We had some more new blood on our team. Erskine Bowles had come to the White House from the Small Business Administration as deputy chief of staff, switching jobs with Phil Lader. Erskine was especially well suited to the mixture of careful compromise and guerrilla war that would characterize our relations with the new Congress, because he was a gifted entrepreneur and world-class deal maker who knew when to hold and when to fold. He would support Panetta well and provide skills that complemented those of Leon’s other deputy, the hard-charging Harold Ickes. Like so many months, January was filled with both good and bad news: Unemployment was down to 5.4 percent, with 5.6 million new jobs; Kenneth Starr showed his “independence” when, unbelievably, he said he was going to reinvestigate Vince Foster’s death; Yitzhak Rabin’s government was threatened when nineteen Israelis were killed by two terrorist bombs, an act that weakened support for his peace efforts; and I signed the first bill of the new Congress, one I strongly supported, requiring the nation’s lawmakers to comply with all the requirements they imposed on other employers. On January 24, I gave the State of the Union address to the first Republican Congress in forty years. It was a delicate moment; I had to be conciliatory without seeming weak, strong without looking hostile. I began by asking Congress to put aside “partisanship and pettiness and pride” and suggesting that we work together on welfare reform, not to punish the poor but to empower them. I then introduced perhaps the best example of the potential of America’s welfare recipients, Lynn Woolsey, a woman who had worked her way off welfare all the way to becoming a member of the House of Representatives from California.
Then I challenged the Republicans on several fronts. If they were going to vote for a balanced budget amendment, they should say how they proposed to balance the budget and whether they would cut Social Security. I asked them not to abolish AmeriCorps, as they had threatened to do. If they wanted to strengthen the crime bill, I would work with them, but I would oppose repealing proven prevention programs, the plan to put 100,000 more police on the streets, or the assault weapons ban. I said I would never do anything to infringe on legitimate firearms ownership and use, “but a lot of people laid down their seats in Congress so that police officers and kids wouldn’t have to lay down their lives under a hail of assault weapon attacks, and I will not let that be repealed.”
I finished the speech with an outreach to the Republicans, pushing my middle-class tax cuts but saying I would work with them on the issue, admitting that on health care, “We bit off more than we could chew,” but asking them to work with me step by step, and to start by making sure people didn’t lose their health insurance when they changed jobs or a family member was sick; and seeking their support for a bipartisan foreign policy agenda.
The State of the Union is not only the President’s chance to speak for an unfiltered hour to the American people each year; it is also one of the most important rituals in American politics. How many times the President is interrupted by applause, especially standing ovations; what provokes the Democrats or Republicans to clap, and what they seem to agree on; the reactions of important senators and representatives; and the symbolic significance of the people chosen to sit in the First Lady’s box are all noted by the press and witnessed by the American people on television. For this State of the Union, I had a speech designed to last fifty minutes, allowing ten minutes for applause. Because there was so much conciliation, as well as some meaty confrontation, the applause interruptions, more than ninety of them, took the speech to eighty-one minutes.
By the time of the State of the Union, we were two weeks into one of the biggest crises of my first term. On the evening of January 10, after Bob Rubin was sworn in as secretary of Treasury in the Oval Office, he and Larry Summers stayed to meet with me and a few of my advisors about the financial crisis in Mexico. The value of the peso had been declining precipitously, undermining Mexico’s ability to borrow money or to repay existing debts. The problem was exacerbated because, as Mexico’s condition deteriorated, in order to raise money it had issued short-term debt instruments called tesobonos, which had to be repaid in dollars. As the value of the peso continued to decline, it took more and more of them to finance the dollar value of Mexico’s short-term debt. Now, with only $6 billion in reserves, Mexico had $30 billion of payments due in 1995, $10 billion in the first three months of the year. If Mexico defaulted on its obligations, the economic “meltdown,” as Bob Rubin tried to avoid calling it, could accelerate, with massive unemployment, inflation, and, very likely, a steep and prolonged recession because the international financial institutions, other governments, and private investors would all be unwilling to put more money at risk there.
As Rubin and Summers explained, the economic collapse of Mexico could have severe consequences for the United States. First, Mexico was our third-largest trading partner. If it couldn’t buy our products, American companies and employees would be hurt. Second, economic dislocation in Mexico could lead to a 30 percent increase in illegal immigration, or half a million more people each year. Third, an impoverished Mexico would almost certainly become more vulnerable to increased activity by illegal drug cartels, which were already sending large quantities of narcotics across the border into the United States. Finally, a default by Mexico could have a damaging impact on other countries, by shaking investors’ confidence in emerging markets in the rest of Latin America, Central Europe, Russia, South Africa, and other countries we were trying to help modernize and prosper. Since about 40 percent of American exports went to developing countries, our economy could be hurt badly. Rubin and Summers recommended that we ask the Congress to approve $25 billion in loans to allow Mexico to pay its debt on schedule and retain the confidence of creditors and investors, in return for Mexico’s commitment to financial reforms and more timely reporting on its financial condition, in order to prevent this from happening again. They warned, however, that risks were attached to their recommendation. Mexico might fail anyway and we could lose whatever money we had extended. If the policy succeeded, it could create the problem economists call “moral hazard.” Mexico was on the brink of collapse not only because of flawed government policies and weak institutions, but also because investors had continued to finance its operations long past the point of prudence. By giving the money to Mexico to repay wealthy investors for unwise decisions, we might create an expectation that such decisions were risk free.
The risks were compounded by the fact that most Americans didn’t understand the consequences to the American economy of a Mexican default. Most congressional Democrats would think the bailout proved that NAFTA was ill advised in the first place. And many of the newly elected Republicans, especially in the House, didn’t share the Speaker’s enthusiasm for international affairs. A surprising number of them didn’t even have passports. They wanted to restrict immigration from Mexico, not send billions of dollars there.
After I listened to the presentation, I asked a couple of questions, then said we had to go forward with the loan. I thought the decision was clear-cut, but not all my advisors agreed. Those who wanted to speed my political recovery after the crushing midterm defeat thought I was nuts, or, as we say in Arkansas, “three bricks shy of a full load.” When George Stephanopoulos heard Treasury’s $25 billion figure for the loan, he thought Rubin and Summers must have meant $25 million; he thought I was about to shoot myself in the foot. Panetta favored the loan, but warned that if Mexico didn’t repay us, it could cost me the election in 1996.