The Politics of Taxing and Spending Jude Wanniski January 28, 2004

Earlier this week, Lawrence O’Donnell, a regular panelist on NBC's "McLaughlin Group," put his finger on Howard Dean’s problems with Democratic voters, which is his promise to balance the budget by raising taxes. This from a liberal Democrat who I first met years ago when he was chief of staff to Senator Pat Moynihan, then chairman of Senate Finance. O’Donnell went on to predict that as long as Dean kept up this theme he would not win a single Democratic primary, and that it was almost certainly too late for him to shift gears on the issue. While the rest of the political press corps focused on Dean’s "gaffes" as the chief reason for his sudden collapse going into the Iowa caucuses, O’Donnell cited a "killer" TV spot for Senator John Kerry that aired incessantly in Iowa on the tax issue. Voters who had simply associated Dean with the war began to learn his position on the economy involved rolling back the Bush tax cuts and peeled away, giving Kerry the lift he needed to turn him. His antiwar credentials are not as good as Dean's, but they are good enough, considering how much better he is positioned on taxes. John Zogby, the pollster who tracked Dean's decline throughout, told me "electability," not taxes, was the common chord that sank Dean. But I suggested taxes were the reason a fraction of his supporters realized he could not be elected with the economic plank in his platform. A former Democratic Senator who had endorsed Dean because of his stance on Iraq told me he had tried to nudge the Dean camp toward tax reform and simplification instead of budget balance via tax hikes, but got nowhere:  "You can lead a horse to water, but you can’t make him drink."

Kerry does not have the nomination sewed up yet, but even if his twin-wins in Iowa and New Hampshire propel him to success, he will have a problem with his own economic plank, which is more judicious than Dean’s in promising to keep at least those Bush tax cuts enjoyed by the middle class. All the candidates have been burdened with the "Rubin Problem," the party consensus that the Clinton Administration created several million jobs over eight years by raising taxes in 1993 and balancing the budget. Former Treasury Secretary Bob Rubin seems to have been courted by all the candidates to share his wisdom with them. When Howard Dean was asked by the Wall Street Journal three weeks ago to name the economists upon whom he most relies for his counsel, he cited Rubin and New York Times columnist Paul Krugman. Krugman has been as passionate in his opposition to the war in Iraq as he has been in denouncing the Bush tax cuts. Dean has also cited Jeffrey Sachs of Harvard, Alan Blinder of Princeton, and Joe Stieglitz of Columbia as sometime advisors, all old-fashioned Keynesians. Kerry has not presented a similar roster, but it should be noted he has lately been listening to Bob Shrum, the political strategist, who I think does understand the political potency of supply-side tax cuts on capital formation.

As discussed in earlier letters, I do not think it is necessary for the Democratic nominee to be as strong on tax issues as President Bush has become. The Republican Congress practically everyone expects to survive the November elections would reject proposed tax hikes from a Democratic President. To be sure, there would be some relief from conservative Republicans if they had a President who would begin vetoing spending bills instead of encouraging Congress to spend at will, as Mr. Bush has been doing. GOP conservative activists have been foaming at the mouth at the White House spending spree. "Out-of-control" is the mildest criticism one hears. Many of the old Reagan conservatives and CATO libertarians who were never impressed with the idea of a pre-emptive war in Iraq are now seeing the continued financial drain adding to the $500 billion deficits as far as the eye can see, wondering what new adventures the Pentagon has in mind.

All this adds up to new headaches for Karl Rove and the others who are mapping the re-election campaign. They really had been counting on Howard Dean being the nominee, which they believe would have meant they would not have to worry about their right flank. Longtime conservative activist Jeffrey Bell last week told the Conservative Political Action Conference that if Kerry does turn out to be the nominee, the White House will have to spend more time shoring up its right flank on cultural issues. And the further right Bush moves in that direction, the more he risks losing electoral votes to Kerry. The President’s immigration proposal to give virtual amnesty to several million illegal aliens was designed to drain Hispanics away from Howard Dean this fall. Instead it is not only driving conservatives up the wall, but also bringing denunciations from liberal Democrats who believe the proposed mechanism will give businessmen life-and-death power over low-income workers and increase low-wage problems for Americans at or near the bottom of the income ladder.

There has already been some fallout because of the outsize deficit projections coming from the Congressional Budget Office. Douglas Holz-Eakin, the CBO director and a former member of the Bush Council of Economics Advisors, has been so tough on the administration for its spending posture that he now sees little chance that the President could seriously think of more tax cuts on capital formation this year. There had been some hope that he would be able to sell Lifetime Savings Accounts and Retirement Savings Accounts that would vastly liberalize the Roth IRA approach. With only cursory mention in his State of the Union Message, the President signaled this would not be a high priority. Nor can we expect Congress to make the tax cuts passed in 2001 permanent, as Mr. Bush did promote in a recent Saturday radio address.

The only tax measures expected to pass this year are the "extenders," tax subsidies for R&D and the like that are popular in both parties and would cause heartburn in both red states and blue if they expired. Then there is the Foreign Sales Corporation (FSC) legislation that has been on the back burner for several months, but which must pass in the next few months or bring the wrath of the World Trade Organization down upon U.S. exporters, most of them in the "swing" states that Mr. Bush needs to win in November. The legislation to avoid the penalties is waiting to be moved in House and Ways Means by Chairman Bill Thomas, but a number of rustbelt Republicans are refusing to support it unless it is altered to directly benefit their district manufacturers. We hear Thomas is waiting for the WTO to scream bloody murder in order to focus attention on the problem so he can get the bill in motion. Members of Congress of course hate the idea of having to do the bidding of the WTO, but in this case the WTO has real power to penalize U.S. manufacturers for the illegal subsidies they get from the FSC. When this does break loose, it should provide a boost to equities and also cause a pickup in the demand for liquidity, slowing gold’s advance.

Otherwise, there is nothing further in the presidential orbit on fiscal matters to raise flags, red or green.  And except for Howard Dean’s one-time shot at Fed Chairman Alan Greenspan last week for supporting the Bush tax cuts, no presidential candidate has said boo about monetary policy. The Middle East is another story, still the weak link for the Bush re-election campaign. In the next week, we will watch carefully to see how the politics of taxing and spending are played going into the seven primaries scheduled next Tuesday.