Budget Watch: Memo to Newt Jude Wanniski January 15, 1996

Up ’til now, you have been doing a masterful job of playing with the huge pile of chips you won in the November 1994 congressional elections. You have turned the government in the direction of fundamental reforms and have pulled President Clinton and the Democrats a significant distance down that path. Alas, that pile of chips has been dwindling lately as the President has been getting better cards and playing them with more confidence. In delivering a seven-year balanced budget scored by CBO last week, he called your bluff and won his biggest hand yet. The American people now believe he has essentially met your central demands and that it is up to you to close the deal. You meet again with the President on Wednesday for another hand in this running poker game, and the stakes are higher than ever. After watching the President’s press conference last week, my advice to you, as a friend and longtime admirer, is to cash in your remaining chips. As long as you can preserve the one sure economic growth element in the budget plan you’ve presented -- the capital gains tax cut -- there’s no point trying to drag the Democrats or the nation along without another election. President Clinton now holds all the aces.

Until I watched the President’s press conference, I believed you and your freshmen fire eaters still were in control. It seemed you might face down the President and his team by working with the Blue Dog Democrats, to get the budget reconciliation that has eluded you for the last three distressing months of confrontation. On Meet the Press yesterday, John Kasich clearly indicated a willingness to fight on, betting more of your team’s dwindling pile in another round with the White House. John is a great Budget chairman and a national asset, but neither he nor the freshmen can make further headway with their revolutionary exhortations. The fact, Newt, is that it was never in the cards that you could fundamentally reorganize the federal government in the 104th Congress, based merely on the mid-term elections of ’94. Mid-term elections are meant to be mid-course corrections to the path set by our American presidents. President Clinton was so far off in his interpretation of his meager ’92 mandate that the American people had to shock him in ’94, but we really do need another presidential election to refine the direction you’ve set and the pace of change desired by the American electorate. 

I don’t put much stock in public opinion polls, but exit polls are the most reliable. They at least are meant simply to guide us in what the voters had in their minds as they informed themselves before voting. Political leaders to a large degree can ignore over-the-shoulder uninformed opinions that are collected on street corners and by telephone. Exit polls can’t be ignored. Those taken following the 1994 elections clearly indicated that three-quarters of those voting Republican voted against the President’s direction and only one-quarter voted in favor of what they understood to be the Republican direction. This is as it should be. Presidents are meant to be guideposts, to set general direction; the Congress is meant to define the order and pace of travel down that road, to accommodate as best it can the needs of all who must travel it. 

Newt, you are as important to the nation as you are because, in addition to all your intellectual gifts, you are an overachiever and a risk-taker. You are determined to win as much as you can, leaving nothing on the table. In a political world of deal-makers, who are forever throwing away winning hands, you stand out as a man who is always prepared to push to the limits of your resources. In a nation craving fundamental change, you offer not only revolutionary fervor, but the kind of relentless drive required to bring about change. What you and your troops are lacking, though, is a clear mandate from the American people on the direction of change. That can begin to happen as soon as you put the budget to rest for this year, clearing the stage for a national debate among all the presidential contenders.

To that end, I think we are all relieved that you have decided to put aside as bargaining chips both the debt limit and another potential government shutdown. I don’t think the debt limit was a card that should ever have been played. You got nothing from it, except perhaps conveying a sense of recklessness as part of your motive force. The two shutdowns clearly produced major concessions from the President, including his commitment last week to a balanced budget. You will go into the Wednesday meeting still uncertain about the shape of the tax cut to which the President will agree. But you can be sure that if he tries to deny you what you want on capital gains, he risks losing all he has gained to this point of play. It is really the only growth element in the entire package that is on the table. You and the Republicans have a history for its popular mandate tracing back to the 1988 presidential election, in addition to its inclusion in the Contract. 

This mandate was never nullified by the Democrats, and the President himself has never specifically spoken out against it. The liberal wing of the party would love to see capgains stripped from the budget. But its leaders also know that if the President says it is the deal-breaker, he will be handing you back the aces. They know as well as you that the financial markets are banking on capgains, infinitely more than they are counting on real or imagined spending cuts in the deal. For the President to kill capgains -- and the expectations of relief that have been building in the capital markets for more than a year -- would send the financial markets south in a hurry. The recession of 1996 would destroy any chance of Clinton’s re-election. You have plenty of room for give on the tax cuts, inasmuch as you can easily zero out the $500 kiddie credit in three or four years. The Kemp Commission will report tomorrow, and we should soon see that the country is moving in the direction of a flat tax which will eliminate the kiddie credit anyway. It will be much easier to write its sunset provision into the budget. Don’t be surprised if President Clinton finds a way before the week is out to praise Jack’s work and announce that he is asking his Treasury Department to examine it for ideas that he might incorporate into his own program!

Admittedly, you will have some difficulty selling the House GOP Conference on any kind of deal at this point, given the President’s refusal to budge on the ideological issues. The freshmen may accuse you of cutting a deal prematurely and refuse to go along, as Bob Novak infers in his column today. They have to see that in winning as much as you have, including capital gains, you are forcing the President to get his troops to agree to something they find anathema. There really are two sides to a deal here, in perfect political balance. Some of my clients are telling me this would assure Clinton’s re-election, but that sentiment is precisely why you have no choice but to accept such a deal. The country would otherwise see you as preferring recession to a deal. And there would be no certainty to the outcome of the November elections even if the economy were in a boom. The people still crave a fundamental change of direction and they may not see it coming from either Bill Clinton or Bob Dole. You’ve done the best you can, Newt. It’s time to cash in.