Clintonomics Watch: Positioning Jude Wanniski February 26, 1993

The negotiating strategy of the Clinton team is a familiar one, last employed by a Democratic President, Jimmy Carter, in 1977-78. They pile on the bargaining table a mountain of higher taxes, pork-barrel projects, cuts in defense spending, and a few domestic spending cuts that primarily hit people who vote Republican. They assume they will only get a certain percentage as they negotiate with Republican leaders and their allies among conservative Democrats. They fight tooth and nail for every scrap of their mountain, conceding bits and pieces until they have won over enough opponents to get a bare majority and/or exhausted the opposition. To get enough Republican votes to claim bipartisan support, which will enable them to blame the GOP for the inevitable distress of all this "fiscal responsibility," they will hand out tax subsidies or import protection to the lobbying groups of the big corporations, who will get their country club Republican senators and congressmen in line. 

President Clinton this time has revived two other tactics of past Democratic Presidents that always work like a charm. One, learned years ago from Benito Mussolini and Adolf Hitler, is sheer terrorism, directed at the captains of industry. The method is to pick out one target, say the steel or oil industry, and bash the bejeesus out of it until all other Corporate Titans are quaking in their boots, thankful they have been spared. The Business Roundtable, inclined in that direction anyway, always leaps to support the President's plan, their members getting markers, like party favors, good at the Export-Import Bank. In the current maneuvering by President Clinton, it is the pharmaceutical industry that finds itself being marched to the gas chamber.

The second tactic is to present the Republican leaders with a rope and dare them to hang themselves with it. We observe the President and his team goading the GOP into coming up with ITS LIST of spending cuts to substitute for the Democratic defense cuts and tax increases. The Republicans feverishly prepare a long list of nickels and dimes squeezed from social spending, arguing that they mainly benefit bureaucrats, lawyers and accountants. The Democrats circulate the lists among the army of bureaucrats, lawyers and accountants they have cultivated, and they all scream about how the nickels and dimes will starve the lame and the halt, widows, orphans and minorities of every stripe and shade. The Democrats never expect the Republicans to actually hang themselves in this fashion, and often the Republicans realize just as they are about to jump that it isn't the smart thing to do. The tactic always works to keep the Republicans distracted, however. So it is now, as Senate and House GOP leaders hold lengthy daily meetings, debating the length of the rope and the size of the tree.

In 1978, the only way this Democratic strategy was thwarted, at least in large part, was through the entrepreneurial initiative of the late Rep. William Steiger [R-Wis.]. While the GOP leaders danced around as they are doing now, Steiger, a slight, young, personable member of the House Ways and Means Committee, quietly met with each member of the committee, Democrats and Republicans, one at a time. His idea was to cut in half the capital gains tax, which had been raised to 48% by President Nixon in 1969 with the encouragement of the Business Roundtable, and was strangling new enterprise. He brought with him a young economist from the American Council for Capital Formation, Richard Rahn, and a Silicon Valley entrepreneur,  Ed Tschau. At the end of the process, Steiger announced to a dumbfounded world that a majority of the Ways & Means Committee had co-sponsored his bill. The political establishment went bonkers. The White House frantically instructed the Democratic leaders in Congress to suspend work on the tax-and-spend legislation. It was too late. The news galvanized the growth wings of both parties at the grass roots. The Steiger amendment was adopted in 1979 and signed into law by an outfoxed Jimmy Carter. Atop that success was erected the victory of Ronald Reagan a year later.

We could sure use Bill Steiger now, but he died of diabetes soon after his momentous victory, only 41 years old. As far as we can tell, there is nobody at all doing the real work it will take to outflank Clinton, as Steiger did Carter. The GOP leadership is routinely denouncing the President's proposed tax increases and demanding bigger spending cuts. The corporate wing of the GOP is in complete control. Warren Rudman, the former New Hampshire Republican Senator who has become the most vocal proponent of austerity outside the Congress, is now arguing that the President should drop even the few meager gestures in his package devoted to economic growth. Jack Kemp and Vin Weber, the most vocal members of the GOP growth wing outside the Congress, call press conferences now and then, as they did yesterday, denouncing higher taxes and proclaiming solidarity with Senator Minority Leader Bob Dole and House Minority Leader Bob Michel, who are, of course, busy measuring rope. 

The Democrats have been prepared to give the Republicans some form of capital gains tax cut, perhaps limited indexation. They have it in their back pocket, ready to put it on the table if they can extract a high enough price for it. It begins to look as if they won't have to take it out of their pocket at all. Thus far, GOP opposition has been so pitiful that the Clinton Treasury has even reduced the miserable slice offered to entrepreneurial capitalism, the capgains tax cut offered to new businesses. There will now be a "cap" on the permitted gain, to prevent small business from getting ideas about growing. Meanwhile, BusinessWeek, the house organ of the Business Roundtable, gives us a cover story this week, "Is Microsoft Too Big?" Oh, oh. Bill Gates had better throw a Billary Party in Silicon Valley and get behind the Plan! The U.S. Chamber of Commerce, which had backed Bill Steiger in 1978, two weeks ago fired its chief economist, Larry Hunter, who had succeeded Richard Rahn. Hunter had been critical of the Clinton Plan, and the Chamber has been properly terrorized. The American Council on Capital Formation has been transformed into the American Council for a Value Added Tax, courtesy of Charls Walker, eminent lobbyist for the Biggest American Corporations. 

The economy remains glued together by Fed Chairman Alan Greenspan, who put in place a prospective bond rally in 1991-92 by resisting the demands of the Bush Administration that he inflate. The bond market held back its rally until it saw the Clinton team not only withdrawing such demands, but also promising to retain the Fed's independence, as long as he behaves. While Greenspan has not really endorsed the Clinton Plan and has not promised to bail out a Clinton recession with easy money, he has been kind enough to the White House to leave the impression that he is in the Clinton pocket, to be used when necessary. Instead of praising the President for leaving the Fed alone to do its job, which has produced the bond rally, he has been giving Clinton's deficit mania the credit for the rally. I'm afraid Greenspan is afraid to take any chances with this White House. Although there is nobody in Washington who better knows that the unindexed capital gains tax is at the heart of the deficit problem, Greenspan has persuaded himself to keep that information to himself. Then again, he may be taking some risks in private. Of course, these will amount to naught unless the issues surface in Congress.

That may not happen. Senator Phil Gramm [R-Tex.] now takes the position that the GOP should forget tax cuts, concentrate on pushing deeper spending cuts, watch Clinton destroy himself and the economy, and ride back into power in 1996. Many of my old friends in the GOP are chastising me for trying to persuade the Clinton people to try some supply-side angles, on the grounds that we should not want him to succeed. I find this amazing and wonder if this same attitude prevailed among Republicans in the first administration of FDR: "Let him fail, and we will march back to power in 1936! Uh, 1940. Er, 1944." History is already repeating itself, with Reagan, a President in the Coolidge tradition, being followed by Bush, a President in the Hoover tradition, being followed by Clinton, a President in the Roosevelt tradition. Unless history takes a different turn pretty quick, the already deep problems of the economy will get deeper, Chairman Greenspan will find he has no friends at the White House, and the world will suddenly seem a much more dangerous place.