Letter to the President
Jude Wanniski
April 22, 1997


The Hon. William J. Clinton
President of the United States
1600 Pennsylvania Avenue
Washington, DC
[via fax to Erskine Bowles]

Dear Mr. President:

Our government appears to be heading into budget gridlock once again, as Senator Lott indicates there is only one small chance this week to work out a compromise on your administration's budget. My guess is that it will fail, chiefly because the political forces that bear upon you and congressional Democrats are once again in a standoff with the political forces that bear down on the Republican leadership in Congress. In chess, the term is stalemate. If the Republicans do develop a budget of their own, even Senator Lott concedes it will be less than satisfactory all around. My suggestion is that you consider the bipartisan plan proposed almost a year ago by Jack Kemp, when he still believed his elective political career was at an end.

Republicans blame you for being stubborn and partisan in refusing to bend to their demands and make spending concessions that cannot be done without betraying your constituency. A budget compromise could be made if the Republicans gave up on their attempt to get a serious capital gains tax cut and estate tax relief, cuts which I believe would be very good for the country, along with a $500 kiddie credit, which I believe would not be good for the country. The numbers don't work and no matter how many times you add and subtract, multiply and divide, we come back to stalemate.

The reason this will continue at the legislative level is the determination of the political Establishment, Republican and Democratic, to refuse to accept its responsibility to employ the law of diminishing returns in setting tax rates. It has been true throughout history that when tax rates get too high, they discourage growth and revenues. Part of the responsibility of government is to make those judgements. The budget process by which the Ruling elites now attempt to manage the national economy is diabolical. Imagine a rule at General Motors that would not allow you to cut the price of a Buick unless you raised the price of a Chevrolet!

The Kemp proposal, Mr. President, skirts this process with two executive orders that would be supported by both parties if you initiated them, but would get tangled up in the broader omnibus legislation if initiated by Congress. The first would instruct the Treasury to strip inflation out of capital gains before determining tax liability. The second would instruct the Treasury and the Federal Reserve to stabilize the dollar value of our international gold monetary reserves around a price of $350.

Those of us who assisted Mr. Kemp in devising this plan, which he described on the editorial page of The Wall Street Journal on June 18 last year, did so in the belief that it would meet with little objection in either major political party and that it would invite the kind of healthy, non-inflationary economic growth that would find favor both in the financial markets and with Federal Reserve Chairman Alan Greenspan.

Indexing capital gains, retroactively and prospectively, has no theoretical opponents in the Democratic Party or among Republicans. Treasury bureaucrats may complain it is difficult to administer, but it is easily done in the U.K., as Senate Finance discovered when it had hearings on the subject in 1993. By the stroke of your pen, you would release an estimated $7 trillion in inflated gains from tax liabilities and the backs of American farmers and small businessmen. People would dance in the streets and celebrate your administration for several generations.

When Alan Greenspan became Fed chairman ten years ago, the gold price was $350. By using it as a guide to inflationary impulses, he has managed to keep it from straying too far in one direction or the other. Both Kemp and I have spoken to him about formalizing that practice within a price range, which would give the markets some flexibility on either side of $350. By taking the risks of wide swings out of the market, the value of government bonds would increase by a significant amount. This would of course reduce the cost of debt service in the budget for years to come, as the past debt is refinanced at lower interest rates.

This executive order would also cover the warning of Ross Perot, who observed during the campaign last year that your Treasury had been issuing a great amount of short-term debt to economize on debt service. If inflation hit suddenly in the next several years, the administration would have its hands full refinancing short debt at very high interest rates, ballooning the deficit that has lately been coming down nicely. This executive order might have some complaints from purists who insist gold should have no role in policymaking, but these purists are more likely to be found in the GOP than among Democrats.

If the budget talks break down tomorrow, as we fear, Senator Lott and Speaker Gingrich will attempt to fashion a Republican budget. The financial markets would have an added burden of worrying through the summer into autumn whether this can be done without your veto or another government shutdown. The suggestion I make regarding the executive orders is one that would not only be cheered in the bond and stock market, it would also make it much easier for a budget to be worked out on the Hill, as the prospects of higher revenues from a sounder economy would be factored into the calculations of the Congressional Budget Office.

At the very least, I hope that you would discuss the idea with Jack, who may be assuming that you are not interested in ideas that come from the other party and would reject them out of hand. There are many executive orders that you can sign, but few that will enjoy widespread support in both parties. My belief is that if you did these, you would break the barrier of partisanship and acrimony that has grown up around these years of budget stalemate.

Sincerely, as ever,

Jude Wanniski

cc: Mr. Jack Kemp
The Hon. Newt Gingrich
The Hon. Trent Lott