The Summit's Dead End
Jude Wanniski
July 31, 1990


Over the weekend, Richard Darman had his face cut up badly in a fall at a Virginia hamburger stand. Sunday's Washington Post Magazine also cut him to ribbons in a psychobabble cover story, which suggests he may well be a good guy (i.e., liberal) over the long term, but is forced to take bad (i.e., conservative) positions in the short term. It also became clear to me over the weekend that Darman's summit strategy had at last come to a dead end, and that President Bush has less than nothing to show for it. Where Ronald Reagan and Jack Kemp spent a decade recasting the GOP as the party of economic growth through supply-side tax cuts, Darman's strategy of bipartisan budget summitry now threatens to throw this all away. When The New York Times can blast the administration's idea of a stock-transfer tax as a "dagger pointed at Wall Street," as it did in a Monday editorial, we have palpable proof that the world has turned upside down. In the same issue, New Jersey Gov. James Florio, for goodness sakes, is quoted among the nation's governors outraged at the latest wacko idea to come out of Barman's shop, a capping at $10,000 of the amount of state and local income and property taxes that "the rich" can deduct from their gross incomes to arrive at taxable federal incomes.

To be fair to Darman, Treasury's Nick Brady is the original source of many of the tax ideas being floated. Darman doesn't really believe, as does Brady, that the financial markets will crack unless spending is cut and taxes are raised in a summit budget deal. But it was Darman's strategy to generate a sense of crisis in order to get such a deal, and he had a true believer in Brady, who is almost fanatical on the subject. In the last week I found it hard to find anyone in or near policymaking circles around the White House who did not volunteer a bashing of Brady.

There is now underway a search for a "face saver," something that will permit the President to extricate himself from the mess he finds himself in. It is now perfectly clear the Democrats have no intention of helping Bush, Brady or Darman by offering up wacko ideas of their own. The Darman assumption that the Democrats will be spurred by the prospect of a terrible October 15 budget sequestration into agreeing to painful measures has just not materialized. Democrats are treating sequestration as a Bush problem and are getting away with it. The only agreement possible is to recess until Labor Day, come back and hammer out a deal by September 10, and somehow avoid a sequestration that will technically force at least a 32% cutback in all government agencies not specifically excluded. (The congressional and executive agency staffs are included in the cuts!) But it's pure fantasy to assume they can accomplish something then if they haven't yet been able to do so.

It seems bizarre to put it this way, but the essence of the problem is that there is no problem. There is no budget crisis, only the inflationary illusion of one, a ghostly shadow that is frightening Nick Brady. Measured by pieces of paper, the deficits seem terrifying. Measured in real things whether gold, oil or baloney sandwiches the nation's debt is considerably lower than it was 20 years ago and continues to fall as a percentage of GNP. The automatic Gramm-Rudman mechanism that was set up to solve this non-problem is now, like a robot out of control, marching toward the Republican White House, not toward the "profligate Congress," as originally intended. In their desperate search for revenues, to feed the robot, Brady and Darman seem oblivious to the political damage they are doing, harkening back to Hooverville and the Old Time Religion.

From what I can tell second-hand, Darman has now fallen completely back into the demand model. Last week, he advised the House Republican Policy Committee that a deal with the Democrats on taxes and spending was necessary to get a guarantee of lower interest rates from Alan Greenspan and the Fed. I was told this at a Capitol Hill lunch last Friday with several GOP congressmen. I allowed that if Darman made such a statement publicly, Greenspan would be forced to renounce the idea of any such guarantees. It's most discouraging that after six years discussing these monetary ideas with Darman, he still thinks tax hikes and spending cuts can produce easy money.

In that vein, Darman does want to get the capital gains tax cut, but his reasoning is also in the demand model, where the benefits are long term, not immediate. This is no doubt why he has been so lackadaisical about capgains, rarely mentioning it in public, seeing it as something nice, but hardly essential. Darman's chief economist is a dyed-in-the-wool Keynesian, as is his chief public affairs advisor, Edwin Dale, who was also David Stockman's confidante. Dale for years was chief financial writer for The New York Times and has always been quite direct in pooh-poohing my arguments about capital gains.

At my GOP lunch last Friday, I pointed out that there have been no net capital gains in the United States in the last quarter century!!! The Dow Jones industrials stood at 1000 in 1966, when the gold price was $35. To equilibrate with gold, oil and baloney sandwiches today, this measure of the nation's capital stock would have to be at 10,000 before there would be a net capital gain. In Japan, where there is virtually no capital gains tax on equity investments, the Nikkei Dow was also 1000 in 1966 and is about 32,000 today. Converted to gold, the Dow went from 25.6 to 7.8, the Nikkei index from 25.6 to 86.4!! Of course, Japan's capital stock was smaller than ours in 1966, but this gives us some sense of the breathtaking advantage they have had with their superior monetary and fiscal policies over these years. On the present track, Japan will indeed own a hefty chunk of the U.S. by the end of the decade.

With the Bush economic policymaking now in disarray, the capital gains cut is pushed into an indefinite future. Add in the cloud of stock transfer taxation, and the demand for dollar assets has to adjust downward. The dollar continues its decline against the major European currencies and the price of gold inches up. The Bush administration, which has been flogging the Fed to ease further, can hardly call for easier money in this environment, and in any case Alan Greenspan is not about to provide it. I can see Greenspan jacking up fed funds to shore up international confidence in the dollar sooner than I can see him slackening further.

President Bush should simply be announcing the breakdown of the summit as a worthy idea that just didn't work. This would permit him to lay out a simpler agenda that would divide the two parties once again on the tax issue, getting the GOP back where it belongs. All he really has to do is throw the issue out as the centerpiece of the '90 congressional campaigns and be prepared to come back after the elections, to hammer out a budget agreement that allows the Gramm-Rudman targets to slide.

There are plenty of Republicans making this argument at the moment, and the situation is ripening. The White House would rather have the Democrats "walk away11 from the summit, but the Democrats have no reason to do anything at all but sit and watch the White House continue to negotiate with itself. Yes, it looks bad for the President right now, but if he simply looks at this as a learning experience, he could start anew with good humor and regain his standing. President Reagan went through this kind of experience with TEFRA in 1982, and the best part of his tenure turned out to be ahead of him.