Three Days in Washington Jude Wanniski April 15, 1994

Tuesday through Thursday, I spent more than 30 hours in meetings, breakfasts, lunches and dinners with politicians, policymakers and journalists, in the administration, on Capitol Hill, and at the Federal Reserve. We mostly discussed potential Japan trade sanctions, Korea, MFN and China, the bond market, the economy, health care, tax policy, the '94 elections, the '96 elections, the black vote, Russia and Bosnia, and a dozen or so minor matters. Whitewater barely came up. The original purpose of the trip was to cement an invitation from the Cuban government to visit Havana to talk political and economic philosophy with the senior leaders, perhaps the most senior; it appears I will be going mid-May. The debriefing of the Washington trip will take a few weeks, as I sort out my impressions, but here are some highlights:

JAPAN: The administration hardliners have clearly won for the moment, with two weeks left before the President acts. Clinton still has it in his head that Japan's trade surplus is bad for the U.S. and the world (it's not), that its politicians can reduce it if they want to (they can't), and that if we keep up the pressure they will allow themselves to be beaten into submission. I put the following comment to very senior officials at the White House, State Department, and Council of Economic Advisors: "I know it is not a popular view in the administration, but it is a fact that Japan's trade surplus, dollar-for-dollar, yen-for-yen, is exactly equal to its capital outflow. If trade sanctions are imposed, this will disrupt the outflow, which comes mainly to the United States, with automatic negative effects on our capital markets, on Wall Street's stocks and bonds. Insofar as the administration's hard line on trade has in the past year toppled two governments in Tokyo, is there any chance of a reassessment of that policy?" The reaction, universally, was that U.S. trade pressures had nothing to do with the political turmoil in Tokyo. At the White House and State, officials were puzzled at my description of the relationship between trade and capital flows, not having heard of it before, but appeared nervous with the idea that their policy was rattling Wall Street and driving up bond yields. At the CEA, my description of the trade and capital flows was readily accepted as being accurate, with interest in my logic in how this was playing out on Wall Street. The CEA view is that the problem will be transmitted through the exchange rates. I argued that it falls directly into Alan Greenspan's lap at the Fed, as any trade contraction reduces demand for dollar cash balances here, requiring a Fed tightening to prevent the excess reserves from feeding inflation. The view at the Fed seemed almost exactly coincident with mine -- with a guess that at the last minute the White House will back away from this mine field. A word from Senate Minority Leader Bob Dole urging a reassessment might do the trick. My fingers are crossed.

BONDS: The New York Times front-page story on the Fed, signaling another increase soon in interest rates, rests on the assumption that the economy cannot grow faster than 3% without producing inflation -- 3% being a rule-of-thumb on productivity increases -- that the economy is growing faster than 3% now, and that Greenspan buys all this and will argue for tightening until he wrestles the economy down to that level. What's going on? My guess is that Greenspan and others at the Fed are trying to explain their bias toward tightening without having to publicly discuss their concern about the gold price being stuck at $380 or so. On the Times editpage today, CEA chairman Laura D'Andrea Tyson insists there is no inflation on the horizon, dismissing the gold price merely as evidence that it is "out of the doldrums," which is exactly where Greenspan wanted to keep it. Why not simply focus the argument on the gold price specifically, now that Greenspan has already identified it as his favorite leading indicator of inflation? The argument I got from several sources this week was that once a number is announced, speculators will test the Fed's willingness to defend it. My answer was to cite Greenspan's House Banking testimony in February, when he pointed out gold's utility is that the world stock of gold is enormous compared to its annual flow. It is easy to stomp out inflation when it is still a trickle of excess liquidity, from dollars to gold. It is enormously difficult to stop or reverse inflation once the general price level goes into motion. Whither bonds? If Clinton pulls the trigger on Japan, the dollar will sink and gold will rise, and Greenspan will have no choice but to tighten, mopping up surplus liquidity. If Clinton relents, putting Mickey Kantor back in his holster, the dollar should rise and gold fall, and Greenspan can begin thinking about a round of golf. 

CHINA-MFN: Unless there is some organized uprising that Beijing has to stomp out between now and June, my sense is that the White House will finesse this problem. The line I picked up on China is very soft this week, in sharp contrast to the line on Japan.

NORTH KOREA: The line on North Korea has definitely softened. A senior State Department official privately volunteers that neither Japan, China, Russia nor South Korea believe Pyongyang has a nuclear bomb, "although they may be wrong." If North Korea's neighbors are telling us to relax, why should we foment a crisis? People in Washington are shocked when I tell them I wouldn't get excited even if North Korea had a bomb. What would they do with it? There are ten thousand of the damned things scattered across Asia. I'd only worry about SPECTRE getting a hold of one, unless of course we could coax James Bond out of retirement to deal with it.

HEALTH CARE: There is motion on health care at the committee level, but the financial problems still seem impossible for the Democrats. Senate Majority Leader George Mitchell's decision to turn down the Supreme Court in order to stick around to pass a health care bill has all of Washington wondering "What's really going on?" My guess is that Mitchell really doesn't want to don the black robes, but has been kidding all along, as an intellectual pretension -- much as Mario Cuomo toyed with us for years about the presidency. Everyone still seems to think some legislation will be signed into law in time for the elections, but the Republicans actually seem to be uniting against any plan that would both increase the power of the government and decrease the viability of small or emerging enterprise. GOP Senators are meeting in Philadelphia this weekend for a policy powwow and may come closer to developing a unified conceptual approach. The idea of putting tax reform at the center of the health care debate -- pushed by all the conservative think tanks in their Consensus Group -- is still very much alive. Bill Kristol is now leading a charge against a hard commitment to "universal coverage." 

CAPITAL GAINS: Our idea last year of a coalition behind a capital gains tax cut that would merge Republicans and the Congressional Black Caucus has come back to life. I ran into Rep. John Kasich [R.-OH], ranking Republican on the House Budget Committee, who told me he's working directly with Rep. Bill Jefferson [D.-LA] on a bill that would eliminate capital gains taxation in urban enterprise zones and index capital gains for the rest of the country. Jefferson, a CBC member who is on the Ways & Means Committee, was asked to undertake the assignment by Rep. Kweisi Mfume [D.-MD], chairman of the CBC, who was a guest at our client conference in Boca Raton, Florida in February. He told our conference that "the biggest problem facing the African-American community today is access to capital and credit." Mfume this week asked if I would address the CBC to discuss these and other matters. I hope to do so when I get back from Cuba -- a trip I am undertaking at the instigation of Rep. Charles Rangel [D.-NY] and the passive assent of Senator Dole, both of whom are interested in where the exploration might lead. I informed the White House of the trip as well.

RUSSIA AND BOSNIA: As I suspected, the bombing of Bosnia last weekend was engineered by the international bureaucrats at a moment when nobody in the White House or on Capitol Hill had time to think of the implications. The idea that UN Secretary General Boutros Boutros-Ghali has suddenly become commander-in-chief of U.S. armed forces has since been confronted with horror. Note in this morning's Wall Street Journal "Washington Wire" that the Administration is now scrambling to kiss and make up with the Russians, the only force around that can help us off the slippery slope with the Bosnian Serbs. Anthony Lake, the President's national security advisor, should be sent back to his Ivy League classroom.

1996: Columnist George Will has given a big push to the idea of a Colin Powell presidential candidacy in 1996, and I bumped into the idea again and again on this trip. Until now, he'd been thought of as a GOP running mate in '96. Congressional Republicans seem intrigued with the idea of Powell's charisma, his clarity of mind, his presence radiating discipline and authority. The idea of going after the black vote in '94 and '96 has also caught on. I'm dubious of the Powell idea, though, as he would have to run in the primaries, and the electorate would not necessarily find his military experience suited to the nation's crying domestic problems.