval Office and tell the President that the Howard Baker compromise was okay. But it was too late. When the President finally reached Domenici, his Budget Committee was out of control. The Committee voted out the 5 percent defense plan and adjourned.

In the following days and weeks, the White House put out a new line, fulminating against the "Domenici double-cross." Another game of Ping-Pong was over; the contingency tax was dead; the nation was guaranteed $200 billion per year of deficits for the foreseeable future. Weinberger's unreturned phone call may have been the costliest in history.

* 1986 by David A. Stockman. From the book "The Triumph of Politics: Why The Reagan Revolution Failed" by David A. Stockman. Published by Harper & Row, Publishers Inc.

Distributed by Los Angeles Times Syndicate

Next: The Coming of the New Order