Moscow Trip, etc.
Jude Wanniski
December 5, 1991


MOSCOW TRIP: As I reported 12-3, my trip to Moscow on Sunday is proceeding as planned, although only Professor Reuven Brenner of McGill will be accompanying me. Ironically, we will be flying over on the Forbes Boeing 707 ("Capitalist Tool"), as Steve Forbes (Malcolm Jr.) learned of my mission and offered a ride. Coincidentally, as chairman of Radio Free Europe, he's flying the directors to Moscow to inaugurate the RFE office there. Dr. Brenner and I will apparently have several meetings arranged at which we will attempt to persuade the Russian Republic, which now has control over monetary policy, to at least postpone its decision to float the ruble on January 1. If we can get that far, we think we may be able to then persuade the Government to fix the ruble first, to avoid the chaos we otherwise predict. We hear the U.S. Embassy in Moscow, learning of my trip, has said "Even God can't stop the floating of the ruble." The chief difficulty insofar as the Bush Administration is concerned is that the Brady Treasury has been given complete authority to manage the Russian economic issues, and Undersecretary David Mulford has essentially delegated his authority to Jacques Attali, head of the European Bank for Reconstruction and Development. Attali is a socialist menace who believes in the coming collapse of both the USSR and the United States. Why Mulford is so enchanted with Attali is beyond me, but then Mulford was the culprit who in 1987 coaxed then-Treasury Secretary Jim Baker into a fight with the Bundesbank, thereby blowing up the Louvre currency accord and triggering the October stock market crash. In another odd twist, we learn that the chief agent of the ruble float within the Moscow bureaucracy is Oleg Mozaiskov, director of research at the USSR Gosbank, who has been co-opted by the EBRD. Mozaiskov's daughter Julietta is the Russian translator of my book, The Way the World Works, and I've known her father for more than two years as a devoted currency floater, an admirer of Milton Friedman. In April of this year, I lunched with Mozaiskov in Moscow and told him the monetary ideas he was entertaining even then would cause chaos throughout the union. I'm now advised by Soviet diplomats in Washington that he has become the most ardent champion of the float. I'll probably see him next week. At the same time, I've learned that the State Department is practically as alarmed as I am at the abyss facing the people of Russia and the Republics as they march toward the float. The last minute appeals for western aid will do nothing to stop the collapse that I see following a ruble float, even if the aid were available. Reuven Brenner and I will do our best, with a prayer to St. Jude, patron saint of lost causes. (JW)

THE DOWNWARD REVISION OF THIRD QUARTER GDP GROWTH to only 1.7% (or 2.0% on the old GNP basis) from the earlier 2.4% estimate confirms our often-repeated forecast of 1.5-2.0% growth during the second half of 1991, the worst recovery in the post-war period. A year ago we predicted a modest first-quarter decline, a flat second quarter, and negligible growth during the third and fourth quarters. Conventional business-cycle theory, we argued, missed the underlying factors that had already locked the U.S. economy into stagnancy before the Gulf crisis tipped the economy into recession: suppression of the grass-roots entrepreneurial energy, that impelled the 1982-89 Reagan recovery, by confiscatory taxes on risk-taking. The consensus of business-cyclists, as reported by Dow Jones, as well as CEA Chairman Michael Boskin, wrongly predicted an upward revision. (DG)

The following letter to Secretary Jack Kemp is for your interest and information.

December 4, 1991

The Hon. Jack F. Kemp
Dept. of Housing  & Urban Development
Washington, D.C. 20410

Dear Jack:

The reports of the President's meeting with the real estate lobby indicates the lobbyists do not understand the source of their problem. They ask for tax breaks for real estate, making the same error Donald Trump made in his House testimony. Tax breaks for real estate only relieve the tax burden of the real estate crowd at the expense of everyone else. It does nothing to solve the problem of vacant office space, which requires tenants.

Here, the capgains tax is the problem in that all the factors of production are being idled because the reward for their combination into enterprises is too small to warrant the risks involved. That is, labor, management, real estate and capital are all available, but in a neutral gear, idling. The market will not allow them to assemble because as new enterprises most of them will fail, as is always the case with most new enterprises. The return on capital is insufficient to justify the mobilization of the four factors of production. Lowering the tax increases the rate of return on the entire system, winners and losers, and the market will respond with new business starts. Nothing else will work.

Savings and investment are not the problem. All four factors of production are available now! To argue that the value of real estate will rise simply because of a tax break is incorrect. For every dollar of tax saving by the owner of real estate, the government loses a dollar of revenue that has to be financed with a dollar of new tax somewhere else. This, the Keynesians are right about. As, in the final analysis, only factors of production can be taxed, no tenants will appear if the tax burden is simply shifted from one factor of production to another. Without new tenants, a building's value cannot rise. As the Keynesians do not have risk-taking in their model, they do not see the dynamics, as in my race-track example. A lower capital gains tax increases the value of all the factors of production simultaneously. They move out of idle into gear, the rewards of enterprise no longer being threatened with confiscation.

Sincerely, as ever,