A Major Republican Mistake Jude Wanniski March 19, 1997

The decision by House Speaker Newt Gingrich to repeat his mistakes of the 104th Congress, by putting the austerity cart ahead of the growth horse, has won him the praise of President Clinton, but I would not be surprised if this latest blunder by Newt costs him his Speakership. Don’t believe the newspapers that Gingrich has some grand strategy to eventually get the tax cuts, after he sends a balanced budget to the White House. His decision was based on fear, plain and simple, that he has to get the budget out of the way lest there be another budget stalemate for which he gets blamed. It is a “moral imperative” that the budget be balanced, he said, on the wing. No matter that every time this century Republicans have put budget balance ahead of economic growth they get neither, and pay the price in the coin of political defeat. Newt the history teacher refuses to learn from history, ancient or modern.

It wasn’t as if he didn’t get plenty of advice on how to get it right this time. A week ago, Jack Kemp put out a press release at Empower America that said “Gingrich and Senate Majority Leader Trent Lott must immediately repudiate the rumors and speculation swirling around Washington that some in the Republican Congressional Leadership have decided to put off tax cuts. Delaying tax cuts would be bad for the economy and dangerous for the Republican party.” As far as we know, nobody read the Kemp press release, much less printed or broadcasted it anywhere. He issued another yesterday that did not make the news: “KEMP EXPRESSES ALARM AT DECISION OF HOUSE GOP TO DELAY TAX RATE CUTS,” and “calls idea to hold off on tax rate cuts ‘major mistake.’” The fact is, Kemp’s influence in the GOP has dwindled to a vanishing point and everyone knows it. This is the heart of the problem. The leader of the party’s growth wing -- who would never worship at the shrine of a balanced budget -- has allowed himself to be marginalized by a series of concessions to the austerity wing. At the convention of party conservatives last week in Washington, a straw preference poll on the party nominee in 2000 had Kemp, who in the past has routinely won these things by 40% or more, coming in second to Steve Forbes, who won with a meager 9%.

It had been our expectation that Senator Lott, who has come up the ranks on Kemp’s supply-side, would keep the budget process on track for a capital-gains tax cut. In recent weeks, Lott has stumbled badly by allowing Chairman Pete Domenici of Senate Budget once again to elevate the balanced budget to its shrine. In the House, Budget Chairman John Kasich, who is getting married this weekend and has only honeymoon on his mind, blithely promises that there will be tax cuts after budget balance. None of the technical experts we talk to can figure out what any of these people think can be done. Unless the budget resolution provides for tax cuts, procedural rules make it practically impossible to bring them back later. On the current track, no one we know who is expert in legislative mechanics can see tax cuts at the end of the process. President Clinton will get 100% of the credit for balancing the budget. The Republicans will get, and deserve, 100% of the blame for once again failing to cut the capital gains tax.

It becomes more obvious on Wall Street, with low-cap, high-tech stocks being crushed, that only the top of the economic pyramid is surviving this debacle. Almost a year ago, I reported a conversation I had with Felix Rohatyn, in which he observed that both major parties represented the bond market, with neither representing equities. The leaders of both parties seek security. Nobody wants risk. The handful of avid growth advocates in Congress are burning up the wires, trying to figure out procedural strategems that can save the tax cuts this year. As long as the “moral imperative” is a balanced budget, though, no strategems can work, given the way Congress has rigged its operating procedures. Dynamic analysis is not allowed to show that a 50% exclusion on capital gains would add more than enough growth to pay for itself; the Joint Tax Committee figures it would cost $200 billion over 10 years. Any other creative moves would require Republicans to confront the rich-versus-poor “fairness” argument that Democrats always win. This is why there is a general sense that Gingrich is flying blind, and Lott, like Bob Dole before him, is standing aside and watching it all happen.

Is this all inevitable? Of course not. The American people elected the 105th Congress to govern, despite the mistakes Newt made in the 104th. All it takes is a decision by the joint GOP leadership to break loose from the budget handcuffs it imposed on itself a decade ago. This first requires that the leadership amend Newt’s “moral imperative” statement by saying it would be immoral to balance the budget on the backs of the people on the bottom of the pile, and that the imperative requires a tax bill even prior to the budget resolution to spur economic growth. What would it have in it? A capital gains tax cut and the education tax credits President Clinton wants. It would have to pitch out the horrendously expensive kiddie tax credits, which have been a millstone around the necks of the GOP since Newt agreed to them in an odd moment with leaders of the religious right. How hard would this be to do? Senator Domenici and Rep. Kasich would fight it, because it would take power away from them and put it back where it belongs, in the Senate Finance Committee and House Ways and Means. But it could be done, and it really has to be done. In that sense, what Gingrich did yesterday was to force the Republican Party to squarely face this fork-in-the-road: Austerity or Growth?

Democrats are mere bystanders in this process. They know their only value at the moment is in making sure Republicans can’t do anything that will directly hurt their constituents. (Indirectly, those hurt most will be the minorities at the bottom of the economic pyramid, who look to the Democrats only for last-resort welfare.) The political universe is focused on how the Republicans will decide their fate. It doesn’t look good so far, which is reason enough to sell financial assets. It being only mid-March, there is still plenty of time for corrections, as I observed in my last missive. What Gingrich did, though, is to begin pouring the concrete around his feet. His inner fear is misplaced. It is not the budget process that did him in two years ago, although he still believes that. It was his threat to default on the national debt in order to balance the budget! If he will not acknowledge that error, the one great error that he knows he was totally and completely responsible for, he will continue to make major “mistakes.” Insofar as neither the party nor the country can afford such mistakes, the political process would be forced to expel Newt.

All of the GOP leaders are marginalizing themselves at present, Kemp most of all. They do so by calculating risks and rewards in the technocratic sense, as if we were in a football game that has to have a winner and a loser. We have the feeling that there is no desk at which the buck stops. They prefer to do that which their advisers tell them will give them an edge over their opponents. The national electorate, the heads of household in the national family, would prefer they respond to the admonition that comes from filmmaker Spike Lee, to "Do the Right Thing."