Clinton/Lott Government VII Jude Wanniski March 7, 1997

GREENSPAN: We did everything we could these last two weeks to find a Senator or Congressman on either banking committee to ask the Fed Chairman if he could imagine himself worrying about an incipient inflation if the price of gold remained in its current $350 range and the dollar/yen rate remains as strong as the Rubin Treasury wants it, above ¥120. Had Greenspan been asked, bonds would have rallied, but instead declined on the continued assumption that rates will be raised if someone, somewhere, gets a pay raise. I asked several Republicans and Democrats on both committees to pose these questions, but no one asked. Rep. Barney Frank [D-MA] told me he would ask, but at the last minute personally called to say his staff had already committed him to ask other questions in his five-minute time allotment. At a Wednesday morning breakfast talk, Greenspan did say “gold is the only truly monetary metal out there which captures changes in price expectations as well as anything we’ve got,” which appeared in one line on the Reuters wire.

LOTT: He is finding it increasingly difficult to simultaneously be the Senate’s GOP leader and the Republican Party’s leader. As legislative leader, he cannot stand above the fray to offer strategic guidance. His job forces him to locate the center of gravity among the 54 GOP Senators he leads and devise tactical moves from there. Columnist Bob Novak points out that this is the first time since the period leading up to the 1940 elections in which there is no clear Republican frontrunner for the presidential nomination -- which explains the vacuum at the top. President Clinton is on one side of the chessboard and the GOP side now seems to be occupied by William Kristol, the editor of The Weekly Standard, the only clear voice inside the Beltway who knows where he wants to go. Kristol is goading the Republicans to engage in partisan warfare and relentless attacks on Clinton campaign sleaze, practically forgetting serious policy objectives. The aim is to accept gridlock and hope to win big in the 1998 midterm elections. The current issue of the Standard pictures a Rambo elephant holding a giant assault weapon, with a headline: “Republicans -- Get Tough.” The Kristol line, which also recommends unifying the party around a crusade against our “new mortal enemy,” China, is guaranteed to cause the loss of the House in 1998 and a Democratic sweep in 2000. In the absence of anything better, this hard line is having its effect. Newt Gingrich, who had been licking his wounds, is now heating up again.

CPI: Thursday’s lead editorial in The Wall Street Journal insisted the GOP march over yet another cliff by embracing the Boskin Commission’s adjustment in the Consumer Prime Index. The editorial says the only people who are out of step are “the AFL-CIO, the American Association of Retired Persons, and Jude Wanniski,” failing to mention Jack Kemp and Steve Forbes. Even if Boskin is right about a 1.1 percentage point annual cut in the index, the number was derived out of a period of 5.5% annual inflation. Gary and Aldonna Robbins, the best technicians in the Reagan Treasury, argue that with inflation at 3%, the Boskin number should be cut to three-fifths of 1.1 or 0.66%. If the dollar/gold price were fixed at $350, inflation would go to zero and the annual CPI adjustment would too. Any residual SSI problems could be resolved by small adds to the retirement age as life expectancy moves toward 80. The WSJournal, which once would have made this argument, now prefers to cut Social Security benefits and raise marginal tax rates by 1.1% a year as a way of outfoxing the Democrats. Trent Lott’s call for a CPI commission makes little sense, especially if it were composed of Ph.D. economists. A commission of economic growth and entitlements might be okay if it were driven by Lott, with the White House invited to participate, instead of the other way around.

TAX REFORM: The Joint Tax Committee recently invited a dozen noted Ivy League Ph.D. economists to project the economic effects of a broad-based tax reform of the kind that Jack Kemp or House Ways&Means Chairman Bill Archer propose. Each presented papers proving there would be no positive long-term economic effects. Gary and Aldonna Robbins, the experts of the Reagan Treasury, presented a paper demonstrating likely increases of 15% annually in GNP as such reforms unfolded. Because their work was so far out of the mainstream, committee staff spread the word to influential GOP members of Congress that their work can safely be ignored. A major committee chairman in the House told me he has been personally assured that the Robbins’s are incompetent. I suggested he check with House Majority Leader Dick Armey, who swears by them, as do Kemp and Forbes. Such is life among Republicans.

KEMP: The only immediate threat to Beltway Bill Kristol’s leadership of the GOP is Kristol’s longtime nemesis, mortal enemy in Republican ranks, the leader of the Republican growth wing. Kemp has immobilized himself by allowing Lott and Gingrich to lead him around, using him for their tactical advantage instead of strategic guidance. This may have been necessary when he joined the Dole ticket last August, when he was forced to shave his positions on affirmative action and immigration in order to present a unified team -- and to campaign on a 15% tax-cut scheme designed by Beltway Boskin that he did not believe in. None of that is necessary now, but he is allowing himself to trim his positions on practically everything he has stood for in order to accommodate his old friends on Capitol Hill. Unless he can get used to saying no to Lott and Gingrich and provide direction to them instead, the direction established by Kristol will undermine any chance of policy cooperation with the White House. As we have been making clear ad nauseam, this sort of confrontation is what would bring about a major market correction on Wall Street before spring gives way to summer.

ANGELL & 1929: Former Fed Gov. Wayne Angell should be ashamed of himself for the op-ed in today’s Journal for “proving” that a demand-side monetary tightening by the Fed in the years 1924-1929 caused the Crash on Wall Street. Why ashamed? Because he told me he was going to write it and I asked him to debate me before he did so. He agreed, but when I won the debate, he went ahead anyway, never mentioning my arguments and those of David Gitlitz. There was an 8% decline in wholesale prices in the 1924-1929 period, as he says, using numbers we supplied him! But the price of gold was constant throughout the period and so were gold stocks. If the Fed had printed more money than the market was demanding, there would have been a gold outflow. Why was there an 8% deflation in wholesale prices over six years -- about 1.2% a year? Because there had been an enormous increase in wholesale prices when we went to war in 1917 and the government bought everything in sight. Prices fell sharply from 1919 to 1924 as the war ended and the government stopped buying. The gentle decline of 1924-29 got the price level back to the pre-war level. I explained this to Angell, but he decided he would rather dynamite my supply-side theory, which is that the Smoot-Hawley Tariff Act caused the Wall Street Crash. What do you think? A 1.1% decline in wholesale prices for six years in a row, or a sharp increase in tariffs on 20,000 imported goods? Sorry Wayne, but you did not play fair.