A Political Catch 22 Jude Wanniski May 31, 2001

Bob Novak’s syndicated column today reports on how dismayed the White House has been with the lack of public enthusiasm for its $1.35 trillion tax cut. It had been several years since he got a phone call from Larry Lindsey, the architect of the tax legislation, but Lindsey called him on Saturday to tell him how terrific it was and urged him to trumpet the good news. The biggest applause the Bushies have been getting is from Democratic political operatives who are lavishing praise on President George Bush for his amazing victory, which of course is designed to persuade him that it was an amazing victory. Meanwhile, Senate Minority Leader Tom Daschle -- soon to be Majority Leader -- is darkly warning that Republicans will rue the day they forced such a big tax cut on the Congress and the American people. As night follows day, we can be sure that when the economy does not respond to the wonderful tax cuts, and the continuing pressure of monetary deflation weighs on the economy, supply-siders will get the blame for the policy and President Bush will be left holding the political bag. The national electorate, which gave Bush the White House by the thinnest of margins, has permitted him several months to blame any economic weakness on his predecessor, but from now on, the buck will stop at his desk in the Oval Office.

Lindsey, the President’s Assistant for Economic Affairs, cannot be blamed for the monetary deflation, which he does not understand even though he spent several years as a Federal Reserve governor. But as the architect of a Keynesian tax bill, designed to “put money into people’s pockets,” Lindsey last year was a drag on the Republican Party in general and George W. Bush in particular. As we noted from the earliest moments, the demand-side tax cuts designed to put money into people’s pockets would be challenged by Democrats, because the cuts in fact would put money into the pockets of the rich. Because Lindsey does not understand the difference between taxing income and taxing assets, there was no capital-gains tax cut in the plan, so there was no way Bush could make supply-side arguments that the strategy would be to get the rich to invest in the poor, in order to have a shot at capital gains. Even small changes in this direction might have produced a clear Bush victory and a comfortable GOP margin in the Senate.

Supply-siders should have joined in the criticism of the original Bush plan, but most of them were swept along by a desire to be part of the team. Jack Kemp, who should have taken the lead in urging Bush to amend his plan, instead publicly gushed about its benefits. The WSJournal editorial page joined in, its assurance further confusing not only candidate Bush, but also Karl Rove, his campaign manager. The only thing good they now can say about the tax bill is that it chewed up much of the projected surplus before the Democrats could spend it. Of course the Democrats are taking credit for insisting on lump-sum rebates -- $300 for an individual and $600 for a couple -- which redistributes wealth from those who have more of it to those who have less of it, with zero effect on economic growth. The WSJournal has decided that Sen. Chuck Grassley, chairman of Senate Finance, is the culprit, but all the key battles were fought long before Grassley came into the picture. Conservatives also are chewing on current Senate Majority Leader Trent Lott, for being ineffective in getting better tax cuts and for losing Jim Jeffords to the Democrats. He too was playing the cards cut by Lindsey and dealt by President Bush.

As we reported this week, Lott is determined to put the capgains issue back on the front burner even while he leaves the Senate majority, and even while Larry Lindsey is vowing there will be no capgains cut this year. I’d bet there will be, as I expect Treasury Secretary Paul O’Neill to put himself on the flip side of Lindsey on this issue. In case you have not noticed, O’Neill has been a spectator in this administration on macro-economic policy, having arrived on the scene long after Lindsey and thus handed the assignment of helping pass Lindsey’s tax cuts. Now that Act One is over, O’Neill may come into his own as the dominant economic spokesman. He will have to, if there is any chance of a second term for Bush No. 2. In Act Two, O’Neill will have to deal with the monetary deflation, which will intensify, I think, if there is success on capital gains. The financial markets now are trading practically lock-step with the gold price, which now is back at $268 -- even lower than it was before the Greenspan rate cuts began in January. The $7 slide yesterday was accompanied by lower commodity prices almost across the board. Our economy is still bumping along, but as most of the world economy is dependent on commodity production, things do not look so good from the bottom looking up. There’s a chance success on capital gains exert a powerful pull on Wall Street, especially NASDAQ and high tech, perhaps offsetting much of the monetary drag. We still think at best it could only extend the adjustment process. Gold must go up.

The Chinese say a trip of a thousand miles begins with a single step. We simply cannot put off the debate about gold any longer. To his credit, I’m told that Kemp now is finally making the arguments in GOP circles about the monetary deflation, and its potential for wrecking the economy and the chances of winning back the Senate and holding the House in 2002. I’ve not spoken to Kemp in more than a year, as a result of our differences over the Bush tax bill, but I’m also told he has written an op-ed article on the need for a gold-based monetary reform that the WSJournal has been weighing for the past week. It has to run in order to start the conversation. I had thought Trent Lott might take this lead, but Lott prefers that Kemp take the lead, as Kemp knows monetary policy as well as anyone in Washington, Alan Greenspan included, and would have to carry the ball. The administration is not likely to come along unless Greenspan gives the nod, but chances of him doing so are not that bad. Like his former Fed colleague Wayne Angell, he probably has thought enough rate-cutting would turn gold up, so he would not have to note its importance. Angell now has given up on interest-rate targeting, he tells me, so Greenspan may not be far behind. And we notice Secretary O’Neill casually saying “the dollar is almost as good as gold.” Notice the Journal has been studiously silent on the deflation issue, preferring to continue celebrating Greenspan’s genius.

The trip to gold will not have to take a thousand miles from where we are. On August 15, we will celebrate 30 years since Richard Nixon was talked into breaking the dollar/gold link, by Ph.D. economists who promised that good things would happen to the U.S. economy if he did. If the discussion can begin with a Kemp op-ed and several members of Congress at least commenting positively about the need to consider monetary reforms, in two months we would find what now seems totally implausible seeming plausible. The exercise will not be entirely intellectual, for of course we will have the economy reminding us all along the way that things are not as good as they should be and may be far worse than we now think they will be at the end of the summer. If we are right, and nothing is done to end the deflation, there will not be many sectors of the economy that will be cheering Wall Street or Republican politicians.