Clinton So Far: Going in Circles
Jude Wanniski
February 2, 1993


Our friend Steven Greenhouse of The New York Times this morning advises us that the Clinton Administration has rid itself of the "Chicago" economists who supposedly populated the Reagan-Bush administrations for the last dozen years, and replaced them with a bevy of beauties from MIT. John Maynard Keynes has replaced Friedrich von Hayek; Robert Solow has replaced Milton Friedman. Government intervention has replaced "the free market." And so forth.

This is all supposed to be meaningful stuff, but in reality nothing has really changed when it comes to the baton pass from one bunch of academics to another. This is why the Clinton Administration is thus far going in circles on economic policymaking. When you start with the same assumptions, it does not matter whether you were schooled, in the Windy City or along the river Charles. Circumstance and logic get you to the same place. The Bush Administration was thoroughly dominated by demand-side economics, which was the formal training of CEA Chairman Michael Boskin and the informal training of Nick Brady and Dick Darman. There was not a single supply-sider in any subcabinet position with influence on the domestic economy during the four Bush years. Not one. All of the Ph.D. economists at the CEA, Treasury and OMB studied out of the same books that circulate at MIT: In order to "grow the economy" there must be an increase in investment, which requires an increase in savings, which requires a decrease in the budget deficit, which requires an increase in taxes and decrease in spending.

President Clinton is now seemingly trapped in this logic, which, when combined with "political reality," makes it increasingly unlikely he will be able to do what his MIT economists tell him he must do: Raise taxes on the middle class and cut "entitlement" programs such as Social Security. This is all to the good, which is why both the stock market and the bond market are enjoying themselves these days. One trial balloon after another is being shot to pieces as it becomes clear that this Congress is no more eager to raise taxes on the middle class than was the last. A week ago, as rumors swirled of new taxes on energy, pensions and home mortgage deductions, Kevin Phillips fumed in the Los Angeles Times that "The incoming yuppie Democratic Administration is starting to look like it has almost as much sensitivity to Main Street pocketbooks and values as the departing preppie Republican  Administration...Now a new Washington game is afoot -- raising revenue for new programs and deficit reduction. And the middle class, once again, is dumped as an icon and relabeled as a milk cow." Phillips, a favorite of the Establishment wings of both parties for having opposed the supply-siders during every skirmish of the Reagan Revolution, presumably wants to put the income tax rates back to 70% on the rich, to finance a middle-class tax cut.

Two important liberal thinkers of the "soft left," Michael Kinsley of The New Republic and Senator Bill Bradley of New Jersey, seemed terribly distressed last night on the CNN "Crossfire" show. The new chairman of the Senate Finance Committee, Pat Moynihan, for goodness sakes, is not showing any enthusiasm at all for taxing the "entitlements" of Social Security recipients. Indeed, Senator Moynihan actually objects to calling Social Security payments "entitlements." He points out that this year, for the first time, new recipients will be receiving less than they paid into the system on an actuarial basis -- and that the trust fund will run a $60 billion surplus this year. Moynihan, the most growth-oriented of all Democrats, two years ago proposed cutting SSI tax rates! He was only a nuisance, then, to the Hooverian cabal that included the congressional leaders of both parties and the Bush Administration. Now he has the gavel, which makes him something more than a nuisance. While some of the yuppies in the Clinton White House think they can roll over Moynihan with their MIT degrees (according to Time magazine), Wall Street knows better.

What is more likely to happen is that Sen. Moynihan, Treasury Secretary Lloyd Bentsen, and Fed Chairman Alan Greenspan -- none of whom have a Ph.D. from MIT -- will bide their time and rescue the President from the professors. It's already beginning to take shape. Mr. Clinton has now broken all records for public disapproval of a President after only one week in office, 32% over Reagan's previous record of 12%, according to Newsweek. We were pleased to see the President was smart enough to summon Chairman Greenspan to the White House last Thursday, the day of Newsweek's polling, so they could be seen smiling together on the evening news and on the front page of the NYTimes the following day. Think of Moynihan, Bentsen and Greenspan as rocky crags at sea, a welcome sight to an exhausted swimmer. [Please note: If you read the NYTimes yesterday, you will be advised it is Greenspan who is the exhausted swimmer, Clinton the rock of Gibraltar. The Times has also advised us that Greenspan has embraced Clinton's economic plan, which has yet to be written. It also reports that he has promised to lower interest rates if the Clinton tax increases sink the economy, something Greenspan would never promise.]

What do we think will happen? President Clinton will announce his economic plan February 17. It will contain a little of this and a little of that, nothing scary, nothing we haven't heard about, but nothing so downright stupid that would alarm Rush Limbaugh's radio audience. The proposal will go to the House Ways & Means Committee, where it will be massaged and improved, then to the House floor where it will be massaged and improved, then to the Senate Finance Committee where it will get better, and then to the Senate floor where it will get better still. Senate Majority Leader George Mitchell will permit a vote on indexation of capital gains, perhaps a cut in the rate itself, knowing his party, not the GOP, will get the credit. The Conference Committee will throw out any flotsam and jetsam that might include onerous middle-class tax increases. The unwashed masses will kibitz right along, via Larry King, Limbaugh, Donahue, and Ross Perot. It will be a long and ugly process, but the net result will provide a bit of oxygen for the economy, lifting the financial markets along the way.

Some of the Beltway Boys instead talk wistfully of a Florio Scenario, which sounds rather like a Hawaiian sportshirt. This involves springing a huge middle-class tax increase on the electorate in the middle of the night. There would be temporary anguish, but, as we all know from reading the Times, Alan Greenspan would bail us out with easy money. President Clinton would get his recession out of the way in his first year; the budget deficit will be cut in half, and by 1996, the voters will have forgotten his treachery and will send him back for another round of tax hikes to attack the other half of the deficit. Few nudniks are willing to endorse the Florio Scenario publicly, Sam Donaldson of ABC-TV being the usual exception.