Taxes, Oil and the Polls
Jude Wanniski, Michael Darda and Karen Kerrigan
September 15, 2000


TAX UPDATE: Republican political tactics in the House seem to threaten any chance of tax relief this year, but there is less than meets the eye. The bill to use 90% of next year's $268 billion surplus for debt reduction passed the House Ways&Means Committee by a 33-0 vote. This seems like long-ago bipartisanship, but it really only amounts to GOP partisanship matched by Democratic partisanship as both sides know it would not even get out of the box in the Senate, as only $27 billion would be left for the tax cuts AND the extra spending that both parties are eager to get. The House GOP's maneuver is an attempt to limit the amount of spending that Clinton will extract from them when their final negotiations occur over tax relief measures. Clinton will likely get much of what he wants to spend plus selected tax credits while the GOP will get the Roth IRA expansion to $5000 from $2000, with several small business tax cuts to offset the $1 hike in the minimum wage. There is talk IRA expansion and pension reform may reach the full Senate floor next week following the China PNTR vote set for Tuesday. A date certain has not yet been set for IRA action, but Finance Committee sources see it happening very quickly. There remains a high level of confidence on IRA expansion this year. (KK)

FEDWATCH: After taking several weeks to inch its way to 5.70%, the long bond lost it all this week with a 21-bps retreat to 5.90%. This most likely reflects fear that crude oil prices likely will remain above $30 per barrel for longer than previously assumed, that the input costs will have to show up in CPI and PPI data, and the Fed will react again with a higher funds rate. When this issue came up in Jude's Wednesday conference call, he said he did believe oil prices would remain high, but that Alan Greenspan would be able to sort it out and dismiss the need for a tightening of the economy. His real concern remains a tight labor market, not higher oil prices, which will soften the economy even more surely than a hike in the funds rate. Futures markets still are pricing in no move on rates for the rest of the year, and even the possibility of a rate cut in 1Q01. The Fed's response to higher crude has been muted so far. Fed members' most recent opportunity to comment on the U.S. economy came at Wednesday's National Association for Business Economics Conference in Chicago. Greenspan skipped any discussion of monetary developments in his address, but several other FOMC members mentioned the risk that rising crude prices would spill over into the general price level. The jump in the oil price today no doubt reflects Bill Clinton's saber rattling over Iraq, warning he will use force if Baghdad makes a move on Kuwait. The market has to discount at least a possibility that he will find an excuse to stir up trouble in Iraq and there is always the possibility that Saddam Hussein will do something to goad Clinton into action that would send oil through the roof. (MD)

BUSH/GORE: There are two national polls run with Democratic/Republican co-sponsors, one the Battleground Poll, the other the Bullseye Survey. The most recent of both show the race even, with Bush slightly ahead in the former. By most accounts, the House and Senate will remain in GOP hands in the new Congress. For what it is worth. (JW)