Transition Jude Wanniski January 24, 2001

I’ve been relatively quiet these last few days because of the temporary breakdown in communication between the executive branch of government and everyone else. All the phone numbers and e-mail addresses relevant last Friday now are obsolete and it is almost impossible to reach anyone via the White House switchboards. After two hours of trying, I got through to a secretary whom I know in Vice President Dick Cheney’s office, obviously frazzled, telling me they won’t even be assigned e-mail addresses until today, at best. The other part of the problem is that I cannot trust any rumors on what is happening with the remainder of the transition from the Democratic President to the Republican. I caught myself last week almost writing an analysis of Treasury nominee Paul O’Neill’s testimony before the Senate Finance Committee, based on the report in The New York Times. I decided to first find a way to watch the hearings on C-SPAN after noting that the NYT reporter was not the regular Treasury reporter and could have been misinterpreting what he heard. As my client brief last Friday indicated, the reporter missed all the nuance, and as a result misled all the electronic media into thinking there was already a breakdown in policy between the President-elect and his Treasury nominee. It even got to be amusing when I watched NBC’s "McLaughlin Group" on Sunday and heard Tony Blankley, who usually gets it right, observing that O’Neill told the Finance Committee we did not need a tax cut at all.

My most important “insight” this week, if I can call it that, was when I picked up my copy of the NYTimes Tuesday morning and found a front-page photo of three Republicans: President George W. Bush sitting between House Speaker Denny Hastert and Senate Majority Leader Trent Lott. It struck me that I had not seen such a photo since I was a high school kid 48 years ago, when Ike was President and the GOP controlled the Congress. My next thought was that Trent Lott had introduced the idea of adding a cut in the capital gains tax to the Bush tax package, once it is sent down Pennsylvania Avenue to Capitol Hill later this week. If he had such an idea prior to last Saturday, and happened to be sitting next to President Clinton, he would not have mentioned it. Sitting next to President Bush on GWB’s first day at work, Lott almost certainly discussed it with him -- and the fact that when he first raised the issue on CNN’s "Evans & Novak" ten days earlier, he said he expected the Republican Congress would want to put its imprimatur on the tax legislation. When CNN’s Wolf Blitzer this last Sunday twice asked the new White House Chief-of-Staff Andy Card if they were now considering a cut in the capgains tax, Card only smiled broadly and promised the tax proposal would be “comprehensive.” Then we have Sen. Joe Lieberman [D-CT], most recently the bottom half of the Democratic presidential ticket, on Meet the Press recommending a cut in the capital gains tax at the same time Congress trims back the aggregate amount of tax cutting that Mr. Bush will be proposing, $1.6 trillion over ten years.

If you have been following all this, you really don’t need Polyconomics to tell you NASDAQ is flying and the dot.coms are leading the way because they smell the mother’s milk of fresh capital just down the road a piece. Except, of course, the financial commentators are attributing the good news on Wall Street to the possibility that Fed Chairman Alan Greenspan may soon cut another 25 basis points from the funds rate, or at least hint at the possibility. Nope. It is capital gains taxation and the likelihood that a 15% rate, down from 20%, will be made retroactive to the first of the year. We know the Democrats in both the House and Senate will resist a budget resolution that encompasses the dollar amount of the Bush plan -- although Georgia Democratic Sen. Zell Miller now has broken ranks in support of the whole shebang. But there is so much rank-and-file support for a lower capital gains tax among Democrats -- and always has been -- that we now can think of banking on it.

The Bush tax plan, designed by conservative Keynesians, always has been deeply flawed as far as supply-siders have been concerned. If it were to pass as is, with no capgains cut, it actually would permit taxes to rise on 26 million taxpayers who would confront the Alternative Minimum Tax. This was the contribution of Larry Lindsey and his colleagues, the same folks who designed Bob Dole’s 1996 tax “cut,” which also raised revenue via the AMT and was denounced back then, by Vice President Gore, as a “risky scheme.” Senate Banking Chairman Phil Gramm [R-TX], a conservative Keynesian himself, now pooh-poohs the AMT problem in the Bush plan. He told a press conference this week that the folks who have to pay it are well-to-do and can afford it! On the other hand, Paul O’Neill, who supposedly doesn’t see the need for a tax cut, promised several members of the Finance Committee that he would take the AMT problem seriously.

Indeed, I find I now am sleeping sounder than I have for several months after relishing the idea of O’Neill at Treasury. Where I had sized him up as a bean-counter, who must have had a genius working for him at Alcoa, it is now clear that O’Neill may deliver a wholesale, fundamental tax reform while he is at Treasury. His passionate public denunciations of the complexities of our tax code last week were not accidental. I’ve learned he asked permission to do so, given the fact that the Bush campaign never raised the issue. O’Neill is the wizard who made a success of Alcoa and he did it because he automatically thinks on the margin. He saw Alcoa as a system for making aluminum, not a company, and thereby spent his days removing all the little pieces within the system that were inhibiting its efficiency. He proudly boasted to the Finance Committee that Alcoa now is able to close its books in 2½ days, quicker than any other major company in America, including the high-tech firms, because of the way it streamlined its methods. It takes that kind of insight to tackle the tax codes. I’d hoped Bush might pick Steve Forbes as Treasury Secretary, but as much as he would like basic tax reform, Forbes does not have this gift. I’ve been explaining to business reporters all week, who are stunned that I am now praising the O’Neill appointment, that supply-side economics is ALL about removing unnecessary barriers to commerce. O’Neill will not have to be dragooned into the supply model. You will not be able to stop him. The added good news is that he has Ken Dam as his deputy. I’ve known Dam for almost 30 years -- almost as long as I’ve known Cheney. Neither is a supply-side ideolog, but both were present at the creation and appreciate the economic and political power of the ideas. Of course, I’ll be as disappointed as The Wall Street Journal if O’Neill brings in Charles Dallara as Undersecretary for International Affairs, as its lead editorial suggests today. Someone has to bring O’Neill up to speed on the monetary system.

What else do I know for sure? Well, the press corps is trying to maneuver Secretary of State Colin Powell and Secretary of Defense Don Rumsfeld into a slugfest, to see who comes out on top as far as the Oval Office is concerned. The NYT thinks they should fight over Iraq.  We will have to get deeper into the transition before I know enough to pick the winner.