An End to the Saddam Stock Market? Jude Wanniski October 24, 2002

The Dow Jones Industrial Average is now about 1000 points higher than its low last month, when it looked like the Bush Administration might start bombing Iraq before the November elections. The sharp ups-and-downs in between have correlated with moves toward and away from military engagement, with war bearish and peace bullish. The situation at the United Nations is still murky, as the U.S. attempts to pass a fresh resolution superceding UN Security Council Resolution #1284. This UNSCR now authorizes UN weapons inspectors to return to Iraq, on terms which Iraq now fully accepts. The inspection team under Hans Blix had planned to be on its way to Baghdad a week ago, but held off until it saw what the UNSC might do with a tougher resolution, which Baghdad might not accept. In that case, there would be no point in returning to Iraq for inspections as the United States and the UN would presumably go to war to enforce the new resolution.

The murkiness, which should soon clear, is what happens if the United States cannot get its new draft resolution adopted by the Security Council. If the U.S. cannot get nine of the other 15 Security Council members to join in voting for it, or if one of the permanent SC members vetoes it, what happens next? According to the news accounts all of us see, France and Russia are still threatening a veto and China watches, not having to veto if France or Russia exercise theirs. It is being assumed that because the U.S. and UK presented the resolution that they have the other nine votes they need, absent a veto, but it is not certain that is the case. One scenario may be that Russia, France and China will abstain if they see the resolution can’t get the 10 votes it needs to supercede #1284. In that case, presumably Hans Blix would not have to hang around New York City any longer and head for Iraq.

The authority President Bush was given by Congress last month to use unilateral military force in Iraq if Saddam Hussein gives the inspectors any trouble does not require a new UNSCR. In fact, the congressional resolutions specifically require UN action to enforce its existing resolutions, not resolutions not adopted. Russia has said all along that no new resolution is needed, because #1284 has all the authority the UN needs. If Iraq gives the inspectors any trouble under #1284, they can then take up a new resolution authorizing military action. Or the United States could jump in on its own, as the Pentagon wants it to that anyway. The draft resolution circulating now made only minor changes in the first draft that Baghdad said it could never accept, that it would be “a declaration of war” if the Security Council passed it. It seems hardly likely that it will be adopted under any scenario, but the most felicitous solution would be to have it die for lack of the needed 10 votes. Blix could then get going and report back to the Security Council before the U.S. pulls the trigger. The Pentagon does not like this outcome because it knows Iraq does not have weapons of mass destruction at the moment. Indeed, Russia and China abstained on #1284 when it passed in 1991, believing it too intrusive in its language and setting troubling precedents.

The Pentagon intellectuals are of course not going to give up on their plans for a “regime change” in Baghdad and they still seem to have the support of the President. He showed up yesterday in the Rose Garden to sign the defense appropriation bill, with Vice President Cheney and Defense Secretary Rumsfeld at his side. The President also thanked Deputy Defense Secretary Paul Wolfowitz for being there, Wolfowitz being the chief hawk on Iraq.

By emptying all the prisons on Monday, Saddam showed his own continuing ability to play chess with his adversaries in Washington. Letters to the editor in the major papers Wednesday were crediting the hard line taken by the President with the release of the prisoners. We can expect more of this kind of gesturing if the Blix team proceeds with inspections. Baghdad will permit more access to journalists to see the “good things” the government is doing for its people. His aim remains a lifting of the 11-year-old economic sanctions, which will mean he will have to be on his best behavior even if Blix finds nothing and reports that to the Security Council.

So far, President Bush has played his cards fairly well, having set out so many different goals in Iraq that he can claim victory and credit by achieving any of them. His popularity remains as high as it is because he has not pulled any triggers precipitously. The economy remains in difficulty and the Democrats are trying to make an issue out of it. But without being able to say how Bush erred or how they would fix things, they get no traction. What a surprise this week when Sen. Joe Lieberman, who is planning a run for the Democratic presidential nomination, said he would abolish the capital gains tax!! The best Treasury Secretary Paul O’Neill has been able to come up with is a desire to end the double taxing of corporate dividends. Larry Lindsey, the President’s hapless demand-side economist, is still trying to figure out how to put more money into people’s pockets. We are, by the way, opposed to his idea of increasing the tax write-off for capital losses, another demand-side hobby-horse of conservatives. Eliminating the capital gains tax maximizes the rewards for successful capital formation. The capital-loss provision has no supply-side effects, instead subsidizing those taxpayers who make poor decisions in allocating capital.

As soon as we see the inspectors heading toward Iraq, we will be able to mark an end to the Saddam Stock Market, at least for several months. That does not mean we will see a DJIA much higher than it is now or a gold price much lower. The threat of war was worth a thousand points and the removal of that threat gets the market back to where it was, with the gold price off $20 from its high. This means the economy will be back in its deflation mode, trying to manage as best it can. That is, until Sen. Lieberman decides to call for a gold standard at $350 per ounce and Karl Rove takes a poll for the President and finds it will be safe to follow. Only then will we again be in a “Supply-Side Stock Market.”