Bad News, Good News Jude Wanniski August 1, 2003

The worst news of the week comes out of Israel, which has been testing the Bush administration’s resolve to keep Israelis and Palestinians on track – with the White House failing the test. In his meeting with the President in the Oval Office, Prime Minister Ariel Sharon rejected the idea of tearing down the wall it is building along the Palestinian border. An expansion of settlements in the Gaza Strip was then announced, with the excuse that it was merely a “natural expansion” of an existing settlement. And the Knesset passed a law denying citizenship to a Palestinian who marries an Israeli Arab. My reliable source of opinion in Israel, a Russian-Jewish astrophysicist in Tel Aviv, writes today that “the social climate in Israel after the Iraq victory is, honestly saying, very far from an idea of any Palestinian state, at least, placed some where near Israel. I do not believe in a peace process, based on a good will of Sharon and others from the right. Some elements which have been presented in Rabin`s Oslo time in the society (it is difficult to determine them verbally) are visibly absent in nowadays Israel.” 

Unless I’m missing something here, we should soon expect an unraveling of the Hamas three-month cease fire, with the White House demanding of Mahmoud Abbas, its hand-picked Palestinian leader, the extermination of Hamas once and for all. The spillover would be felt in Iraq, with stepped-up attacks on U.S. military forces. The situation in Iraq is far, far worse than it is being painted by the President and his team. I have to read the British and Canadian press accounts of how a small number of heavily armed U.S. troops in the cities and towns are facing Iraqi vigilantes and Muslims from neighboring countries who are making better use of weaponry and intelligence to kill and maim. There is no reason to believe the U.S. troops can regain the initiative when every serious effort they make to contain the opposition causes serious loss of live by Iraqi civilians – which inflames the population and feeds the recruiting efforts. It would be nice if European and NATO relief could come to the rescue, but as Europeans read of the Likud Party intransigence on the Road Map, they are unlikely to support action by their governments to come to the rescue of George W. Bush, who they already dislike to a degree that exceeds any felt by any other American President in my lifetime. 

Mr. Bush himself has now taken to explaining why it is CNN’s fault that the economy is not in great shape, noting yesterday and this morning that the CNN logo “The March to War” – running hourly in the weeks in advance of the war -- was not conducive to business investment. The unavoidable fact is that he gave CNN that headline and he is now faced with a long uphill road as more an more facts emerge about how he marched the nation to war because of an imminent threat from Baghdad that was never there. It is my best guess that unless the President accepts a few resignations from his security team, he will be in the same kind of fix his father was in 1991 in refusing to ask for the resignation of Treasury Secretary Nick Brady. It was Brady then who encouraged Bush Sr. to break his “read my lips, no new taxes” pledge. Personnel is policy, and the millstones around the President’s neck are named Condi Rice and Don Rumsfeld. It is hard to see how things will get better on that front unless the President is as clean cut as he was in removing the incompetent Treasury Secretary  Paul O’Neill and the inept Larry Lindsey from the levers of economic policymaking. 

So where is the good news?

Bill Thomas: God knows, the chairman of the House Ways is as unpopular with his House colleagues as he is popular with his constituents in California. But if I had to name one single person inside the Beltway who is responsible for what strength there is on Wall Street today it is Thomas. Yes, the chairman of the President’s Council of Economic Advisors earlier this year, Glenn Hubbard, was instrumental in persuading the President to shift gears away from Larry Lindsey’s soggy Keynesianism and to cut tax rates on capital. But Hubbard himself has departed the Beltway, leaving Treasury Secretary John Snow as the leading supply-sider close to the Oval Office. But it is Thomas who – with a dynamite staff – took the play away from Hubbard’s tax initiative (which was okay) and made it much better by cutting the capital gains tax to 15% from 20%. Earlier this week I wrote about the possibility of getting a string of supply-side tax and regulatory changes as a result of Thomas’s approach to the Foreign Sales Corporation problem with the World Trade Organization. The more I look into this, the more possibilities I see for a real boost to the nation’s capital stock. I’ll be writing about all this next week when I have a firmer grip on the politics behind it, but meanwhile have a look at the list of proposals in the Thomas plan. Much of it, I think, can fly.

North Korea: The mass media is reporting that Pyongyang has been backing down on its insistence of bilateral talks with the Bush administration, but that’s the necessary spin to show the President is not letting Kim Jong-Il get the better of him. What Kim has agreed to is “multilateral talks,” within which will take place “bilateral talks.” Those of you old enough to remember the Vietnam negotiations will remember the angry words between the diplomats over “the shape of the table” they would sit at. Kim Jong-Il has all along wanted the U.S. to formally agree to a non-aggression pact as the price it has to pay for the DPRK dismantling its nuclear weapons program. They are of course doing this because they watch the U.S. launch a pre-emptive strike on Baghdad, when practically everyone in the world could see Iraq was no threat to anyone – allowing UN inspectors to look under Saddam Hussein’s bed for WMD. We are not yet out of the woods on an escalation of threats with Pyongyang, but I think this is one area that is on the road to peaceful resolution. 

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