The Central Importance of Wall Street Jude Wanniski March 1, 1999

Memo To: Louis Uchitelle, NYTimes economics columnist
From: Jude Wanniski
Re: Your Sunday column

You outdid yourself Sunday, Louis, in firmly making the point several times that the only reason the government confronts surpluses of several trillion dollars now projected into the decade ahead is because of the revenues being thrown off by the Wall Street boom. I don't know how you can be so sure stocks are overvalued, Lou, and that a bubble has been formed, which you state as if fact. In the many years I've known you, it never occurred to me that you knew or cared much about the valuations of equities as determined in the broad and deep free-auction markets we enjoy. Still, the point has to be made over and over again that the ONLY way we can save Social Security, Medicare and private pension systems is if Wall Street remains strong and vibrant.

The financial-auction markets are the only true measures of the spirit of enterprise in our nation and in the world. Gross Domestic Product can rise if the government sells bonds in order to build more prisons for people who are jailed because they have better options underground than in the legal economy. But the financial markets will not be impressed with this kind of rise in GDP. Investors winnow out this kind of flotsam and jetsam in assessing equity values in aggregate. The robust expansion of the market we have experienced in recent years has been the direct result of changes in national tax and monetary policies. These in combination have increased rewards to successful risk-taking, which is the core of economic vitality, and of reducing risks to enterprise that are built into the government's monetary and regulatory policies.

Yes, you seem to be worrying that the good times here are benefiting the rich in terms of their increased wealth, but I'm happy to see you also point out that the rich are paying most of the taxes. You say: "Thanks mainly to the stock market windfall, the richest Americans -- the 1 percent of households with incomes of $200,000 a year or more -- now pocket a much greater share of the nation's total taxable earnings than they did in 1994. After all, they own a lot of stock. They also pay the highest income tax rates. So Federal tax revenues have risen by enough to put the budget in surplus." The implication of what you are discovering in these numbers is that it would be a good thing for all concerned if the stock market at least stayed where it is and did not go into a swoon.

In the winter of 1977, I recall William Agee of the Bendix Co. campaigning in the business community to DO something about the enormous unfunded liabilities in the private and state and local pension systems, which amounted to hundreds of billions of dollars. As a young CEO of a Fortune 500 company, he confronted staggering unfunded liability passed on to him by Michael Blumenthal, who was then Treasury Secretary to Jimmy Carter. Agee heard that I was writing the WSJ editorials on this topic, so he called to sell me on the idea of an austerity program at all levels of government to fund the pension systems. When we met, I asked him what would happen to the liabilities if the Dow Jones Industrial Average, then at 800, would climb to 2000. He blinked, thought a moment, and said that would also solve the pension problem. But how do you do it? I said tax rates should be lowered, not raised, and that the capital gains tax especially should be brought down from its then lofty level of 48%, courtesy of Nixon in 1969. Agee turned around with that one discussion and became one of the three CEOs of the Fortune 500 to support Ronald Reagan in his 1980 campaign. Most of the others supported George Bush over Reagan.

My earnest hope is that you will continue on this line of reasoning until you see that changes in tax policies that will benefit "the rich" by increasing the value of financial assets on Wall Street will also benefit the non-rich. This is of course because it will sustain the budget surpluses that are financing all the government programs -- including Social Security and Medicare -- which benefit the non-rich, not the rich. You almost have captured the essence of the idea that if the rich are going to pay almost all of the taxes -- as they do -- we want to increase the number of rich and decrease the number of non-rich. In doing do, we will prevent the stock market from falling and the surpluses from disappearing. As John F. Kennedy put it, "A rising tide lifts all boats."