War on Two Fronts: At Home and Abroad Jude Wanniski September 26, 2001

ATTACK ON AFGHANISTAN? If there is going to be one, the Pentagon says we will not ask any of our NATO allies to join us. We will do it ourselves, as all of Europe is terrified of terrorist bombers. As every day goes by, though, the possibility of U.S. military action seems to dwindle. Attention returns to the rescheduled peace talks in Israel, which seemed to begin successfully today. There is an unspoken agreement among the powers to pretend the September 11 attack had nothing to do with Israel and the Palestinians. The most ridiculous is Paul Krugman’s assertion in his NYT column today that the suicide bombers were protesting America’s military presence in Saudi Arabia. Next most ridiculous is that Muslims would hate America even if there were no Israel, in a NYPost letter to the editor from Norman Podhoretz, accusing Bob Novak of anti-Semitism for mentioning the connection. In our September 11 brief, “First Thoughts,” I noted how important it would be to hear how the American Jewish community would react. The reaction is still unclear, although there is a report in the Jewish press that those leaders who do not want to be quoted are doves and those who want to be quoted are hawks. As long as the peace talks between Yasir Arafat and Shimon Peres are proceeding, no bombs should be dropped, although the hawks might cook up a pretext because they prefer conflict.

ATTACK ON COLIN POWELL: The hawks who want to declare war on the Islamic world are beside themselves with fury at Secretary of State Colin Powell’s dominant role in managing White House policy. They know they must drive a wedge between Powell and the President if they are going to be able to come out of Afghanistan with a mandate to turn their guns on Iraq. At the moment, though, Powell is well-entrenched, extremely popular on Capitol Hill among Republicans and Democrats. Richard Perle, the mastermind of the hawks and chairman of the Defense Policy Board at the Pentagon, actually had the nerve to sign a letter to the President, with 40 other policy hawks, mostly journalists, urging an invasion of Iraq to provide a “zone” for a puppet regime that would move on Baghdad with U.S. military assistance. Michael Kelly, editor of the normally staid National Journal, today writes that “pacifism is evil.” Perle, a master of misinformation, probably was behind the “leak” last week that Israeli military intelligence believes Iraq was behind the September 11 attack. The chief of Israeli military intelligence told Reuters this week that there is no evidence of such a link. The Perle network for the most part is composed almost entirely of conservative Republicans who have ties to the Likud Party in Israel, especially the far right wing of Likud that is now in power in Tel Aviv. I recommend you link to the website of the Jewish weekly Forward, where you will find commentary as sensible as anything you will find here or in the editorials of the NYTimes.

CHENEY/RUMSFELD: It is hard to get information on how Vice President Dick Cheney and Defense Secretary Don Rumsfeld are playing their cards in the internal debates, but my assumption is that Cheney has been coming down on Powell’s side, or Powell would not be winning. When Cheney was Defense Secretary in the Bush administration, he was heavily influenced by Perle and Paul Wolfowitz in the decision to go to war against Iraq following its invasion of Kuwait. Back then, the James Baker III State Department seemed little concerned and had actually signaled Saddam that the U.S. would not get involved in his border dispute with Kuwait. General Powell, then chairman of the Joint Chiefs, described Kuwait as “a gas station in the desert” and seemed unconcerned. President Bush did not act until British Prime Minister Maggie Thatcher kicked him in the pants with rhetoric about Nazi aggression and Munich and told him not to go “wobbly.” Thatcher took her advice on such matters from the late Albert Wohlstetter, the mentor of Perle and Paul Wolfowitz, Rumsfeld’s deputy. In his first tour at Defense in the Ford administration, Rumsfeld also relied on Wohlstetter, and when Wohlstetter died he remained part of the Perle network. Perle is married to Wohlstetter’s daughter. In the last few days, though, as the Perle network has become more rabid, Rumsfeld has calmed down, seemingly fallen under Powell’s spell, as has the President. Rumsfeld even has been sharply criticized for going wobbly by the Washington Times, which has been a mouthpiece for the Perle network.

GREENSPAN: The Fed Chairman did not do any good for himself by showing up at the Ways&Means Committee with Clinton’s Treasury Secretary, Bob Rubin, for a joint blast against cutting tax rates -- especially undermining the GOP campaign for a cut in the capital-gains tax. Greenspan has testified many times that the capgains tax is the worst possible tax and probably loses revenue, yet he backed up Rubin, the most overrated Treasury Secretary in American history, who opposes a lower capital-gains tax on principle. Greenspan said he favors a lower capgains tax for the long run, but not now. He’s probably right in that cutting the rate to 15% from 20% would have few positive benefits at the moment, especially if it were enacted as a temporary cut and coupled with a rise in the minimum wage. With minorities getting whacked as unemployment expands in the travel/hotel/tourist industries, a minimum wage hike would send black and Hispanic teenage unemployment soaring, with concomitant increases in the crime rate. GOP leaders will make a run at it anyway, we think, but it remains discouraging that no member of Congress has been willing to challenge Greenspan on the deflation issue. To devalue the dollar against gold by even 10% and then stabilize it would instantly invite the kind of consumer spending the Keynesians and Greenspan have in mind. The $90+ billion in liquidity the Fed injected two weeks ago has already been reeled in, as the banks did not want or need it, and the Fed is forced back to targeting the funds rate.

“SURPLUS” SHARING: Jamie Galbraith, son of John Kenneth and an economics professor at Texas U., is promoting the idea of a massive “revenue sharing” approach to fiscal policy. Galbraith does have a following among Democrats and the idea is actually not bad. If Congress is determined to spend megabucks to reverse the economy’s slide, parsing out cash to state governments would have more positive effects than appropriating pork. States could use some quick cash to avoid raising taxes, which they will otherwise be forced to do to meet constitutional constraints on deficits. Galbraith is talking about $300 billion in the first year, scaled down as the need for cash infusions diminish. I told him I could see another $50 billion injection, which would do the job as long as we straightened out monetary policy with a rebalancing of the dollar/gold price. Democratic academics tend to focus on fiscal policy and have fewer hang-ups about gold than Republican academics, who remain basically committed to monetarism. Richard Nixon took us off gold on Milton Friedman’s advice. For the most part, policymakers in the White House and the Congress are stumbling around the way they were in the early 1930s, when nobody knew what to do, generally making things worse as they went along. At least some of us know how to solve the problem now, where back then nobody really understood the supply-side cause of the 1929 Crash.