Lower Risk to Equities
Jude Wanniski
April 15, 2003


The Polyconomics pension funds went into 25% cash on March 18, as insurance against a worst-case scenario in Iraq. We activated the cash this morning, satisfied that the risks that concerned us have been removed. The war may have been unnecessary in that Baghdad posed no discernible threat to the region or to the U.S. and we will be greatly surprised if credible "Weapons of Mass Destruction" are uncovered. Still, we had assumed there would be much more of a fight for Baghdad and believed the number of deaths on the Iraqi side might reach 100,000 and as many as 2,000 of coalition forces. The biggest surprise was the incredible accuracy of U.S. airpower in pinpointing military targets, which limited the number of civilian deaths to 4,000. Had Baghdad suffered the greater losses, the level of outrage around the world would have been much greater and the monetary costs associated with a longer war and reconstruction would have been several times what we can now expect. It was a most economical war. 

There are still concerns about "blowback" from an angry Islamic world. Fears of al-Qaeda cells being activated here soon after the invasion of Iraq were unfounded. There could still be some thought of suicide bombings here, but political terrorists act out of a sense of outrage, not out of a sense of revenge. I`ve always believed 9-11 was meant to "get our attention" regarding perceived injustices in the Islamic world, not to punish the United States out of hatred or envy. America`s attention has of course been fully engaged and it will now be critical to see how U.S. diplomacy can work to resolve the issues involving the Arab/Israeli issues. The civilian Pentagon hawks have always said the road to peace in the Arab/Israeli conflict will come through Baghdad, and we now wait to see if they were right. As for Iraq`s future, even my most ardent anti-war Iraqi acquaintances now tell me they are pleased that the country`s suffering under 12 years of UN economic sanctions will now be over.  

Because the leadership produced what can only be described as a "best-case scenario" in terms of the war itself, the President stands a much better chance of getting the $550 billion in tax cuts which he pitched again today -- including the elimination of the double-tax on dividends. What is most impressive is the refusal of the White House and Treasury to throw in the towel after running into so much opposition. The arguments he made today are still in a conservative Keynesian demand model -- putting money into the pockets of investors, etc. But by insisting he will not give up on this issue unless he gets what he wants, he is throwing down the gauntlet to the Democratic presidential contenders, especially those in the Senate like Kerry of Massachusetts and Lieberman of Connecticut. Had President Bush fought for his campaign promise of a 15% capital gains tax instead of throwing in the towel in 1989, he would have gotten it, avoided the recession he got instead, and almost certainly been re-elected. The economy desperately needs a cut in taxes on capital if it is to dig itself out of the deficits accumulating across the board, which the electorate will support as long as it sees the President is going to hammer at it until he succeeds. 

He could not have done this with Treasury Secretary Paul O`Neill, who was always faint-hearted about supply-side dynamics. But John Snowe at Treasury is totally focused and determined to keep the pressure on until the resistance cracks in the Senate. Conventional wisdom on Wall Street is that with only $350 billion coming out of Congress this year for tax cuts (spread over 10 years), the package will contain the non-growth elements such as the marriage-tax penalty relief and the increase in the kiddie credits to help families. If it were up to Snowe, I believe, those measures should be put forward as stand-alone tax cuts outside the Budget Resolution, with the entire amount dedicated to cutting tax rates on capital formation. It will be a few weeks before we know how this will play out.