Try Again, Senator Daschle Jude Wanniski January 7, 2002

Memo To: Senate Majority Leader Tom Daschle
From: Jude Wanniski
Re: Tax Cuts and Tax Cuts

We can all see you are doing your best to hang the recession around the neck of the Bush administration, Senator, but thus far you are not scoring any points. The primary reason, I think, is that you do not understand that the recession was not caused by anything the Clinton administration did in 2000 or anything the Bush administration did in 2001. We are experiencing a rare monetary deflation caused by a series of small errors made by the Federal Reserve over the last five years. The ONLY way to fix this problem is to raise the dollar price of gold, to between $325 and $350, by executive fiat or by congressional legislation or by accident. A year ago, I explained all this to Vice President Dick Cheney and Treasury Secretary Paul O’Neill, but because I’m the only fellow in the world who could see what was happening, I knew they would not be able to take action until it became clear I was right. Because your home state of South Dakota is the home of Homestake Mining, the important gold-mining company which you try to help when you can in bad times, you know the dollar/gold price is more than $100 lower than it was in late 1996, when it began its decline.

Once you understand that the Fed can make these kinds of mistakes when there is no gold-based monetary system, you will be able to see why the Bush tax cuts of 2001 did not have any effect on the economic decline and why the eleven Federal Reserve cuts haven’t any effect either. If you ask Trent Lott, your Republican counterpart in the Senate, or Sen. Bob Torricelli, who is one of my New Jersey Senators and a Democrat, they will both tell you I met with them early last year to make this warning. As we still have this deflationary drag chewing away at the foundations of the economy, nothing you folks do in a partisan way or a bipartisan way will do much good.

The point of this memo, though, is to help you see that the Bush tax cuts, which you and most Democrats opposed last year, did not contribute to the recession. It did little to alleviate the recession, because it really did not do much more than hand out cash rebates to taxpayers. This had no supply-side effects, but it did chew up a big chunk of the budget surplus. You might say that to the degree it did not help, it hurt, but I’m afraid this is a weak line of reasoning. You’re on much firmer ground in justifying your refusal to give in to the GOP “stimulus” plan it tried to pass in closing days of last year. However, a dozen of your Democratic colleagues in the Senate did vote for the first tax bill because it was typically Keynesian. My Republican friends get mad at me for saying so, but I began warning two years ago that Larry Lindsey was a hapless conservative Keynesian, and he would be a dead weight on President Bush. Now I see Lindsey in 2000 collected $50,000 in consulting fees from Enron, which no doubt took his advice as it marched toward bankruptcy in 2001. Now I would not blame Lindsey entirely for the disappearance of the $5 trillion prospective surplus, but if he hangs around the White House much longer, he can lose another few trillion without even breathing hard. He has no idea what he’s doing.

What I recommend, Senator, is that you forget about blaming the continuing recession on the tax cuts, as you really do set the Democratic Party on the road to Hooverville. As it is clear you are not talking about rolling back the Bush tax cuts anyway, there is no point in making an argument that has a hollow ring to it. The only thing that will really fix the economy is a dollar devaluation against gold, but I know you would never be able to do that. I don’t know of a single economist associated with your party who would support a dollar/gold link. The GOP at least has a handful of Reaganauts and Austrians who would do gold if they had a chance.

It would be possible to improve the economy with a cut in the capital gains tax to 15% from 20%. As a good Keynesian, Larry Lindsey has fought this from the beginning of the Bush campaign in 1999. You might make it clear you will back such a cut if the GOP will support the kind of revenue sharing Jamie Galbraith has been promoting. That kind of “spending” would at least enable state governments to avoid tax increases. There are plenty of Democrats in Congress who would vote for such a cut, but if you really do want to win seats in the November elections and believe you can only do so if the economy remains weak, I suppose you do not want to do anything that will cut the other way. You have to be careful if you proceed in that direction, though, as the administration would be able to make the “obstructionist” label stick, which they could not do with the deeply flawed “stimulus” bill that died last month.