Thinking about the Contract Jude Wanniski April 7, 1995

It is entirely appropriate to label these past hundred days an historic milestone in U.S. history, quite the equivalent of FDR’s first hundred days of New Deal legislation in 1933. In both, the splash of legislative action signaled the arrival of a new epoch of American political economy. At the same time, we must be careful to note that the actual achievements of each historic milestone were rather modest -- flurries of activity that represented announcement of great change ahead. When Newt Gingrich and Dick Armey cooked up the contract agenda last summer, the ten promises they chose were specifically shaped to be within the bounds of reason. The intent was to present credible pledges that would not only be seen as attainable, but that also could be attained. Gingrich, remember, led the revolt of House Republicans against President Bush’s 1990 budget deal -- which broke his “Read my lips, no new taxes” pledge. He was determined to begin the process of restoring the electorate’s faith in the political class in general, Republicans in particular. He has certainly begun that process. 

In recreating the political climate of last summer, it is important to recall that Gingrich had the encouraging experience of the 1993 gubernatorial race in New Jersey. This was the race that was supposed to have demonstrated how President Clinton could win re-election after breaking his campaign promise on taxes -- raising them after promising to cut them. The President’s political strategist, James Carville, was assigned the task of getting New Jersey’s Democratic Gov. Jim Florio re-elected, after Florio had reversed his tax pledge in 1989. To all the political world, until the very end, it looked like Florio would do it. His GOP challenger, Christie Whitman, had begun her effort with a lackluster primary campaign, winning only after a midstream shifting of gears from budget balancing to tax cutting -- on the urging of Forbes publisher Malcolm (Steve) Forbes. What Gingrich saw was the voter reaction in the closing days of the campaign. The early cynicism that greeted Whitman’s promise of a 30% income-tax cut over three years tested her resolve. Florio played the class warfare card, as expected. Polls consistently indicated weak support for her promise, tempting her to change tactics. Instead, in the closing days of the campaign, she reaffirmed her commitment and dashed past Florio at the wire. 

The victory reaffirmed Gingrich’s confidence in the wisdom of the electorate, the essential ingredient in representative democracy. If he could put together a credible policy menu of change, offer it to the national electorate, and stick to it through hell or high water, he would be rewarded by the voters with GOP control of the House. And so he was. The November 8 victory that gave the GOP control of both Senate and House for the first time in 40 years almost certainly would not have occurred without Newt’s initiative -- which gave the national electorate sufficient assurance that he would be moving in the correct general direction. The exit polling indicated a primary rejection of the direction offered by the President and the Democratic Party, but there clearly was warm applause for the GOP themes as embodied in the Contract. It was a victory of the Reagan direction over the New Deal direction. The GOP is at least in the right quadrant.

There is still serious work to be done in the 104th Congress during the remaining 600 days -- particularly as the Senate grapples with the House tax bill and welfare reform. But we are already into the orbit of the 1996 presidential race, one of the most important of the 20th century. The general assumption is that a Republican will win the White House and that the GOP will control both houses of Congress. The reformation to take place with that concentration of power will constitute Act One of the Republican new deal. These last 100 days will already be remembered dimly as an overture. The Republican who is elected President will have to be carefully selected by the electorate to refine general direction into a more specific path -- one that prepares the United States and the rest of the world for the 21st century. As the twig is bent, so grows the tree. These thoughts are now on Washington’s mind. 

Newt himself would no doubt throw his hat into the presidential ring come September, if he should observe the contenders now in the field spinning their wheels. Gingrich knows the polls that show him to be unpopular with the masses are not to be taken all that seriously, because they are merely a reflection of the savage scare campaign undertaken against him by the Democrats. If he entered the race in September, he would soon have an army at his side and raising a warchest would be no problem at all. The fact that he is letting it be known that he would do this, if necessary, is reason enough for Senate Majority Leader Bob Dole to make sure Newt is happy with the way he handles the Contract. How does he know what will make Newt happy? Newt will advise him every step of the way, through his amigo, Sen. Trent Lott, the Majority Whip, and through myriad other channels, including the national press. 

What is of most interest to me is how the tax bill will fare in the Senate. Without any question it will contain the capital gains provision as passed by the House. The more important question is whether it will emerge in a way that will permit the House-Senate conference committee to get it signed by the President. If so, the Dow Jones Industrial Average will end the year somewhere above 5000. Instead of a sluggish economy in 1996, we would have a zippy year as a backdrop to the presidential campaign. The Democratic Party’s liberal ideologues, whose public voice is Michael Kinsley’s, will try to persuade the President to veto the tax bill to prevent this from happening. They do not want a boom on Wall Street, with the rich getting richer, and Newt Gingrich taking credit for the Republicans. There are, of course, Republicans who would also prefer Clinton to veto the tax bill, in order to carry the issue into the ‘96 campaign against him. Sen. Phil Gramm of Texas, who hopes to overtake Dole and win the GOP nomination, would probably prefer to see Dole stumble through the tax bill and have it emerge from conference in a form that invites a presidential veto. In that regard, nothing Dole achieves in the Senate on taxes will be satisfactory to Gramm. Indeed, Gramm has now endorsed the House-passed version, which President Clinton has indicated he would veto. My guess is that the Senate will convert the $500 kiddie credit in the tax bill -- which was always a terrible idea -- to a marginal rate reduction. The conference committee in the end will produce a bill that includes an indexed capital gains tax cut and an increase in the personal exemption. The President will be able to sign this on the grounds that it does not transfer as much cash to the rich as does the House bill. It also frees up enough money to enable Dole to seem less grinchy than Gingrich on school lunch programs and such. On the side, Dole and Gingrich might have to give the President an increase in the minimum wage, to mollify his troops. Obviously, it gets murkier at this level. 

Why should we be so optimistic? Because it is in the interests of the major players in both political parties -- Clinton, Dole and Gingrich -- to succeed in working out a bipartisan compromise. Each has to fear most the electorate’s wisdom of seeing through a cynical, partisan approach by either side. Vice President Gore and House Minority Leader Dick Gephardt continue to babble class warfare arguments, because that’s all they have in their empty bag. President Clinton has remained sufficiently above the battle to be able to make a deal, if the Republicans are prepared to do so. There will be a lot of yelling and screaming between now and then, but I think we can bet it will happen.