Weekend Notes
Jude Wanniski and David Goldman
February 15, 1991


GULF WAR: On Monday we urged a pause in the bombing of Baghdad, to give the Iraqi commanders in the field the option to surrender or have their 500,000 troops either be blown to bits or die for lack of food and water. As if to prove our point that the continued slaughter of an armed force that has been militarily defeated is no longer cause for celebration, the Baghdad bunker was hit overnight, reportedly killing hundred of civilians and causing unrest among the allied coalition and throughout much of the Islamic world. President Bush is, of course, correct in responding negatively to Saddam Hussein's offer to pull his army out of Kuwait now, but his urging the Iraqi people to overthrow Saddam strikes a false note. He's still better off, we think, announcing a bombing pause that does not include resupply convoys and SCUD launchers, urging the field commanders to surrender. In a letter I wrote to Defense Secretary Cheney Tuesday morning, I suggested the current slaughter is the equivalent of a heavyweight fight, where the opponent has been knocked down a dozen times in each of a dozen rounds, has been mashed to a pulp, but whose owner, sitting in a skybox, continues to insist his boxer fight on. It's time to appeal to the handlers in the corner. The coalition is now at the point of simply enjoying target practice with live targets. (JW)

THE GREENSPAN COMMISSION: The news from the Gulf has totally preoccupied the Bush Administration this week. It will be another few days before the White House can focus on the fact that the Democrats have outmaneuvered the President once again on capital gains. On Tuesday, the morning it was announced that the Democratic leadership would not cooperate with Fed Chairman Alan Greenspan on a capgains study, the President, Chief of Staff John Sununu and OMB Director Richard Darman agreed to a reaffirmation of their commitment. But by the time Press Secretary Marlin Fitzwater got to his morning briefing, all hell had broken loose over the Baghdad bunker, and the response was drowned out. Chairman Greenspan, left feeling high and dry, felt he had no choice but to announce he could not proceed with a study unless he had a green light from the Democratic leadership. The White House may regroup this coming week when Congress returns from the holiday. The best news of the week on this score is that Treasury Secretary Nick Brady has shown more aggressiveness on behalf of capgains than he has in months. (JW)

JERSEY REDUX: Tax increases have flattened the New Jersey economy, and threaten to deepen and lengthen the recession in other deficit-ridden Northeastern states. N.J. State Treasurer Douglas Berman admitted yesterday that this year's state deficit would rise to at least $900 million, after last June's $2.8 billion tax increase. Higher taxes, as we warned in our July evaluation of Governor Jim Florio's tax scheme, are producing lower revenues. Sales taxes, expected to bring in $700 million last year, came in at only $450 million, 36% under projections. A year ago, New Jersey's unemployment rate was only 4.6%, well below the national rate of 5.2%; in January, New Jersey's rate had risen to 6.4%, above the national rate of 6.2%. Florio's disaster has not deterred Connecticut's Governor Lowell Weicker from proposing a 6% income tax for individuals earning over $12,500, in return for a sales tax reduction from 8% to 4.25%. Reports today's New York Times: "A sampling of opinion among Connecticut residents, business executives and local officials showed support for the Governor's plan to cut the sales tax but concern over the proposed state income tax." (DG)

POEHLS APART: The Bank of England's half-point reduction in its minimum lending rate produced not a hint of weakness for the sterling-mark parity, suggesting that the foreign exchange market expects German rates to fall soon. The Bank of England's quarterly report, released yesterday, squarely attacked the Bundesbank's attempt to contain the supposed inflationary effects of Germany's budget deficit. Bundesbank President Karl-Otto Poehl appears to be pressuring the government to raise taxes in order to contain the deficit, i.e., to reverse the Kohl government's longstanding commitment to gradually reduce taxes. German government bond yields, though, are now below the short-term DM interest rate. The inverted yield curve suggests the market expects a drop in short-term interest rates. Germany's budget, announced yesterday, contained none of the rumored tax increases. Instead, Finance Minister Theo Waigel argued that economic growth would reduce next year's deficit -- precisely the right way to think about it. Once again, the Kohl government is right, and the Bundesbank is wrong. The dollar rose today against the DM after Iraq's statement about a possible withdrawal from Kuwait, perhaps because an end to the Gulf war would eliminate much of the Bundesbank's pretext for excessive monetary stringency. (DG)

SOVIET SCENE: Prime Minister Valentin Pavlov's outburst against foreign ruble speculators got plenty of attention this week, making it seem more than ever that the Gorbachev team doesn't know what it's doing. The New York Times and Wall Street Journal stories missed one relevant Pavlovian response to his interview in Trud, the Soviet labor journal. In the Financial Times, we find Pavlov indicated he is pondering a partially backed gold ruble, along the lines of the chevronets, issued by Lenin in the early 1920s. Amid all the zaniness, all is not yet lost. (JW)