Notes on the Revolution XXVIII Jude Wanniski February 22, 1996

GREENSPAN: The stock market slide on Tuesday had practically run its course before Fed Chairman Alan Greenspan gave his congressional testimony. What he said was neither here nor there. Yet, the financial press blamed him for the selloff, which was accompanied by a steep decline in the bond market that he had nothing to do with. The market rebound on Wednesday that continues today was in place before Greenspan repeated his clouded testimony before Senate Banking. Now the financial press credits him with the rebound in stocks, which was not accompanied by a steep advance in bonds. The market sell off Tuesday was more likely related to early assessments of the New Hampshire primary and Pat Buchanan’s victory, a surprise and confusion which would normally invite nervousness in foreign markets. 

BULL MARKET: We can thank Steve Forbes for the continuing bull market, especially his decision to stay in the race all the way to San Diego. Imagine if there were no supply-sider in the race, to embarrass the other doom-and-gloom budget-balancers with a high-octane growth message. Bob Dole might already be the anointed winner instead of yesterday’s mashed potatoes. With Pat Buchanan also spurning a balanced-budget Holy Grail and boosting a modified flat tax, economic growth has come back into vogue. Newt Gingrich’s Contract With America is gathering dust, except for the capital gains tax cut that all of Washington seems to want to get into law. The exit polls from Iowa and New Hampshire are being carefully studied at the White House and by the Clinton re-election committee, where they are noting serious support for a flat tax. It is now inconceivable that the San Diego convention will not have a platform plank committing the party to a total scrapping of the existing tax codes and some form of simplified flat tax. By the time Forbes is finished, there should be a commitment to a gold-linked dollar. Treasury bureaucrats had been assuming the flat tax idea would blow over, but the politicos in and around Mr. Clinton are beginning to see the wisdom of getting a competitive model on the drawing board. The longer and better Forbes does in the primaries ahead, the more likely there will be a supply-side tax competition in the fall campaigns. We said Steve’s entry alone would get the DJIA above 6000 this year. A victory would add another 1000-1500 points. When Steve sees an era of unparalleled prosperity in this post-Cold War world, he is not kidding. 

ECONOMY: Greenspan says there is better than a 50-50 chance recession will be avoided this year. This is because he continues to believe there will soon be a budget deal of some sort. The debt limit bill that will be filed next week will attach the capgains tax cut, which Republicans expect the President to accept. Economic expansion can then begin in earnest, beginning with inventory rebuilding. Scuttlebutt reaching the press corps indicates there will not be retroactivity or indexing of capgains, and I tend to agree, but as long as Ways & Means Chairman Bill Archer has a say, at least retroactivity to January 1 of last year is still alive. By year’s end, the economic expansion would be the most vibrant since the Reagan years. Remember the capgains tax is discretionary, which means assets have been piling up behind the tax wall since ’87 when  rates went to 28% from 20%. The expansion would not be inflationary, although wages and commodity prices will rise. Productivity increases and declines in financing costs will cut the costs of finished goods.

BONDS: As soon as the capgains cut is in hand, the demand for dollars will renew downward pressure on gold, which has already come well off its recent peak and hovers below $400. We still think gold would decline in the expansion, dragging down long-term rates. It’s hard to think of much to worry about at the moment, but we are sure something will come along to take the time off our hands.