The Economy Stinks Jude Wanniski December 3, 1993

Britain has finally decided it has had enough economic misery, cutting the capital gains tax for small business in budget measures just announced. It's half-hearted, limiting the incentives to the entrepreneur rather than the investor, but it's the first step in the right direction. Here at home, though, the business and political establishment -- the corporate economists and their media agents -- are telling us daily how nicely the U.S. economy is doing. This or that index is up, Christmas looks good, various surveys of consumer sentiment are up, construction spending is climbing, and business economists are confident that 4th quarter GDP will hit 4% at an annual rate. Everything, though, is relative, as they say, and we say the economy stinks. The growth rate should be closer to 6% for the next several years for the economy to be considered as healthy as it was in the later Reagan years -- not to mention the 1950s and early 1960s, when one breadwinner per household was usually sufficient to finance the American Dream. The federal deficit is still clicking along at an annual rate in excess of $230 billion and is projected to rise steadily unless we nationalize and ration health care. State and local governments are squeezing everywhere, cutting services, raising taxes and fees. They are building more jails to contain an underclass outraged because there is no point to education when there are no jobs. The economy stinks, but the same establishment that trumpeted the news of Ronald Reagan's failure is singing from an Orwellian hymnal that celebrates this mess. Rep. Dick Armey of Texas, the Ph.D. supply-side economist who chairs the House Republican Conference, is practically alone in Washington calling all this "an intellectual crime."

Where is the leadership going to come from? Not the White House. The Clinton Administration is in the forefront in proclaiming slow growth a blessing to mankind. Anonymous quotes leaked out of the West Wing this week fretting that if the unemployment rate gets down to 5.5% next year it will be inflationary, and the Federal Reserve will have to raise interest rates to slow the economy. The Phillips Curve -- the neo-Keynesian theory that argues growth is inflationary -- is back in vogue around the world, led by the intellectual criminals in the U.S. establishment. The World Bank has been controlled by intellectual criminals practically since its founding in 1944. It is rushing all over Asia, trying to persuade the few governments left on earth who are celebrating growth to slow down. 

The U.S. Treasury Department, which is a hotbed of intellectual criminals, was the chief culprit during the Bush years in persuading Japan, with threats, to "burst its speculative bubble" of economic growth. Now, with Japan in recession and the Tokyo stock market in a free fall, the U.S. Treasury is so desperate that it is unashamedly recommending income-tax cuts in Japan. [Read about it in Paul Gigot's column in this morning's Wall Street Journal.] Treasury Secretary Lloyd Bentsen obviously has one advisor who tells him tax increases spur economic growth and another who says the opposite. Or maybe it is the same fellow on Mondays, Wednesdays, and Saturdays. Income tax cuts would help Japan, but not as much as if Japan either restored the lower capital gains tax on real estate that is the root cause of its current problem, or, better yet, eliminated capgains taxation on all capital assets. Would the U.S. Treasury recommend that idea? Don't hold your breath. It would expose the intellectual crimes at home, among Treasury's masters of aggregate demand.

In Britain, at long last, the decision to cut the capital gains tax on small business is at least an opening. England's Prime Minister John Major, whose popularity has been approaching single digits, finally budged off the Phillips Curve, having observed the demolition of the Conservative Party in Canada two months ago. The Canadian Tories had promised the beleaguered people of Canada another major dose of austerity to get the economy moving again. The message got through. In the Times of London this week, Nigel Lawson, who was Maggie Thatcher's Chancellor of the Exchequer, penned an apology on how he fumbled on capital gains taxation. It was Lawson, following the U.S. Treasury's lead, who put the U.K.'s capgains tax up to 40% in 1988, which ended the Thatcher boom and sent poor Maggie into retirement. She has privately said this was the biggest mistake she made in all her marvelous years as PM. At last we hear from Nigel. The British still have their economics screwed up, however. The proposal calls for giving entrepreneurs a break on capital gains, with a zero rate up to 250,000 pounds, half the regular rate on the next 750,000. The people who have the capital, though, are those in the higher brackets. It is not the entrepreneur who needs the lower tax rate, but the capitalist. Still, we are thankful for small favors and expect this will at least open up the discussion again.

Amidst all this cheer, I spent a delightful three days in Mexico City, which is the only other capital in all the world where they cut taxes this week. Remember our scale on finance ministers? With Alexander Hamilton at 10 and Nick Brady at zero? What a pleasure it is to be in the company of Pedro Aspe, Mexico's finance minister, the best in the world with a Polyconomics rating of 8.0. [A close second at 7.5 is Anwar Ibrahim of Malaysia, with Lloyd Bentsen at an even 3.] In introducing Dr. Aspe at our annual meeting of the Mexico 2000 Council, I observed there was bad news and good news: "The bad news is that Pedro Aspe will not be the next president of Mexico. The good news is also that he will not be the next president of Mexico." That is, he will be free to do that which he does best, play a creative role in Mexico's economic revolution. We can almost bet that Aspe will be named governor of the Bank of Mexico, replacing a retiring Miguel Mancera, and that Aspe will work with Fed Chairman Alan Greenspan to fix the dollar/peso ratio. Aspe and his deputy, Francisco Gil Diaz (a fellow who has the potential to be an 8 or better himself), also promised they will resolve the confusion over the capital gains tax. They think they eliminated it entirely, but with legislative language that seems sufficiently flawed to the business community as to produce doubt.

[A lengthy, bullish report on Mexico and the PRI's presidential candidate, Luis Donaldo Colosio, appears in the December Global 2000 Perspective, being sent to our subscribers this afternoon.]

What do we do with this stinko economy at home? We suppose we have to wait until the holidays are behind us, and the shopping season gives way to President Clinton's stimulative tax increases of 1994. Both Senate Minority Leader Bob Dole and House Minority Whip Newt Gingrich have indicated an intention to raise the economic issue when the Congress returns. The Clintons, of course, want to have us all believe the economy is doing so well, growing slowly enough not to ignite inflation, that we can get right down to the health care business. 

Where is Alan Greenspan when we need him? He is the one man with the standing and the credibility to bend the Phillips Curve into a pretzel and toss it back onto the trash heap of history -- where he knows it belongs. Indeed, it was not many moons ago that Greeenspan was privately celebrating the death of the Phillips Curve, observing how fortunate the world is that the days when it dominated policymaking everywhere are over and done with. Alas, the Phillips Curve will be with mankind forever, as it is the principal weapon of the Malthusians, who will also be around until the end of time. As we continue to hope this will be later, rather than sooner, we look to the resurrection of the Laffer Curve, the principal weapon of the Reaganauts and other political optimists. Christine Todd Whitman dusted it off in New Jersey last month. Dick Armey has been sharpening it. We shall see who next takes it up for the kill. Meanwhile, don't let anyone tell you the economy is swell. By Alexander Hamilton's standard and ours, it smells.