On the Other Hand, the West May Rise Again
Jude Wanniski and David Goldman
April 10, 1992


THE TORIES have won an extremely important, historic victory, which will be all the more spectacular if Chancellor of the Exchequer Norman Lamont now puts into motion a plan to eliminate the capital gains tax, as we have been speculating for several months. If so, the Canadian stock market should boom as well, as Brian Mulroney would probably follow Britain's lead. In fact, this would put the bad guys to rout in Washington too. (JW)

GOLD'S DIP TO $337 on Tuesday tipped the balance in favor of easing at the Board of Governors, an action we have recommended for the past three weeks. Securities markets were ecstatic, as we expected ("Finally, A Clear Signal From Gold," 3-17-92). Until the last minute, the Fed governors were still debating whether the falling gold price might reflect short-term trading noise. The drop from the low $340s to $337, though, made the gold signal unambiguous. The prevailing view at the Board is that all gold price movements have monetary significance. Attempts to explain the Fed's action outside the price-level-target model break down on first examination. Fed-watchers who look at monetary aggregates rather than market signals had ruled out the possibility of monetary ease; caught short, they were at pains to invent exogenous explanations, such as fear over the Japanese stock market. If the Fed's action in the markets yesterday was a panic response to a (strictly chimerical) danger of chain reaction in the markets, why did the long bond rally? As we advised, the outsized yield curve indicated that the market is "parched, not sopped. If the Fed loosened monetary policy in response to the gold signal, the risk premium on long-term money would fade [and] long-term rates would fall." (DG)

JERRY BROWN still doesn't know what hit him in New York, as Clinton outfoxed him in the closing week, blunting the cutting edge of the Brown campaign -- the flat tax. In the closing debates that we said would decide the NY primary, Brown seemed unsure of himself as Clinton hammered at the flat tax. Rather than engage Clinton's arguments, Brown allowed himself to devote almost all that precious air time to his half-baked health-care and energy schemes that are of zero interest to the voters. I saw Brown on Sunday in Washington and discovered that he had seen none of the memos I'd written to him on the flat tax the previous week. He had been unaware until I told him that the Citizens For Tax Justice had misrepresented his position in order to allow Clinton to attack it as a $200 billion revenue loser. Brown's inexperienced staff retreated from the flat tax idea, which he himself understands only in part, and is now almost certainly urging him to concentrate solely on his other issues, which of course will send him into a tailspin in the remaining primaries. I'd urged Brown by memo to up the tax ante by telling New Yorkers he would index capgains ex poste, as Paul Craig Roberts recommended to the Bush Administration. This memo hadn't gotten to him either, although his staff assured me it had. The only mention of capital gains in the closing week of the primary was Clinton's attack on Paul Tsongas for favoring a cut in the capital gains tax! Tsongas didn't say a word and got 29% of the vote, beating out Brown for second place. The only way for Brown to regain his footing is to throw out his secondary messages and concentrate solely on taxation. I have no idea what he will do. (JW)

BILL CLINTON seems certain to be the nominee if Brown can't win enough of the remaining primaries to at least force a second ballot at the convention. Clinton will be a stronger contender than the White House seems to believe. I'm almost certain he will re-tool his economic policy positions once again to get closer to President Bush, seeming to be reasonable on taxation. The Democratic theoreticians are closely following my "Two Santa Claus Theory" in putting "middle-class tax cuts," "targeted capital gains tax cuts," and a $50 billion increase in infrastructure spending -- including education spending -- in his goodie bag. My 1975 Santa Claus theory held that the GOP could not allow the Democrats to be both the tax-cutting party and the spending party; there had to be a division of labor between offering the voters lower taxes or higher spending. With Treasury Secretary Nick Brady in control, George Bush has forgotten everything he learned about Santa Claus from Ronald Reagan and turned back to Scrooge. H. Ross Perot will almost certainly get into the race. With the right message he could pull enough of the white vote from Bush, especially across Dixie, to throw the election to Clinton. We have no idea what Perot's message will be, as there is not a whiff of information on who has his ear. With the right message and Colin Powell as his running mate, Perot might even win. (JW)

PRESIDENT BUSH told David Frost he would do whatever is necessary to be elected, but the one thing he must do is replace Nick Brady with someone who puts growth above the budget. Almost everyone I ask around the White House says this won't happen. The only possibility is if George Bush Jr. would really be deputized by his dad to ask around on why the White House isn't working, figures it out, and persuades the old man. (The President this morning angrily denied a report he was already using his son for this purpose.) There would be two factions who would report to Junior: The Brady-must-go faction, which includes Budget Director Richard Darman, and the Darman-must-go faction, which includes Brady. In this battle, I must confess, I'm once again rooting for Darman's side. On Darman's side, I suspect, is Secretary of State Jim Baker, who is probably ready to recommend to the President that Nick Brady be made Ambassador to Ethiopia. State and Treasury are practically not on speaking terms after last week's fiasco on Russian aid, in which Treasury fouled up months of work by State in making the President look ridiculous. Baker should not only aim at blasting Brady out of Treasury, but also pulling foreign economic policy away from Treasury, as I'd always believed would have to occur in a post-Cold War world. As if thumbing his snoot at Baker, Brady today announced that he would personally fly to Moscow April 15 to sort things out! Heaven help Boris Yeltsin! This morning I told a Wall Street Journal reporter, who is doing a story on all this, that in a parliamentary system Brady would have been forced to resign long ago, even if he had been the Prime Minister's twin brother, not just his pal. RNC Chairman Rich Bond is openly reporting that he is hearing from Republicans across the country from all income classes that Brady should go, but even Bond says this will not happen, that the President will not make Brady a scapegoat. If Brady is blasted out, the stock market will boom, as the new Treasury Secretary, whoever it is, will almost certainly recommend that capital gains be indexed by simple regulatory dictate. (JW)