Budget Agreement: Breaking the Ice
Jude Wanniski
October 8, 1991


Don't get too excited about all the Washington chatter about a break in the Budget Agreement, which followed Budget Director Richard Darman's Sunday talk-show revelation that the Agreement is back on the table. White House spokesman Marlin Fitzwater reacted to the buzz this morning by putting out a denial. If you read Mr. Darman's lips, as I did Sunday, he's saying what he is always ready to say, that everything is always negotiable. He has said that if the agreement is broken, the capital gains tax will have to be cut as part of the deal, which he has to say or congressional Republicans will scream for his scalp. Mr. Darman has, figuratively speaking, a little capital gains flag in his pocket, which he waves around whenever he sees anyone approaching from the GOP's growth wing.

If you listen to the rest of what Darman said, you discover that he is playing the generous role of King of the Realm, who will marry the beautiful princess (capgains) to anyone brave enough to 1) slay a dragon, 2) leap a chasm, and 3) swim an ocean of snakes. Last Friday, President Bush actually made a nice little speech about how pretty the princess is, as he does from time to time. He even used the argument I've been hammering at the White House for several months: The capgains cut doesn't have to actually take effect for it to lift expectations, open profit opportunities and boost the economy a bit. As long as it's clear to the markets that it will happen, soon enough to do some good, it will do good. This, the President actually said, in so many words. Then, Mr. Darman revealed the Conditions by which the King will permit betrothal of the princess. The Democrats have to agree to open up discussion of how to cut $1 trillion in entitlements, not increase new spending much, and address long term spending commitments on health care.

The central problem is that Nick Brady, Dick Darman and John Sununu refuse to admit that the Budget Agreement was a terrible mistake. It is not humanly possible for them to make such an admission, because they are only advisors, not elected officials. It is too horrible for them to contemplate the consequences of their advice and take responsibility for it. President Bush is the only person who can easily acknowledge the great mistake, because he shares the blame with the American people who elected him. This is why David Stockman, Dick Darman and Jim Baker to this day refuse to admit they erred in dragging President Reagan into the 1982 TEFRA, nominally the biggest tax increase in U.S. history. It was Reagan a year later who said TEFRA was his biggest mistake.

In 1982, you may recall, the only member of the GOP leadership to oppose Reagan on TEFRA was Rep. Jack Kemp, who led an outside campaign to try to undermine the tax hike. In 1990, Kemp was the only Cabinet official in the Bush Administration to publicly indicate his opposition to the Budget Agreement and the attendant tax hikes that locked in the recession, ballooned the federal deficit, and scrubbed the President's appeal for a capital gains tax cut. At long last, it is becoming clear to the folks around the White House that Kemp was right, and Brady, Darman, and Sununu were wrong. It may even be occurring to the President. At the Economic Policy Council meeting held this morning at the White House, President Bush was far more aggressive than his economic advisors in wanting to explore growth solutions to the doldrums we are in, according to Kemp. The meeting was held to study the "credit crunch," and limit discussion to that alone. Kemp insisted, and the President agreed with him, that the availability of capital could not be divorced from tax policy that inhibits the creation of capital. If you can't increase capital creation via less onerous taxes on capital formation, it will do the economy very little good to shout at the allocators of capital. As I suggested to Kemp, if an oasis in the Sahara dries up to a puddle, little is accomplished by yelling at those charged with spooning liquidity from it to not waste a drop, but to be more generous.

I'm not at all optimistic in the short term that the President will do any more than contemplate the beauty of the princess and talk about her from time to time. This is fine with his three Wizards, Brady, Darman and Sununu, as long as he doesn't try to interfere with their brewing of policy. Treasury Secretary Brady continues to surprise me with his power to destroy. My greatest error in assessing the Bush Presidency as it began in 1989 was the importance of Brady. He took over Dillon Read on Wall Street when it was running neck and neck in investment banking with Morgan Stanley and when he got done, Dillon Read was a crackerjack stand. I'd assumed he was simply inept, and that Darman, Sununu and Michael Boskin, the President's CEA chief, would be able to work around him on domestic affairs and Secretary of State Jim Baker, Brady's predecessor at Treasury, would carry the international economy portfolio with him to Foggy Bottom. Alas, what Nick Brady could do for Dillon Read, he can do to the United States.

David Goldman, in Tokyo and Hong Kong this week, called to report today that the most feared and hated of all U.S. officials is Nick Brady. They fear he will again browbeat the Bank of Japan into appreciating the yen even as he talks down the dollar. To the Japanese investors David is speaking to, the noises coming out of Treasury are the same they heard in 1987. All we can do is sympathize, explaining that since Brady is unable to look himself in the mirror and realize his Budget Agreement was a disaster, he must look elsewhere. He must yell at the Federal Reserve to ease, ease, ease, and must yell at the dollar to fall, fall, fall. The weakness of the dollar, the rise in gold to $359, the jitters on Wall Street, are all related to Nicholas Brady doing yet another Wizard dance. We have to believe reports he has persuaded the G-7 to try to sink the dollar. We also have to believe he's made enough noise to persuade the Fed's Open Market Committee to give Alan Greenspan authority to ease, ease, ease. It is only our shaky confidence in Greenspan -- and his fellow governors Mullins, Angell, LaWare and Kelly that keep us shakily confident on the dollar and bonds.

There will be a break in the Budget Agreement down the line. At the moment, it's still just a lot of talk.