Market Slide/Japan Trade War: A Way Out Jude Wanniski & David Gitlitz May 19, 1995

MARKET SLIDE

Yesterday’s 82-point plunge of the DJIA, with most of it coming in the final hour, can be traced to the sudden dimming of prospects on Capitol Hill for capital gains action this year. Yesterday afternoon, seven Senate GOP “moderates” released a letter to Senate Majority leader Robert Dole stating that they could not support a budget resolution that includes sizeable tax cuts this year. The budget resolution approved by Sen. Pete Domenici’s budget committee now being debated on the Senate floor does not specify a tax cut. However, it includes a $170 billion “reserve fund” for the seven-year time frame of the resolution, which represents the surplus revenue that would accrue during this budget balancing exercise. Amendments now being developed among Republicans for votes next week would use all or part of these “reserves” to support a tax cut. Sen. Phil Gramm’s proposal to append the entire House contract tax package to the Senate resolution may gain no more than 30 votes. However, a group being led by freshman Sen. Spencer Abraham, with the expected support of Dole, will offer a scaled-back measure that includes capital gains relief. The Abraham group will need all but one or two of the seven who signaled their anti-tax cut sentiments to Dole. They include Sens. Cohen, Simpson, Jeffords, Chafee, Hatfield, Murkowski and Kassebaum. Senate approval of some form of tax cut is considered vital to Dole’s presidential prospects, yet there is no assuranace that he will convince a sufficient number of this group to give even the scaled back Abraham plan a majority. The sell-off is the first sign of the market discounting the anti-growth bias now becoming increasingly apparent in this Congress.

David Gitlitz

JAPAN TRADE WAR: A WAY OUT

When the Senate on May 9 voted 88-to-8 in support of the Clinton administration’s hardball negotiating position on Japan there was scarcely any discussion. Apparently Special Trade Representative Mickey Kantor simply asked Senate Majority Leader Bob Dole for a sense of the Senate resolution and Dole agreed to do it. There was supposed to be a voice vote, which would have enabled Senators to give Dole and President Clinton the cheapest kind of support. Sen. Robert Byrd, who co-sponsored the resolution with Dole, asked for a roll call, though, and the Greatest Deliberative Body in the World was stuck with a recorded vote on an issue of profound importance, without debate. Sen. Bill Bradley was the only member to raise his voice against the resolution, and even he did not mention our negotiating demand that the Japanese government force its citizens to buy auto parts they do not want from American manufacturers. The others voting in opposition were Republicans Packwood and Hatfield of Oregon, McCain and Kyl of Arizona, Kassebaum of Kansas, and Democrats Inouye of Hawaii and Johnston of Louisiana. It has now come as a shock to several of those who voted for the resolution that they gave their okay to a White House bargaining position with which Japan cannot comply. One Republican staffer later learned in horror that his boss voted for the resolution, explaining to him later: “It’s like the girl I want to marry won’t have anything to do with me, so I ask the government to require her to do so.” 

Indeed, Japan’s Ambassador to the United States, Takakazu Kuriyama, Wednesday told the MacNeil-Lehrer news hour that there was basis for an agreement between his country and ours, except for this one sticking point. He tried quietly and patiently to explain that there was no way his government could do what we were asking of it. Our European trading partners appear to have learned about this latest U.S. fiasco and are opposed to it. Japan is almost certain to win on appeal to the World Trade Organization, but as of tomorrow, any of the 13 luxury cars arriving at a port of entry will be subject to the 100% tariff. The tax, though, will not be collected until June 28. What the Senate should do is draft a new resolution that supports the President’s negotiating position, minus the demand on managed trade. Even Senator Byrd should agree to support such a resolution, as he would understand that if the situation were reversed, the Japanese would be demanding that we violate half the provisions in our Constitution.

Such a measure not only gets the Senate off the hook should this fiasco turn into something uglier than even we contemplate, but it also gets the President off the hook for the consequences of the ill-considered use of force. It also would produce a trade agreement by enabling Ambassador Kuriyama to inform his government and the Japanese people that the United States had dropped this sticking point, this impossible demand. The likeliest source for such an initiative would be Senator Connie Mack, chairman of the Joint Economic Committee of Congress, who has been alerted to the suggestion. Mack is a close friend and longtime political ally of Jack Kemp of Empower America. Keep your fingers crossed over the weekend.

Jude Wanniski