Treading Water with the 105th Jude Wanniski October 21, 1998

With less than two weeks until the November 3 elections, the 105th Congress is still thrashing about with its principal business, the appropriation process. We haven’t said much about Congress for several weeks, since it became clear there would be no interesting changes in the tax law that might affect the financial markets and the economy. Because we never expected much out of the second year of this Congress, we can’t say we are really disappointed in the final result. Early this year in discussing “The Politics of Surplus,” we said the only thing we could expect for sure is a shortening of the holding period on capital gains, which is the one good thing that Congress delivered in tax policy. Once Republicans in 1997 extended the “Pay-go” rule, requiring tax cuts to be “paid for” with tax increases or spending cuts, they ended any realistic chance of getting a tax bill that would make a difference to the markets and the economy. 

The movement under way among conservatives to oust Senate Majority Leader Trent Lott in favor of his Majority Whip, Don Nickels of Oklahoma, more or less rests on Lott’s failure even to bring a tax bill to a vote -- to force Senate Democrats to go on record against a GOP tax cut. Because House Speaker Newt Gingrich refused to back a cut in the capital gains tax in the $80 billion (over five years) tax cut that passed the House, there really would not have been much pressure on Senate Democrats to vote for the House bill anyway. In other words, unless Lott were willing to push the budget balancers in the Senate toward a meaningful tax cut like capgains, President Clinton and the Democrats would have won the public-relations game by insisting they had “saved Social Security.” Make no mistake: If Lott had gotten a capital gains tax cut to the floor, plenty of Democrats would have fallen all over themselves to vote for it. New Jersey Sen. Bob Torricelli in 1996 demonstrated the appeal of capgains when he demolished his GOP opponent, who spent his time decrying Torricelli’s liberalism. In the California gubernatorial race, the Democrat Gray Davis is supporting elimination of the state’s capgains tax and is winning against Republican Dan Lungren, whose inept campaign advisors have him running against crime. 

The outcome of the November elections may be less favorable to the Republicans than they expect. At the moment, the consensus seems to be a pickup of a few Senate seats and a few House seats. One important change is that if the GOP holds control of the House, it will have a new Rules Committee chairman, David Dreier of California, who swears on a stack of bibles that he will kill the Pay-go rule. Still, given the potential for further distractions from the President’s legal problems and the kick-off of the 2000 presidential race, we would not bet the farm on any serious changes in the tax code through the normal legislative process. The GOP could pass a 15% capgains rate over a presidential veto -- and I doubt there would be a veto. But there will be so many pressures from the conservative social engineers for marriage-tax and family-friendly tax handouts that the process once again could become bogged down. 

There are also plenty of conservative complaints about the congressional cave-in on the $18 billion funding for the International Monetary Fund. I’d never thought there would be stomach in Congress to deny an insistent President the funds. They ultimately fear being whipped by Democrats for causing every global crisis because they didn’t kick in the money. I’d hoped they could hold out for a commitment to change IMF personnel, but instead they had to settle for some meaningless figleaf reforms. Nevertheless, for the first time in the 20 years I have been screaming about the evils of the IMF, the fund had to fight through a storm of criticism from both political parties to get its replenishment. It will, however, require the election of a President who will name a Treasury Secretary determined to institute fundamental IMF reforms before change occurs. It is just one of many reasons I’m encouraging Jack Kemp to run. Of the serious potential candidates, only he and Steve Forbes would not fold to the big banks that sustain the IMF.

The severe criticisms of the Republicans for their management of Congress only now are beginning, as the party’s intellectuals take stock of what has been wrought. Here, for example, is the opening of a missive entitled “Grand Old Plunderers” I received this morning from Llewellyn Rockwell of the Von Mises Institute: “What will the despicable GOP brag about at this midterm election? Well, there's their cheerleading for the largest federal budget in the history of the country, squandering fully $1.7 trillion of private wealth to feed the Leviathan state. There's the failure of Congress to provide tax relief to a people more oppressed than ever before. There's the budgetary cave-in to a newly emboldened left-wing of the Clinton administration. The House Republicans just voted for impeachment hearings, and clearly GOP leaders despise Clinton personally. But the budget negotiations prove that Congress and the White House do not differ on any matter of principle. They agree on a huge role for government in education, tax funds for the IMF, farm welfare, the glories of foreign aid, and the need for ever-more medical largesse, and that's just the beginning.” 

Well, yes, but. When the 105th Congress was elected in 1996 along with the re-election of Bill Clinton, the Republicans had no mandate but to work with the President to balance the budget and hope to get at least a small tax cut. The President had a mandate to make sure the Republicans did not try to pay for tax cuts with spending cuts on widows and orphans. Without a clearer mandate, the divided government could really not do much more than it did. The problem really began when the GOP in 1996 decided to nominate Bob Dole as its standard bearer, essentially knowing he would lose gracefully to the newly popular Clinton. At least the voters would give Republicans control of Congress as a check on any bright ideas from Clinton. I’ve just written a book on the subject, The Last Race of the 20th Century,* which argues that the race was less about competing personalities than of spent political forces. It was all but inevitable that we now would be treading water, waiting for the big event in 2000, when hopefully a global agenda will be confronted and brought to a relatively clear resolution. No deals on more divided government.