1 The Three-Martini Lunch It is October 14, 1978. Jimmy Carter is sitting in the Oval Office about to make what he knows will be one of the pivotal decisions of his still-young presidency. He is deeply unhappy. The economy is souring. Inflation has picked up again. The midterm election is three weeks away. And it is now clear that his own party's congressional leaders have betrayed him on a matter he considers of great moral importance and in a manner designed to humiliate him personally. Across from him sits a young aide in horn-rimmed glasses, Stuart Eizenstat, who is furiously scribbling Carter's complaints onto a yellow legal pad. If you want to locate the moment when the Democratic Party first turned toward Wall Street, when the party of the New Deal quietly switched tracks and started steaming off in a different direction, it's right now, and its initial rationale is laid out in the tale of futility that Eizenstat is recording in his yellow pads. Carter's charmed run for the presidency was propelled by the strength of his personal story: farmer, governor, southerner, born-again Christian, his rectitude and modesty-the very image of him in blue jeans and work shirts-were antidotes to the national nightmare of Nixon's Washington. Carter was a populist. The societal rot that produced Watergate, he told voters, grew out of a corrupted value system that powerful business interests had enshrined in the federal tax code-"a disgrace to the human race" and "a welfare program for the rich" that warped every aspect of American life. As he traveled the country campaigning, he'd catalog its grotesque injustices: deductions for yachts, sports tickets, country clubs, and first-class airfare; preferential treatment for capital gains so investors and the idle rich paid less than ordinary workers. At the same time, he'd note, the middle-class tax burden was rising as inflation pushed those workers into higher brackets. Carter had a favorite illustration that gave vivid dimension to his message that inequality was rampant: the deductibility of "the three-martini lunch." As a populist symbol of elite self-dealing, it was hard to beat. The thought of well-heeled businessmen and lobbyists getting plastered in the middle of the day-at taxpayers' expense!-was infuriating to voters, especially in the wake of the 1974-75 recession. "When a business executive can charge off a $55 luncheon on a tax return and a truck driver cannot deduct his $1.50 sandwich," Carter would say, "then we need basic tax reform." That his attack elicited howls from its targets only added to its broad popular vitality. "You're taught there's virtue in working hard," one banker griped to The New York Times . "So you work hard, and just when you get to where you're about to enjoy some of the reward, you're hated and punished." Another complained, "Who are these people, a bunch of Bolsheviks? It took me all my life to get into the eating class and now they want to take it away." The National Restaurant Association briefly considered launching a march on Washington but seemed to sense that saving the businessman's lunch deduction wouldn't quite measure up, in the public's estimation, to causes such as advancing civil rights and ending the Vietnam War that had spurred earlier Washington marches. Finding the most fatuous example of Wall Street outrage at Carter and crafting a story around it became a kind of sport among national media outlets. "We're in a hyper-tense, high-pressure business," a Wall Street stockbroker huffed to The New York Times, "and if it weren't for these lunches, some of these people would be dead." Along with his diagnosis of what ailed the country, Carter had offered a solution: Zero out the tax code, wipe the slate clean, and start anew. He'd tax capital gains at the same rate as income to put workers back on equal footing with their bosses. He'd eliminate the obscene loopholes through which the middle class subsidized the extravagances of the wealthy. Through determined effort, he would impose his own values-his simple Baptist decency-on the travesty of the federal tax code, ushering it through the Democratic Congress, from whence it would emerge, reborn. To Carter, questions of dollars and cents were secondary to the moral dimension of the problem. When informed that killing the business entertainment deduction for the three-martini lunch wouldn't bring in much government revenue, he shot back, "I don't care if it brings in revenue or not-it's wrong." Tax reform was front and center when Carter had stood before the bunting and stage lights in Madison Square Garden to accept his party's nomination at the 1976 Democratic National Convention. "The powerful always manage to find and occupy niches of special influence and privilege, and an unfair tax structure serves their needs," he declared. "Unholy, self-perpetuating alliances have been formed between money and politics, and the average citizen has been held at arm's length." He continued, "It is time for a complete overhaul of our income tax system. I still tell you: It's a disgrace to the human race. All my life I have heard promises about tax reform, but it never quite happens. With your help, we're finally gonna make it happen." Then, with a broad smile, he shouted, "You can depend on it!" Now Carter is no longer smiling. As he sits with Eizenstat venting his frustrations, his grand plan to reform the tax code has just collapsed and divided his own administration, some of whose members have been trying to influence him by sending him private memos quoting his campaign promises to remedy the tax code in favor of working people. His party is likewise divided, and so is the president himself. Carter doesn't know what to do. He laments to his aide, "Tax reform is so screwed up." He's right about this, and he's also right to sense that his decision will be a turning point in his presidency because the powerful business interests he campaigned against are on the verge of achieving a victory that Carter has the power to stop. What he doesn't know is that it will also be an inflection point in the history of the Democratic Party, one that Eizenstat and other administration officials will come to rue even before they leave the White House. Decades later, Eizenstat will dig up his old yellow notepads and wish he'd counseled Carter differently at the time. Carter had, in fact, already made an honest stab at reform. At the beginning of his presidency, things even looked auspicious. To spearhead the effort, Carter had lured to the Treasury a superstar named Laurence Woodworth, the longtime director of Congress's professional tax policy staff, who was trusted and admired by both parties and, though forbidden as a civil servant to express political views, was known among reformers to secretly be one of their own. Woodworth liked to dazzle congressmen and reporters by scrawling complicated figures on his chalkboard and then explaining them in plain English; in turn, they lionized him as "a walking encyclopedia of tax law" and Carter's secret weapon on reform. But things had quickly gone awry. Upon taking office, Carter's advisers had decided that the economy looked weak and prevailed on him to delay tax reform and first pursue a stimulus, which had bogged down in Congress and finally been dropped. Then rising oil prices necessitated an energy bill. That, too, got stuck in Congress and further damaged the deteriorating relations between the White House and Democrats on Capitol Hill. Carter's habit of ignoring Congress and keeping his own counsel-his "Jesus in the wilderness mode of decision making," as one aide put it-is one of three reasons his reform plan fell apart and opened the door to Wall Street. Carter had no natural aptitude for legislating, disliked horse-trading, and rarely consulted the two critical players who were poised to determine the fate of his tax plan, the Senate Finance Committee chairman, Russell Long of Louisiana, and the House Ways and Means Committee chairman, Al Ullman of Oregon. Carter simply expected them to do his bidding. Chafing at the president's arrogance and having no personal investment in advancing his tax plan, Long later explained, with gratuitous emphasis on his low opinion of Carter, "My advice hadn't been sought. My input's not in it. That's just fine. So I figured I could pretty well do whatever I blessed well pleased about it." Neither did Carter marshal outside help to advance his cause. He quickly fell out with the most important pillar of the Democratic coalition in the 1970s, organized labor. Because unions were practically nonexistent in Georgia, Carter had no affinity for labor, which he regarded as just another special interest looking for a handout. Further cementing this notion was his personal dislike of the AFL-CIO's cigar-chomping boss, George Meany, and frustration with labor's demands for large wage increases, which Carter felt heedlessly contributed to the inflationary pressures weighing on the economy. The antipathy was mutual. Meany resented Carter's preachy moralism, believed his focus on fighting inflation hurt workers' earning power, and found the president insufficiently committed to pushing labor law reforms that would make it easier to form unions. The first (and last) White House meeting between Carter and Meany went so badly that as Carter was leaving, he muttered to Eizenstat, "Stu, I will never do this again." The rancor between Carter and Meany was the result of a disagreement over how Democrats should address an economy suffering from high unemployment, low productivity, and inflation. That's what everybody was fighting about in 1978. The inability to reach a consensus on a solution is the second reason Carter's tax bill fell apart. During his presidential campaign, Carter had emphasized job growth and tax fairness, but once in office he made fighting inflation his priority. These goals demanded different (and countervailing) remedies according to the orthodox Keynesian views held by his economic advisers. Boosting employment through government stimulus and direct job creation, as labor wanted him to do, would increase inflation. But fighting inflation with Nixonian wage and price controls or pushing the Fed to raise interest rates would hurt workers' paychecks, drive up unemployment, and risk tipping the country into recession. The classical economic remedies were no longer working. As Nixon's economic adviser Herbert Stein, himself a committed Keynesian, conceded in May 1977, "We are left now with accumulating criticism of the kind of fiscal policy we have been practicing for the last 20 years, but with no substantial support for any alternative to it." The Carter administration's inability to steady the faltering economy was the third reason tax reform failed. It left an opening for someone who did have a solution-or at least claimed to. Carter never saw him coming. Charls Walker was the living, breathing, cigar-smoking embodiment of a three-martini lunch: a jowly, pin-striped Washington superlobbyist and friend to all in power who rode a black limousine between Capitol Hill and Sans Souci, the French restaurant a block from the White House where he held court over glasses of white wine and fillets of sole. Raised poor in north-central Texas, Walker (whose mother dropped the e from his name in a failed effort to ensure he wouldn't be called "Charlie") rose to become, in succession, a PhD economist at the Fed, fixer for the American Bankers Association, and deputy secretary of Nixon's Treasury, a position he left in 1973, sensing greater profit and opportunity on the outside. With his rough-hewn charm and gravelly Texas twang, Walker founded the capital's hottest lobbying shop and convinced big business generally, and Wall Street in particular, that he could reverse a decade-long losing streak in Washington that Carter's reforms threatened to extend. An astute anthropologist of power, Walker had witnessed from his perch at the Treasury how Ralph Nader's army of public interest lobbyists skillfully cultivated grassroots pressure campaigns that bypassed the committee chairmen, who were traditionally the power brokers, and targeted junior members, often in their home districts rather than Washington, D.C. Walker further recognized, as Nader had, that party rules had shifted after Watergate, opening a path to outsiders like Carter and fragmenting power in Congress in a way that strengthened the rank and file at the expense of the chairmen. Nader's Raiders exploited this insight to secure a succession of legislative and regulatory victories, several of them in the realm of tax law. Soon after Carter launched his presidential bid, Walker took over a sleepy financial industry trade group called the American Council on Capital Gains and Estate Taxation and rebranded it as the more exalted-sounding American Council for Capital Formation, a euphemism for the aggressive accumulation of wealth. Walker began pushing the idea that the economy's productivity crisis could be solved if the government changed the way it induced business investment. Since the New Deal, the preferred method had been the investment tax credit, which rewarded companies for building factories. This generally satisfied labor interests, because factories produce jobs. The major business lobbies like the U.S. Chamber of Commerce and the National Association of Manufacturers liked the investment tax credit because many of their members were large industrial corporations. Carter's plan to eliminate the capital gains preference didn't threaten them. But it terrified Wall Street. Walker's project was to pull off a feat of legislative legerdemain by persuading lawmakers that the solution to U.S. economic malaise lay in shifting the government's focus to encouraging capital formation-a move that would, its backers insisted, revitalize the supply side of the economy by spurring investment, unleashing entrepreneurial energies, and turbocharging productivity. In practical terms, this meant preserving the biggest giveaway to investors in the tax code: the capital gains preference. It wouldn't look good to run a campaign to preserve a loophole for the wealthiest Americans from the back seat of a limousine. So Walker took a page from the Naderites. Working through local business groups and the newly formed Business Roundtable, which he'd helped launch, Walker arranged for the gospel of capital formation to be spread among the members of Congress and the press. No one was overlooked. Although he had no idea Walker was behind it, Representative Abner Mikva of Illinois, one of the most liberal Democrats in Congress, and later Barack Obama's mentor, described the uncanny experience of being proselytized to by Walker's forces. "I got phone calls from several people back in my district who had been supporters of mine, and contributors," he recalled. "People who seldom asked for anything. Progressive members of brokerage houses. Public-spirited bankers. First, they asked if we could have lunch. There was no arm-twisting. They were polite, thoughtful, erudite. They had their facts. We have to do something for the economy; look at the low rate of savings. The letters I got were not mass mailings. They were intelligent letters from people who knew me well. Now, obviously, somebody back in Washington was masterminding this, but I'm sure that some of it did sway me." The reason the pitch was so effective, Mikva explained, was its careful framing: "On an issue like capital formation, where you only hear from business, it isn't something for me and nothing for you; it's something for me, and this doesn't concern you." Excerpted from The Rebels: Elizabeth Warren, Bernie Sanders, Alexandria Ocasio-Cortez, and the Struggle for a New American Politics by Joshua Green All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
