The Price of Politics

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CONTENTS

Author’s Personal Note

Note to Readers

Cast of Characters

Prologue

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Chapter 16

Chapter 17

Chapter 18

Chapter 19

Chapter 20

Chapter 21

Chapter 22

Chapter 23

Chapter 24

Chapter 25

Chapter 26

Chapter 27

Chapter 28

Chapter 29

Chapter 30

Chapter 31

Chapter 32

Chapter 33

Chapter 34

Chapter 35

Chapter 36

Chapter 37

Chapter 38

Chapter 39

Chapter 40

Afterword

Acknowledgments

Photographs

About the Author

Photography Credits

Chapter Notes

Index

To Benjamin C. Bradlee

AUTHOR’S PERSONAL NOTE

I had two terrific people assist me full-time on this book: Rob Garver, a 20-year veteran reporter and editor, spent just six months on this project, coming to work for me in February 2012. I call him the workhorse who energized and focused me. Determined and fair-minded, he did at least two days’ work in each single day. He never wasted a minute as best I can tell. His mature insights, skills and willingness to tell me no when it was needed kept us on track. Rob, 43, is one of the best natural editors and reporters I have ever worked with. He graduated from the University of Vermont and has a master’s degree from the Georgetown Public Policy Institute. His sophisticated understanding of business, banking and policymaking guided me at every step. He quickly grasped the story we were trying to get and went after it. He is a delight in every way, enduring a long commute each day to and from Springfield, Virginia, where he lives with his two sons, Ryan and Andrew. Several mornings each week, he arrived at work by 6:30 a.m., before the newspapers. Without Rob, this book never would have been completed—not even close.

Evelyn M. Duffy, who worked with me on two previous books, The War Within and Obama’s Wars, continued on this third book. I will say it again, Thank God. Now 27, she is a lady of balance and levelheadedness. She again transcribed hundreds of hours of digitally recorded interviews with President Obama and top White House and congressional officials. Her editing skills have grown immensely. What seems a decent draft will come back to me covered in countless marks as she identifies inconsistencies, factual errors and grammatical problems. She can find any person and almost any information. Evelyn graduated from George Washington University in 2007 with a degree in English and creative writing. Her work and presence are marked by grace, kindness and integrity. She is smart, practical and knows how to enjoy a good laugh. No one I have ever worked with of any age has more common sense. I thank her with gratitude. Without her efforts and wisdom we would never have finished.

NOTE TO READERS

Nearly all the information in this book comes from interviews with key White House and congressional officials. Some provided documents, contemporaneous meeting notes, working papers, diaries, emails, transcripts and chronologies. Democrats and Republicans cooperated in about equal amounts.

This book examines the struggle between President Obama and the United States Congress to manage federal spending and tax policy for the three and one half years between 2009 and the summer of 2012. More than half the book focuses on the intense 44-day crisis in June and July 2011 when the United States came to the brink of a potentially catastrophic default on its debt.

Most interviews were conducted on background, meaning the information could be used in the book but none of the sources would be identified by name. Many sources were interviewed multiple times, and nearly all allowed me to digitally record our interviews. These recordings produced transcripts that run to thousands of pages. In all, more than 100 people were interviewed for this project.

Three key figures spoke to me on the record. I interviewed President Barack Obama for 1 hour and 25 minutes in the Oval Office on July 11, 2012; House Speaker John Boehner in his Capitol office on June 8, 2012, for 1 hour and 25 minutes; and Senate Minority Leader Mitch McConnell at his Capitol office for an hour on July 12, 2012.

As much as possible, I have tried to preserve the language of the main participants by quoting them directly or using their words to reflect their speech and attitudes. Verbal exchanges were checked and rechecked with participants as much as possible. No reporting can provide the equivalent of a perfect engineer’s drawing of events. This is the best obtainable version, and it is impossible to do this work and not realize—and be humbled by—what you have not discovered and do not know.

Any attribution of thoughts, conclusions or feelings to a person comes from that person directly, from notes, or from a colleague whom the person told.

In the course of such an in-depth immersion in the decision making during such a crisis, the attitudes of the players become clear. Occasionally, a person said something was off the record, meaning it could not be used unless the information is obtained elsewhere. In many cases, I was able to get the information from others so it could be put in this book. Some people think they can lock up and prevent publication of information by declaring it off the record or by saying that they don’t want to see it in the book. But in the White House and Congress, nearly everyone’s business and attitudes become known to others. And in the course of extensive interviews with firsthand sources about key decisions, the role and goals of the major players become clear.

Bob Woodward

July 14, 2012

Washington, D.C.

CAST OF CHARACTERS

THE PRESIDENT OF THE UNITED STATES

Barack H. Obama

VICE PRESIDENT OF THE UNITED STATES

Joseph R. Biden

Ron Klain, chief of staff (to January 14, 2011)

Bruce Reed, chief of staff (January 14, 2011–present)

SECRETARY OF THE TREASURY

Timothy Geithner (January 26, 2009–present)

WHITE HOUSE ECONOMIC TEAM

Director, National Economic Council

Larry Summers (January 20, 2009–December 31, 2010)

Gene Sperling (January 20, 2011–present)

Director, Office of Management and Budget

Peter Orszag (January 20, 2009–July 30, 2010)

Jack Lew (November 18, 2010–January 27, 2012)

WHITE HOUSE STAFF

Chief of staff

Rahm Emanuel (January 20, 2009–October 1, 2010)

William Daley (January 13, 2011–January 27, 2012)

Jack Lew (January 27, 2012–present)

Senior adviser to the president

David Plouffe

Director of legislative affairs

Rob Nabors

Director of communications

Dan Pfeiffer

Press secretary

Jay Carney

THE SENATE

Majority Leader

Harry Reid, Democrat of Nevada

David Krone, chief of staff

Minority Leader

Mitch McConnell, Republican of Kentucky

Rohit Kumar, domestic policy director and deputy chief of staff

Senators

Max Baucus, Democrat of Montana, chairman, Finance Committee

Kent Conrad, Democrat of North Dakota, chairman, Budget Committee

Dick Durbin, Democrat of Illinois, Majority Whip

Jon Kyl, Republican of Arizona, Minority Whip

Patty Murray, Democrat of Washington State, supercommittee co–chair

THE HOUSE OF REPRESENTATIVES

Speaker of the House (to January 2011)

Nancy Pelosi, Democrat of California

Speaker of the House (January 2011–present)

John Boehner, Republican of Ohio

Barry Jackson, chief of staff

Brett Loper, policy director

Kevin Smith, communications director

Michael Steel, press secretary

Majority leader

Steny Hoyer, Democrat of Maryland (to January 2011)

Eric Cantor, Republican of Virginia (January 2011–present)

Steven Stombres, chief of staff

Neil Bradley, policy director

Brad Dayspring, communications director

Members of the House

Dave Camp, Republican of Michigan, chairman, Ways and Means Committee (January 3, 2011–present)

Jeb Hensarling, Republican of Texas, supercommittee co–chair

Kevin McCarthy, Republican of California, Majority Whip (January 2011–present)

Paul Ryan, Republican of Wisconsin, chairman, House Budget Committee (January 3, 2011–present)

Chris Van Hollen, Democrat of Maryland, ranking member, House Budget Committee (January 3, 2011–present)

NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM

Co–chairmen

Alan Simpson, former Republican senator from Wyoming

Erskine Bowles, Democrat, former chief of staff to President Bill Clinton

PROLOGUE

The lavish dinner at the Capital Hilton Hotel in downtown Washington on the evening of Saturday, March 11, 2006, was about the last place you would expect to find him. But there was Barack Obama, age 44, the junior senator from Illinois for only the last 14 months, in formal white-tie with tails and very much at ease in the crowd of 600. His trademark smile, broad and infectious, dominated his face as I met him for the first time.

We were at the annual Gridiron Club dinner—a rite of passage for national political figures such as Obama. The crowd included President George W. Bush and most of the major politicians in Washington. It was one of Senator Obama’s maiden voyages into the unsavory belly of the Washington beast. Bush was to speak for the Republicans, and Obama had been selected to speak for the Democrats.

Founded in 1885, the Gridiron—named because its motto was to singe but not burn—had the reputation of being an old-school event of in-jokes, skits and music that seemed more fitted to a bygone era.

You’re from Wheaton, Illinois, Obama said to me, referring, unprompted, to the small town where I was raised in the late 1940s and ’50s. Wheaton, 25 miles west of Chicago, is home to Wheaton College, best known for its alumnus evangelist Billy Graham, whose influence permeated the town.

I’ll bet you didn’t carry Wheaton, I said confidently, referring to his Senate race 16 months earlier. A bastion of Midwestern conservatism and country-club Republicans, Wheaton was the most Republican town in the country in the 1950s, or at least regarded itself that way.

I carried DuPage County by 60 percent! Obama responded, beaming that incandescent smile. Wheaton is the county seat of DuPage.

I said that seemed utterly impossible. That couldn’t be the Wheaton or DuPage I had known.

Obama continued to smile me down. The certainty on his face was deep, giving me pause. Suddenly, I remembered that Obama’s opponent for the Senate seat had been Alan Keyes, the conservative black Republican gadfly. Keyes had substituted at the last minute for the first Republican nominee, who withdrew from the race when divorce and child custody records revealed that he had taken his wife to sex clubs in New York, New Orleans and Paris.

Well, everyone who runs for office should have Alan Keyes as their opponent, I said, trying to hold my ground.

Obama smiled some more—almost mirthful, yet unrevealing. The conversation turned to Illinois politics, and Obama ticked off the areas where he had strong support—Chicago, the labor unions—and weak support, downstate and the farm areas. He defined the categories skillfully, expanding on the state’s interest groups and voting blocs. He made it clear he knew where he had work to do.

He sounded like a graceful old-fashioned pol. Though he had carried DuPage by 60 percent, he had won 70 percent of the statewide vote.

His wife, Michelle, stood by his side in a stunning gown. But the focus and the questions from people crowded around were all directed at the dazzling new star.

• • •

When he appeared at the podium several hours later, Obama stood perfectly erect, projecting radiant confidence.

This is a true story, he said.¹ A friend sent me a clip about a new study by a psychologist at the University of Scotland who says sex before a public speaking engagement actually enhances your oratorical power. I showed this clip to Michelle, before we arrived here tonight. She looked it over, handed it back and said, ‘Do the best you can!’

The laughter ignited instantly.

This appearance is really the capstone of an incredible 18 months, he said, citing the keynote speech at the Democratic National Convention in 2004, cover of Newsweek, a best-selling autobiography, Dreams from My Father, a Grammy award for reading the audiobook. Really what else is there to do? Well, I guess . . . I could pass a law or something.

The self-deprecation played well.

Referring to Senator John McCain’s positive treatment by the press up to that point, Obama said, Some of my colleagues call John a prima donna. Me? I call him a role model. Think of it as affirmative action. Why should the white guys be the only ones who are overhyped?

The self-awareness played smooth.

Noting the speculation that the 2008 presidential campaign could come down to McCain, a maverick Republican, versus Senator Hillary Clinton, he said, People don’t realize how much John and Hillary have in common. They’re both very smart. Both very hardworking. And they’re both hated by the Republicans!

This played bipartisan.

Obama turned toward President Bush, who was on the stage nearby. "The president was so excited about Tom Friedman’s book The World Is Flat. As soon as he saw the title, he said, ‘You see, I was right!’ "

The joke played confident.

I want to thank you for all the generous advance coverage you’ve given me in anticipation of a successful career. When I actually do something, we’ll let you know.

The audience clapped and hooted in delight.

After dinner the buzz was like a chain reaction. Not only could this young Obama tell a joke on himself, with the required self-effacement, but he had remarkable communications skills. An editor at The Washington Post once said that journalists only write two stories: Oh, the horror of it all, and Oh, the wonder of it all. Obama was the wonder of it all that night and he basked in the attention he had captured. Rarely have I seen anyone manage the moment so well. He had frankly and forthrightly trumpeted his lack of accomplishment, and the roomful of egos ate it up. But if he had done nothing much so far, why was he there? Why the buzz? The approbation? What exactly was being measured?

It was the dramatic impact he was having on his audience. The triumph was the effect.

Twenty-five years earlier in 1981, I had attended a Gridiron dinner where the speaker for the Democrats was Senator Daniel Patrick Moynihan, the bookish intellectual who had served in prominent posts in both Republican and Democratic administrations. Moynihan, then 53, made some good jokes, but his theme was serious: what it means to be a Democrat. The soul of the party was to fight for equality and the little guy, he said. The party cared for the underdogs in America, the voiceless, powerless and those who got stepped on. It was a defining speech, and the buzz afterward was that Moynihan was going to be president. He wasn’t, of course. That was then, this was now.

Obama had not once mentioned the party or high purpose. His speech, instead, was about Obama, his inexperience, and, in the full paradox of the moment, what he had not done.

Two and a half years later, he was president-elect of the United States.

1

Two weeks before their inauguration, President-elect Barack Obama and Vice President–elect Joe Biden headed to Capitol Hill to meet with the Democratic and Republican leaders of the House and Senate. It was 3:15 p.m. on Monday, January 5, 2009, and Obama was fresh from a 12-day Hawaiian vacation.

The leaders gathered in the ornate LBJ Room of the Senate decorated with a painting celebrating the laying of the first transatlantic cable. In it, the allegorical figures of Europe and America joined hands in friendship across the ocean.

As if in that spirit, Obama called on the group to work together across the partisan divide to address the looming economic crisis.

Action on our part is urgent, he told them. Unemployment was at 7.2 percent and rising, and the economic situation was threatening to get worse with the financial system in full-blown crisis. He wanted the Congress to quickly pass an economic stimulus package in the range of $800 billion to $1.3 trillion.

It would include some tax cuts—sweet music to the Republicans—and some investment, such as spending on roads, buildings and other job-creating projects. In addition, he said, they had to build in medium- and long-term fiscal discipline to tame the growing federal deficit.

Looking at the four Republican leaders—the GOP was in the minority in both houses of Congress—Obama reached out.

I want everyone’s ideas, he said. But we can’t get into political games.

Nancy Pelosi, the California Democrat and speaker of the House, interjected, I come to Washington to work in a bipartisan manner.

Both Republicans and Democrats stifled chuckles. Pelosi, a 12-term veteran of Congress and the first female speaker, was notably partisan in her leadership of the 257 House Democrats. She had been born into Democratic politics. Her father was a congressman from Maryland and both her father and brother served as mayor of Baltimore.

We’re in a unique situation, said Harry Reid, the soft-spoken but combative Senate majority leader. The son of a miner, Reid had grown up in the tiny town of Searchlight, Nevada, without electricity or indoor plumbing. A former amateur boxer who had faced down organized crime bosses while chair of the Nevada Gaming Commission, Reid avoided declarations about bipartisanship, adding simply, I want to work.

The Senate Republican Minority Leader Mitch McConnell spoke next. At 66, a veteran of five terms representing Kentucky in the Senate, McConnell was known for the ruthlessness with which he ruled the Senate Republican minority. He cut straight to his suggestions.

I like the idea of tax cuts, he said. But we should also take a look at the money the federal government pays to the states for programs like Medicaid, the health insurance program for the poor. Beloved by the Democrats, Medicaid cost the federal government more than $250 billion a year. Perhaps, he suggested, we should treat that money as loans instead of outright grants. Having to pay the money back would make the states more judicious in spending it, he said.

Obama seemed receptive. If it works, we don’t care whose idea it is, he said evenly.

John Boehner, the leader of the House Republican minority, came next.

Tanned from many hours on the golf course, Boehner (pronounced BAY-ner) spoke in a casual Midwestern baritone roughened by years of incessant cigarette smoking. At age 59, he was beginning his 10th term as congressman from his largely suburban district in southwestern Ohio. The second of 12 children, Boehner had grown up working in a bar owned by his grandfather, and was the first person in his family to attend college, working his way through Xavier University in Cincinnati to earn a degree in business administration. The minority leader was a conservative and ardently pro-business, but not an ideologue. A force for moderation, who had forged agreements with Democratic icon Ted Kennedy on education, Boehner understood that the secret to getting anything done in Washington was the ability and willingness to cut deals.

Boehner knew how to tend to personal relationships and, unlike many of his colleagues, was not a workaholic. Informal and on the surface accessible to colleagues and press, he liked to tease fellow congressmen and staff, and enjoyed a glass or two of red wine at the Republican Capitol Hill Club in the evening.

A stimulus package would have to go through the congressional committees to ensure transparency, Boehner said, but he agreed they could not tolerate unnecessary delay. The economy is in unprecedented turmoil.

No one needed to spell out the political risks of passing a new stimulus bill, but Obama said he thought there was a lesson to be learned from TARP, the Troubled Asset Relief Program, which had passed in the last months of the Bush presidency. TARP was controversial and dauntingly complex, a $700 billion temporary bailout for the banks—money that was supposed to be paid back. If the public doesn’t know what the money is for, the president-elect said, citing TARP, it’s a big problem.

He pledged to personally sell the stimulus package to the American people as something that would help everyone. At the moment, Barack Obama, president-elect, was the most famous and possibly the most admired political figure in the world. The Republicans were a dispirited lot. Political writers were speculating that the GOP might devolve into a regional party representing mainly Southern whites as the Democrats ascended to permanent majority status. Obama held all the cards. How would he play his first hand?

There will be times, he said cordially, when we will want to bulldoze each other.

True, all knew.

This isn’t one of those times, he said.

Time frame? asked Boehner.

Have to get it done before Presidents Day recess, Obama said, referring to a four-day break in the congressional schedule that was to begin in six weeks.

We understand the gravity, added Vice President–elect Biden, suggesting that they could work seven days a week on the stimulus package.

Senators McConnell and Dick Durbin, the Democratic whip, joked that they would not work weekends.

What about the thousands of homeowners who owed more on their mortgages than their homes were worth? asked Durbin.

We will not roll out an aggressive housing plan, Obama said, and it would not be part of the stimulus bill. The housing problem was massive and baffling, and none of them had solid ideas for fixing it.

Then Virginia Representative Eric Cantor spoke up. Cantor was the minority whip, and the title suited him—thin and taut, he was quick with stinging partisan sound bites and was a fast-rising figure in Republican national politics. He had trained as an attorney and worked in his family’s real estate firm in Richmond for a decade before entering politics in the early 1990s. Now he was the House Republicans’ vote counter and disciplinarian. He made it his business to be closely tied in to all the GOP House members and had especially strong links to the ultraconservative wing of the party.

Fear is grasping the country, Cantor said, giving voice to something everyone in the room already knew. People were worried that they might lose their jobs. But there was a parallel concern that affected them all, A fear of Washington. It was a familiar Republican talking point.

We need to do something bold that says we are not wasting their money, Cantor urged. There was little public confidence in government, so the only solution would be full transparency.

After the meeting, Obama approached the Republican House leaders, Boehner and Cantor. I’m serious about this, he told them. Come with your ideas.

Steven Stombres, Cantor’s chief of staff, left the meeting with conflicting emotions. A former Army Reserve intelligence officer with a shaved head and a military bearing, Stombres was impressed. If this really was a bipartisan coming together it was precisely what the country needed at such a critical time, and as a citizen he found it genuinely inspirational. As a Republican, though, he was worried: If Obama followed through on this promise of political togetherness, Republicans would be in bad shape.

Phew, Cantor said afterward, we may be in this minority for a while.

After the meeting, Senator McConnell told reporters, I thought the atmosphere for bipartisan cooperation was sincere on all sides.² The Republican leader said of Obama, I think he’s already been listening to the suggestions we’ve made.

Reid and Pelosi seemed almost giddy. Pelosi announced that it was a new day in the capital.³

• • •

Obama’s stimulus package, meant to jump-start the failing economy, had been in the works for weeks. His chief economic advisers had been working on it since the election.

Larry Summers, the incoming head of the National Economic Council, which coordinates all administration economic policy, supported instant additional spending of hundreds of billions of dollars.

A former treasury secretary in Bill Clinton’s administration, the brusque Summers was better known for his brainpower than his people skills. He had hesitated to take the job as Obama’s NEC head, viewing it at first as a step down from his previous job running the Treasury Department. In the end, he had relented under the combination of pressure from Obama and the urging of friends, including former Federal Reserve Board Chairman Alan Greenspan, who assured him that the job could offer him more influence than he realized.

In Summers’s view, the economic problem was lack of demand: Not enough people were spending money on goods and services. The administration had to stimulate consumer spending. He later described it to others in simple terms: We didn’t have jobs because we didn’t have demand. And if we didn’t get more demand, we weren’t going to get more jobs. And if we did get more demand, we would get more jobs.

Worried about the cost of a stimulus package, Obama wondered what else could be done. What about accelerating job training, strengthening employment services, and reforming unemployment insurance?

Demand is the big elephant in the room, Summers insisted.

Obama didn’t like that answer, but finally came to accept it.

• • •

In the weeks before the election, Obama was interviewing candidates for the all-important post of treasury secretary. While in New York, he met with Timothy Geithner, the head of the Federal Reserve Bank of New York, who had been a key figure in stabilizing the U.S. economy after the 2008 financial crisis.

The two had not met before. Geithner, who was 47 but looked a decade younger, launched immediately into a well-rehearsed, five-point argument on why he should not be picked.

One, I promised my kids I wouldn’t move them again. Two, we’re at a moment of national crisis. I’m not a public figure. You need to have a public figure people have seen before in this context, because it matters hugely. Three, there are better-qualified people than me for this. Four, at some point the U.S. will have solved the financial crisis, and you’ll be left with a whole set of other challenges that I’ve not spent my life thinking about. And fifth, he said, I’m up to my neck in this crisis, as you know. And I’m going to carry with me all those decisions. And you may need to have some separation from those decisions. It’s harder for you if you choose me. Because I’m not going to walk away from them.

It was a brilliant case against himself—precisely the kind of analytical power that appealed to Obama. After the election, he picked Geithner.

• • •

Obama selected Peter Orszag as director of the White House Office of Management and Budget. Just a few weeks past his 40th birthday, Orszag was a summa cum laude graduate of Princeton with a Ph.D. in economics from the London School of Economics. He was tall, gangly and brilliant. Obama had plucked him from his position as head of the powerful and independent Congressional Budget Office, which Orszag had held for nearly two years.

Unlike Summers, Orszag and Geithner did not believe the need to increase demand trumped all other policy priorities. Both recognized the need for a stimulus, but resisted the idea of a package that might last for more than two years. They were facing contradictory policy requirements: spend more quickly, but address the long-term deficit of hundreds of billions of dollars per year.

In one early memo, the team advised Obama that there was no danger of too much stimulus, or spending too much money in the first year. The question was: How do you make it politically salable?

Once he accepted the need for a huge infusion of public spending, Obama began to see it as an opportunity—a chance to invest in projects like high-speed rail, visionary environmentalism and innovation-related projects.

A lot of that is going to take seven years to happen, Summers pointed out, splashing cold water on Obama’s big dreams. Big visionary things just take a long time.

The Hoover Dam, which had employed thousands of workers during the Great Depression, had taken five years to build, Biden reminded them.

Obama wanted to pull the Band-Aid off fast, as he put it. Let’s do whatever needs to be done, but let’s not keep at this for five years. He made it clear he wanted to pivot as soon as possible from rescue to a broad kind of economic renewal. He thought and spoke in terms of FDR, and some in the White House wondered if he had Roosevelt envy.

Comprehensive health care reform, though, remained his priority. The world knew that from his campaign. What the world didn’t know was that his top advisers, led by incoming chief of staff Rahm Emanuel, disagreed, arguing that it would require too much effort. Survival had to come first.

But to Obama, health insurance for everyone as a new entitlement was the major unfulfilled task of the political movement of which he was a part and now led.

It was now or never, he said. So it would be now.

• • •

Later, Cantor approached Emanuel, who had been No. 3 in the House Democratic leadership before joining the incoming administration. Is this bipartisanship stuff for real? he wanted to know.

Wiry and intense, Emanuel was seen as something of a political bodyguard for the relatively inexperienced Obama. A veteran of the Clinton White House before his own election to Congress in 2000, he had a varied background. He had been a serious ballet dancer as a young man, and served as a civilian volunteer with the Israel Defense Forces during the Gulf War in 1991. Above all, he was known for his quick-draw temper, foul mouth, and killer political instincts.

We want to work with you, Emanuel said. We’re serious.

Cantor, the only Jewish Republican in Congress, and Emanuel, also Jewish, had a history of working together on Israel.

There are some things we’re going to disagree on, Emanuel explained, but I think there’s a lot we can work on together.

Cantor considered the incoming administration’s offer to work with Republicans sincere, but finding common ground on how to jump-start the economy would be tricky.

Obama and his economic advisers were economic Keynesians—they believed that government spending could create jobs and grow the economy. It was a philosophy Cantor and many young House Republicans rejected. Instead, Cantor believed that entrepreneurs—small-businessmen and risk takers—were the engine that would drive the economy. Cantor realized that his 10 years in the family real estate business made him the only former small-businessman in the group that Obama had met with.

The 45-year-old Cantor, a workaholic even by Washington standards, quickly set up what he called the House Republican Economic Recovery Working Group, made up of 33 conservative members of Congress, to map out an alternative to a traditional stimulus package.

The group insisted on what Cantor called three ironclad criteria: Proposals had to be limited in scope and spending; they had to result in real, long-lasting jobs; and small businesses had to be put first. They solicited input from former eBay CEO Meg Whitman, former Massachusetts Governor Mitt Romney, and anti-tax leader Grover Norquist of Americans for Tax Reform.

• • •

Three days after his inauguration, Obama summoned the congressional leadership to the White House Cabinet Room to discuss the stimulus package.

Protocol dictated that the president control the agenda and discussion, but Cantor spoke up immediately.

Mr. President, with your permission I’d like to hand something out.

Obama nodded, and Cantor passed out copies of a one-page document entitled House Republican Economic Recovery Plan. It listed five unambiguously conservative proposals:⁴

• Immediate reduction in the two lowest individual income tax rates. Because all taxpayers pay some of their income at these initial rates, taxes would go down on more than 100 million tax returns, saving families between $500 and $3,200 in taxes each year.

• A tax deduction of 20 percent on the income of all small businesses.

• No tax increases to pay for stimulus spending.

• Make unemployment benefits tax-free.

• A homebuyer’s credit of $7,500 for those who make a down payment of at least 5 percent of their home’s value.

Obama glanced at his copy, looked at Cantor, and said amiably, Eric, there’s nothing too crazy in here.

But Orszag, the budget director, noticed that Cantor’s proposals were all tax cuts.

And Cantor’s document declared that, furthermore, any stimulus spending should be paid for by reducing other government spending.

Absurd, thought Orszag. The whole point of the stimulus was to inject extra money into the economy. The requirement that all stimulus spending be offset by cuts elsewhere would defeat the purpose. Meeting Cantor’s goal would be impossible, Orszag concluded instantly. But no one asked him, so he didn’t say anything.

Obama said his plan would include tax cuts, but not only tax cuts. He seemed inclined to compromise.

Mr. President, Cantor offered, I understand that we have a difference in philosophy on tax policy. But a massive stimulus package would be too much like old Washington, he said.

I can go it alone, the president said, but I want to come together. Look at the polls. The polls are pretty good for me right now.

Cantor chuckled and nodded. The polls certainly looked good for Obama now. To Cantor, that meant there would be no easier time to compromise and to disappoint some on the left. As he listened, Obama’s tone seemed to change.

Elections have consequences, the president said. And Eric, I won.

On the table, some copies of the one-page document called House Republican Economic Recovery Plan lay where Cantor had put them.

So on that, I think I trump you, Obama said.

• • •

In his short tenure as a senator, Obama had dealt with South Carolina Senator Lindsey Graham several times. Now, in his early days as president, he had Graham, a moderate conservative Republican, to the White House to talk.

Barack, Graham said, dispensing with the formal Mr. President when they were alone in the Oval Office, can you believe this has happened to you?

No, the new president replied. I mean, this is kind of one of these things you think about, but it really doesn’t happen to you.

The power of this office is amazing, Graham said. Your worst critic is going to be like a schoolboy coming into this office. Just the power of it. They may shit on you when the meeting’s over, out in front, but people are going to listen to you unlike any other setting in any other time in your life. Don’t ever let that be lost upon you.

2

The $800 billion stimulus bill of new spending and additional tax cuts, introduced on January 26, was the first bill of the new Congress and the Obama administration. It was called, appropriately, H.R. 1, and it contained not one proposal from Eric Cantor and his conservative Republican group.

The bill was drafted by the Democrats and whenever any Republican tried to make changes, Emanuel’s response was, more often than not, We have the votes. Fuck ’em.

This was the bulldozing that Obama had promised to avoid. Cantor reached for the phone and his BlackBerry and launched a full-court press. He was the Republican whip, and he was whipping his members against H.R. 1.

The stimulus bill will not get a single Republican vote, he declared.

Oh, man, Stombres, Cantor’s chief of staff, said. What are you doing? Cantor’s staff was horrified. It was a promise he would almost certainly not be able to keep.

On January 27, Obama again came to the Capitol, this time to meet just with the House Republicans.

He excoriated Boehner and Cantor for already being against the bill.

How is it that we could be for your bill, Cantor replied, if we weren’t a part of any of this? It looked like a Democratic spending wish list.

It’s a bipartisan bill, the president insisted, listing elements he assumed Cantor’s caucus would support. Republicans like business expensing. They like bonus depreciation.

Cantor resented Obama’s presumption that he knew what Republicans wanted, and what their priorities were, without consulting them. Cantor had served in the Virginia state legislature for years when Democrat Douglas Wilder had been governor. Wilder, the nation’s first African American governor, had taken the time to develop personal relationships with Republicans and find common ground.

Rahm Emanuel told Cantor flat out that his pledge of zero Republican votes for H.R. 1 was delusional. Eric, don’t embarrass yourself.

Despite Cantor’s promise, the White House exuded confidence. They had won the election. They were winners. Ray LaHood, a Republican and former member of Congress whom Obama had picked as his transportation secretary, assured the White House that they could confidently count on 30 Republican votes because of money allocated for projects and contracts in Republican districts.

But as details of the bill emerged, it turned out there was less money than expected, and support began to evaporate.

Soon, there were just a few House Republicans saying they would vote with Obama.

Then there was only one.

The holdout was first-term representative Joseph Cao, Republican of Louisiana and the only Vietnamese American in Congress. He planned to vote yes on H.R. 1.

Cantor knew every member in his conference, and he judged that changing Cao’s mind would be nearly impossible. Cao was an idealistic 41-year-old attorney whose 2008 victory was a fluke. Some 70 percent of registered voters in his New Orleans district were Democrats, 19 percent were independents, and only 11 percent were Republican. Representative William Jefferson, the Democratic incumbent, effectively handed Cao the win when FBI agents investigating charges of corruption and bribery found $90,000 in cash in Jefferson’s freezer. He was indicted on 16 felony counts, and Cao became the first Republican to serve the district since 1891.

Emanuel and the White House worked hard on Cao, reminding him that his congressional district was heavily minority—65 percent African American—and Obama had carried the 2nd District by 75 percent in 2008.

Emanuel still worked out in the House gym, where he got up close with Cao, and he got personal on the phone. According to Cao, Emanuel insinuated that if he voted for the stimulus bill, he would be owed a big favor—even help in a reelection campaign.⁵

Meanwhile, Cantor also pressed Cao, making the standard Republican pitch. Federal spending would not revive the economy, but it would contribute to the soaring deficit. The Republican Party was about small business, which created jobs. They had to put incentives in place for the private sector. Small business first.

The mantra rang true to Cao, whose district was dominated by small businesses that served the vast New Orleans tourism industry.

Look, he revealed candidly, the White House is going to help me with my reelection. Obama’s endorsement—or even his neutrality—could be critical in 2010.

Cantor was skeptical. Why don’t you get it down in writing? he said, urging Cao not to believe any promises White House staff weren’t willing to put on paper.

Cao never asked for anything in writing. He was still inclined to support the bill, even if he were the only Republican to vote for it.

• • •

Meanwhile, the White House was dealing with a bigger problem.

The day before the stimulus was to come up for a vote in the House, the phone rang in Emanuel’s office.

It was Baron Hill, a second-term Democratic congressman from Indiana who served as co-chair of the House Blue Dog coalition. The 52-member coalition had met at 11 a.m., and they were pissed.

Founded in 1995, the Blue Dogs were Democrats who defined themselves as fiscal conservatives. Most came from politically split congressional districts closely divided between Republicans and Democrats. Many were freshmen who had won traditionally Republican seats by touting their passion for spending constraints and deficit reduction.

The Blue Dogs held mandatory weekly meetings, whipped their votes intensely to ensure that they voted as a bloc, and were not shy about bucking the Democratic leadership on fiscal issues. Obama’s stimulus package cut against the grain of their anti-spending beliefs, and they didn’t think they were getting anything in return.

As one member, Louisiana Representative Charlie Melancon, put it, We felt like we were getting pushed into a corner and we were damned if we were going to stay there.

On the phone with Emanuel, Hill said, Look, we’ve got a problem here.⁶ The majority of the Blue Dog coalition planned to vote against Obama’s stimulus package—more than enough to kill the bill.

And this from Obama’s own party.

Emanuel erupted into a profanity-spiced tirade. This is the first piece of legislation that our administration is going to be voting on and you guys are going to kill it?

Hill waited out the storm of F-bombs—anyone who had worked with Emanuel knew his technique—and said, Look, I’m just delivering the message. I’m trying to make this thing work. I don’t want to embarrass the president. And I’m telling you that these guys are going to vote against it.

Emanuel asked Hill to arrange a meeting with the Blue Dog leadership for later that day.

Hill had reason to hope that the White House would accommodate the Blue Dogs. An early endorser of Obama during the election campaign, Hill had spent time with him on the campaign trail.

More than once, in conversations about economic and fiscal policy, Obama had told him, I feel like I am a Blue Dog, Baron.

For their part, White House senior staff recognized that the Blue Dogs had some leverage—just not as much as the coalition believed. The sense in the White House was that with aggressive arm-twisting, enough Blue Dogs would vote to push the legislation through the House. But just winning wasn’t enough. Emanuel wanted to win big.

Win big was a mantra he and Phil Schiliro, the White House’s chief lobbyist and congressional liaison, kept repeating: Success breeds success, one legislative victory leads to future legislative victories. This vote needed to set the Big Win tone for the new administration. And the Big Win had to come fast. Delay would break the positive momentum.

The focus on win big was more a product of Emanuel and Schiliro’s legislative strategy than the president’s. Orszag could see the president was focused on getting the deal done. He was in implementation mode.

The stimulus package found the president in a position similar to that of the Blue Dogs—torn between competing priorities. Wanting to tame the federal deficit, he nonetheless believed that, with unemployment on the rise, the economy needed aggressive government support.

• • •

Later that day Emanuel, accompanied by Summers and Orszag, met with the Blue Dog leadership in Majority Leader Steny Hoyer’s private conference room just outside the House chamber. Things didn’t begin well.

You guys can’t do this, Emanuel lectured. You can’t embarrass the president right out of the gate.

His tone grated. Yelling broke out on both sides until Allen Boyd, an influential Blue Dog from Florida, stepped in. A burly fifth-generation farmer with a shock of white hair and a Southern drawl, Boyd tried to calm everyone down.

Look, we want to try to get to resolution on this, he said. But we can’t vote for the stimulus package because, first of all, we think it’s too big. Secondly, there are things in there that we don’t feel are stimulative. And thirdly, we want a commitment on PAYGO.

PAYGO was an enforcement mechanism previous Congresses had imposed on themselves. The rule required that all new federal spending be offset by cuts or new revenue.

Despite his anger, Emanuel understood the Blue Dogs. During his tenure as head of the Democratic Congressional Campaign Committee from 2005 to 2007, he had focused intensely on defeating Republicans in swing districts, typically by recruiting and supporting candidates who were moderate and fiscally conservative. He had personally persuaded many of them to run.

Emanuel made them a threefold promise. The administration would support cutting some of the nonstimulative items from the package, Orszag would put the administration’s commitment to reinstating PAYGO in writing, and the president himself would meet with the entire coalition after the vote so that they could make their case personally.

Hill looked around the room and hoped that would be enough.

• • •

On January 28, the day of the first House stimulus vote, the White House sent Congress a copy of the projected stimulus spending in each of the congressional districts. Since the bill now contained some $767 billion, Cao calculated that the average district would get about $1.7 billion—a welcome windfall for New Orleans, still recovering from an estimated $81 billion in damage from Hurricane Katrina in 2005.

But when