FYI-040105 Thinking about the U.S. of 2004

Thinking about the U.S.
of 2004
Jude Wanniski
January 5, 2004

In my optimistic assessment of how the world economy should do in 2004 my core assumption was that a second wave of the supply-side revolution was already underway, at least in the tax policies of the major national governments of the world. With the dollar monetary deflation having ended in 2003 and no sign of a return in 2004, the world economy finally has the wind at its back, with a good chance good times will even spill into those parts of the globe that have seen nothing but distress for more than a decade. For that to happen, though, the American economy has to remain on the slow, steady growth track made possible by the more hospitable climate for capital formation, deflation’s end, and expanding economies abroad.

In thinking about 2004 in recent weeks as I prepared for this report, as much as I tried to isolate the economic trends and variables I could not escape the conclusion that foreign policy and national security will at least color the market movements. To be sure, it is because the economy is on a positive growth track that the electorate will have the time and space to focus on America’s role in the world in this most critical presidential election year. The 1968 election at the height of the Vietnam War and the depths of the Cold War comes closest to mind as a time when the voters were asked to put aside local matters and choose a leader capable of dealing with the formidable challenges abroad. Richard Nixon defeated Vice President Hubert Humphrey, with the voters hedging their bets by giving the Democratic Party both houses of Congress. Even then, the contest narrowed sharply in the closing days as Humphrey signaled a break with President Johnson’s Vietnam commitment. It was my first vote ever for a Republican in choosing Nixon, because, as political columnist for the National Observer, I had anticipated that he would “play the China card” in the process of winding down the war in Vietnam.

This year is the first since 1968 when I will seriously consider voting again for a Democrat, if former Vermont Governor Howard Dean is the nominee. The conditions in Iraq are not going to improve in the next 11 months unless there is a fundamental change in the President’s foreign policy, not only toward Iraq, but also toward the Middle East in general. As committed as Lyndon Johnson was to “nailing the coonskin” to the wall in Vietnam, President Bush seems committed to his vision of an American Empire, with the U.S. not only sovereign, but the Absolute Sovereign. Howard Dean is the only one of the contenders who understood that the pre-emptive war was unnecessary in the sense the United Nations Security Council was functioning as its creators in 1945 had hoped it would. The other Democratic candidates now say they supported the war because they believed the President had better information than they had about the threat from the Baghdad regime, but then why didn’t he share it with the UN? As the year unfolds, it will become clear to a wider portion of the electorate that it isn’t enough to now say the President was justified in going to war because Saddam Hussein was a despot. The United States is always justified in taking pre-emptive military action against a clear threat to its national security. Of the candidates, Dr. Dean is alone in understanding the danger to the United States when its leader acts as Mr. Bush did last March.

If the election were held today, the President would win re-election, but not in an electoral landslide. If nothing else changes between now and next November except the passage of time and serious concentration of the voters on the options they have, Dean could win, even with all the problems he has with his no-growth economic agenda. The electorate knows how to arrange the checks and balances when confronted with options like these. It would simply mean putting Dean in the White House by a narrow margin and increasing the numbers of Republicans in the House and Senate. Because President Bush has alarmed his own party conservatives by a willingness to sign any legislation no matter its costs in order to buy votes, as he did with the Medicare legislation, the kind of “fiscal conservatism” Howard Dean has been pledging he would make sense to the broader electorate. There is of course not a chance a GOP Congress would repeal the Bush tax cuts, which has been Dean’s proposal. It would be foolish for him to ask, but also impossible for Congress to send new tax cuts to the Oval Office for his signature. There would be a greater chance of basic tax reform with Republicans forced to work with Democrats on House Ways and Means, and Senate Finance with a Democrat in the White House. On the spending side, the savings on national defense would be considerable, considering the astronomical levels necessary under the Bush Doctrine.

If you can see the possibility of this outcome, with nothing happening but the passage of time, consider the likelihood that American casualties in Iraq will continue at the same rate as they have for the last several months. There would be at least 1,000 dead by next November and 4,000 wounded. Consider the possibility the guerrillas or insurgents would become more proficient at hitting Coalition aircraft. Consider the probability the timetable for political transition to an Iraqi governing body will be continually upset by conflicts with the U.S. agents in Baghdad who are still trying to control the outcome. And consider the likelihood that continuing investigations will be feeding new embarrassing material into how this mess came about in the first place. At some point, too, Saddam Hussein himself will have to be permitted a legal defense, which cannot but add to the administration’s political woes. It is still incredible that Tariq Aziz, the deputy prime minister of Iraq, is still held by the U.S. military as a prisoner of war, without legal counsel and without contact with his family. They can’t be held forever. I’m afraid President Bush knows only a fraction of what will be coming out of their mouths – which can be verified by classified U.S. documents that will be or are already being declassified. From this perspective, it seems to me the odds will shift against the President’s re-election as time passes. The capture of Saddam gave him a quick boost in his popularity and the expansion of the stock market and economy are helping, but from here on in it could be a much different story.

Of course Karl Rove, his political counselor, is neither sitting on his hands nor oblivious to the scenarios painted here. The match-ups between Bush and Dean in the opinion polls indicate no contest, with the President in some cases winning by 20 points. When likely voters were sampled in one recent poll, the number dropped to 5, a number that can vanish once the Democratic primaries are closed and the party unites behind Dean, which it will as soon as it realizes he might actually win. In this circumstance, the President has to “move to the center,” which in this case is toward diplomacy (Colin Powell) and away from force (Donald Rumsfeld and Dick Cheney). Changing personnel will not be enough, I don’t think. There has to be either a policy break with the American Empire and the Bush Doctrine or a clear success in the Arab/Israeli struggle. The former would mean a genuine power sharing with the UN in Iraq, which is hard to imagine the warriors would concede without a bitter fight, but which would quickly occur in a Dean Administration. The latter means real progress to a Palestinian state, which at the moment seems as hopeless as ever.

It was Wolfowitz who sold the idea that the road to peace between Arabs and Israelis went through Baghdad. This seemed to mean that once Israel was rid of a threat from Baghdad it would be more amenable to a Palestinian state more or less along the lines of the 1967 borders. The latest twist comes from former Clinton Defense Secretary William Cohen, a former Republican Senator, and Jimmy Carter’s National Security Advisor Zbigniew Brzezinski. Appearing on CNN’s Late Edition last Sunday, they made a persuasive case that the road to peace in Iraq went through Jerusalem! Said Cohen: “If we`re going to have success in Baghdad, we also have to have success in the Middle East peace process. And the president has to be as vitally engaged there as he is in Baghdad.” Brzezinski chimed in: “If we don`t deal with the wider problems in the Middle East, including the Israeli-Palestinian issue, we`re going to be stuck in an extremely explosive, indeed exploding, Middle East. And what he said is absolutely right: The road map, reinforced by the Geneva Accords, is now the way to go, and the United States has to push.”

What Brzezinski means, of course, is that Ariel Sharon and the Israeli government has to be pushed. The Palestinian leadership, including Yasir Arafat, has not only endorsed the road map, but also has indicated that it could accept the Geneva Accords, which represents a proposed completed settlement. It is more or less what the Palestinians and Israelis worked out in Taba, Egypt, in the first weeks of the Bush Administration, before the talks were suspended for the Israeli elections. The chance the President would push Sharon in any of meaningful way in time to signal palpable progress before next November now seems non-existent. In his December 29 telephone interview with the Washington Post, Secretary of State Colin Powell twice noted how progress could be made only if the Palestinians behaved themselves. The Palestinians of course note that there were no suicide bombings in Israel for two months from October to December, when the Israeli army then sent gunships to assassinate a Hamas leader, killing others in the process. A Palestinian suicide bomber followed almost immediately in breaking the two-months of lessened violence. None of the candidates for the presidency raised an eyebrow, but this suggests there will be no relief in the violence of the Middle East anytime soon, as Cohen and Brzezinski propose. There will be no pushing.

In this scenario, there remains the GOP assertion that if there is more violence in the last weeks of the presidential campaign, the electorate will stick with President Bush rather than turn to an “anti-war” Dean. This is the rally-round-the-commander-in-chief thesis, closely related to an “October Surprise” notion that might shift opinion going against Mr. Bush to him in the closing days. Dean has tried to counter this by insisting he is not at all “anti-war,” and he is not a pacifist, or he would not have a chance in November. The issue is when do you war and when do you not and that will play out in the course of the campaign. The obvious choice for Dean as his running mate is General Wesley Clark, the most impressive candidate in the field other than Dean himself, a Southerner by birth and the favorite of Bill Clinton. Political prognosticator Charles Cook said last week that Dean could not win south of the Mason-Dixon Line even if he had Robert E. Lee as his running mate. But with Clark, who insists he will not go on a Dean ticket, Dean gives Clinton a clear victory in his encouragement of Clark, and an influence in the Dean Administration. A Dean-Clark ticket unifies the Democratic Party, leaving only pro-war Joe Lieberman sulking.

What else does it do? It would bring tax reform to the fore of the Democratic domestic platform. In his Meet the Press appearance yesterday, Clark said he would today unveil his plan for a “fairer, simpler and more progressive” tax system. I have no idea what the specifics will be, but that hardly matters. That is because the electorate may put Howard Dean in the Oval Office, perhaps with my vote, but it will not give him a Democratic Congress to boot, nor would I. The term “more progressive” is interesting, though, as it would permit Clark and Dean to propose a 40% top rate on income, but I could easily see myself supporting it at a threshold of $1 million, as long as “income” does not include “capital gains.” On that I am certain it would not, because even the Clinton Democrats know farmers, small businessmen, shopkeepers, etc., might have one year in their lives with an income over $1 million and the voters could figure that out. Remember that Wesley Clark’s earliest supporter in Congress was Rep. Charlie Rangel, the ranking Democrat on House Ways and Means, whose Harlem office is in the same building as Bill Clinton’s and who was among the first to promote Hillary Clinton as a Senate candidate. If there is anything I have persuaded Rangel in the years we have been in contact it is that the capgains tax really is bad news for poor people. The Clinton tax increase of 1993 was scrupulously careful to leave capgains alone at 28%. That is why I would not be worried about a Dean-Clark administration, either as an investor in equities, or as an advisor to investors in equities.