Growth Package: Good News, Bad News/Problems in Moscow
Jude Wanniski
January 15, 1992



The Wall Street Journal p. 3 story today, on the Bush Administration's "growth package," is almost certainly a leak from OMB Director Richard Darman, as he is trying to cement into place his strategy. The good news is that the White House has apparently decided to actually negotiate with the Democratic Congress to get legislation passed this year. Until the leak emerged yesterday, the probable cause of the stock market burst of enthusiasm, it had not been clear that the White House was interested in going beyond setting out a growth package for political campaign purposes. The Darman approach is so pragmatic that it establishes a negotiating posture that points toward legislation this year. This is a shift in Darman's position from last autumn, when he advised that a capgains tax cut was in the cards, but not until early 1993, after the elections. The miserable economy and dismal Christmas season, confounding the White House's rosy scenario, has forced this adjustment. Pat Buchanan's challenge to the President has also helped break the complacency in the economic cabinet. (We're waiting breathlessly, along with the Beltway political crowd, to see how President Bush handles Buchanan's taunting of his "No New Taxes" pledge from the '88 campaign. This may be the most delicate moment the President is likely to face this political year.)

The bad news is the Chinese Menu that Darman has selected contains a feeble stance on capital gains, not the aggressive stance we thought we'd get from Chief of Staff Sam Skinner. It is the same Treasury position the Administration advanced two years ago, when the economy was still growing: A cut to 19.6% from 28% in the top rate, with a three-year holding period, intermediate rates for one and two year holding periods. We have confirmed that the lower rate is retroactive, a critical point not clear in the WSJ .  The old liberal intellectuals that still have some grip on the Democratic Party, led by Yale's James Tobin and MIT's Paul Samuelson, are violently opposed to cutting the capital gains tax at all, and completely against making it retroactive. Those in the White House, who this morning asked my view of the package, were at least cheered when I told them it would clearly be good for the economy, as is, although I'm again unhappy that they did not take a more aggressive posture -- the 15% indexed rate the President campaigned for in 1988. The 19.6% proposal, I suggested, is another inviting target for Pat Buchanan, another watered-down campaign pledge by George Bush. It also opens the President to a flanking move by Democrats like Paul Tsongas, perhaps even Bill Clinton, who will probably take more aggressive stances as the campaign unfolds. I keep reminding the White House that Clinton's chief economic advisor is Harvard's Robert Reich, who is on record as favoring a lot of terrible stuff, but part of his mix is a zero capgains tax after a six year holding period. If Clinton would pick this up on a retroactive basis, he would attract the attention of everyone in the nation who is sitting on an asset held that long, which includes practically anyone over fifty.

The other elements of the menu are relatively familiar, increases in the personal exemption, first-time homebuyers credits, restoration of passive loss tax breaks, etc. The Darman leak to the Journal is something of a trial balloon, in that it is still open to minor amendment. There will be another push to get the capgains rate to 15% with the political arguments, along the lines suggested. Otherwise, this is it. With the Federal Reserve doing its thing in keeping liquidity under control around the $350 gold price, the growth package would be sufficient to pull the economy onto an okay track. If it is not fouled up in the negotiating process, the good news outweighs the bad.

My meetings in Washington Monday and Tuesday included discussions with several of the Fed governors. Mostly I offered congratulations all around for the swell job they have been doing, especially the way they handled the December discount rate cut. They are all aware of our call of a 6% long bond by the end of '92, and I found no disagreement with our logic, especially if they get help on the fiscal side with a capgains cut. My only disagreements with them are on the issue of whether or not 30-year bonds should be issued during the coming refundings. They say yes; I say no, on the grounds that they should be thinking of getting the long bond to 6%, as we do. If that occurs, they will save the taxpayers considerable billions. I did agree with them that if Treasury does not include a 30-year issue, it should be absolutely clear in advising the markets that it believes those long rates are still coming down, which will force Treasury's attention away from the short rates, thus taking more pressure off the Fed to inflate. The Fed governors seem to worry that the absence of the 30-year bond will take discipline out of the system, but there are plenty of 30-year bonds out there to do that job.


While in Washington, I had lunch Tuesday with Boris Yeltsin's first Ambassador to the United States, Andrei Kolosovsky, a very bright, 36-year-old diplomat who speaks excellent English, and who has promised to entertain my invitation to speak at our Boca Raton conference next month. The situation remains extremely fragile in Russia and the Republics as there are not the slightest signs of improvement since January 2, when prices were supposedly "liberalized." In fact, the only reason there has not been greater strife is that no prices have been completely freed; there are simply two different categories of state administered prices. The ruble, though, is now trading at 180 to the dollar, which means the average worker would earn less than $3 in monthly purchasing power if the administered prices were freed to that level. All the Yeltsin government has achieved, by increasing administered prices by factors of four, five or six, is to bring out the hard-line demonstrators carrying portraits of Stalin and Lenin. The head of the Russian Parliament, one of Yeltsin's closest associates, Ruslan Nazbulatov, is so anguished by the suffering of the population that he has demanded the resignation of Yeltsin's economic cabinet. This would be the equivalent here of Secretary of State Jim Baker denouncing Nick Brady, Dick Darman and Mike Boskin. In the Tuesday Washington Post , the head of the Russian Central Bank, Georgy Matyhkin, openly denounced Harvard economist Jeffrey Sachs for his destructive advice to the Yeltsin government.

The facts, as the Ambassador explained, are that the Yeltsin government has no choice but to remain on this course, as this was the condition for receiving Western credits from the IMF and G-7 for grain imports to get through the winter. The tail is wagging the dog, I told him, suggesting that unless a way is found to alter this course, the demonstrators will grow from 10,000 to 100,000 and then millions. This is why Karl Marx wrote Das Kapital, I said, as he saw mindless bankers screwing the peasants. I'd been horrified last Saturday when I read in The New York Times that the IMF is demanding that Yeltsin increase the price of energy to the citizenry by a factor of 12, so they will freeze as well as starve. Step One, I told Kolosovsky, is to drive down the purchasing power of the people to zero. Step two, drive up the ruble price of internationally traded commodities to infinity. Then, when 300 million people cannot afford to buy any oil, gold, platinum, etc., they will have to sell it for foreign exchange. Step three, the foreign exchange is used to pay the Western bankers. It is criminal, and the Bush Administration is doing nothing about it. Indeed, Treasury thus far has been behind the IMF and the G-7 in demands for payment. (A senior Pentagon official told me this morning he was recently shocked at a NATO meeting to hear the finance representatives, especially those from the U.K., demanding payment from the Yeltsin government.) Here again, though, Kemp is the only official in the Administration who is publicly arguing against this course of action and is recommending a review of U.S. policy in this regard, at least privately. I invited him to join us at lunch this week with the Russian Ambassador to the United States, where he proffered informal encouragement for the general thrust of my suggestions. My trip to Moscow remains scheduled for the week of January 25. Next week, attention will be focused on the problem, as representatives of 50 countries gather in Washington at the call of Jim Baker, to discuss collaborative efforts in assisting the Yeltsin Government. There is a small chance, at least, that Baker will find a way to pull control of policy away from the creditors and put political and national security interests up front.