Bullish on Jim Baker Jude Wanniski August 24, 1992

Today is Jim Baker's first day as savior of the Bush Administration and re-election campaign. With 10 weeks to go to November 3, he takes over with President Bush trailing Governor Clinton in the polls by 8-14 percent. He has the power to hire or fire practically anyone in the White House or the campaign HQ four blocks away. He will also be able to play his political trump cards on any policy within reason. We have our hopes high that he will trump Treasury Secretary Brady's legal and political objections to indexing capital gains by executive order, tackle the "fairness" issue head on, and position George Bush for a home stretch dash as a champion of entrepreneurial capitalism.

This would imply a different direction than we saw in the President's acceptance speech last week in Houston, which put budget considerations ahead of economic growth. The best we could say is that Baker and Bob Zoellick, his right hand man, did not have the time to do more than make minor adjustments to the game plan they found on the eve of the GOP convention. The fact that the President committed himself to an unspecified broad-based tax cut conditioned on unspecified spending cuts is being interpreted today by Evans & Novak as a victory for supply-siders -- but only based on their reading of the direction of policymaking, in much the same way that HUD Secretary Jack Kemp ten days ago predicted the President would pledge a tax cut solely on the basis of Baker's farewell speech at the State Department -- in which he specifically placed lower taxes ahead of spending cuts.

The columnists also recall that in early December 1988 JBIII spoke glowingly of supply-side economics at a Washington, D.C. black-tie testimonial to Kemp at which President-elect Bush also spoke. It was JBIII who astonished the audience with the following words of praise for a man supposedly his political competitor:

You know, Will Rogers once wrote, "The fellow that can only see a week ahead is always the popular fellow, for he's looking with the crowd. But the one who can see years ahead, he has a telescope. It's just that he can't always make anyone believe that he has a telescope." I can remember when people said Kemp-Roth would not work. I can remember one editorial that called it "macroeconomic snake oil." An academic wrote, "It's a mistake to assume that a tax cut is going to encourage investment." And a congressman said, "You don't know very much about economics." The critics and the skeptics are silent now, and a lot of us have eaten our share of crow because what some of us thought might be best termed "voodoo economics" really turned out to be "can-do economics."

Remember the context. Vice President Bush had just won the presidential race in a landslide over a moderate Democrat, Michael Dukakis, in a come from behind victory. JBIII was his campaign director. And it was JBIII, who had left his Cabinet post at Treasury to take on this political assignment, who set the supply-side substance and tone of the campaign. Not only did President Bush campaign aggressively on behalf of a capital gains tax cut, Jim Baker also aggressively argued its merits every chance he had, in the face of the "fairness" arguments raised by Dukakis. It's my sense that Baker was responsible in 1988 for the campaign's supply-side approach and that he will recast the 1992 campaign in that direction. President Bush, campaigning in the Midwest over the weekend, took a far more aggressive stance on capital gains than he did at the convention, indicating his willingness to debate Clinton on the merits. As Clinton has been ridiculing the idea of a capital gains tax cut, we may actually hear the future of capitalism hashed out in this campaign.

As we've been suggesting for the last several weeks, the issue may next surface over the question of the President's right to at least index capital gains by executive order. The President's old team, led by Nick Brady, snuffed out this idea earlier this year by arguing that he did not have authority. Brady and his lawyers were backed up by the Attorney General and by White House chief counsel Boyden Gray. It has been our belief that Brady simply does not want to get into these areas of confrontation, that he believes capgains is a losing issue for the President, and that the lawyers gave him the position he wanted.
 
The businesses that would benefit most from a positive decision to index capgains are the 95% of the businesses that could be classified as small and medium-sized, with lots of growth ahead of them. These are the businesses typically represented by the U.S. Chamber of Commerce. So it was that Larry Hunter, who recently replaced Richard Rahn as the Chamber's chief economist, asked the prestigious New York law firm of Shaw, Pittman, Potts & Trowbridge for its opinion on the matter. He picked the firm because two of its partners, Charles Cooper and Michael Carvin, are former officials of the Justice Department's Office of Legal Counsel. Cooper is the fellow whose legal opinion at Justice sank the attempt to have the President claim line-item veto power by executive order.

Tomorrow afternoon in a briefing at Citicorp Center, the National Chamber Foundation, along with the National Taxpayers Union Foundation, will release the Cooper-Carvin legal opinion that confirms the authority of the President to index the capital gains tax through administrative means. The legal memorandum, which is as firm as anyone could ask in asserting this position, has been presented to Jim Baker and other relevant officials in the Bush Administration. A Washington, D.C., press conference will display the memorandum on Wednesday.

Officials of the U.S. Chamber of Commerce, who had totally given up hope of ever getting anything out of Brady, are now telling me they actually believe there is a very good chance the President's new team will be able to lean on this private memo to overcome Treasury's objections. If Jim Baker wants to do it, there is absolutely nothing to prevent him. There is nothing to lose, as an executive order indexing capgains would not harm anyone in the world, except the Clinton-Gore ticket. There is everything to gain, as the action would have the impact of an enormous tax cut on the economy with no loss of federal revenues even under static analysis. Because locked-in gains now frozen would be liberated by the order, the Treasury would gain more than $20 billion over the next three years as real gains are realized, freed from the threat of confiscation. Of course, on a dynamic, supply-side analysis, tax revenues at all levels of government would surge by many times that amount as the national economy climbed out of its torpor. I believe it would also be enough to break the current worldwide deflation fever as the action would be emulated elsewhere, beginning in Canada.

This will of course be in the news Wednesday. By the weekend, with a full work week in the White House behind him, Jim Baker will likely be on one of the talk shows. He'll be asked about this strategy and I can't think of a reason why he wouldn't signal a willingness to proceed on this line if the gridlock on Capitol Hill is not broken on its own. I have no inside information on this and have not spoken to Baker or Zoellick. But as Evans & Novak seem to be betting on the come, so am I. We'd be in a Baker bull market.