State of the Union Jude Wanniski January 21, 1999

SENATE TRIAL: The President’s defense team is essentially filling their allotted time, making scant headway against the perjury and obstruction of justice articles. On Tuesday, Charles Ruff’s two-and-a-half-hour contribution was his insistence that while the President is innocent of all charges anyway, if he were guilty, he is permitted a more lenient standard for removal than federal judges. On Wednesday, Gregory Craig sought to unravel the circumstantial case made by the House by snipping it into little pieces. This is what might get the case thrown out in a criminal court. But as Senator Tom Harkin [D-IA] pointed out last week when the case against the President was being made, the Senate is not simply sitting as a jury, forced to throw out the case if there is a reasonable doubt about the legal technicalities. Ultimately, the Senators will have to vote one at a time on whether they think he perjured himself and obstructed justice; if he did, should there really be a different criterion for presidents than for judges? Surely there is not a Senator who believes Mr. Clinton, although there are at least a dozen who follow the arguments developed by the NYTimes and say they do not care if he lied under oath. As witnesses now will be called, it will get tougher for Mr. Clinton. The key figure will be Clinton aide Sidney Blumenthal, I still believe, who will nail down the argument developed in the House by Rep. Lindsey Graham [R-SC] that the President used Blumenthal to broadcast the flat-out lie that Monica Lewinsky had threatened to make trouble for him unless he had sex with her, and that she was spreading lies about him because he had refused to engage in sex with her. 

CLINTON “AGENDA”: The Tuesday night state of the union was a domestic attempt to “Wag the Dog,” the President at this point being the tail on the congressional hound. The several dozen proposals, as John Fund of the WSJournal pointed out, seemed to be the 50 most popular spending ideas to come out of a focus group. Like the bombing of Iraq, Afghanistan, and the Sudan, it is the President’s way of showing how indispensable he is to the nation and why we should forget about a President Gore in the wings. From that standpoint, the exercise can for the most part be discounted, as the White House cannot really believe that the 106th Congress is going to take it seriously. The centerpiece of the grab bag, the President’s plan to invest Social Security surpluses in the stock market, has already been laughed out of the Ways&Means Committee with Fed Chairman Alan Greenspan’s testimony yesterday afternoon. 

GREENSPAN: In his Ways&Means testimony, Greenspan adopted the same stance he had a year ago at this time, essentially telling Wall Street it should not expect another cut in interest rates until the equity markets fall several hundred points, to satisfy him and his colleagues that there is no “wage inflation” on the way. He painted a rosy scenario about the economy, but there was at least some notice of the weakness in manufacturing. There was of course no mention at all of the monetary deflation the Fed permitted, which prevents the kind of price inflation the Fed still worries about. Fed policy will thus be a drag on the economy in every regard for the period ahead. The long bond should remain in a trading range between 5% and 5.2%. The only direct pressure on Greenspan to ease in a way that pushes up commodity prices has come from the American Farm Bureau Federation, whose officers now understand the monetary deflation. The steel industry, by contrast, seems to have not the slightest recognition that its problem with steel being dumped here from the Asian market would not have occurred if Greenspan had not deflated.   

GOP TAX CUTS: The timid Republicans should be ashamed of themselves, unwrapping a 10% across-the-board cut in marginal income_tax rates as their big deal for 1999. This would bring the top rate to 35.64% from the present 39.6%, the bottom rate to 13.5% from 15%. Remember the Dole plan of 1996 was a 15% across-the-board cut, which Jack Kemp criticized before he was picked as Dole’s running mate, arguing that instead the top rate should be brought to 28%, where it was when Reagan left office. In the face of White House insistence that there be no general tax cuts until “Social Security is saved,” Republicans are allowing their austerity wing to dominate budget and finance policy. Senate Democrats are already complaining that a 10% tax cut to the rich is more money than a 10% tax cut to the low brackets, which we can anticipate will lead to a compromise that has no growth dynamic.

CONGRESSIONAL BUDGET OFFICE: Senate Majority Leader Trent Lott has allowed Sen. Pete Domenici [R-NM], one of the most ardent foes of supply-side economics for the past 20 years, to grab control of budget and finance policy. Lott and House Budget Chairman John Kasich (now a presidential candidate) both told Kemp they would not sign off on a new director of the Congressional Budget Office without Kemp’s acceptance. Domenici announced that his choice for CBO, Dan Crippen, had the job! Crippen, who had been invited by Kemp’s staff to visit Empower America for a discussion of tax and budget philosophy, called Kemp’s office and said he didn’t think it was necessary for him to come by and talk to Kemp because he already had the job! With Crippen at CBO, it will be much, much harder to get any kind of supply-side tax cut into law this year. As bad as the Senate austerity wing had been when the government faced deficits as far as the eye could see, it will be worse now that they contemplate surpluses. The real bad guy in all this is Domenici’s chief aide, Steve Bell, who was the congressional ally in the Reagan and Bush administrations of David Stockman and Richard Darman --  the men who talked President Reagan in 1982 into raising taxes and President Bush into breaking his 1988 “no new taxes” pledge. 

THE ROTH IRA/401(k): Sen. William Roth [R-DE], chairman of Senate Finance, helped fuel 1998’s stock market advance with his back-loaded “Roth IRA,” which permits workers to invest up to $2000 a year of after-tax income and pay no taxes when they retire or draw down the funds for specified purposes. As we explained in an April 3 paper last year, “The Roth IRA and the Bull Market,” the back-loading has phenomenal supply-side effects on capital formation by eliminating the investor’s risk of future inflation or tax increases. Roth on Friday proposed to expand the limit to $5,000 a year, permit workers over 50 to invest $7,500 a year, and to eliminate the income caps that now limit the IRA to individuals with incomes under $75,000. He also proposes to extend the back-loading feature to the Roth 401(k) plan that permits higher-income employees to invest $10,000 annually in tax-advantaged accounts. The amount would rise to $15,000 under this proposal. Older workers with high incomes could save up to $30,000 annually through a combination of the two plans. If the plan passes into law this year, it would easily get the Dow Jones Industrial Average above 10,000 and run up the NASDAQ and Internet stocks, as the Senator’s marvelous idea would alter the risk structure to favor long shots and long-term investments. The plan will be aggressively opposed by the Citizens for Tax Justice and liberal Democrats, who see it as a back-door way of reaching House Majority Leader Dick Armey’s proposed flat-tax provisions. We believe much of the run-up of the Internet stocks this year can be attributed to the Roth IRA.