When Senator Lloyd Bentsen was chosen for the Treasury post by President-elect Clinton, my immediate assessment was that on a scale of zero to ten, with Nick Brady at zero and Alexander Hamilton at ten, I could see Bentsen as a five, perhaps six, but in any case, an infinite improvement over a zero. After watching Bentsen's Senate confirmation hearings this morning, I'd say he's at least a six and may turn out to be a seven or more. The financial markets did not budge during the hearings, but I felt considerably better about the world after his appearance before the Senate Finance Committee that he has chaired for the past six years.
The most important moment came late in the two and a half hour session, not in response to a question, but with Bentsen clearly volunteering for the record his friendship with Fed Chairman Alan Greenspan. Out of the blue, Bentsen noted that there are those who would try to reduce the U.S. trade deficit with a currency devaluation. He then proceeded to shred the idea of devaluation as a policy tool, arguing that a nation's currency is a function of market forces that evaluate its economic performance and interest rates. He then volunteered that he and Greenspan have enjoyed a friendship for many years, that he has met with him twice recently to discuss the problems of the economy, and that he will meet with him frequently in the future. He underscored the word frequently as if consciously wanting to assure the bond market that there will be no feuding between Treasury and Fed as long as he is around.
Bentsen was about as good as I could have expected in putting economic growth at the heart of the deficit issue. He turned away specific questions on taxes and spending from various senators, on the grounds that no decisions have been made. He did note that while no decision had been put in concrete on a fourth bracket or a millionaire's surtax, these were items the President-elect had discussed in the campaign. Senator David Boren, Democrat of Oklahoma, is probably the member of the Finance Committee who is most focused on getting the economy growing rapidly through capital formation. He talked about how he has just returned from China and was astonished to observe 30% economic growth rates in some areas and 15% in others, and the positive effect this had on social conditions. Boren, perhaps the most intellectually committed to a capital gains tax cut because of his understanding of the dynamics, waxed enthusiastically about Bentsen's repeated statements before the committee about the need to focus on long-term growth. Bentsen, while unable to be specific, was obviously more in tune with Boren than with any other member of the committee. He did clearly indicate, by his expression and comments on his own past statements, a distaste for any idea that would reduce the estate-tax exemption.
Sen. Bill Bradley of New Jersey, for example, was absolutely awful, the most Hooverian of all the senators. All considerations had to be put aside in order to deal with the deficit, he said. All discussions of any tax cuts had to be abandoned, and the Clinton Administration should raise the gas tax, pass a carbon tax, pass a VAT tax. He was practically breathless. For his part, Bentsen acknowledged that there would have to be "a tough package" that would have to address entitlements, taxes and fiscal restraint. He was certainly much cooler to the idea of tax increases than Bradley. Unless it was wishful thinking on my part, I think he clearly wants to do something about capital gains taxation. The fact that Greenspan is emphatic in believing capital gains should be indexed retroactively, as well as prospectively, is built into my reading of this situation. If Bentsen will work as closely as he indicates with Greenspan, he will move in that direction. There's time to get there too, with Bentsen indicating he'd rather delay an economic package until the end of February rather than put one out right after the Inauguration and not get it right.
Clinton had indicated in his Wall Street Journal interview that he was prepared to consider taxing capital gains at death. The Washington Post last week devoted a lead editorial to the idea, which suggests to me that this is an idea whose time is coming. It was raised in negative tones this morning from one of the farm-state senators, as this would crush family farmers unless it is accompanied by complete indexation of capital gains, forward and backward. Every member of Congress would feel unbearable heat otherwise, from families forced to pay inflated gains at death. [In a letter to Princeton's Alan Blinder, named last week to Clinton's Council of Economic Advisors, I recommended this tradeoff and argued it would produce a stock market boom and a flood of unexpected revenues to the Treasury.] I'm told by second hand sources that at the moment prospective indexation is all that is likely. If the economic team has crystallized around even that piece, it's likely it would expand once it hits Capitol Hill. Former Rep. Vin Weber of Minnesota has argued that once Congress is ready to do prospective indexation, it will be forced to go all the way by the farmers of America. Our judgement is that perhaps as much as 50% of prospective indexation is already built into stock prices, the NASDAQ would be about 80 points higher upon enactment.
Where is Bentsen weak? On the international side, as he's caught up in the usual, conventional views of global economics. It will not help him any that Harvard's Larry Summers has been dumped in his lap as Treasury Undersecretary for International Affairs. He's concerned about the Japanese trade surplus with the U.S. for example, and believes it will recede because Japan has decided to spend another $87 billion on infrastructure, although there is not necessarily any connection between the two. He wants to find ways to revive the policy-coordinating functions of the G-7 and downplay the "public relations aspects" with an eye to getting all seven countries growing at once. It would be a nice trick, possible if it would be done through an international monetary reform led by the United States, Greenspan and gold. Somehow, I suspect Bentsen has something clunkier in mind, perhaps influenced already by Summers. I'm not jumping to conclusions because the discussions were too vague this morning, but the vibes were not as good on the international side as on the domestic side.
On Monday, Leon Panetta did his confirmation turn before the Senate Budget Committee for OMB Director. He was, if anything, worse than Senator Bradley, a deficit maniac who does not know what he's doing; David Stockman and Dick Darman cubed. We can easily expect tension between Treasury and Budget. Happily, Lloyd Bentsen seems to be on the right side, and for the most part, he knows what he's doing and will have the Senate Finance Committee behind him.