Update on Indexing, etc.
Jude Wanniski
September 1, 1992


UPDATE ON INDEXING: It doesn't look good at the moment, but we should at least know very soon whether the Justice Department will give President Bush at best an amber light on indexing capital gains by executive order. Attorney General Barr has been advised by the White House that the President believes it would be a good thing to do. The problem is that the career bureaucrats at Justice, having once agreed with the Treasury lawyers that clear legal authority does not exist, are of course resisting a change of opinion -- even though their former boss in the Office of Legal Analysis, Charles Cooper, has authored a 90-page legal memo stating the President can proceed. The career bureaucrats have my sympathy; the last thing civil servants want is to be seen as shifting ground for partisan reasons. The remaining slim shot is that Barr can take a half step toward indexing because of the Cooper memo. He can tell the President that there is enough reasonable disagreement to permit him to proceed if he believes it is in the national interest. This is beyond any question, but would still require a commitment from Jim Baker in advance to take whatever political heat might emerge. In that sense, the decision has probably been made not to proceed unless JBIII decides otherwise. With the President 19 points down in the lastest poll today, it should seem worth the shot. On Friday, I informed the White House that the total amount of inflation in unrealized capital gains held by Americans is on the order of $7 trillion, according to Gary Robbins, the former Treasury official whose consulting firm is working with the U.S. Chamber of Commerce on this. The magnitude of this number -- one quarter of the nation's total assets -- makes it clear that the general welfare will be served, not simply the rich. The Justice bureaucrats are simply insisting that the capital gains basis has always been "cost," from 1918 onward, and that the term is unambiguous. I've disputed that point, on grounds that I do not believe the Justice or Treasury lawyers have considered: From 1918 until 1973, the legal definition of the dollar was its gold weight, and the gold weight changed three times in that period. In other words, the legal cost of capital has not remained constant. In that light, the Justice lawyers could easily alter their earlier finding. In any case, the issue remains hot in Washington.

JAPAN'S REBOUND: The Nikkei continues to improve since the Finance  Ministry, August 19, decided it was flirting with financial crisis and it was time to bail out the stock market. The most important part of the rescue package that pulled the Japanese banks and economy away from the cliff was something that will not be done. All summer the economy has been threatened by the Prime Minister's Tax Commission with a possible recommendation to tax capital gains on shares traded on the Tokyo exchange as ordinary income. We cited this as the reason for the meltdown in the stock market in our August 13 report, "Japan's Capital Gains Tax and World Deflation." We like to think we contributed to the decision not to proceed with this globally threatening tax proposal. We issued a press release to the Japanese press community in Washington, headlined: "Japanese Tax Move Threatens Global Deflation, Polyconomics Warns." The Kyodo news service carried the report in Tokyo that weekend.

EYES ON FRANCE: What if the people of France kill the Maastricht Treaty when they vote September 20? We expect the Bundesbank to maintain its deflationary posture until then, which would help kill the Treaty. The dollar should look stronger thereafter, as we expect the Bundesbank to ease on its DM liquidity squeeze. The White House was correct yesterday to wave off concerns about a falling dollar, pointing to the interest-rate differentials. This reflects the influence of Jim Baker, who knows enough not to be buffaloed on exchange rates. As we get closer to the French vote, I'll offer some thoughts on what the world might look like without Maastricht.