The New York Primary/The IMF Loses a Round in Russia
Jude Wanniski and David Goldman
April 3, 1992



The Democratic primary next week in New York is easily the most important election of the year, an historic event. If Jerry Brown defeats Bill Clinton, it not only finishes Clinton, but practically assures that Brown will get the nomination. This means that the only way President Bush can win re-election is by co-opting the flat-tax issue, congratulating Brown for having raised it, writing it into the GOP platform in Houston, and defeating Brown on national defense, the health care issue, and far-out environmentalism. Instead, the Bush Administration, with Treasury Secretary Nick Brady and Budget Director Dick Darman at the helm, is preparing to attack the flat tax and move left on national defense, health care and far-out environmentalism! The level of incompetence around President Bush has reached a new, profound level.

Brown trails Clinton in the latest New York polls by 10 points, but the enormous undecided vote, 25%, heavily favors Brown. First, because Clinton's supporters are organization Democrats who have committed themselves, and second, because Clinton has extremely high negative ratings on the character issue. The weekend debates may be decisive. It will be Brown's first chance to confront Clinton with the outrageous news that the Citizens for Tax Justice (CTJ), which until recently was run by Clinton's campaign manager, David Wilhelm, doctored the numbers to be able to assert that Brown's flat tax would increase the budget deficit by $200 billion. They did this by assuming Congress would add in exemptions that would increase the deficit by $200 billion, attributing this to Brown. This precisely demonstrates the corruption issue Brown has made the centerpiece of his campaign. Here we have the Establishment's candidate, Clinton, employing a Beltway tax-free "public service" lobby to massage statistics in order to persuade the people that something which is good for them is bad for them. Oddly enough, this genuine scandal was first reported in the "Counterpoint" column of The Wall Street Journal, by Alexander Cockburn of The Nation magazine, one of the most respected leftwing journalists in the country, in which Cockburn argues the left should support the flat tax!! In his Wall Street Journal column this morning, Paul Gigot called the Clinton-CTJ relationship "incestuous." Amazingly, no news organization has yet picked up on this outrage.
This would be enough to stir up the press but not enough to win New York for Brown. The most dangerous card Brown has played is his announcement that Jesse Jackson would be his running mate. This has infuriated New York's Jewish community (see Abe Rosenthal's column in this morning's NYTimes). But Brown had no choice. Jesse is the only person who could split the black vote away from Clinton's organizational coalition. Jackson cannot publicly throw his support to Brown until after Clinton loses New York, but the ironclad guarantee from Brown undoubtedly has triggered Jesse into behind-the-scenes activity that could swing the black vote to Brown next Tuesday. Establishment Jews were not going to vote for Brown anyway; Jewish leftists are not going to be deterred by Jackson. They will vote for Brown.

Brown's campaign appears to be a leftwing effort, except for the flat tax, but in fact that's not where he is coming from. In the next issue of The Nation , Brown explains his philosophical tack as "Catholic Social Doctrine," which is of course the texture of Mario Cuomo's thinking. Cuomo is pulling for Brown behind the scenes, although not as energetically as the Rev. Jackson. Fasten your seatbelts. We're in for quite a ride the next few days.

Jude Wanniski


The sacking of Russian finance minister Yegor Gaidar at the moment of his apparent triumph, namely the West's agreement in principal to provide substantial financial aid to Russia through the IMF and various other channels, shows how poorly Washington has understood the evolution of Russia's crisis. Contrary to most of today's press reports, the issue is not whether Mr. Gaidar's policies will be pursued or abandoned. There is no factional split within the Yeltsin government between pro-market and anti-market elements. On the contrary: the entire government wants to strike an agreement with the International Monetary Fund. The problem is that the IMF has been making demands that the Russians cannot meet no matter what they do.

A balanced budget, decontrol of energy prices and strict monetary controls were widely advertised as the acid test of Russia's commitment to market reforms. All three have been thrown overboard. As we expected, Russia has postponed energy price decontrol indefinitely, citing the urgent needs of agriculture and state enterprises which cannot pay the higher prices. John Lloyd of the Financial Times quotes Mr. Gaidar in today's edition to the effect that 100 billion rubles would quickly be disbursed to state enterprises now shutting down output for lack of funds, a position he opposed only two weeks ago. Gaidar told the FT that the IMF itself proposed the loosening of monetary reins.

What the IMF now thinks about the disintegration of its program in the face of economic reality and inevitable political opposition is not clear. The Group of Seven may attempt to help President Yeltsin through the next several months by throwing some money in Russia's direction, ignoring the IMF's conditions, or it may hold up funds on the grounds of Russian non-compliance. There is reason to doubt that Washington has grasped the gravity of the Russian situation, let alone formulated a workable policy response. Speculation about personnel changes in Moscow is idle, because the issues transcend the personalities. The government will need to present a plan for economic survival to the April 7 meeting of the Russian parliament, now that the first round of IMF recommendations has failed.

If the IMF persists stubbornly in making impossible demands of the Russians, many in Moscow may come to agree with former Soviet leader Mikhail Gorbachev, who attributed evil motives to the West's handling of Russia in a March 24 interview with The Washington Post. Speaking of the controversial "unipolar world" Pentagon memorandum leaked to The New York Times some weeks ago, Gorbachev said, "This smells of mothballs, like prehistoric thinking from the time of the Cold War. We have already left the bipolar world, to say nothing of the unipolar world, and then somebody has this crazy idea that maybe they can lead the world again." The Asian press already speculates about a revival of the "Eastern" trend in Russian thinking, which argues that the West means no good for Russia, and that Moscow must look towards China, Singapore, and Korea for future economic and political ties. Informed Russians explain that the "Eastern" tendency remains a fringe element, and that Russian sentiment overwhelmingly favors joining the community of Western nations. Should the Group of Seven and the IMF push Russia to the wall, though, the possibility of an eventual anti-Western reaction cannot be excluded, with potentially tragic consequences.

Regarding Polyconomics' plan to stabilize the ruble, we can only reiterate that it is under serious study at the highest levels of the Yeltsin government. We hope to have more to say about our progress in the near future.

David Goldman