Breakfast at the Fed, etc.
Jude Wanniski
February 7, 1992


BREAKFAST AT THE FED: Fed Chairman Alan Greenspan bought me O.J., poached eggs and coffee Wednesday morning at the Fed, while I made a presentation on how to save Russia from certain chaos via a gold ruble bond issue. HUD Secretary Jack Kemp asked to attend, to hear my formal pitch, and Greenspan agreed to buy his breakfast, too. It was off the record, which means I can't tell you any of the interesting things he said, but I'm sure he will not mind if I offer a few items to clear up discrepancies about his recent public testimony. For example, I'd read in the newspaper that he had attributed the recent run-up in bond yields to the revival of economic growth, and told him I disagreed with this position. He said he had merely said that this was a position being taken by the Fed staff, not by him, and he did not necessarily agree with it. In his testimony last week, the press also left the impression he didn't think it necessary to cut taxes to restore economic growth. What about his position on capital gains? Greenspan said it should be clear from his testimony that he does not favor a Keynesian fiscal stimulus. He says it remains his position that the capital gains tax should be eliminated whether or not the economy is in recession or expansion, and in that regard it is an issue independent of the recession. He also reiterated his public view that a cut in the capgains tax is the only tax policy change that would immediately cause the value of real assets to rise. In regard to my Russia presentation, he expressed skepticism as well as interest, and agreed to remain open to further information and argument. I will put on the record the fact that I left the breakfast with a happy smile.

TREASURY'S TAX LAWYERS: In a CNBC television interview last Friday, I suggested that while half the country thinks the Democrats are the source of our economic problems and the other half think the Republicans are to blame, the real source of our miseries are the tax lawyers at the U.S. Treasury. These are the folks who came up with the brilliant idea of raising $4 billion in the next three years by forcing brokerage firms to pay taxes on unrealized capital gains -- a dagger aimed at the heart of entrepreneurial capitalism. If enacted, it would cost the Treasury a zillion dollars in the next decade. These are also the fellows who decided to sneak into the President's growth package a provision that requires almost all savings from the capgains tax cut to be taxed away via the Alternative Minimum Tax, which puts us in mind of a dog chasing its tail. The most entrepreneurial of all Americans are the oil and gas wildcatters, who were in to see President Bush last week to tell him their industry is being shut down by the Treasury tax whizzes, who are requiring them to put their tax savings on intangible drilling expenses into the ATM, which has the net effect of pushing marginal tax rates on exploration over 100%. The wildcatter delegation advised the President, who used to be a Texas wildcatter, that he would never have left Connecticut for Texas after graduating from Yale if these rules were in effect. The drill rig count is currently below 650, from a 1980 high of more than 3,500. This is the lowest count in the 20th century. How much revenue will Treasury collect from an industry that it has crushed with its mindlessly static computers? In the old days, the tax lawyers were kept on a political leash. Their brainstorms would have to pass through a screen that would permit industry analysts to advise on the destructive practical effects of what they see as whizbang tax enhancements. Not in this Administration.

GROWTH PACKAGE: As we have all been reading in the press, the Democrats are planning to send the President a growth bill before his March 20 deadline and have him decide whether or not to veto it. The guessing is it will have some watered down capgains tax cut, a middle-class tax cut along Keynesian lines, and a higher bracket on the rich. The White House will threaten a veto as the bidding proceeds, but the guessing is the Democrats will finally  send him a package that would be veto proof. Rep. Bill Archer (R-Tex.), a key member of House Ways and Means, is now working to get capital gains indexed, an idea the Democrats should go along with. An indexed capgains rate would enable the Democrats to push a lot of their other baggage into the bill and have it veto proof.

PRESIDENTIAL: Evans & Novak report this morning that the Bill Clinton campaign is crumbling, that Clinton is now considered the "walking dead." The Wall Street Journal report that he was a draft dodger put another nail in his coffin. (He says he didn't, but reporters tell me they know he's not telling the truth.) The press corps is now buzzing with rumors of an illegitimate child. The steadiest, most attractive campaign is that of former Massachusetts Sen. Paul Tsongas, who might now win the New Hampshire primary. Tsongas' message remains steadfastly supply-side on economics and decidedly liberal on social issues: He will only appoint Supreme Court Justices who support Roe v. Wade, he says. Still, there is too much austerity in Tsongas' agenda to keep it flying to the White House. Perhaps another Democrat will pop up by March 1. On the GOP side, the news of the week was Jack Kemp's apology to the White House for describing the President's payroll withholding plan as a "gimmick" on the Evans & Novak TV show last weekend. (Actually, he was goaded into the remark, and the withholding plan is one of the few items in the package that is not a gimmick.) There followed reports and rumors of grave unhappiness with Kemp at the White House, in the Cabinet, and on the campaign team, with some anonymous quotes in The Washington Post recommending he resign or be fired for disloyalty. Of course, Kemp had nothing to do with the President's dizzy plunge in popularity in the past year, a decline that can only be attributed to his primary Economic Team, led by Treasury Secretary Nick Brady.

A GOLDEN FORECAST: In a model that captures the past 20 years of market movement, David Goldman and our new staff economist, Evan Kalimtgis, offer formidable proof that long-term bond yields are determined by the gold price. Their essay, which you will receive next week, contains a forecast of a strong bull market in bonds during the next two years, presuming that the Fed keeps the gold price fluctuating close to $350. The methodology is brilliantly simple, and reflects a real contribution to economics. Their focus on the volatility of the change in the gold price turns out to be a superb forecasting tool.

BOCA CONFERENCE: Last chance for clients to sign up for our Eighth Annual Supply-Side Festival, coming up February 27-March 1 in Boca Raton. Evans & Novak will, as usual, officiate. Guests now signed up for sure include: HUD's Jack Kemp, Senator Trent Lott, Texas Democratic Governor Ann Richards, Canada's Dennis Mills, M.P. in the Liberal Party, Russia's Andrei Kolosovsky, acting Ambassador and Deputy Chief of Mission, Japan's Seiichiro Noboru, economics minister in the Japanese Embassy in Washington, and Irving Kristol, our favorite philosopher. We're still hoping to land an important Democrat from the House Ways & Means Committee. Call us if you'd like more information. This might be the best yet.

THE OZONE HOLE: The big hole left in our Boca Raton program, we are extremely sad to report, could not possibly be filled following the untimely death of Warren Brookes several weeks ago. Warren for several years has been the single most important journalist in America, with his syndicated column out of The Detroit News constituting a one-man truth squad on environmental issues. He was the only journalist to achieve a four-star top-rating every year in our annual Repap MediaGuide, including the 7th edition which will be published later this month. Warren was the first person I invited to speak to our conference, and he accepted last summer. We note the environmental loonies have lost no time pressing ahead with their ozone hole doomsday theories, which Warren had held at bay with his dogged reporting among serious scientists. It goes to show how one fellow can make such a difference. Unless another reporter steps into his shoes quickly, we'll all wind up dropping through the Ozone Hole.