One Last Stand
Jude Wanniski
November 22, 1991


With the President still insisting economic relief can wait until next spring, the White House in disarray as Congress prepares to adjourn for the balance of the year, the bond market teetering as gold nudges $370, and stocks teetering too, it looks mighty dark indeed. The last stand, which will play out today, through the weekend, and into early next week, is an attempt by the growth Republicans in the House to rescue Western Civilization just in the nick of time. If all goes well, an attempt will be made to attach the Gingrich-Gramm Growth Package which includes a 19.6% capgains rate, enterprise zones, super IRAs and tax breaks for real estate to the $70 billion bank bailout legislation which must be signed into law before the end of the year. As of Friday, November 15, this maneuver seemed doomed, as it had no support in the Administration. At the moment, it has the support of Budget Director Richard Darman, who has slowly but steadily been accepting the reality of the unending recession. Even more importantly, Darman is also accepting the supply-side argument that a capgains cut would bring instant relief to the economy which translates into the savings of tens of billions of dollars of tax revenues by not waiting another two or three months to press the issue.

If, as expected, the House GOP Conference today announces its plan to use the RTC bill as a vehicle for the growth package, we will then have to await word from the White House on what the President intends to do. Having Darman argue for support is essential, but not decisive. Treasury Secretary Nick Brady still wants to go home. The President is meeting today with several economists that Michael Boskin has pulled together for last minute advice, including Martin Feldstein, Paul McCracken and Alien Sinai. As all are Keynesian, they would tend to support the view of the National Association of Business Economists which, according to The Wall Street Journal's "Washington Wire" this morning, believes a cut in the capital gains tax would not do much to liven up the economy in the next six months. On the other hand, the President does know he has to do something to arrest the surging doubts about his leadership on the domestic economy. Backing the activist Republicans would provide a focus.

The Democrats do not want to pass a bank bailout bill without Republican support, especially if the argument the Republicans are using for withholding that support goes to the heart of the "credit crunch," the solvency of the thrifts, banks and insurance companies as the real estate picture remains one of unremitting depression. Federal Reserve Chairman Alan Greenspan is certainly one who believes a capgains cut would bring instant relief. His re-confirmation hearings, before the Senate Banking Committee, continue to be pushed off as the RTC bill holds center stage, however.

It all depends on pulling the President into a fight he has wanted to avoid, on the assumption that once he commits himself, he will find a way to win. (Notice this morning Mario Cuomo is finally talking about a zero capgains tax!!! Cuomo will be on the Brinkley Show Sunday). If he instead finds a way to walk away from this last ditch fight to save the economy in time for Christmas, I think he will be forced onto the defensive for the remainder of his one-term presidency.

The following letter to Donald Trump is my personal response to his testimony before the House Budget Committee yesterday.

November 22, 1991

Mr. Donald Trump
The Trump Organization
725 Fifth Avenue
New York, N.Y. 10022

Dear Mr. Trump:

Something made me wake up at 4 a.m., walk downstairs, turn on the TV to C-Span, and watch your testimony before the House Budget Committee. A few thoughts:

I'm in complete agreement with you that there is no end in sight to the recession/depression, especially in real estate. I'm afraid your prescription, though, would only deepen the problem. Because your career is in real estate, you see the problem from that angle, identifying the Tax Reform Act of 1986 as the source of your problems. If we could return to the status quo ante, all would be fine, you believe, suggesting Congress raise income tax rates on the richest people to 50% or 60%, and then reopen the real estate tax shelters. Your idea is that this will drive the rich to invest in real estate to economize on taxes.

Unhappily, the recession has not been caused by the problems of real estate, and incentives to build new houses and commercial office space will have almost no effect on construction activity. This is because the capital gains tax is, after a generation of inflation, the highest it has ever been in the nation's history. It was pushed to 28% from 20% by the '86 Act. This is a tax on the very concept of growth, threatening confiscation of enterprise before it even occurs.

I agree with you completely that the commercial office space built in the 1980s would now be filled up if it were not for the recession. Elimination of the tax, or its sharp reduction, would invite new enterprise of all kinds, and these would "gobble up" the commercial space in short order. There is no reason for anyone to build new shelter for business or labor if both are unemployed, which is why your approach would not work.

The growth Republicans in the House, led by Gingrich and Weber, next week will attempt to graft a growth package onto the RTC bill. If they get the President's support, they may be able to force the issue to a successful conclusion next week or require Congress to return after Thanksgiving. The growth package reduces the capgains rate to 19.6%, which would certainly help immediately. The package also contains enterprise zone legislation and some of the provisions on passive losses that you favor.

I'd support a slightly higher income tax for incomes above $1 million in order to win a solid cut in capgains. But raising the top bracket to 50% or 60% at incomes of only $200,000 would cause a host of other problems. In any case, I appreciated your message of urgency. I've advised members of the Bush Administration of my belief that if nothing is done to get things going in the next several weeks, the President will not be re-elected. There is great anguish, suffering and fear across the breadth of the political economy.


cc: Secy. Jack Kemp, H.U.D. Richard Darman, O.M.B.