It is almost as if the Reagan Revolution never happened. There is a budget surplus as far as the eye can see, yet the Democrats have cowed the GOP into putting two-thirds of it into a "lockbox" to prevent tax cuts. The President proposed to use two-thirds of the other third for new spending initiatives -- on behalf of those Americans who do not pay taxes and are happy to get handouts if that's all there is. In his State of the Union message last night, he said he would use the last $350 billion of the almost $3 trillion in projected surplus for "bipartisan" tax cuts to his liking. He proposes to eliminate the marriage-tax penalty, a change in the tax law that has practically zero supply-side effects. He also will "fix" the marriage-tax penalty for people who receive the "Earned Income Tax Credit," which simply gives free money to people who work but pay no income taxes. With the "fix," married couples who pay no taxes will get more free money. In New Jersey, by the way, GOP Governor Christie Todd Whitman has announced she too will cut taxes this year, by increasing the Earned Income Tax Credit for New Jerseyans who pay no taxes. Step-by-step, the Democrats are leading the GOP to a guaranteed annual income. The President also wants to go out leaving smiles on the faces of the seniors who now have to pay for prescription drugs. The cowed Republicans are rushing to design their own prescription drug plan, which they will add to the already bankrupt Medicare system.
What we might expect is that the President soon will announce his willingness to negotiate a tax-cut package with the Congress. The GOP strategy announced thus far, by the hapless Speaker of the House Denny Hastert, will be to send up a series of tax cuts in piecemeal fashion, none of them amounting to very much -- except for elimination of the estate tax. The assumption is that the President would veto the tax cuts one by one and the American people will get mad at him. The only tax legislation that would cause the President some grief would be if they proposed to cut the capital-gains tax to 15%. This is because there are now several trillion dollars of capgains in the hands of middle Americans as a result of the stock market gains -- since the Republicans pushed through the last capgains cut in 1997 to 20% from 28%. Alas, the Republicans are scared to death that Clinton will accuse them of wanting the rich to get richer, so there is no talk from any GOP leader of doing this. Please note that George W. Bush has no capgains cut in his tax plan -- for this very reason. One wonders what Vice President Al Gore would do if the GOP put capgains on the table, even now. The smart guys in the Democratic party -- such as Gore's top handler, Bob Shrum -- remember how Michael Dukakis ran against George Bush the Elder in 1988. Way back then, Bush campaigned for a 15% indexed capgains tax and Dukakis campaigned against it on the grounds that it made the rich richer. Dukakis was swamped in the election, but Bush the Elder soon gave away his mandate in exchange for promised spending cuts that never materialized.
No, the GOP leaders will agree to negotiate with the President and his $350 billion in tax cuts (over 10 years). But wait, the President proposes to raise $150 billion in taxes by cutting loopholes, which means there is only $200 billion on the table. After some huffing and puffing, the President will agree to "split the difference" at these meager levels, after subtracting the marriage-tax penalty costs, which the President will point out are on both party's lists. The Republicans now really will be down to peanuts, out of which they might get a small increase in the exemption on estate taxes. The President no doubt will propose such a compromise and take credit for it and announce that Vice President Gore talked him into it. The polls and focus groups, you see, are uniformly reporting that a cut in the federal estate tax is popular across the middle-class.
What now looms as an increasing possibility is that Gore will be able to overtake George W. Bush, now that the electorate has seen how uncertain and inexperienced he is about most of the big issues. The only reason the GOP establishment rallied around Bush a year ago was his impressive poll numbers against Gore. Gore had been trailing badly for the last year in all the match-ups, but now practically has drawn even with Bush. The wooden Clark Kent entered the telephone booth looking like a loser and now has emerged in a Superman costume, bopping Bill Bradley all over the lot. In our report Monday, I thought Steve Forbes had opened up the possibility of doing well enough in New Hampshire to look like the more serious contender for the balance of the campaign, given his deep pockets. In the Wednesday debate, though, he performed poorly again, spending his time beating up on Bush while Arizona Sen. John McCain watched with a Cheshire cat grin, happy that Steve was doing his dirty work for him. Even before the debate, Jack Kemp made it known to the press that he had decided to endorse Bush, in a "Move Embarrassing to Forbes, Whom He Backed in ‘96 Race," as the NYTimes put it in a headline. Kemp not only did not give Forbes an advance notice of his decision, but also did not seem to get anything for his effort. In the press conference with Bush, Kemp threw a bone to Forbes by saying he would make a good treasury secretary, then added "I'd make a great chairman of the Fed." Bush quickly suggested Kemp would more likely get an ambassadorship out of the bargain and asked him: "Have you ever heard of Chad?"
This about sizes up what is left of the Reagan revolution: the Gipper's chief lieutenant reduced to the ambassador to a landlocked central African country of 4 million people, a bit smaller than Alaska in size, but with no decent ski slopes. (Sorry Jack.) The reason Kemp endorsed Bush at this moment, I presume, is the fear in the Bush camp that he will come in well behind John McCain next Tuesday in New Hampshire. Having won only 41% of the vote in a caucus state, against a weak field, Bush needs to avoid looking like the wheels are coming off his campaign. He might find himself struggling in a three-way race all the way to the convention. South Carolina is normally a state that can be safely salted away for the organization's choice -- as it was in 1996 for Bob Dole. But McCain has Rep. Lindsey Graham, the most popular Republican in the state, working for him.
With this all-consuming haplessness in the Republican Party, I think we would be lucky to scrape through 2000 with complete gridlock on spending and taxes. With President Clinton clearly demonstrating that he can get the GOP leaders sitting up, rolling over, and wagging their tails for little treats, I'm afraid we will not be so lucky. The response of the stock market and the bond market today to the President's State of the Union address is chilling. Stocks down big and bonds up big -- with the yield curve now inverted all the way back to the 2-year note -- tells us the market is not happy at all with the state of our political future, at least in the near term. There are plenty of skirmishes ahead and there will be opportunities galore for Republican adjustments. It can't get much darker than the prospect of a President Gore with a Democratic House and wimpy GOP Senate.