Bill Clinton: The New, Moderate Democrat
Jude Wanniski
October 9, 1992


Governor Clinton has won over a growing segment of the business community with the pitch that he is a New Democrat. He has collected some 400 business executives in Chicago, even a few dozen CEOs in Silicon Valley -- including a bunch of onetime Republicans. A growing number of Polyconomics' clients who have not voted Democratic since 1964 are preparing to support Clinton. My old friend Arthur Laffer has endorsed Clinton on the grounds that even if his economics turn out to be terrible, it can't be worse than what we have, and out of the chaos Jack Kemp will be elected President in 1996! Hmmm. Then we have Lawrence Kudlow of Bear Stearns, another occasional stalwart, advising The New York Times that he is taking off his "economic hat" and his "ideological hat" and getting behind Clinton's economic plan because that's what people seem to want.

Let us review Clinton's method. He has studied the footage of the Carter loss in '80, the Mondale loss in '84, and the Dukakis loss in '88, and decided to retool. He is not going to  be a "Tax and Spend" Democrat like they were. He will not be a "trickle down" Republican either. He has found another path, an "investment path." He is going to increase spending on public works and education by tens of billions of dollars to get the economy going, even though it means a temporary increase in the budget deficit! This is the New Democrat we've all been waiting for?! The New York Times cheered as Carter, Mondale and Dukakis declaimed against budget deficits. Now, with the deficit at $350 billion and climbing, it is suddenly fashionable. In yesterday's Times, Louis Uchitelle reports on the front page: "Old Idea Gains New Respect: Spending Way Out of Slump." In addition to quoting a cheering Kudlow, Uchitelle informs us that Robert Giordano, chief economist at Goldman, Sachs, thinks this is a swell idea. Goldman, Sachs, remember, is home base for Bob Rubin, who is on the very short list as Clinton's Treasury Secretary. Felix Rohatyn of Lazard Freres sold both Clinton and Ross Perot the idea of a $100 billion investment in infrastructure! Rohatyn recommended to Perot that this pork be paid for with a 50-cent gasoline tax, which Perot has swallowed. Clinton rejected the idea and now criticizes Perot for trying to reduce the deficit too fast. Clinton will bring down the deficit eventually, as this $100 billion pork barrel "creates growth." He will also tax incomes of "rich people" at higher rates, as it is a Keynesian assumption that high income people don't spend enough of their incomes to increase spending on domestic consumer goods. They buy imported cars, fashions and wine. And when they save, all too often it is in the form of tax-free state and local bonds, which are used to finance (ahem) public works.

Uchitelle actually called me before he wrote his story, told me of his theme, and for a half hour talked to me about it. As my comments did not support his theme, they did not make it into his story. I told him this was a pathetic Keynesian no-brainer. Nobel Laureates Robert Solow of MIT and James Tobin of Yale, two moth-eaten Keynesians, have produced no fewer than 600 economists willing to sign on to this gigantic theft of taxpayer funds. As I explained to the Timesman, investments of taxpayer funds should not proceed unless they clearly produce a positive return. The best way to create work through government spending projects is through bond issues, as the taxpayers have to study the proposal in order to calculate its ROI. They will have to finance the bonds. For the federal government to grab $100 billion out of the economy, because our Nobel Prize winners don't know what else to do, is great for those building contractors and construction unions who know how to play this Democratic New Deal game. Insofar as the market determines the spending will be misspent, producing negative ROI, it will make up the difference by padding the interest rate schedules. 

In this morning's White House Bulletin we find James McIntyre, who was Jimmy Carter's budget director, sizing up this new, New Moderate Democrat approach: "There will be a clamor for an economic stimulus program to prime the economy. In particular, if Clinton is elected, he is going to get enormous pressure from the Hill and from various interest groups for increased spending. After 10 years of pent up demand, expectations are going to be high for expanded federal programs. And a lot of the demands for increased Federal spending will come in the guise that 'we need a stimulus package to get the economy moving again.'"

In its extreme, the model is that which Moscow attempted over the last 75 years, until its economy rotted out at the core. The New Deal Keynesian model provided a difference, in that the means of production would continue to be owned privately, and a free market would be permitted to operate in parallel with government allocation of resources. Arthur Schlesinger Jr., the New Deal historian, has argued that Keynesianism thus saved the United States from communism. He may or may not have been right, but in any case the Keynesian model has served its purpose. If it continues to dictate policy in a Clinton Administration, it will merely continue the gradual, but unmistakable, rotting out of the U.S. economy. The best example is India, which has maintained a democracy, private ownership, and markets. For 50 years, though, the government has been "investing" in public works and education. The public works all have negative ROIs, as the elites arrange them to suit themselves, not economic efficiency. The elites also educate their children with the taxes of the masses, and their children leave India, where they can't make a living, and come to the United States, where they can. This is the brainstorm model that has just occurred to Tobin, Solow, Kudlow and 600 other economists. Because capital is squandered without regard for ROI, labor makes up the difference, and on its present course, India will exceed China in population in another generation.

The curse of Keynes that afflicts his academic followers is to be found throughout the higher ranks of American business -- the "cash-flow cul de sac." Peter Peterson and Roger Altman, both potential Clinton Treasury Secretaries, earnestly believe the nation must increase its savings and investment in order for there to be growth. To them, the government is the problem because it uses the nation's savings to finance the national debt. They are as maniacal as Richard Darman and Nick Brady in pursuit of The Budget Deal that will produce the right mix of spending cuts and tax increases to lower the deficit, thereby freeing "dollars" for private deployment. Or, they promote new tax systems -- such as the Nunn-Domenici scheme announced last week, which lowers tax rates on capital to zero and raises tax rates on consumption to infinity. In this cash-flow cul de sac, every American would, instead of buying an automobile, invest in the auto industry. The stock market would boom, wouldn't it? Pete? Sam? Roger?

I'd written this recently in a Wall Street Journal letter to the editor, pointing out that the nation was swamped with savings. Eleven million workers are saving their work effort, standing around on unemployment lines. Factories are saving themselves by working at a fraction of capacity. Managers and entrepreneurs are saving their talents by working as bureaucrats. Commercial real estate is gathering cobwebs, saving itself for the Clinton Plan to cut the deficit and release capital!!! 

We can never get out of this cul de sac unless we get into a supply model, which forces us to ask the question: Why are all these productive forces idle when they so clearly would rather be creating wealth? The only possible answer in a market economy is that the market is unwilling to risk bringing the factors together because the ROI is negative. The market mechanism will not permit the squandering of capital. This is always the reason for recessions and depressions in market economies. The only thing government can realistically do to help is to reduce the threat to ROI that is making the market reluctant to act. There are a lot of things the government can do in the United States at the moment to improve ROI on the margin. By far the greatest, as we have been arguing, is to index capital gains against inflation. The next is to cut or eliminate the capital gains tax. The next is a gold-index standard that protects future investment from inflation. Nothing else really will do the job of getting the economy moving. Eliminating the capgains tax would so improve ROI from coast to coast that unemployment would soon disappear. At that point, federal, state and local governments would have to direct tremendous amounts of the tax revenue to public works and education, to keep up with the demands of commerce.

The three Presidential candidates are going to be debating the nation's future Sunday night. All three, I'm afraid, will remain in the cash-flow cul de sac, most especially Governor Clinton, the new, New Moderate Democrat. Watch and see.