A Modestly Upbeat Mid-July
Jude Wanniski
July 13, 1990

Our June 18 report, "A Monetary Moment of Truth," may have looked like a loser last week, when the FOMC meeting seemed to produce nothing but yawns. Fed Chairman Alan Greenspan's statement yesterday at Senate Banking satisfies us that the Fed's deflation has ended at the $350 gold range. We had recommended a "gentle" easing of fed funds when gold approaches $350, and gold was almost there at the time of our report. Speculation that the Fed would ease last week sent gold marching back over $360 on the day of the FOMC meeting, which had the perverse effect of stalling the move toward an easing of fed funds. Gold then began a slow slide below $360 as it appeared no action had been taken last week. Greenspan's statement did not mention gold, of course, keying a promised "modest" easing of fed funds to the credit crunch we were practically the first to warn about in "A Regulatory Reign of Terror," Feb. 21. The deft way Greenspan made public this shift in Fed thinking invited the excellent response in the financial markets. He's not seen to be giving in to political pressure from the White House and Treasury, and the "modest" shift in fed funds signals the commodity markets that there is no reason to go bananas bidding up gold and sinking the dollar. The timing and nature of the Greenspan statement also cuts against the theory that any easing by the Fed would have to await a "deal" on the budget.

There is not much new to report on the budget summit, except to say that The Wall Street Journal story this morning, "GOP May Drop Capital-Gains Tax Issue In an Effort to Speed Budget Accord," is simply wishful thinking by the Journal's Washington bureau. It is true that House Minority Leader Bob Michel would like to scuttle capgains. He still thinks capgains is a liability to the GOP because of Democratic polemics that it is a giveaway to the rich. But Michel is an anachronism who has almost zero influence on the budget process, as the WSJ well knows. "There is no merit in the Journal story," our impeccable sources indicate.

It is true that a real gridlock appears to have developed on the issue: A) Senate Majority Leader George Mitchell says there can be no deal on capgains unless the top marginal income tax rate moves to 33%; B) Senator Bob Packwood, ranking Republican on Senate Finance, says there can be no deal that involves lifting the top marginal rate above its present 28%; C) White House Chief of Staff John Sununu says there can be no deal without a cut in capgains. We take Sununu's word as golden, knowing that: A) President Bush and his chief economic advisers know how important capgains is to the economy; B) If the White House drops capgains at this point, the fury in the Republican Party would rupture confidence in George Bush as its leader, once and for all.

The Democrats really don't know what to do as they cling to George Mitchell's blustery vow, especially as it is universally known that if he ever permitted capgains to come to a vote, it would win big in the Senate. Remember, the bill that passed the House last September is still alive, on the shelf gathering dust. If the Senate Republicans this week see the Democrats continuing to stonewall, they might very well try to attach the House capgains cut to some appropriate bill. All hell would break loose at the budget summit. As it is, tempers are beginning to flare, as both sides begin suspecting the other of bending the bipartisan ground rules. Sununu blew his top this week when Senate Democrats had a press conference trumpeting a phony study that shows federal taxation is no longer progressive.

New Jersey's Senator Bill Bradley, who was a key player in blocking capgains in the Senate last October, this week suggested in Senate Finance that the whole budget process be deferred until after the August recess. Of course, as everyone on Capitol Hill knows, this means the process would be deferred until after the November elections. It's clearly in Bradley's interest to have the issue deferred until he is safely re-elected, especially now that President Bush seems to have gotten the high ground with his willingness to be flexible on taxes. Bradley's GOP opponent, Christine Todd Whitman, is hounding him on taxes, wrapping him around New Jersey Governor Jim Florio's manic-egalitarian tax package that has the state in an uproar. Other Democrats, especially those who feel more vulnerable than Bradley, must feel the same way. If there is no deal before the August recess, though, sequestration will take place October 15, and the final three weeks of the congressional campaign promise to be wild and woolly. All the pent-up partisanship of the last six months would explode. We finally saw today a foreshadowing of what could come in a speech by Vice President Quayle in Chicago, before the Republican National Committee:

During the 1988 election, President Bush and I campaigned across the country to reduce the capital gains tax to 15%, because we believe that small businesses and risk-taking entrepreneurs are the motor of economic growth. Meanwhile, Governor Dukakis argued the case for income redistribution. The American people rejected that argument and gave us a resounding mandate. But today, nearly two years later, the Democrats' Congressional leadership has denied the voters' mandate. In fact, Congress' failure to pass the President's capital gains proposal last year is partly responsible for the current slowdown in economic growth. The fact is, ladies and gentlemen, a tax cut the capital gains cut not a tax increase, is the single most important thing we could do for economic growth.

Indeed, and as things heat up, President Bush, who the world knows is fundamentally, non-confrontational, would be forced to fight. The world also knows that when he is forced to fight, he can be savage. There are only two speeds in the Bush transmission.

We're now running out of time in the bipartisan mode, which means this coming week will be critical. "It is a mess," an insider to the budget talks advises this morning, Hand it will get messier." The only possible resolution I can see is if the President offers Mitchell a deal on the higher rates, which would have to mean a much better and lower rate than Mitchell has in mind, but which he might be pushed to accept. The GOP negotiators have offered Mitchell all sorts of symbolic soak-the-rich tax hikes that do not involve the top 28% rate, but it's clear the liberal fixation is on that rate, which represents Reaganism and all its demons. As it seems increasingly unlikely that such a deal will be cut, we'd almost prefer a complete breakdown at the summit and a good old-fashioned partisan brawl. They are having more fun in Moscow these days, on that account.

Boris Yeltsin's resignation from the Communist Party is a fascinating development, viewed by many as a setback to Mikhail Gorbachev, but a good thing for him. Gorbachev has to shake the Party bureaucracy out of its own manic-egalitarian mode. The government apparatus has to look upon the ability of its citizens to get rich as a positive development, as was the case until recently in New Jersey.

The most positive development in the USSR so far this year was the decision of the Moscow City Council to give the city's housing stocks to those who now occupy them. This, as you may recall, was our idea, which I presented to the top officials of the Soviet government during my April visit. In May, the Soviet Embassy in Washington presented the idea to the deputy mayor of Moscow, who was visiting Washington at the time and advised me that he loved the idea and wanted it for Moscow even if Gorbachev didn't want to adapt it for the country as a whole. Once implemented in Moscow, though, it's hard to imagine how Gorbachev could resist spreading it out as national policy. Here, HUD Secretary Jack Kemp would call this "urban homesteading."

So don't be so glum. The news isn't so bad. On this Friday the 13th, for one thing, the Dow Jones Industrial Average is the highest it has ever been.