Surprise: The Florio Scenario
Jude Wanniski
February 16, 1993


Wall Street this morning responded just as it should have to the latest revelations from President Clinton. If he will have his way, we will have yet another effective tax bracket of 40% at joint incomes of $250,000, by having the millionaire's surtax apply at that level. THE RICH are no longer couples filing joint incomes of $200,000. This was the definition of THE RICH during the campaign. Now the number may be $175,000 or even $100,000, which means individals earning $50,000 may be RICH! How far inflation has brought us! During summers in the 1950s, I earned $100 a week as a common construction laborer in New York City, a rate of $5,000 a year on an annual basis. With gold as the unit of account, $5,000 then is equivalent to $50,000 today, although $5,000 put me in the lowest tax bracket in the 1950s, and President Clinton may now be putting its equivalent in the highest bracket. The sickening slide in the stock market, with the smaller cap stocks getting murdered, is only a taste of what would happen if this "ECONOMIC STIMULUS" plan were actually enacted into law. The Dow would fall somewhere below 3000, NASDAQ would be hit even harder, and the bond market would reverse its healthy climb as the temporary truce between the White House and Fed would end, with the White House demanding cheap money to bail out the economy.

Our relative calm is due entirely to the expectation that this "ECONOMIC STIMULUS" plan will not be enacted. We had advised when the NASDAQ was 654 ["Caution on NASDAQ," Dec. 2] that at this level the market was discounting a moderately positive economic plan from the President-elect. The PLAN was, in fact, not devised by economists at all, but by Billary's political class warriors, principally James Carville, and is essentially the same devised by New Jersey Governor Jim Florio: Raise revenues by relying on class warfare to split income classes, do the dirty work in the first year of your tenure and the electorate will have forgotten your treachery by the time your re-election comes around. Carville, incidentally, was Florio's campaign manager in 1989 and is now hard at work on his re-election effort. If Florio succeeds, as well he might if the Republicans continue to bumble, it will certify that Clinton need have no fear with his own Florio Scenario. He will have demonstrated to himself that the voters are dopes and can be manipulated at will.

The big difference between Florio in '89 and Clinton in '93 is that the citizens of New Jersey were asleep when Florio whisked his Plan through the Democratic legislature in the middle of the night. There was no time for the kind of grass roots frenzy that the program generated once the voters woke up. Florio was shocked to find that the most outraged citizens were ordinary folks, not the Country Clubbers. The national electorate is now in a ferocious mood, having been energized by the Perot campaign last year. There will be no whisking this package through Congress in the middle of the night. What Clinton has done to try to offset this difference is to pile his tax increases to outrageous heights in an obvious overkill. This anticipates ordinary people will be furious, but will then be bought off when the legislation reaches Congress by peeling away the tax hikes that bear on them directly. The public opinion polls indicate only 53% of the country is willing to pay higher taxes of only $100 a year, which produces total revenues of a mere $10 billion. The President promises to lay 70% of the new taxes on THE RICH, which would produce only $25 billion more if THE POOR paid only $10 billion more. Carville & Co. have him right at the edge of what they think he can get away with.

Opposition of course will come from the weakened growth wings of both the GOP and the Democratic Party. Carville & Co. are probably correct in assuming that these will be manageable. The coalition the White House will work on building is the same coalition that produced the 1990 budget deal -- the austerity wings of the two parties. Senate Minority Leader Bob Dole and House Minority Leader Bob Michel, who operated hand in glove with Nick Brady and Dick Darmann during the Bush years, are now in almost complete control of the GOP. Dole, who is clearly positioning himself for another presidential run in '96, when he will be 73, has his troops in control of the Republican National Committee. As he is a fanatical debt hawk and budget balancer, we cannot count on  him cutting a very good deal with Clinton and the Democrats. But he will be more partisan than he was in the kindler and gentler Bush years, which means he would hold out for a better deal than he has in the past. If at the end of this process a bill is produced that Clinton will sign, he will have to win Dole's support, or the Democrats will be savaged in the '94 elections. To get Dole's support for the austerity measures in the package, Clinton will have to concede on at least the prospective indexing of capital gains -- which he is prepared to do anyway even while saying it is not on the table. Dole lost the GOP nomination in 1988 to George Bush on the tax issue. He will not lose it in '96 to Jack Kemp. We should also bear in mind that Federal Reserve Governor Wayne Angell, an ardent advocate of capital gains indexation, is a Dole political partisan. He got his appointment to the Fed from Reagan through the intervention of Dole, a fellow Kansan. In 1990, in a last minute try to get a capital gains tax cut in the budget deal, Dole met with Angell and Newt Gingrich to work out a strategy that was killed by Darman via White House Chief of Staff John Sununu. Angell's idea of combining an across-the-board indexation of capital gains with capital gains taxation at death could surface as a Dole initiative that would pull everything together. If it happened, Wall Street would happily forget today's slaughter.
We must also remember that there are a lot of smart Democrats in Washington who know the difference between the Reagan years and the Bush years, and who are dubious about the political staying power of a Florio Scenario. Treasury Secretary Lloyd Bentsen is going to have to put on his best face in defending the "ECONOMIC STIMULUS" plan devised by Carville & Co., but in the end, what he works out behind the scenes with the Democratic leadership in the House and Senate will be much closer to his own preferences. Senate Majority Leader George Mitchell and Senate Finance Chairman Pat Moynihan are extremely intelligent men, who understand the implications of today's carnage on Wall Street and appreciate the leverage it gives them over the new kids in town from Arkansas.

The President today was quick to pooh-pooh the market decline as having anything to do with his address to the nation last night. He pointed out that the bond market was steady and that bonds are a better indicator of the market reaction to his "ECONOMIC STIMULUS" plan. The bond market rally continues, though, because America's creditors continue to be reassured that President Clinton is not asking the Fed to inflate. There are plenty of valid comparisons of Bill Clinton and Jimmy Carter, but money is not one of them. The bond markets are so far happy that where Carter was a cheap money President, Clinton is not. We note happily that C. Fred Bergsten, the manic devaluationist, has been shut out of the Clinton Administration, although he banged on every door. Bergsten was in Tokyo last week, thumping for a yen appreciation on his own. There is absolutely no sign that Lloyd Bentsen agrees with him, which is all that counts.

Fed Chairman Alan Greenspan will be walking a tightrope this week when he appears before the Senate Banking Committee, the morning after the President's State of the Union Speech. Greenspan will try to get away with saying absolutely nothing about the pros and cons of the Clinton "ECONOMIC STIMULUS" plan. If he were to dump on the plan, which he would do if he were first administered sodium pentathol, the White House would no doubt consider its truce with him ended. A phone call would be placed to a strategic senator, withdrawing opposition to legislation that would dilute the Fed's independence. Fed bashing would be back in fashion at least in the vicinity of the Oval Office. If Greenspan were to at least praise the courage of the White House in going after the deficit, though, he might be able to get away with offering suggestions on how it might be amended to make it more palatable to the people, the economy, and the financial markets. I would hope some Senator would at least ask him if he thought today's stock market decline could be read as a reaction to the Clinton plan, and ask his view on what a declining stock market would mean to the future of the economy, employment, tax revenues, and ultimately, the bond market. If Greenspan doesn't find a way to make some waves, we would have to discount our recent assumptions about the positive role he might play in conjunction with Bentsen and Moynihan. At the very least, he must disabuse The New York Times of its notion that he stands prepared to pump money into the system after the White House destroys the demand for money with its Robin Hood tax plans -- which really does get us back to Carter inflation and interest rates.

We're sorry it is getting more and more uncomfortable out there for those of you in the industrial and financial trenches. To tell you the truth, though, we worried last night that when the stock market opened today it would find a way to boom. Then where would we be?