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The decisive meeting occurred Tuesday after the market close. James Baker, by then back in his Treasury office after having cut short his trip to Europe, first called in Howard Baker, Greenspan and Sprinkel to coordinate what they would tell the President. Then, joined by Duberstein, they went upstairs in the White House to the brightly colored West Sitting Room, which the Reagans use as a living room. James Baker opened by telling Reagan that the world seemed to be looking for some movement on the President's part, and the quickest way he could display leadership was by reaching a compromise with Congress on reducing the budget deficit. Everyone knew that would have to include a tax increase.
Greenspan, who had been an informal economic adviser to Reagan before the President chose him to head the Federal Reserve, voiced a somewhat perverse but effective argument: in effect, the only way to keep taxes low was to agree to raise them a bit. If there was no budget compromise with Congress, he said, the financial markets might continue to weaken and the economy might take a real turn for the worse. That, he continued, might give the Democrats enough political clout to shove through a big increase severely trimming back Reagan's cherished tax cuts, either by ramming one through over the President's veto or by winning the 1988 election and enacting a stiff boost after Reagan left office. The President showed great reluctance to accept the advice that he should compromise on a modest boost now. But, says one participant, eventually the "President bought the ((Greenspan)) argument that if the economy goes down the tubes you lose the whole thing, the whole legacy."
Even so, the two Bakers had to argue further on Thursday to cement Reagan's agreement to state in his press conference that night that he would put everything on the table in budget discussions with congressional leaders. But as the President began speaking, advisers who had coached him were concerned that he would take back that pledge almost immediately after making it. Their fear was that once Reagan got past his prepared statement and started answering reporters' questions, he would go on automatic pilot and repeat all his standard denunciations of taxes. In fact, Reagan once or twice started to do exactly that but caught himself before going too far. Said an adviser the next day: "He almost blew it. He came very close."
But he did not blow it, and the budget negotiations were set to begin early this week. It should not take long to find out whether some agreement can be reached. Even if a renewed market decline does not force a quick resolution -- and one very well might -- the talks will be racing a deadline of sorts. If a budget compromise is not worked out and enacted by Nov. 20, some $23 billion of automatic spending cuts go into effect under a modified version of the Gramm-Rudman Act. They would slash away with idiot impartiality at defense and social spending, at good programs and bad. And that would just about end any chance that Washington would give the stock markets the signal they yearn for.