A Sequester Speech
Jude Wanniski
September 26, 1990


News that House Minority Leader Bob Michel was joining the Senate's Bob Dole in recommending a jettison of capital gains added to the burdens of Wall Street this morning. The AP report at 10:42 that the President was prepared to consider alternatives to capgains hung some more crepe on the gasping DJIA. Our sources indicate exactly the opposite, that the President is dug in and prepared to shut down the government to get what he wants. We will know he is deadly serious if and when he requests prime time for a televised Presidential address to the nation, explaining why he is ordering a budget sequestration in compliance with Gramm-Rudman. The mere announcement of such a request should be taken as an extremely bullish sign, as it would signal his determination to win on capital gains.

After spending the last three days in Washington, with meetings at the White House and on Capitol Hill, I'm assured that such a speech will say the right things, and have the effect of breaking the summit gridlock over capital gains. The only reason for President Bush to address the nation at this point would be to state his rationale for accepting the distress of sequestration. The Democratic leadership believes they have so thoroughly conditioned the public against a "tax cut for the rich" that the President will be unable to go through with sequester without taking the blame for the distress it will cause. The first clear signal that the President is getting ready to go through with sequester was in The New York Times story this morning that the White House is planning to use a legal loophole to keep essential personnel at work including air-traffic controllers and prison guards. The threat of maximum inconvenience to the public has thus far been the Darman strategy to force the Democrats into an agreement. Instead, it has persuaded the Democrats that the White House could not go through with sequester. By switching to the kindler and gentler sequester, the President has a much more credible threat.

The most encouraging discovery I made was that the President's chief political advisors are enthusiastically urging him to do battle. I met Tuesday with one of his closest political strategists and was astonished at how thoroughly he agreed with the idea of public confrontation on the capital gains issue! He observed that the latest polls show a 45-to-45/o split on the issue, but pointed out that the Democrats have had the field to themselves in denigrating capital gains -- while the White House has not fired a shot. A Bush address to the nation to explain his position, he said, would "have no downside risk and everything to gain." It would put the Democratic leadership in the position of having to take responsibility for the recession that would result if there is no capgains cut, and that thought alone would very likely force the Democrats to capitulate, he believes. "The ball is just hanging there, big and fat. All the President has to do is swing the bat."

The problem is that Richard Darman continues to oppose this strategy, as he has for the past 18 months. Darman has argued that his strategy eventually would pay off and a capgains cut would be part of any deal. At this morning's GOP leadership meeting with the President, though, Darman clearly placed himself in the opposition camp. He is still theoretically in favor of a capital gains cut on the grounds that it would have a long-term investment payoff. But he also argues that a budget deal without capital gains would be good for the economy in and of itself, allowing the Fed to lower interest rates. He also indicated that Michael Boskin, the President's chief economic advisor, thinks the economy could withstand the higher taxes and lower spending implied by a "deal," even without a capital gains tax.

Minority Leader Michel has been meeting with Darman exploring "alternative" growth strategies to capital gains, to fold into a summit deal with the Democrats. There is, though, no alternative, fiscal or monetary. I met yesterday morning with Sen. Pete Domenici of New Mexico, ranking Republican on the Budget Committee and Bob Dole's closest Senate ally. I advised that unless capgains is cut and indexed the economy will slide into a long and deep recession that can only be reversed by cutting and indexing capital gains. The nation's credit system is being smothered by the high capgains rate, which is depressing the value of all capital assets, eroding the capital base of the banks and thrifts to the point where they are afraid of lending anything to anyone. Federal Reserve Gov. Wayne Angell is now making that argument within the Fed, stating his belief that we are not in a "short cycle," but at the edge of a "long cycle," where monetary ease could only accelerate the slide, and where the only policy to arrest the cycle is a cut in capgains as monetary policy is held steady.

If President Bush chooses budget balance over capital gains, he will be repeating the error made the last time we were at the edge of a long cycle, when President Hoover cemented the Great Depression into place with his 1931-32 tax hikes. Just as Hoover could not run for re-election in 1932 on a platform to repeal the Smoot-Hawley Tariff Act that started the slide in the first place, George Bush would find it hard to run in 1992, amidst general depression, on a promise to cut and index the capital gains tax. He won that argument with the Democrats in 1988 and cannot throw in the towel now. House Minority Whip Newt Gingrich, a student of history, is as solid as a rock on this point, believing the President will not cave in as long as he and a hard core of 65 House Republicans remain firm, and that we are set for a victory on capital gains. There is always the chance, though, that George Bush, like Herbert Hoover, will choose bad economics over good politics.

In my several meetings, I expressed the view that if the President had planned the present moment all along, he could not have done it any better. If he chooses the growth path after so much effort in cutting a deal with the Democrats, GOP House and Senate candidates across the country would have a positive banner to run under, instead of the austerity flag of Gramm-Rudman. Mr. Bush's political advisors, including Lee Atwater I understand, are telling him as much. So, I hope, are his own instincts.