Clinton or Dole? Who's Best for Wall Street? Jude Wanniski August 22, 1996

The financial press already is telling us that a Dole presidency would be good for the stock market and a Clinton presidency would be better for the bond market. Please don't waste your time reading any of this nonsense, even when it appears in The Wall Street Journal. The fact is, we still do not know enough about the economic stratagems of the two campaigns to tell us which will be better for the financial markets. President Clinton has been better for the markets in his four years than might have been anticipated — although we predicted he would be good for bonds as early as September 1992, when we learned he was not a weak dollar fan. His backing of Fed Chairman Alan Greenspan, right from the start of his administration, has been his greatest contribution to Wall Street. His domestic agenda in 1993 would have damaged the stock market if it had passed in its entirety, especially Hillary's health care monstrosity. The tax increase, with no GOP votes, was never as horrible as it was portrayed. It left the capital gains tax at 28%. Relatively good Fed policy, passage of the Telecomm bill, and Republican control of Congress in November 1994 kept the economy from slipping into a recession.

The reason the pundits are saying Dole/Kemp would be good for equities and bad for bonds is based on a simplistic rule. The higher level of economic growth that would be produced by the tax plan they have put forward would drive the economy onto a higher growth path, but it would produce big budget deficits which would spook bondholders. This argument flows from the erroneous assumption that the Reagan tax cuts of 1981 led to the huge deficits of the 1980s. There is hardly a scrap of intellectual honesty behind this argument. Even in his Tuesday blast at Reaganomics in the NYTimes, former Clinton economic advisor and Fed Vice Chairman Alan Blinder acknowledged that it was the Volcker Deflation that produced the 1981-83 recession, not the tax cuts. And in any case, the Reagan tax increase of 1982, which Jack Kemp fought tooth and nail, was dollar-for-dollar larger than the marginal rate cuts of 1981. The insane attack on junk bonds in Bush's first year, in the FIRREA legislation, ballooned the federal deficits by several hundred billions via the S&L crisis. The chaos of the time and the deficits that piled up in the Reagan years could all be traced to the decision to go from gold to greenbacks in 1971, Even the defense buildup was not that big a deal.

For the most part, this chaos is all behind us. The federal deficits on the horizon — even those Ross Perot keeps reminding us about in the year 2020 — no longer are a function of the monetary aftershocks that followed Mr. Nixon's 1971 decision to float the dollar. If anything, the bond market would welcome the Dole plan to cut marginal income-tax rates by 15% and to cut capital gains tax in half. Alan Blinder's argument against the Dole plan refuses to acknowledge the law of diminishing returns in tax policy, which is what the Laffer Curve is all about. His view, now the consensus view among Clinton economists, is that you first take note of how much money must be spent by the federal government and then set tax rates to produce the required revenue. In the supply-side world, you set the rates where they will yield the highest revenues consistent with the biggest economy and live with that revenue flow — even if there is a deficit. Even if the Dole plan costs $548 billion over the six years, cumulative GDP in that period would be at least $50 trillion. The bond market could care less about $548 billion when it is seen as 1% of national output. And by our lights, even though the Dole plan is suboptimal in its supply-side economic effects, the 50% exclusion on capital gains by itself would easily produce an extra few trillion of GDP, which would cover the financing costs of the Dole plan several times over.

Since he came aboard, Kemp's technicians have been finding some glitches in the Dole plan. Once debugged, the magnitude of the numbers described above should make it obvious to all but the most hardened academic Keynesian that both the stock market and the bond market would rise on the prospect the plan would be enacted. It wouldn't rise dramatically, because it leaves capital gains unindexed. But it would be better than the current Clinton plan to expand the economy through increases in education subsidies. There are already a million Ph.D.s driving taxi cabs. Educating labor further only increases underemployment in a capital-starved economy. Rep. Bob Torricelli [D-NJ], the only supply-side Democrat among the Northern liberals, is pleading with the White House and Clinton campaign committee to back a 50% capital gains exclusion indexed for inflation. The President's chief political guru, Dick Morris, has been urging Mr. Clinton in that direction. Treasury Secretary Bob Rubin is fighting back. If Rubin wins, Dole will beat Clinton in New Jersey, for example. Campaigning with Kemp today in New Jersey, Dole can credibly promise a capgains cut. Without Kemp, nobody would believe him. Clinton's promise is credible if he were to invite Congress, after the conventions, to send him a clean bill on capital gains that he would sign.

How do we get to a Dow of 10,000 by January 1, 2000? I would be sorely disappointed if we celebrate the new millennium short of that number. (I might even turn in before midnight.) That kind of advance would be meaningless if the price of gold were higher than it is now. But assuming there is at least a de facto stabilizing of gold until that time, there would have to be a serious simplification of the tax system. It doesn't have to be flat. It doesn't even have to be fair. Simplification in itself would liberate so many resources now tied up in managing the complexity of the tax code that the value of all human assets would rise appreciably. The timetable might see a Dole presidency and a GOP Congress spending 1997 and most of 1998 redrafting the federal tax code — trimming it to 7,500 words or even 75,000 from the current 7,500,000. If it could pass by Thanksgiving of 1998, IRS could have it ready to go by January 1, 1999, with a short phase-in of a year so that most of its provisions can take effect by 2000. It would be nice to begin the new millennium with a fresh start on taxes, wouldn't you say?

To do this, Dole has to get elected, because we can't really expect the Democrats to oversee a reorganization of the tax system. The four best technical people to oversee a redrafting of the tax codes are all people associated with Kemp and the Reagan Revolution — Gary and Aldonna Robbins and Steve Entin, who all worked in the Reagan Treasury, and Larry Hunter, Kemp's chief economist at Empower America, formerly the chief economist at the U.S. Chamber of Commerce and minority staff director at the Joint Economic Committee of Congress. As much as President Clinton might love to be competitive with Dole and Kemp in proposing a rewriting of the tax codes, he does not have a single person in the White House or in his administration who can hold a candle to these four. There are another 40 men and women we could probably find in the GOP camp before we could turn up the first Democrat at the bureaucratic level whose mind hasn't been poisoned by a Keynesian textbook.

The stock market alone doesn't determine the outcome of elections. Even if Dole's economic plan is judged better than Clinton's at the wire, he still could lose if he is out-pointed by the President on national security, foreign policy, social issues, fear of Newt, etc. If Clinton does get re-elected, I would bet we could still get to 8000 on the Dow by 2000. My assumption is that he can't get re-elected without some growth initiatives that could then be worked out by a GOP Congress. In either case, it is not hard to see the Dow moving up with either of these men. The much greater potential is with the Republicans, if only because of their bench strength.