Random Observations Jude Wanniski April 17, 1990

INFLATION: In the "Outlook" column in yesterday's Wall Street Journal, Hilary Stout observes that even as the inflation rate rolls right along a bit higher than 4% a year, "hardly anyone besides Fed policy makers, who are paid to worry about inflation, seems to care." The drift is that there are few pressures on the Fed to wrestle the inflation rate down further, because people are happy enough with a steady 4%, and a lower rate would "require some pain." The column is not bad at all. But my additional thought is that the Fed doesn't have to cause any pain to get the inflation rate down to about zero (in a few years). It only has to prevent a new inflation. The price indices we're seeing now are still catching up with a basic inflation that occurred in the Carter years. The public is no longer alarmed about inflation precisely because it knows the government has got it under control. How? The citizenry as a whole knows its real income is rising.

CAPITAL GAINS: Millions of Americans were shocked last week in filling out their 1040s, discovering the impact of the high capital gains tax on their tax liabilities. Still, the Bush Administration is doing nothing, as far as we can tell, to make a case for their capgains proposal with the general public. Except for HUD's Kemp, whose speeches on the subject get no resonance from the White House and are not reported. Again, except for Kemp, there's not a word about the Northeast states and California, almost all suffering budget problems, as much of the capital in those states has become illiquid to avoid the oppressive tax on capital transactions. Is the GOP saving their fire for a campaign issue this fall? Capgains won't be settled one way or another until the end of the year, I'm beginning to think.

BLACKS AND BUSH: Democrats are baffled as to why black Americans are showing support for George Bush. The best answers they can come up with are demeaning and paternalistic: Tom Wicker of The New York Times believes it is because Bush has been successful at manipulating blacks, that Afro-Americans do not seem to realize he is undermining their interests by appointing CONSERVATIVES to the federal courts!!! My belief is that blacks, who are hurt worst in recessions, are mindful that the Bush Administration did not open with one. Every GOP President since Hoover has either stumbled into a recession, or engineered one. Eisenhower's relative popularity with black America correlated with the end of the Korean War and the mildness of the recessions in the 1950s. The Reagan years, remember, opened with a pulverizing recession reminiscent of the 1930s. The longer President Bush keeps the expansion going, with real incomes rising, the more we will see younger blacks especially drift toward the GOP. The masses of blacks, like the masses of whites, get their political information from real life experience, not the newspapers — from recessions and wars, not political speeches.

TRADE AND JAPAN: My guess is that President Bush will not cite Japan with unfair trade practices at the end of April. The President last year showed a willingness to gamble on the leaders in Beijing, keeping the door open while they consolidate for the next leg of political reform. The President this year has gambled on Gorbachev vis a vis Lithuania, again recognizing that Gorbachev needs time to consolidate before his next stage of reform. In both instances, Bush has had to endure withering criticism and scorn, from Democrats and Republicans. So too with Japan and Prime Minister Kaifu, who has gone much further in making concessions to the Bush trade team than I thought were politically possible. If Bush were now to demand more, reacting to the protectionist lobby in both parties, he would undermine Kaifu in Tokyo, forcing the Japanese into a hardline position that would yield only confrontation. Thus my guess is that Bush will once again gamble on a good faith effort by a foreign leader who needs time to consolidate. If so, the stock market in Tokyo should enjoy a modest recovery, getting back over 30,000 on the Nikkei Dow.

BRAZIL: We see in the shock therapy administered by Brazil's President Collor an example of the worst excesses of state corporate capitalism. Alex Cockburn, the Marxist journalist, is quite correct in identifying the economic program as fascist. Bad fascism at that. There are a few positive elements in the program relating to trade, but for the most part it is a disaster. I find it appalling that President Bush, Treasury Secretary Nick Brady, and Fed Chairman Alan Greenspan have sent messages of support to Collor for his initiatives. It's bad enough that the Brazilians have not learned from the Reagan Revolution that devaluation and fiscal austerity is the recipe for inflation and stagnation. Freezing liquid assets to fight inflation, while at the same time devaluing the currency, simultaneously deflates and inflates, with the net effect being economic implosion and a temporary collapse of prices. For the Bush Administration to applaud Collor for sinking his country's pitiful economy with that recipe is simply incredible! Where is Michael Boskin?

PERU: The most exciting development unfolding in South America is the probable elevation of a Peruvian of Japanese ancestry, Alberto Fujimori, to the Peruvian presidency. Mario Vargas Llosa, the novelist and darling of the far right in the United States, had been way ahead in the polls until he began revealing his "free-market" program, a fascist shock therapy patterned after Brazil's. Fujimori, described as a "centrist" by The New York Times, strikes us as an incipient supply-sider, who wants to rebuild the economy around a silver-backed currency and the restoration of individual incentives and values. A Roman Catholic with the backing of Protestant evangelicals, Fujimori is called "sympathetic" to the terrorist Shining Path by the NYT, but that's only because he correctly sees that the Maoist rebels grew out of an economy that smothers individual incentives. He wants to provide an economic alternative to the peasants, who now grow the coca that contributes half the cocaine coming into the U.S. This is exactly the approach we have argued for years, with no interest from either the Reagan or the Bush foreign-economic teams. Peru, with the highest combined marginal tax on labor we can find anywhere in the world — about 90% — and currency that has no meaning, is the perfect example of an IMF hothouse. Three cheers and a banzai for Fujimori!! But watch, as soon as he is elected, the IMF crowd will be swarming around him, pushing shock therapy.

ISRAEL: For 23 years, since the Six-Day War, the political elite of Israel, Likud and Labor, right and left, have studiously ignored the central question facing the nation's future: Is it to be a religious state or a secular state? As Thomas Friedman put it in the NYT last year, the Israelis can only have two of their three objectives: One choice is to keep all the Land of Israel and remain a Jewish state but give up democracy. The second is to annex the West Bank and Gaza, remain a democracy, but give up the character of the Jewish state. The third is to remain Jewish and democratic, but give up most of the West Bank and Gaza and with the land, the Palestinian problem. Now, the Israeli electorate, in its wisdom, is forcing the elites to confront the question. It has given Labor and its allies 59 votes in 120-member Knesset, Likud and its allies another 59, with the tiny Agudat Yisrael party holding the swing votes. But Agudat encapsulates the problem. An orthodox religious group whose spiritual leader, the Lubavitcher Rebbe, lives in Brooklyn, not only refuses to give up any land to settle the Palestinian problem, but insists that no convert to Reform or Conservative Judaism may be considered Jewish, for state purposes. Likud simply refuses to answer the central question, but will not form a coalition with Agudat because of the Jewishness issue. Labor favors giving land for peace, which means Agudat won't play on that score. So we get gridlock, courtesy of an 88-year-old mystic who has never set foot in Israel. Isn't democracy neat?

MEXICO: Our Mexico 2000 Project is delayed again. The amount of work involved is twice what I'd contemplated at the outset. The report will also be twice the size we'd reckoned, 14 chapters in all, dozens of recommendations large and small. Of course I have my fingers crossed that it will have twice the impact we imagined on policymaking in Mexico, and the way Americans and Canadians think of our neighbor. We're now hoping to get the report printed before President Salinas' visit in June, although the Spanish translation will take longer. We're up to our knees in red ink. The cost of the project far exceeded estimates. We are trying to put together a fact-finding trip to Mexico City for our clients, June 28-29, a Thursday & Friday. (Bring your spouses and stay the weekend!) We would meet with top officials of the government to explore the possibilities and pace of future reforms. Give us a holler. We'll go with a minimum of 15 signups.

USSR: We're still waiting a green light from Deputy Prime Minister Abalkin on our proposed Soviet project, but the Soviet Embassy is optimistic. I'm meeting Monday in NYC with Ernest Obiminsky, the deputy foreign minister for economic affairs, to try to speed things up. On its present course, Moscow is headed the way of Brazil.