The Uses of American Power: The Conference View from Puerto Rico Jude Wanniski and David Goldman March 5, 1991

Not since the apex of the British Empire at the turn of this century has a single power enjoyed the dominant position of the United States in the wake of Operation Desert Storm. What the Bush Administration will attempt to do with this power was the leitmotif of the Seventh Annual Political/Economic Conference sponsored by Polyconomics, Inc., held in Puerto Rico last weekend. Speakers included Republican National Committee Chairman Clayton Yeutter, Virginia Governor Douglas Wilder, Federal Reserve Governor Wayne Angell, Congressman Vin Weber, Mexican Finance Minister Pedro Aspe, former Thatcher cabinet member John Moore, author George Gilder, and political columnists Rowland Evans and Robert Novak. All remarks were off-the-record, but we can summarize the leading impressions that participants took home.

The great debate inside the Administration now centers on how to deploy the enormous strategic capital amassed from the success in Gulf War. A "maximalist" group, which some associate with Defense Secretary Dick Cheney, believes that this store of power should be used before it is lost. The United States, in this view, should not merely attempt to force a longer-term solution in the Mideast, but push for solutions to a set of other international problems, ranging from Baltic independence to the current tensions between India and Pakistan. The opposing view, which some associate with James Baker III, argues for caution. The United States should "stretch out" its political capital, rather than spend it all at once. At the center of the debate is the purpose for which the United States made its stand in the Gulf: the war was not fought for oil, nor was it fought for democracy, since we remain allied to Arab monarchies, but for a concept of world stability. The Bush Administration is still struggling with the vision of the kind of stability it wants to emerge from this victory. The consensus at the conference was that the President would be sparing in his exercise of power in the international arena, using moral authority to maximize influence over developments in the Middle East and the Soviet Union.

There were spirited discussions about the future of Mikhail Gorbachev. The dominant view was that the situation in USSR would become more chaotic in the year ahead and that civil war was an increasing possibility. A minority view suggested Gorbachev still had a little room to effect necessary reforms at the 11 th hour to avert a breakdown, and that he should not be viewed as being a hopeless case.

Domestic politics have changed as radically as the world scene. No Democrat presidential candidate is likely to emerge from senators and congressmen whose impassioned denunciations of the war policy are preserved on video for future campaign sound bites. That leaves the statehouses, with the erstwhile frontrunner, Governor Mario Cuomo, crippled by poor performance in dealing with New York's fiscal crisis. Democrat presidential candidates are conspicuously absent from the hustings at this relatively late point in advance of the 1992 elections, an unprecedented display of weakness, in the view of one seasoned observer. Party leaders worry about the loss of several Senate seats.

How President Bush will parlay his unprecedented popularity into support for his domestic agenda remains the biggest question of all. Bush is far more comfortable with foreign than domestic policy to begin with, and is still smarting from the burns of last October's budget debate. House and Senate Republicans are confused and divided over tax initiatives. In the absence of clear White House signals, Republicans are unclear as to whether they should support Senate Majority leader George Mitchell's payroll tax cut as a first step towards enacting a lower capital-gains tax, or whether they should eschew a deal with a Democratic leadership that has thus far stubbornly refused to budge on the capital-gains issue. Some Republican conservatives now believe that the capital-gains issue can be broached only as an afterthought to payroll tax reduction. An alternate suggestion was to put the political equivalent of a Norman Schwartzkopf in charge of the capgains fight at the White House, and to bomb George Mitchell until he surrenders unconditionally. The issue of how we tax capital formation is as central to the "New World Order" as is how democracies respond to naked aggression abroad.

During the past several months, the war has crowded other issues out of the President's field of vision, and the White House staff has spent virtually no time on capgains. A major weakness in the Administration's position is Council of Economic Advisors Chairman Michael Boskin, whose academic macro model predicts only marginal economic benefits from a capital-gains tax cut. Bush is far more susceptible to academic conventional wisdom than was Ronald Reagan, and still appears to believe that capgains reform is desirable but not mandatory for the economy's health. An aggressive minority of his advisors are trying to convince him otherwise. The consensus was that little can be expected on capital gains, but even the most skeptical agreed that if Boskin were to become more aggressive, the President would too.

Monetary and exchange-rate policy was discussed throughout the proceedings. There emerged a general sense of confidence that the monetary authorities were aware that periods of excessive liquidity in the '80s had forced the banking institutions into making bad loans, and the current economic weakness, not a traditional inventory recession, is tied to the unwinding of those transactions. The monetary authorities are being careful not to offset the pain of adjustment with a new cycle of excess liquidity and bad loans.

Mexico and the North American Free Trade Agreement (NAFTA), though, remain high on the Administration's agenda. Participants believe that free trade, both in the context of the GATT negotiations and the North American regional proposal will be at the top of the President's list. A tough fight with textile industry and union interests is expected, but Bush is likely to prevail. The Mexican government, for example, is prepared to defuse objections from U.S. farmers who fear an avalanche of Mexican produce under an NAFTA, by permitting them to invest in Mexican agriculture. Mexico continues making progress in controlling inflation and privatizing (or shutting down) state industries, and in attracting sufficient outside capital to finance its trade deficit. Supply-side reforms, including fixing the peso to the dollar and lowering income-tax thresholds for the middle class, remain on the government's agenda, but without a fixed timetable for implementation. The conference consensus seemed to be that the government is in good hands and Mexico continues to advance along plausible lines. The Salinas team, however, does show signs of excessive caution with so much left to be done.

If the discussion left one overriding idea in the minds of participants, it was that the United States now looks toward a prospect of possibilities limited only by the uncertainty of political leadership in defining goals and policies commensurate both with our newfound power and the responsibilities that accompany it. As our conference began the Gulf War came to a close. The conference ended on an uncertain note, as if it would be too much to expect that George Bush would be as decisive at home as he has been abroad, but with the hope that he might surprise us again.