April Considerations Jude Wanniski April 20, 2005

TAX SELL-OFF: A reporter for the NYTimes tells me I may have been lucky in telling my clients on Friday that the sell-off would not extend into this week, as it was directly related to taxpayers running into the April 15 deadline with tax bills that surprised them (as happened in April 2000). I had to explain to him that if I was wrong, I could be out of business, which is why for 27 years I`ve been sure of my ground before making those kinds of predictions. Reporters (or academics) can be wrong 90% of the time and keep their jobs.

JOHN BOLTON: I told a contact in the White House last week that Bolton`s nomination to be UN Ambassador was almost certainly doomed and a back up should be arranged ASAP. My reasoning was that he was so thoroughly inappropriate for the position that the Democratic opponents would keep piling on stuff until there would be a straw that would break the Republican camel's back. At the last minute, yesterday, Sen. George Voinovich [R OH] provided that proverbial straw, saying he could not vote for Bolton just yet because of reports that he is not, at heart, a please/thank you kind of fellow, which is what one expects in a diplomat. Bolton`s defeat would be a serious defeat for the neo-cons in the Veep`s office who have been cooking up plans to isolate Iran on trumped-up nuke issues.

BEN BERNANKE: There have been several dope stories in the last week indicating that even though Fed Governor Bernanke has now been nominated to be chairman of the Council of Economics Advisors, he may still be the front-runner to replace Alan Greenspan next year as Fed chairman. What`s closer to the truth is that former CEA chairman Glenn Hubbard is the front-runner, because he has already passed muster at the White House and is well liked by the President and Karl Rove. In that sense, Bernanke is going to be auditioning for the Fed chair, getting serious "face time" with the President, and with Rove observing how he handles himself with the media and with Congress. I'd guess Bernanke would also pass muster, so it could be a toss-up that Greenspan could tip, most likely to Bernanke.

CHINA CURRENCY: The April 6 Senate vote by 67-to-33 to punish China with high tariffs if it does not revalue its currency in six months would be a serious error if it made it into law, but the vote was only procedural, forcing a formal vote perhaps in July. There are serious opponents of such action in the administration, especially the CEA, and I would expect even if it does pass a formal vote in the Senate it still could be blocked in the House, where the GOP leadership has more control. The Treasury Department isn`t helping, with John Snow practically begging China to revalue to get the political heat off his back and Undersecretary for International Affairs John Taylor using stronger language. Fortunately Taylor, a total flop at his job, is leaving to go back to Stanford at the end of the month and we can hope for an improvement in that slot. We will follow this closely, of course.

THE PHILLIPS CURVE, REBORN:  In 1958, a British economist named A.W. Phillips made a splash with a paper purporting to show a trade-off between inflation and unemployment. If you accepted a little bit of inflation, you could lower the unemployment rate. The idea turned out to be one of the dopiest of the century, and it was discredited when inflation and unemployment went up together in the 1970s ("stagflation"). Paul McCulley of Pimco reminds us it has snuck back into the heart of current Fed policy. That is, the Fed is actually looking for the sweet spot on the Phillips Curve where inflation and unemployment are in balance. Fed Chairman Alan Greenspan of course knows the Phillips Curve was a zany idea, borne of necessity in the U.K. of the 1950s when British Keynesians kept trying to expand the stagnant economy with devaluations of the pound sterling. It was still alive and kicking in 1971 and was cited by Keynesians at the time as reason for going off gold and devaluing the dollar against the yen. But Congress does mandate that the Fed contain inflation and unemployment at the same time, violating the Mundellian rule that if you are trying to hit two targets, you need two instruments. The Phillips Curve is a handy concept, even though it leads to "conundrums." If there is more interest in this poisonous idea, which Milton Friedman told Bloomberg recently was one of the worst of the last half-century, we will return to it in a future letter. For now be assured the Fed really could push the U.S. economy into a new stagflation as it tries to chase inflation and unemployment at the same time with an ever higher funds rate.

BUSH REFORMS: Several conservative commentators have lately been pronouncing the President`s Social Security reforms dead for this session of Congress. But I still think the White House strategy designed by Rove & Co. is the correct one. Instead of presenting a formal plan designed by Treasury bureaucrats, the idea was to simply throw out the concept, and to let the Democratic opposition punch away at the smoke. The idea of carving out a piece of Social Security for personal accounts is a good one, but unless House Ways&Means Chairman Bill Thomas can work out a package that includes a tax reform, Democrats will not break ranks on personal accounts. Much of this will have to await the Mack/Breaux Tax Commission`s findings in June, and Thomas and Rove will have to be nimble in dealing with multiple issues al fresco. But it could be done and would be great for every aspect of public finance that now bedevils Washington.

IRAQ: Although the news media is not spending as much time reporting on the violence in Iraq, with fewer American troops being killed compared to the numbers several months ago, the situation is not getting any better, either politically or militarily. The Bush administration hopes things will improve when the new government can begin writing a constitution, although I still doubt improvements can come as long as there are U.S. boots on the ground.