The Budget Deal Jude Wanniski May 5, 1997

Despite all the huzzahs from the Republican leadership, as it stands the budget deal is really not very good. Even with the $225 billion “Surprise” the Congressional Budget Office came up with at the 11th hour to rescue the deal, there is a possibility the $33 billion that CBO says a 50% capgains exclusion will cost will not be covered. Yes, as it stands there will be a capgains cut of some sort, but the Clinton administration, through OMB Director Franklin Raines, already is saying it will have to be minimal. We’re talking smaller exclusion and long holding periods. It’s not that the White House will have any say in the matter, now that the deal has been struck. It is because the Republican leadership decided to allow all the “new money” the CBO came up with to reduce the deficit. This enabled the White House and Congressional Democrats to declare victory as they signed off on the deal. The most vociferous Republican opponent of the deal, Sen. Phil Gramm of Texas, would have preferred a breakdown in the talks by having the GOP insist on using the “new money” for tax cuts instead of discretionary spending increases. He’s right, of course, but as long as a politically crippled Newt Gingrich is Speaker, the House will not agree to a strategy that carries any risk. We have to accept the cards dealt here as the best we could expect at this point and hope for a better deal now that it is out of the hands of the Senate and House Budget committees and into the hands of the tax-writing committees. 

The Wall Street Journal this morning praises CBO Director June O’Neill for having come up with this “miraculous” $225 billion, but that’s because the Journal promoted the inexperienced (and thus inept) Ms. O’Neill for the job and cannot now admit it goofed. All that really happened is that CBO was forced to admit its own revenue projections were seriously flawed, especially on business taxes. With the expansion underfoot, corporate tax revenues are flooding Treasury and no longer can be ignored by CBO’s staff of junior Herbert Hoovers. Of the $225 billion, about $118 billion was already being counted in the negotiations anyway and was not “new” at all. In the five-year scoring period, this really means CBO only provided $20 billion a year that had not been seen before. That’s what greased the deal. The GOP budgeteers couldn’t use any of the $20 billion for tax cuts, you see, because they still refuse to score tax cuts dynamically. Thus, by grabbing the $100 billion over five years, Chairmen Pete Domenici of Senate Budget and John Kasich of House Budget would have had to explain the soaring costs of the tax cuts in the out years, beyond the year 2002. Under static scoring, a 50% exclusion on capital gains costs only $33 billion in the first five years, because of temporary unlocking effects, but loses enormous amounts thereafter. 

Of the $135 billion available in this budget deal for tax cuts over five years, $35 billion goes to the President’s college tax credit scheme, which is fresh spending by a different route. This leaves $100 billion, out of which has to come capgains, an increase in the estate tax exemption, and the $500 kiddie credit -- which is also fresh entitlement spending by a different route. The only way we can see a decent capgains cut emerging from this squeeze is if the GOP can get it scored dynamically by CBO. This now becomes more difficult because the press corps already has decided CBO’s $225 billion “surprise” was dynamic scoring, when it was not. Treasury Secretary Bob Rubin remains so fanatically opposed to a capgains cut that he has insisted he will fight “cooking the books” on capgains, i.e., dynamic scoring. There are genuine concerns that Gingrich may have agreed to give Rubin a say in this process, which would just about eliminate any chance of getting a 50% exclusion. By all accounts, Rubin is acting as if his place in history would be secure if he could kill capgains outright. 

There really is no logical reason for Democrats to oppose dynamic scoring of capgains, when it only could mean more revenue available to spend. I’m even fairly sure that Rubin accepts the arguments of Fed Chairman Alan Greenspan that a lower rate would pay for itself ad infinitum, but by fighting so hard to keep the GOP from getting it, he suckers Gingrich & Co. to negotiate with themselves in conceding point after point to the President. When Rubin flat out insisted he would not even consider indexing capital gains in a budget deal, that was that. 

In Washington last week for three days, I tried a different tack. I’d written a letter to the President April 22, urging him to consider the two executive orders that Jack Kemp described in a WSJournal op-ed last June 18. One would stabilize the gold price of our gold reserves at $350. The other would index capgains. The beauty of the two exec orders is that there should be no partisan theological opposition to either, by Democrats or Republicans. The only reason Democrats oppose indexing capgains is within the framework of the budget negotiations, where every dollar of tax cuts has to be offset with a spending cut. An executive order outside this framework would not have to be paid for. Democrats and Republicans know it is improper for government to tax inflated gains as if they were real. Elimination of an impropriety by the stroke of a pen should not have to be offset by a tax increase or a spending cut. Similarly, an executive order stabilizing gold might encounter technical questions from Treasury, but it is clearly something Greenspan would agree could be done and even should be done. 

I’d asked for a meeting with Erskine Bowles, the President’s chief of staff. New Jersey Democratic Senator Bob Torricelli, who was intrigued by my letter, urged Bowles to do so. Better yet, Bowles asked Deputy Treasury Secretary Larry Summers to meet with me, to discuss the letter to the President. That I did on Thursday afternoon, in Summers’ office. He was quite pleasant, especially considering I had named him the 6th Most Dangerous Man in the World in one of my website musings some months ago. (I did tell him he had dropped down the list because of competition from Fed Governor Larry Meyer, who thinks too many people are working.) Summers was receptive to my argument that the exec orders involved Great Issues worthy of discussion at a time when the whole world is looking to the United States for resolution of these issues -- both fundamental to all governments. If Kemp were to make these recommendations directly to the President, I suggested, it would fall to Summers anyway to vet the ideas. He offered an informal exchange of ideas, which immediately caused me to drop him from my list of Ten Most Dangerous Men. 

Similarly, I spent more than an hour each with House Minority Whip David Bonior and Rep. Charlie Rangel, the ranking Democrat on House Ways and Means, explaining the executive orders to them. My intent was not to persuade, but to alert them to my reasoning in the event the initiative went anywhere. In the past, both Bonior and Rangel have told me they are not ideologically opposed to indexing capital gains. Finally, I told both Senate Majority Leader Trent Lott and House Majority Leader Dick Armey of my discussions with Summers, arranged by the White House. The approach is at least a fresh one, in that we normally do not see Republicans suggesting executive orders to a Democratic President. In any event, we now have two distinct tracks that could break the budget gridlock in a way that would bring more rapid non-inflationary growth. Neither of them look very bright at the moment, but we surely are better off than we were a few weeks back.