Keeping Up Jude Wanniski July 17, 1998

IMF: The NYTimes Thursday reported that House Majority Leader Dick Armey had conceded defeat in his opposition to the $18 billion IMF replenishment. He told a Chamber of Commerce audience it was likely the fund would eventually get all it is asking. It’s true a deal will no doubt be struck, but Armey did not exactly throw in the towel. There will be a floor fight next week to keep the House at $3.5 billion and if Armey succeeds in fending off amendments to boost it to $18 billion (under pressure from the small farm and bank lobbies), the House-Senate conference will have some leverage to extract concessions from the administration. Armey’s blunder in answering a question rests on the fact that because these amounts are “off budget,” and not counted in the PayGo rules, the Senate conferees will dominate and get all they want. There is, though, plenty of room for the GOP leadership to erect so many “reform” demands as the price the administration has to pay in compromise that a deal could be struck that would force changes in personnel at the IMF. House Speaker Newt Gingrich and Senate Majority Leader Trent Lott have to be willing to fight this through, and these are the question marks. Jack Kemp is telling the news media that if he runs for President he will make the IMF a campaign issue -- on the misery it causes around the world. Pat Buchanan agrees. (They are on CNN’s "Inside Politics" today at 5 p.m. EST.)

TAX CUTS: Reports that House Ways&Means chairman Bill Archer has given up on the idea of a tax cut this year are also not quite correct. Archer needs to get more than just happy talk from Gingrich before he pushes ahead with a tax bill. The fact that the Congressional Budget Office this week announced it sees a cumulative budget surplus of $1.5 trillion over the next ten years has more Republicans grumbling about the leadership’s dithering over tax cuts. The issue will not be resolved until Republicans return from their August recess, when they will have gotten an earful from their constituents on the subject. A 15% capgains rate is still in the realm of possibility.

RUSSIA: The Russian stock market has been the worst performing market this year, along with Indonesia’s. It has been creeping back in the last several days only because the Duma has been approving some small tax cuts on businesses -- which we’re told is happening so it can qualify for another $22.6 billion in IMF aid. The NYTimes today trumpets the good news as being the good work of Deputy Treasury Secretary Larry Summers, which is nonsense. Russia had been clobbered by the slump in the price of oil and gas, its biggest hard-currency exports, and oil and gas are down because our Federal Reserve has been starving the world for the dollar liquidity it has demanded. Ipso facto, Moscow can’t pay its hard-currency debts to western banks, so the IMF has to give them the cash. In an excellent editorial July 14, the WSJournal pointed out that this looks suspiciously as an IMF bailout of the western banks -- although the WSJ failed to point out the problem was triggered by the Fed deflation. The WSJ also commends the IMF for seeking stability of the ruble, but does not say what it should be stable against. The ruble price of gold is down 10% in the past 18 months, which means Russian ruble debtors are also being squeezed. This is why a celebration of “stability” is meaningless without the gold reference point. And the last thing Russia needs is the IMF demand that it bring its budget deficit to 2.5% of GDP from 5.5%, with tax increases and spending cuts. A supply-side tax reform would temporarily increase its debt, but flood the country with foreign and domestic capital. For that, the IMF needs a new director -- or better advice to Boris Yeltsin from the U.S. Treasury and the NYTimes.