Miscellaneous Updates Jude Wanniski and Michael Darda September 16, 2003

MORE TAX CUTS: The Democratic leadership in both House and Senate are calling for new tax cuts to help the manufacturing industry save blue-collar jobs. Senate Minority Leader Tom Daschle and House Minority Leader Nancy Pelosi have assured President Bush such a tax bill would get Democratic support and whisk through Congress. This is all about the legislation being drafted to substitute tax changes to offset the requirement of the World Trade Organization (WTO) that the Foreign Sales Corporation (FSC) subsidies to American exporters be eliminated by the end of this calendar year. As we’ve pointed out before, the legislation could add another few hundred points to the Dow Jones Industrials in sort order if it includes even a small piece of the bill presented before the recess by House Ways & Means Chairman Bill Thomas. The Democratic move is in support of the bill being offered by Rep. Charles Rangel [D-NY] and Rep. Phil Crane [R-IL], which is what I would call a “top down” solution to the WTO problem, primarily benefiting the multinationals that do the exporting. The Thomas version is a “bottom up” solution that works through the entire economy with supply-side tax cuts aimed at small business and entrepreneurial America. I’m assured by my sources that after early hesitancy, the two sides are trying to find common ground, on ways to split up the roughly $50 billion that becomes available with the end of FSC. The even better news is that Rangel seems prepared to accept some form of “dynamic” scoring, which is implicit in the Thomas version, which would “cost” more than $100 billion over a decade if scored dynamically. If both sides could get 75% of what they want instead of each getting half a loaf, it would be fairly simple to cut a deal. The Laffer Curve may be alive and well.

SARBANES/OXLEY: If you recall, at the time the Sarbanes/Oxley corporate governance legislation passed a year ago, we estimated that it probably lopped 800 to 1000 points off the DJIA. This was the bitter fruit of Enron’s fiscal shenanigans, which led the Bush Administration and Congress to smother the economy with a new set of needless regulations. Except for the bill authorizing the President to go to war with Iraq if he felt like it, this was probably the single worst piece of legislation that has passed in the Bush years. Congress did not do any cost-benefit analysis, because it really is impossible to put numbers like that on a bill that threatens the entire business community with drastic penalties for employee behavior over which they will have little or no control – unless the corporate officers spend a small fortune in oversight that is a dead weight on initiative and enterprise along with the occasional corner-cutter. The best source of information on how this is being handled we have found is in CFO magazine. Its current issue has a lengthy survey, headlined "Sticker Shock," which does point out that the SEC does have to come up with a cost-benefit analysis. The article notes: “No doubt, the SEC's biggest miscalculation was its original estimate that Section 404 compliance would require an additional five hours` worth of work per annual and quarterly filing. The figures were too low "by at least a factor of 100" if not more, wrote Cary Klafter, director of corporate affairs for Intel`s legal department, in a November letter to the SEC. "We can only hope that the Commission`s burden estimates are not used for any substantive governmental purpose, since they are completely incorrect."

IRAQ: I was flabbergasted in watching Vice President Dick Cheney interviewed on "Meet the Press," his first Sunday talk show appearance since March 16, the last time Tim Russert interviewed him. He seems to have learned nothing in the intervening six months. When I got the transcript yesterday, I went through all his commentaries on Iraq, finding glaring inaccuracies in his assertions.

CALIFORNIA: The decision by the Ninth Circuit Court of Appeals to postpone the Oct. 7 recall vote in California until electronic voting machines are available in all precincts muddies up the waters too much to estimate effects on the state’s economy. Because Gov. Gray Davis seemed to be getting on top of the political storm, with the GOP challengers including Arnold Schwarzenegger spinning their wheels, a postponement of the election to next March would enable all the candidates to alter their positions on how they would deal with the state’s budget problems. Davis himself could shift gears and seem less threatening to the business community, which has been hammered relentlessly by his payoffs to organized labor. The economic climate also should look better by March, as the national economy continues to benefit from lower tax rates and the absence of deflation. And Schwarzenegger himself might find his footing as a candidate, which would require some changes in personnel on his campaign staff.

PRESIDENTIAL: The GOP is cheering on the candidacy of former Vermont Governor Howard Dean, believing he would be far easier to beat than an establishment candidate. The White House at least pretends to fear the putative candidacy of retired General Wesley Clark, who like Dean opposed the war in Iraq. My guess is that Clark seems ready to get into the race just to show his stuff as a political candidate, to either prove to himself that he can attract voters big time, a la Dwight Eisenhower in 1952, or at least prove to Howard Dean that he would make a good running mate. It is more likely the latter. It still seems likely as the situation in Iraq remains a negative for the Bush Administration, there will have to be a few warhawks thrown to the wolves for Mr. Bush to win re-election. There is now reported to be at least a superficial squabble among the neo-conservatives, with Defense Secretary Donald Rumsfeld said to be ready to get the troops out of Iraq ASAP and turn things over to the UN and an Iraqi police force. The hardliner warhawks led by Richard Perle will fight any attempt to have a UN force at the top of the organization chart in Iraq’s future. They have always planned to have Iraq as a prime outpost in the American Empire. The other members of the UN Security Council have no intentions of helping with the costs of pacifying and rebuilding Iraq if it means an organization chart with the Oval Office at the tippy-top.  (JW)

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THE FED: There were no surprises in today`s FOMC statement, which essentially repeated the Fed`s ongoing concern about deflation risk and its promise to keep rates low for a "considerable period." With the price of gold at $373/oz. and the Fed`s reserve base expanding at a 10.3% annual rate, however, the FOMC`s preoccupation with monetary deflation is becoming increasingly ironic. At this point, it`s too early to sound the inflation alarm bells, but the backward-looking policy guideposts of the Fed are not reassuring. We would like to see Fed Chairman Alan Greenspan, once tuned into sensitive indicators of inflation/deflation risk, re-align the FOMC with a more market-based approach to managing monetary policy.  (MD)

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