The War Market III Jude Wanniski April 1, 2003

Wall Street: When the DJIA was at 8400 a few weeks back in the glow of early war reports, my instincts told me it would go to 7000 before it hit 9000. The market is not driven entirely by the war, but nearly so, as the negative ripple effects have already put in doubt the President’s tax cuts -- the only major macro force that has a positive tilt. The sell off today is clearly related to the widespread assessment that the Pentagon’s war planning totally misread the willingness of the Iraqi people to defend their homeland, if not the regime in Baghdad. There are still political factions in Iraq who are supporting the coalition forces, but every Arab/Muslim paramilitary unit in the country is fighting on the Iraqi side, including those Southern Shiites who detest Saddam Hussein. It is not the dollar cost of a longer war that burdens equity markets. The U.S. economy is so big that it could finance double-and-triple the projected costs of a few hundred billion dollars and do so without a significant increase in interest rates. It is the news of Muslims by the thousands willing to commit suicide, in Iraq and no doubt in the U.S., that multiplies the risks to commerce. 

Pentagon Planning: The talk of Washington is the New Yorker article by Seymour Hersh. The lengthy piece constitutes a serious attack on the competence of Defense Secretary Donald Rumsfeld. It comes just one week after Hersh exposed the financial dealings of Richard Perle, which forced him to resign as chairman of the Defense Policy Board. Although the most damaging quotes from Pentagon generals directed at Rumsfeld are anonymous, the 70-year-old Hersh has never been known to fabricate and has “deep throats” throughout the military and intelligence communities. What came across to me is the extent to which Rumsfeld allowed himself to be used by Perle and his sidekick, Paul Wolfowitz. The two obviously designed the plan that relied on precision bombing and the eagerness of the Iraqi people to welcome troops from a country that has bombing them on and off for a dozen years -- and has contributed to their miseries for that entire period with an embargo never intended to be lifted as long as Saddam was in power. General Richard Myers, chairman of the Joint Chiefs, has been a good sport in defending Rumsfeld, his immediate boss, but if Hersh is correct, the war difficulties ahead will only lead to more and more revelations about the dealings of the Military-Industrial Complex in the run-up to the war. 

Tax Cuts: Believe it or not, there is still a smidgen of optimism in John Snow’s Treasury Department for ending the double-tax on dividends. It rests on the possibility that the House conferees will be able to extract more than half-a-loaf in this week’s conference committee with the Senate. The House Budget Resolution provides for $726 billion in tax cuts that could not be filibustered, the Senate $350 billion. Both sides will open negotiations with an insistence on their exact numbers, but because Republicans control both houses and the White House, they think they might be able to squeeze more than half out of the conference, perhaps $580 billion. House Ways & Means Chairman Bill Thomas late last week floated a few options that would accommodate most of the double-tax proposal. One would tax dividend and capital gains income at 8% for the lowest bracket, 18% for the highest. The other Thomas option would exclude from tax 50% of an individual’s dividend earnings, approximating the 8/18% capgains rate that obtains after five years. Each of the options would cost $234 billion over five years. How does the administration get 100% on dividends? By having the reforms expire after only eight years. To do that, the key would be getting the support of Maine’s GOP Senator Olympia Snowe, a swing voter in Finance. These maneuverings will no doubt cause ups and downs on Wall Street until final tax legislation is signed months from now. 

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