Several clients having questioned the optimism expressed in last week's report, "Texas Bush, April Upbeat," 4-18-91, I zipped down to Washington Monday to check things out on the downside.
On the surface, the Capital seems half asleep. There's almost no motion on the fiscal issues that lie at the heart of the country's economic problems, and the folks at the Office of Management and Budget are as happy as clams. One of Richard Darman's top aides told me the peace and quiet was a welcome relief, the result of last year's Budget Agreement working exactly as planned. Because of the constraints on spending and tax-cutting, the congressional fiscal machine has been immobilized. Darman has achieved the age-old fantasy of Old Guard Republicanism: The suspension of representative government on matters relating to the public purse. Members of Congress who would normally have to spend a good part of the day responding to a constituent appeal for resources can instead issue recorded messages: "Sorry, the 1990 Budget Agreement makes it impossible to do anything at the federal level. Try your local government. And have a nice day."
Once you see how serene life becomes within the Beltway when there is this Big Excuse to Do Nothing, you can understand how the highest priority of the Bush Administration and the Congress has become its protection, I came away from my meeting at OMB with vague thoughts of Jonathan Swift's Gulliver's Travels. The Budget Agreement is the objective, in and of itself, as if our leaders had decided the most important thing in the world was to balance an ostrich egg on its big end -- and they have accomplished this marvelous deed. If only people would not jump up and down or breathe heavily, the egg will stand.
This week, the nuisance to be dealt with is New York's Sen. Daniel P. Moynihan, who might topple the egg if he is somehow successful in cutting Social Security taxes. The same computer at the Congressional Budget Office that tells us a lower capital gains tax would be simply terrible for the economy in the long run also tells us a 1% shaving of the payroll tax would produce nasty problems sometime in the next century. In order to protect his ostrich egg, Budget Director Darman has put his seal of approval on the CBO computer, which leads one to wonder how the Administration plans to ridicule the CBO computer when it scores capital gains.
White House Chief of Staff John Sununu has been broadcasting his strategy for achieving a capital gains cut — a "Schwartzkopf Flanking Maneuver," is what he calls it. Sometime later this year, when an appropriate legislative vehicle comes along, the White House will suddenly throw its weight behind a growth package that will include capital gains, IRAs, and maybe even a small cut in the payroll tax. How this can be accomplished without breaking the Budget Agreement remains a mystery, especially after Darman has certified the CBO computer. Nor is it necessary that an "appropriate legislative vehicle" suddenly appear. It is in the interest of the Budget Agreement that no tax bill of any kind emerge from the House Ways & Means Committee in the forseeable future. Various Old Guard Republicans on Ways & Means are now predicting there will be no bill. The congressional leaders of both parties who balanced the egg last year are eager to prevent a tax bill and they have Richard Darman, if not Treasury Secretary Nick Brady, on their side.
It does seem a discouraging downside. So why my persistent optimism? Let's review:
First, the domestic agenda has to wait its turn. Practically all of the intellectual energy of the Administration is being consumed at the moment by the Free Trade Agreement with Mexico and "fast track" negotiating authority -- which is part of the growth agenda. It's worth the effort, and the President's determination now seems to be paying off. The issue will be behind him on June 1 and all that intellectual energy will be available for the domestic growth agenda.
Second, the President and his political advisors are still eager to go on the offensive with a growth agenda. Sununu remains serious. And the entrepreneurial wing of the GOP in the House and Senate has been settling internal differences on tactics. There was an important meeting with the President last week, at which he indicated he is more worried about the vigor of the economic recovery than he's let on, and he wants the growth package to move forward. True, if the economy suddenly springs to life, with a robust growth seen as being in the bag, the "contingency" package will be buried. But that's not going to happen. Around the White House, only Richard Darman -- who has yet to realize the law of diminishing returns applies to monetary as well as tax policy -- still seems to think the Federal Reserve by itself can boost the economy toward expansion. In 1982, a Fed easing brought a sharp decline in long-term interest rates and a bond-market boom only because the Fed had been excruciatingly deflationary in the previous 18 months, driving the price of gold below $300. When Darman got his Budget Agreement complete with tax increases last October, gold was above $400, and Fed Chairman Greenspan correctly noted that attempts to ease were greeted with alarm by the bond markets.
Michael Boskin, the President's chief economic advisor, is getting nervous about his sanguine forecasts as the economy continues to struggle and the stock market gives back some of its gains. As I warned Boskin a year ago, the failure to cut capgains would ensure a recession that would feed on itself, as state and local governments raised taxes to meet budget requirements. He did not dispute me, but instead was cowed by Darman into going along with the Budget Agreement, hoping it would all work out anyway. His fear of Darman has rendered him ineffectual thusfar, but as he now begins to realize the economy isn't going to work itself out according to Darmanomics, he will have to break the news to his boss.
If he doesn't, the Democrats will. This was another point I made in my essay last week, as I observed the gyrations of Senate Majority Leader George Mitchell in explaining his longstanding devotion to a capital gains differential. The first Democratic presidential candidate out of the box, former Sen. Paul Tsongas of Massachusetts, is lustily peddling a "targeted" capital gains tax cut, chiding his fellow Democrats for fussing abourthe fairness issue. I've advised New York Gov. Mario Cuomo that if he would become more aggressive on capital gains, it would not only break the logjam in Washington, but establish him as the first leader of the entrepreneurial wing of his party since JFK. Even Tsongas appends his targeted capgains cut to an elaborate National Industrial Plan for Big Business. Virginia's Gov. Doug Wilder, a "semi-announced" candidate for President, understands the growth arguments for capgains better than most Democrats.
Perhaps the most important element of my optimism is the refreshing boldness of Alan Greenspan, who suddenly has stepped out of his own shadow and is acting as if he isn't afraid of anything. When Greenspan was CEA chairman to Nixon and Ford, he was as timid as Boskin is today, afraid to stick his neck out on anything, which is why he got stuck with President Ford's silly WIN buttons ("Whip Inflation Now") and a proposed income-tax surcharge. Just as the economy is driven by risk-taking and innovation, so is economic policy, and the Fed chairman is now the only man in town throwing the dice. His arguments now for tight money to whip inflation and elimination of capgains taxation to break the credit crunch and lift the economy to higher levels of productivity are classic. His opposition to Darman's plan to have the FDIC fund replenished through a $25 billion borrowing from the Fed, instead of Treasury, is also a correct, bold step, all the more courageous in that his renomination is not yet secure.
Yes, there is downside. But there is more upside. All the ingredients are there. Only the timing is at issue. When the only thing that might undermine a growth package is a spontaneous outburst of economic activity, the upside seems brighter than ever.