When George W. Bush signed his $1.3 trillion tax cut into law, he thanked three people first: “Mr. Vice President, Secretary O’Neill, and Director Daniels.” Mr. Vice President? Yup. We all know Cheney. Secretary O’Neill? Sure. That silver-haired guy who used to run the aluminum company. Director Daniels? Hmmm…

Most people don’t know Mitch Daniels, director of the Office of Management and Budget, but they should. The OMB chief has the most critical but unheralded job in government. He gets to stick his fingers in almost every federal pie, and Daniels has accumulated remarkable power since his swearing in. He has developed a close relationship with the president and inspired confidence among those around him. In fact, he has been deeply connected with all the decisions that have defined the Bush administration so far. He helped design and defend the Bush tax cut; he was the main architect of Bush’s budget; he presides over decisions on which Clinton-era regulations stay and which ones go.

But that isn’t surprising. Over the last two decades, the main battles in Washington have been fought over the size and scope of government, with the OMB director commanding the presidential battalions. Ronald Reagan will be forever known for David Stockman’s slicing of the government and famous admission that the president’s tax cuts were a “Trojan Horse” for helping the rich. Richard Darman, perhaps George H. W. Bush’s most influential domestic adviser, is credited with–or blamed for–Bush’s tax increases. Budget hawks Leon Panetta and Alice Rivlin helped keep Clinton fiscally in line early on. The more liberal Jack Lew expanded spending toward the end of Clinton’s term.

Fittingly enough, given the intensity of the struggles over spending, all of these directors, including Daniels, have worked out of an office originally designed in 1883 for the secretary of war. But if he’s at war, Daniels is a canny fighter who knows one can best administer the stiletto while in an embrace–a vastly different philosophy from that held by the churlish Republican congressional leaders like Tom DeLay and Trent Lott. Daniels, in fact, bears an uncanny resemblance to Dick Cheney. He’s calm, unassuming, likable, self-deprecating, and very smart. Like Cheney, Daniels won the trust of the president through his loyalty, command of the issues, and dry wit. Like Cheney, Daniels is deeply conservative with a moderate demeanor. Like Cheney, Daniels is a major reason that the Bush administration has had success pushing its agenda through, despite the president’s failure to win the popular vote. In his New Yorker profile of Cheney, Nicholas Lemann likened him to a serotonin uptake inhibitor. Daniels also has that same calming effect on those around him–an appropriate skill for a man who made a fortune at the company that produces Prozac.

Daniels’ similarity to the highly competent Cheney doesn’t bode well for liberals. Since George W. Bush announced his candidacy and the entire Republican establishment and its wealth started migrating toward Austin, the scariest thought for his opponents has not been that a Bush administration would push conservative policies, but that it would do so with consummate skill. Regardless of Bush’s own personal abilities, talent has accumulated around him: from his early advisers to his campaign team to the merciless lawyers who prevailed in Florida to the successful CEOs who now run the government. These people know how to win.

True enough, the administration has stumbled a number of times recently, and there’s evidence of liabilities created by the arrogant moral certitude of its corporate ethos. Jim Jeffords blindsided the party because the White House failed to realize what its sharp elbows and juggernaut conservative agenda felt like to moderates; blocking increased arsenic safety standards in drinking water suggested a blindness to the worries of average Americans. Still, the administration has done vastly better than anyone could have expected given the chief executive’s inexperience and the circumstances of his election. In fact, if two things have become clear about Bush since he stood in the rain and took the oath of office, they’re that his administration will be deeply conservative and damn effective. He has assembled the most formidable conservative team since Ronald Reagan’s first term. And Mitch Daniels is one of its best players. We should all get to know him better.

Hurricane Mitch

On the day Bush signed the tax cut into law, Daniels was darting around frenetically–from the White House to Capitol Hill to his office to a co-worker’s baby shower–before finally settling down for an interview. His small frame and perpetual motion brought to mind a bureaucratic Allen Iverson with a receding hairline.

Daniels speaks with a strong Midwestern twang and uses phrases like “I don’t reckon.” He works out of the cavernous former war room which he has sparsely decorated with pictures of his four daughters, a portrait of Eisenhower, and a landscape from the National Gallery that Daniels picked out online because he didn’t have time to go there in person. Conspicuously absent are the usual Washington vanity photos. The only hint of Daniels’ power is a picture squirreled away in the corner of Bush signing Daniels’ OMB appointment. But the image doesn’t even show the president’s face–just his hand and the pen.

Daniels comes from Indiana, a deeply conservative state that still has Midwestern sensibilities. The Hoosier state always supports GOP candidates for president, but it is dominated by laid-back Republicans, not the reflexive Washington-haters who make up so much of the party’s base. It’s even possible for moderate Democrats, like Sen. Evan Bayh, to win elections there. The apotheosis of Indiana Republicanism is Sen. Dick Lugar: strongly conservative and entirely likable.

The culture that produced Lugar also produced Daniels, and appropriately enough, Lugar gave Daniels his start, hiring the young Princeton graduate as an aide in 1971. Daniels got to work quickly–one of his first tasks was undigging a pothole so that Lugar, then mayor of Indianapolis, could be photographed filling it back up. Then, when Lugar was elected to the Senate in 1976, Daniels went with him. Daniels eventually became chief of staff and earned the reputation as the senator’s alter ego.

In 1983, Daniels left Lugar to run the Republican Party’s senatorial campaign committee. Two years later, the Reagan White House snatched him away and made him the president’s political director. Chaos reigned in Reagan’s second-term White House, and Daniels’ main job was damage control every time a colleague did something like announce that we were at war with Honduras or let the press know that Nancy Reagan’s astrologer set the president’s schedule.

A crafty inside player, Daniels stayed out of trouble and ultimately left after sparring with Chief of Staff Donald Regan, arguing that Regan should be more forthcoming on Iran-Contra. According to Jack Svahn, a domestic political adviser at the time: “Mitch was an unknown to most of us there. But he surrounded himself with good people and worked quietly and methodically. He knew enough to stay out of the way of the bullets, and there were a lot of bullets flying around then.”

After leaving the White House in 1987, Daniels was hired as president of the Hudson Institute, a conservative think tank back in his hometown of Indianapolis that had fallen on hard times after the death of its founder, a quirky iconoclast named Herman Kahn. Daniels served three years and now receives credit for helping turn the institute around financially–even if current members are hard pressed to name its intellectual accomplishments in the Daniels era. Hudson takes a traditionally free-market approach, arguing against government intervention in the economy. But the institute isn’t necessarily for hardliners; Marshall Wittmann, now the most-quoted man in Washington and a strong supporter of John McCain, is probably its most famous fellow.

After leaving Hudson, Daniels moved over to the pharmaceutical giant Eli Lilly, the largest company in Indiana. Daniels started in government relations, advanced to direct North American operations, and then moved further upstairs to direct strategic planning. While there he earned a reputation for tight, efficient control, eliminating offices for example and making everyone, including himself, work out of cubicles.

It was hard to work in a pharmaceutical company’s upper management in the ’90s without dirtying one’s hands a little. Lilly, for example, saved money for years by testing their drugs on subjects off the Indianapolis streets, many with substance abuse problems desperate for Lilly’s cash, according to a 1996 Wall Street Journal report. Daniels didn’t start the practice but he surely knew about it. The company also helped lead the industry’s siege of Capitol Hill, morphing into a massively powerful interest group and getting government to serve the industry’s interests and not necessarily the public’s: rewriting legislation to accelerate the FDA’s drug approval process, extending patent terms, and stifling generic-drug makers.

But Daniels seems to have remained above the fray, saying that he’s “pretty near virginal” when it comes to lobbying–a believable claim since he stayed in Indiana and never registered as a lobbyist. The only controversy that snared him was a dogfight between Lilly and the Church of Scientology, which objected violently to Prozac, Lilly’s best-selling drug. The Church ran a brutal campaign to destroy the drug’s reputation. Daniels pulled no punches fighting back, arguing that crass financial motives drove the Church. He told USA Today, “Any vulnerable patient saved by psychiatry or therapy of any kind is one less potential victim for them.”

Lilly and Daniels won their battle–and they should have. Increasingly, the evidence shows that Lilly was right about Prozac’s safety and the drug has helped millions overcome depression. After a significant dip during the company’s Scientology scrap, Lilly rebounded, and Daniels helped give it one of the country’s 10 best profit margins. Daniels certainly feels proud of what he accomplished. “Those aren’t ball bearings we were making out there,” says Daniels–but then, always one with quick political instincts, he adds “as valuable as ball bearings are.”

That’s What Friends Are For

Daniels came to W.’s attention through Al Hubbard, an Indiana businessman and Harvard Business School classmate who had coordinated the campaign trips to Austin of Bush’s suitors and tutors. Daniels was also friends with George Bush the elder, an Eli Lilly board member in the late ’70s.

After Hubbard threw Daniels’ hat into the ring, Cheney and White House chief of staff Andrew Card immediately supported him. Both had known Daniels during the Reagan administration, and both also knew the importance of getting an ally at OMB. Cheney even slotted his former defense department comptroller, Sean O’Keefe, as Daniels’ deputy.

Still, the choice of Daniels surprised many people. Yes, he had White House experience, but he had never worked on government budgets. Sure, he knew how to make money, but did he know the reasons for the floundering of the Office of Personnel Management’s “Automated Processing System” for federal retirement benefits? Did he know whether the Army Corps of Engineers’ computers were secure?

When Daniels was appointed, Washington insiders murmured that he got the job because Bush just wanted a low-profile loyalist. Such speculation increased significantly when the White House transition team didn’t hold a press conference to announce the appointment. Many Republicans still blame Bush senior’s hugely influential OMB director, Richard Darman, for losing the 1992 election by persuading the president to cut spending and raise taxes–helping move the country onto a sound financial track but forcing Bush to repudiate his “read-my-lips” pledge.

Daniels, the thinking went, was more loyal than bold. He had contributed exclusively to Republican candidates, worked for a company that gives about 90 percent of its donations to Republicans, held major fundraisers for W.’s father, and been quoted in the press frequently over the past decade making the requisite pro-Republican and anti-Washington quips. When the Democrats controlled Congress, Daniels once said, “If Congress were a corporation, it would have been taken over in a leveraged buyout.” In early 1994, he chided critics concerned about rising health-care costs and the number of the uninsured Americans by telling The Washington Post: “Markets do self-correct, and this one is well into the process. As usual the politicians are several miles behind the market.”

Daniels clearly has the right attitude for the current White House team, particularly since he has also made heaps of money while retaining an appreciation for the jocular male Budweiser-and-baseball camaraderie that Bush so enjoys. Like the president, Daniels finished off quite a few six-packs in his youth and loves sports. When asked about the difference between Indianapolis and Washington, he responded, “The football team’s not as good here.”

Most important of all, Daniels fits into this administration because he is as tightfisted as they come. He ruthlessly cut budgets at both Hudson and Eli Lilly, and he tried to get the Rolling Stones’ “You Can’t Always Get What You Want” played for people put on hold by OMB’s phone system. Herb London, the current president of the Hudson Institute, calls Daniels “viscerally parsimonious.” Daniels told Time magazine that as a young man he once plucked quarters out of a toilet bowl to pay for a pitcher of beer. Today, he still hunts down every single golf ball that he swats into the woods. “I saw in the paper that he was worth something like $38 million,” says Al Hubbard. “I guarantee his wife was the most surprised person in the world when she read that. She probably thought he wasn’t worth 38 dollars.”

All Along The Watchtower

Directing OMB should be a penny-pincher’s dream. Most of the government is set up to reward people who can wrangle more money for their district, their agency, or their program. But the Office of Management and Budget serves as the federal government’s curmudgeonly accountant. It doles out money, reins in programs, and ensures that the parks stay open even as administrations turn over.

Daniels immediately put his parsimonious instincts to work writing the budget: coordinating the 20 or so political appointees working out of the White House with OMB’s roughly 500 career civil servants, and attempting to evaluate whether every single federal program deserved more money or less. Traditionally, the process resembles a combination of cat-herding and Sumo wrestling, with every agency resisting cuts, often by nasty means, and trying to circumvent them. But Bush’s budget-approval process was remarkably orderly, even with the brutally short timetable forced by the Florida mess.

First, Daniels met personally with every cabinet member to discuss perceived needs. Then Bush and his top economic advisers decided to set an overall target of a 4-percent nominal spending increase, a significant drop from Clinton’s last years, with an extra, exempted, fudge factor–like Stockman’s famous magic asterisk–for likely increases in military spending. Daniels notes that he offered Bush the option of actually freezing government spending, a drastic step given inflation, population growth, and the fact that even a 4-percent increase created the lowest federal spending level as a percentage of GDP since the ’60s.

Next, Paul O’Neill, Cheney, Card, Daniels, and Larry Lindsey, Bush’s top economic adviser, huddled together in the West Wing, writing the budget, listening to agencies’ complaints, and finally reaching compromise. Daniels and the board were so persuasive that no cabinet secretary complained to the president, standard operating procedure in years past. Under Clinton, agencies routinely resorted to White House back channels to win larger budget increases, such as getting a senior aide to drop the president a line during a midnight game of hearts. Describing the process this year, Daniels says: “The District Court took care of almost everything. The Appellate Court heard a few, and the Supreme Court was never appealed to.”

Daniels and company were also remarkably effective when it came to the tax cut, which Daniels played key roles in drafting and presenting. He spun print reporters and appeared on talk shows, calmly describing why a $1.6 trillion tax cut was eminently affordable.

He also earned rave reviews for his performance on Capitol Hill. He arrived at his first hearing with the budget committee’s ranking Democrat, Kent Conrad, armed with an apple pie, Conrad’s favorite. The pie was cut up in sections to depict how Bush planned to divvy up the surplus, one labeled “tax cut” with the phrase “don’t touch me.” Daniels also mastered the details and didn’t just spin from notes. When Sen. Robert Byrd (D-W. Va.) lectured him on King Charles I of England’s arrogance, Daniels responded by zinging back another line about Charles I, charming the stentorian senator. Daniels also never wavered. When asked later whether it ever crossed his mind that, given the uncertainty of the projected surpluses, $1.6 trillion might prove extravagant, he coolly responded: “I think it was appropriate for now. It might prove to have been too little.”

With Daniels’ help and unswerving commitment, the Bush administration needed only four months to pass its most important proposal. True, giving away money isn’t the hardest task in politics, but compared with Clinton’s initial top priority–his self-immolating health-care plan–the Bush team did a remarkable job. Moreover, in the process of crafting the budget and selling the tax cut, Daniels has placated his early critics. William Niskanen, chairman of the Cato Institute, tore into Daniels when the appointment was announced, telling The Chicago Tribune that Daniels was a “political gofer” in the Reagan administration who worked as “an errand boy.” Now, Niskanen has changed his tune. “He’s done very well to my surprise,” he says. “He’s clearly got the trust of the president and he and Cheney seem to be doing everything together. That’s a very good sign that the administration respects him.”

Power To The People

Daniels’ portfolio extends well beyond the budget. As OMB director, he is also charged with managing, or at least consulting on, all government programs. OMB should know that the State Department lags so far behind current technology that many embassies don’t have email; it should also know why the Department of Agriculture recently paid $97 million for a car and $11 million for a microscope.

Management has always been OMB’s neglected stepchild, and Daniels has not shown that he’ll change that. He has stated that his top priority will be expanding the Clinton administration’s focus on evaluating programs based on how well they meet specific goals and targets. That’s a noble goal–even if there’s great potential for partisan misuse. But Daniels hasn’t even nominated a deputy director for management yet and its unclear how much further he will be able to go than Clinton’s ambitious team.

The real action under Daniels seems likely to come from OMB’s ability to evaluate significant agency regulations. With certain exceptions, a cabinet member who wants to do research on a potentially important new rule (for example, setting haze limits for national parks) has to go to OMB’s Office of Information and Regulatory Affairs (OIRA) for permission. After formulating the rule, the agency must then submit it back to OIRA for review. OIRA isn’t the ultimate authority. It can’t completely overrule a congressional order, for example, but “it can always keep whatever it wants holed up in the Khyber Pass for a long long time,” says Bob Knisely, deputy director for regulatory review under Clinton’s national performance review.

The model for Daniels’ approach to regulatory review so far seems to be Dan Quayle’s Council on Competitiveness–an anti-regulatory SWAT team created because, as Quayle wrote at the time, “faceless bureaucrats” were conspiring to “strangle the free market with red tape.” In the latter half of the first Bush administration, if a company wanted a regulation changed and was stifled by OSHA, the FDA, or Congress, it could take its cause directly to the council.

Daniels comes from that world, even if he has more subtlety than Quayle. Al Hubbard, Daniels’ patron, was the council’s original chair before he had to leave after coming under criticism for making rulings that favored companies in which he held stock. Hubbard was replaced by David McIntosh, another old friend of Daniels’, whom Bush at one point considered for the OMB director’s job.

Daniels was even connected directly to the council while at Lilly, and his lobbying shop helped get the council to work to accelerate the FDA’s drug approval process–bringing life-saving drugs to market quickly, along with a few life-ending ones, such as the diabetes drug Rezulin. The council, later aided by Newt Gingrich’s Congress, also put tight restrictions on how the FDA can spend industry-paid user fees. Subsequently, by the mid ’90s, Eli Lilly had a larger budget for promoting Prozac than the FDA had for monitoring adverse reactions in approved drugs, one of this country’s 10 leading causes of death. In addition, when Daniels was in charge of government relations, Eli Lilly helped convince Quayle to weaken emergency pollution standards for major companies–circumventing an EPA ruling that threatened one Lilly plant. Daniels has claimed that he did not directly lobby at all, but in 1991, he did tell The Boston Globe that council members had called Eli Lilly executives to “try out some of their ideas on us.”

Under Daniels’ leadership, OMB has already moved in the direction of Quayle’s council. In 1992, for example, Quayle and his council convinced George H. W. Bush to issue a moratorium on new regulations. Immediately upon coming to office, George W. Bush and Daniels’ OMB allowed agencies to hold up pending Clinton-era regulations. OMB and the White House then started rolling a good number of them back, eventually charting a more open course only after burning its fingers on its proposed overturning of arsenic regulations. According to Gary Bass, director of the liberal OMB Watch, the Council on Competitiveness differs only in that Daniels’ OMB team: “is much more polished. But they seem likely to make equivalent if not greater rollbacks of public protections.”

Perhaps even more prominently, Daniels has picked John Graham as head of OIRA. A well-respected, Harvard-affiliated academic, Graham has served as a lightning rod during his confirmation hearings because of his previous work highly favorable to corporations. Graham, for example, has argued for years that many environmental regulations are counterproductive. Graham also infuriated consumer advocates with the disclosure of a letter he wrote to Philip Morris while at Harvard requesting (successfully) $25,000 for his center for risk analysis, noting that “currently we have major projects underway in carcinogen classification, risk assessment, public health priorities, and the use (and misuse) of risk numbers in environmental legislation.”

Most controversially, Graham vigorously supports sweeping application of cost-benefit analysis, a tool that, used well and with humility, could be a powerful force for government efficiency. But cost-benefit calculations can be cruel. OIRA will soon have to evaluate whether pollution restrictions should be tightened to reduce smog in national parks. Measuring the costs to industry is easy, but how will OIRA gauge the benefits? What’s a scenic vista worth? What’s the value of keeping someone healthy and prolonging his or her life a little bit? There’s no easy answer, and General Motors has vastly better access to the White House, and Graham, than the Appalachian Mountain Club.

As with almost everything in Daniels’ toolbox, cost-benefit analysis could be a major asset for making government work if used transparently and nonpartisanly. Unfortunately, however, transparency and nonpartisanship haven’t been the dominant traits of this administration, or Daniels, so far.

Mitch The Knife

On the day he started working in the former war room, Daniels began a quest to pass Bush’s massive tax cut. Along the way, he used almost every trick in the book. The biggest likely spending increase, military appropriations, was never disclosed; the tax cuts were designed to kick in down the road, minimizing political damage to this administration; the tax cuts were even budgeted to phase out in 2010, decreasing their short-term cost but creating a crazy quilt of incentives. For example, the estate tax will be fully repealed for only one year under current rules, vanishing in 2010 only to reappear in 2011. The message: If you’ve got heirs, 2010 is the year to die.

Daniels’ budget also sets spending levels nearly as low as politically possible, given the current surplus. To his credit, Daniels’ budget has targeted corporate pork, like ship-building subsidies, that his Republican predecessors considered untouchable. But the budget also cuts funding for agencies popular with the public, like the EPA, and even goes after programs that Bush himself says he likes. Bush donated part of the advance he earned on his biography to the Boys and Girls Clubs, saying that he “believe[s] so strongly in helping children understand that somebody loves them.” Page 673 of the budget Daniels wrote zeroes out government funding earmarked for the organization.

Most important, Daniels has tossed out a grenade with its pin pulled that will likely detonate when future administrations write their budgets–about the time the baby-boomers retire and create a whole host of fiscal problems. After the tax cut, even assuming that the administration’s optimistic surpluses come to fruition, there simply won’t be much money left over. The budget contains an approximately $900 billion “contingency fund” to pay for all additional future programs over 10 years, a deeply troubling sum given that Bush’s promised prescription-drug benefit could cost more than a trillion dollars and that missile-defense systems can’t be bought in Filenes’ Basement. And forget about any money left for shoring up Social Security and Medicare–two of Bush’s most oft-repeated campaign promises–without likely moving into significant deficit spending. (For more on Bush’s budget, see Walter Shapiro’s “Duped by Dubya” on p. 49.)

Don’t Mean A Thing If It Ain’t Got That Swing

When the president announced the tax cut, he said, “There’s a new philosophy in town now.” That’s certainly true, and Daniels is certainly one of its main implementers. But that new philosophy seems mainly to guarantee that, unlike all the previous conservative retrenchments, this one will be done with style. Newt Gingrich and his band of warriors made it seem as if they wanted to slash programs for the poor because, well, the poor needed to be kicked around a bit. Daniels says that he wants to reduce government spending because it genuinely helps the disadvantaged. When asked what drew him to the Bush administration, he thought for a minute and then said: “his emphasis on social justice and his new ways of achieving it….The idea of trying to demonstrate that principles that we casually refer to as conservative not only work, but work better for the least advantaged among us.”

Daniels says this with a sincerity that is convincing–until you remember that the real point of his budget strategy is to put government on a long-term starvation diet. In a way, Daniels is Newt Gingrich with charm, and thus the ideal employee for the Bush administration: smart, loyal, and committed to his party’s long-frustrated and deeply conservative agenda.

When I asked Daniels whether he ever disagreed with the president’s policies, Daniels smiled and said of course he did. But then he added that whenever someone on his staff takes issue with the administration: “I always give the same speech around here.” He held his thumb and forefinger together to make a zero, “We all got the same number of votes for president.”

That’s a doubly important point. George W. Bush is trying to ram his agenda through as though he won an overwhelming majority of the vote. That strategy has begun to catch up with him, and his popularity levels have dropped. But to the extent that he has succeeded so far, it’s not because he has a mandate from the American public. It’s because the people working for him are awfully good.

Research assistance by Tory Newmyer and Jason Zalinger.

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