December Outlook
Jude Wanniski
November 30, 1990


The index of leading indicators, down today for the 4th consecutive month, should help the growth forces in the Bush Administration wrest control over economic policy from Richard Darman, who wants to stand pat. If CEA Chairman Michael Boskin could rouse himself to forecast a recession, the strait jacket provisions of the Budget Deal would be suspended and the White House would be free to revive a capital gains cut. Any serious growth package has to be free of these budget-scorekeeping provisions, which Darman negotiated as a mechanism to hold down spending, but which, in fact, prevent tax cutting.

Darman would fight a recession forecast exactly for this reason, arguing that Congress will demand public works pork barrelling to offset recession, but we would argue that there should be more public works spending in addition to a capital gains cut. Arguments are also being made that it's bad politics to forecast recession, even if the reason is to enact tax cuts before the recession gathers momentum. Darman is also horrified at the thought of a Social Security tax cut as a companion to capgains, but Bill Bennett, the new RNC chairman, seems eager to pair tax cuts for labor with capgains, for political balance. Darman also seems to have sold the neo-Keynesian fiction at the White House that oil is the chief burden on the economy, and the economy will snap back without fiscal fiddling when the Mideast crisis is behind us, or if the Fed offsets the oil problem with more green liquidity. President Bush reflected this view in his speech yesterday to the Association of Bank Holding Companies. Of course a peaceful end to the Mideast crisis would benefit the economy and financial markets, but not enough to offset the tax and regulatory burdens.

HUD's Jack Kemp continues to wage war against what he now calls "Social Darmanism," which correctly sees Darman's arguments against "now-nowism" as a disguised attack on the Reagan Revolution and supply-side economics. The entire growth wing of the GOP has now taken dead aim at Darman, understanding that he will wreck the economy if he maintains control of the economic agenda. Darman is scrambling frantically to keep his footing. He tried to patch things up with Kemp early this week, but Kemp demurred, feeling he has already been played for a sucker by Darman once too often. House Minority Whip Newt Gingrich, this past Tuesday, called for Darman's resignation, and Darman quickly called and asked for a meeting. If The Washington Post is to be believed this morning, he has had some success in setting Gingrich up again, Newt saying a few kind words about Darman and withdrawing his call for resignation. Darman surely knows he can't string Gingrich along forever, but then he perhaps thinks he only has to squeak by January and his agenda will be set in concrete.

December, though, should bring more and more discussion about the need to do something quickly to prevent a deepening recession. After two years in opposition, New York Governor Mario Cuomo, of all people, has now embraced the idea of a cut in the capital gains tax to get the economy back on a growth track. This definitely establishes Cuomo as the leader of the growth wing of the Democratic Party, the governor correctly interpreting New Jersey Sen. Bill Bradley's close shave in November. Just as important, Henry Kaufman, Dr. Doom himself, is on the cover of Investment Vision this month, predicting gloom and doom over the next few years, and calling for "removal of the capital gains tax as a necessary incentive for equity financing." Ted Forstmann of Forstmann, Little & Co., who has also argued long and loudly against excessive debt leveraging, is also making the argument that while near-term problems call for a "substantial" cut in the capital gains tax, the longer term calls for a zero rate after a three-year holding period. With any luck, we might see this approach adopted by the White House and Treasury, over Darman's prostrate body, in the State of the Union. In London, remember, the younger Tory backbenchers are urging a zero rate on the new prime minister, John Major.

With any luck as well, Secretary of State Jim Baker will bring back a Christmas gift from Baghdad. JBIII continues to display sensational diplomatic skill in setting up Saddam Hussein, keeping his eye on the ball while Congressional Democrats and defeatist admirals and generals counsel timidity. As skeptical as we were at the outset, we also have to hand it to President Bush for clearly seeing the principles involved in this first, critical post-Cold War police action. As soon as I became completely persuaded that Saddam would have invaded Saudi Arabia had we not intervened, the principle became clear to me as well.

This is not a local beef, as I at first had thought and as Saddam would still like us to believe, but a historic, global event. This is the very first time in this unipolar world that the world community has had to deal with an aggressive expansionist. This is precisely the reason why our fathers established the United Nations in 1945, when they assumed the world was finally unipolar. President Bush handled his press conference beautifully this morning, and it seems evident he knows exactly how to marshal broad public support at home, as he has at the United Nations. We can hope that Saddam will back down when he sees the American people are behind the President in his willingness to expend American lives in this cause. We can be sure Jim Baker will take this message to him. It only remains for President Bush to explain to the American people why, this first time, the burden falls mainly on us, and how the burden must fall more equitably on the United Nations when future expansionists appear.

A serious distraction, working against the allied coalition, could be further political disintegration in the Soviet Union. It would be in Saddam's interest if shooting began this month or next inside the USSR. Everything Fed Governor Wayne Angell and I predicted in Moscow, when we were there in September 1989, in the absence of monetary reform has come to pass. My forecast in April of food riots this year unfortunately looks possible sometime this winter. No one in Moscow seems to know that the monetary problem is the root cause, and the advice Gorbachev and the other leaders are getting from the West has been no help at all. Gorbachev this week joked that he has a hundred economists and only one of them is smart, but he doesn't know which one it is. Instead of sending him a boatload of food for Christmas, President Bush should send him an Angell.

Unhappily, there are not enough Angells to go around this Christmas. Eastern Europe is being hammered by a hundred Ivy League economists, none of whom is smart. China has just devalued its currency again, Brazil is crumbling under the weight of a Latin version of Social Darmanism, and Italy is about to jack up its capital gains tax. Finally, New Jersey Gov. James Florio, who last spring raised taxes $2.8 billion to cover a deficit of $800 million, has now announced that for some reason the economy is in such bad shape that a new $600 million deficit has appeared. With one month to go, we have had enough of 1990.