In addition to observing the Dow finally close above 3000, two days in Washington this week lifted my spirits considerably. Before I left April 2 for my two week spin through Moscow and Tokyo, I was still somewhat concerned the President's "fast track" authority for negotiating a Free Trade Association with Mexico was in jeopardy; the protectionist forces had' been putting excrutiating pressures on the House Democrats, and the White House hadn't fired a shot. And movement on capital gains had stalled as congressional Republicans feuded over tactics as the White House stood aside. I left Washington last night after spending the day at the Evans & Novak Spring forum, delighted to find major obstacles overcome on both, more confident that the FTA and capgains are ripening nicely.
More important than anything else, President Bush's new speechwriter, Tony Snow, has been churning out the first exciting speeches on economic policy the President has delivered since the 1988 campaign. As we advised in our "February Upbeat," 2-12: "We have been crossing our fingers and saying our prayers for weeks, and maybe it helped: John Sununu has hired Tony Snow as the President's chief speechwriter. This alone will be worth a few hundred points on the DJIA and even more on the NASDAQ, as Tony is a bona fide, no-holds-barred supply-sider, who many of you met at our supply-side festivals the last two years in Boca Raton." The President's Houston speech on free trade with Mexico lifted the issue to a high level of principle, shaking the FTA's natural supporters out of their torpor and setting off a surge of activity on its behalf that now has Sununu confidently predicting victory. This would not simply be a victory for free trade in North America, it would reinvigorate the free trade principle, via American leadership, throughout the world. Indeed, the President is now moving toward sketching out an economic component to his New World Order.
In his American Business Conference Speech April 9, for the first time since his inauguration, the President lifted the capital gains issue out of the muck through which it had been dragged by the Democratic leadership of Congress. He elevated it to the high level of principles embodied in the American Dream and entrepreneurial capitalism: "My point is simple: Taxes on growth are taxes on the American dream. We should clear away such obstacles to the American dream. And similarly, we should foster innovation wherever we can." The press ignored the speech, but word of it has been spreading to electrify the cadre of leaders in the entrepreneurial wing of the GOP. And, as there will be more to come, the press corps will soon be unable to dismiss this new Bush.
The Democratic leadership is well aware of what's happening and is already scrambling on how to meet the challenge. Senate Majority Leader George Mitchell, the primary obstacle to capgains in Congress, is telling people this week: 1) the Democrats offered the President a capgains cut last year during the budget deliberations, but the White House rejected the offer; 2) the President has revived the idea because of the 1992 elections -- which reveals the Senator knows it is a winning issue for the GOP, as it was in '88; 3) he, George Mitchell, always favored a capgains differential, but caved in to the Reagan Administration in the 1986 Tax Reform!!! There's a grain of truth in everything he says, but the overall message is loud and clear: He's maneuvering to negotiate, not to kill. I spoke with Mitchell briefly Wednesday, giving him a copy of David Goldman's March 8 essay, "The Failure of Economic Models: The Issues Before the Greenspan Commission," which addresses many of the concerns the Majority Leader has raised. He looked at the title and said he could agree with that much already. "We should not be making policy based on what the computer models are telling us," he told me with some intensity, promising to read the paper carefully. Hmmmm.
It is also of incalculable importance that Federal Reserve Chairman Alan Greenspan is now being more aggressive than ever in arguing that a capital gains tax cut is the surest way, perhaps the only way, to end the credit crunch. Monetary policy can't do it, he is saying, without igniting a new inflation, a position the White House now seems to be realizing. Nor does he think regulatory relief would be much help: Banks are remaining stingy -- refusing loans to borrowers even the regulators would concede are creditworthy — out of protective concern for their core capital. He has testified a number of times in recent months before congressional banking committees that a capgains cut would lift the value of commercial real estate and turn bad loans into good. But where he has heretofore sounded as if it would be prudential to do so, he is now beginning to indicate he believes it is necessary! These bolder arguments from Greenspan can only work to further embolden the President. Greenspan is finding he can comfortably argue that capital gains should not be taxed at all, a position so principled that opponents shrink from contesting him. The Fed chairman is also saying that even if the recession soon ends, it may be a much weaker recovery than the economy needs. He may be nervous that the bond market has not participated in the Wall Street rally, which is a concern we would share.
Differences over tactics remain. The entrepreneurial wing of the congressional GOP, led by Rep. Vin Weber, wishes to pair a capgains cut with a Social Security tax cut. The corporatist wing, led by Senator Phil Gramm of Texas, believes a capgains cut would be prudential but is not necessary, and a Social Security tax cut would complicate the budget problems that are his central concern. Senator Gramm has a PhD in Economics and he seems trapped by the computer models programmed by the Keynesians. He violently opposes cutting the payroll tax, and one suspects he would urge the President to veto a bill that packaged a capgains cut and a payroll tax cut, a view probably held by Budget Director Richard Darman as well. Floating between the Weber Group and the Gramm Position is House Minority Whip Newt Gingrich, who is in a position to work out a consensus. White House Chief of Staff John Sununu met with the Weber Group Tuesday and seems to be saying a payroll tax cut will be acceptable if the White House can retain control of its shape. There is, after all, justifiable concern the Democrats would try to remove the earnings cap from Social Security.
The sourest note I picked up on this visit was the realization that Senator Gramm, who now chairs the Senate Republican Campaign Committee, genuinely believes the GOP next year should build its campaign around two issues: Democratic opposition votes to the use of force in the Gulf War and Democratic votes for the the Civil Rights legislation which the President vetoed last year on the grounds that it was a racial "quota" bill. The negative approach is what one would have expected from President Nixon, perhaps even President Ford. If GOP candidates follow Senator Gramm's advice, the party would not make much headway in 1992 in gaining strength in Congress. The Senate Democrats, who had been fearing loss of Senate control in '92, cannot believe their good fortune in finding Senator Gramm in control of the GOP campaign committee. This is the reason "term limitation" would do little to change the composition of the Congress. The electorate will not trust control of Congress to a party that is devoted to budget balancing and mean-spiritedness. The GOP lost the Senate in 1986 when it left the growth track in pursuit of Gramm-Rudman spending controls.
In The Washington Post business section last Sunday, I was asked why supply-siders have run into difficulty lately, and I answered that it is because President Bush is really two men: "'The Connecticut Bush is the corporatist and the Texas Bush is the entrepreneur,' he [Wanniski] said, referring to Bush's native and adoptive states. In the first two years of the Bush Administration, the Connecticut 'corporatist' Bush predominated. But Wanniski has hope. This year, Bush is coming back to Texas,1 he said. 'We'll see a supply-side surge, this year and next.'"
The Texas Bush, of course, is not the Texas of PhD economist Phil Gramm, but of the George Bush who shelved his Yale degree in economics to wildcat for oil, the most entrepreneurial of all capitalistic enterprises. In Tokyo last week, in two dozen meetings with institutional investors, I used this metaphor to explain my bullishness this year. I recalled being with Ronald Reagan in early 1980 when he received the results of the Fortune poll of the Fortune 500 CEO's on their presidential preferences. Only three were for Reagan, the other 497 for John (Japan Basher) Connally, Howard Baker, George Bush, or Jimmy Carter. Reagan just laughed: "Let them have the Fortune 500. I've got to be the candidate of the farmer, the shopkeeper, the independent, the entrepreneur. There are a lot more of those." Over the years, George Bush learned how to count too. It looks like he's back in the oil patch and we can see a gusher ahead.