Time Out
Jude Wanniski
June 29, 1993


There's really nothing much to add to what's been in the media regarding the fate of the Clinton economic plan. Nothing of substance can occur until a Senate/House conference committee is named, which will not take place until July 12, when the Congress returns from the Independence Day recess. The conference will then have until August 1 to reconcile the seemingly irreconcilable differences between the Senate and House versions. There are a few items worth noting, however. First, House Speaker Tom Foley, on last Saturday's Evans & Novak TV show, implied that the $500 billion deficit reduction number may not be set in concrete. In other words, to avoid defeat in trying to hit that bogey with tax increases and spending cuts, the President might after all agree to $450 billion or so and call it a day. Foley, who has the impossible task of rounding up Democratic lambs to the slaughter, would gladly recommend that the President hit the target simply by moving it 50 yards to the right. Before all of this is over, Foley will have plenty of company.

The second item worth mentioning is a report in the July 5 Newsweek, "The Split Personality of the Black Caucus," which indicates the President is preparing to use a "divide and conquer" approach against the Caucus, "to beat racial politics with the lure of power and money. He does not need to give the caucus everything it wants; he just needs to give certain members the tax breaks and local projects that will allow them to claim victory back home." This does not sound like a winning strategy, as it is hard to imagine the caucus breaking ranks on this issue, exactly at the moment when it has the leverage to make the difference. It will vote in caucus and cast its votes en bloc, each of its-members knowing the price of division is further submission to plantation politics. My guess is that if the caucus votes to oppose, the Administration will even lose the one black vote it has in the Senate, Carol Mosely Braun of Illinois. I'm told there was not a single member of the caucus who supported the substance of the Clinton plan on the first round, but that the decision was made jointly to back the President rather than hand another victory to the hated Republicans. If an alternative has been developed with the Republicans on the second go round, that's something else.

Elsewhere, we find the bond market happy with the posture of the Federal Reserve. If you have been tracking the mass media, you will note that it is now alright if the Fed decides to tighten up on short-term rates. The most important news item we have seen lately is The New York Times piece of June 23, by Louis Uchitelle, "A Nudging Up of Rates Is Considered by Fed," which quotes a "high Administration official, declining to be named, [who] said the Administration was prepared to accept a mild rate increase. *At this point, a one-quarter of a percentage point rise in interest rates would have more of a psychological impact than an economic one,' the Treasury Department official said." The article also makes it clear that Fed Vice Chairman David Mullins, who has voted with the inflation doves, seems ready to join Governors Wayne Angell and Larry Lindsay. If so, we would expect Chairman Alan Greenspan to vote with them as well, since by inclination he is not an inflation dove anyway. The long bond has since rallied to 6.67% from 6.77%. At the same time it could be said that President Clinton enjoyed a "success" in getting his economic plan out of the Senate, by a one-vote margin. But it now seems far less likely that Congress will enact the kind of tax legislation that would harm the economy and the bond market.

The Uchitelle article was the best single news article on the Fed this year, and I called to congratulate him at the Times as soon as I finished reading it. Unlike most other Fed dope stories that simplify Fed policy making to ridiculous extremes -- as if a button could be pushed to lower interest rates -- this one conveyed the sense that there is serious debate at the Fed on how to lower long-term rates, which always must be the objective of the nation's central bank. That is, how does the Fed persuade the nation's creditors to lend the U.S. government money at the lowest interest rates with the longest maturities? The only material missing from the Uchitelle story, I told him, was the role the price of gold plays in the Fed's deliberations.

In other words, when gold was at $330 earlier this year, the downside risk of further deflation was limited by the fact that only Angell was an inflation hawk at that level. Gold has since climbed to the $370 level, but its upside potential is limited by the fact that Lindsay and Mullins are publicly more hawkish on inflation, and by the fact that Greenspan almost surely has gotten across his message that the kind of freelance pronouncements on monetary policy that were coming from every corner of the Administration were counter-productive. With the bond yield climbing back above 7%, Greenspan's message had authority. Hence, high Treasury officials are now allowing him some wiggle room. There's still a potential for a market decline, but at least some of the political risks are in abeyance while there is time out in Congress.

There are, of course, other political risks behind every other rock on the planet, it seems. President Clinton goes to Tokyo next week for what is likely to be another educational experience for him. The trade talks with Japan broke down last night on exactly the right note, with the Japanese ridiculing as protectionist the "managed trade" proposals of the Clinton Administration. Last week, we noted with pleasure that Japan not only refused to contribute to the Clinton $4 billion kitty for Russian "privatization," but also blasted the idea as "preposterous," in that the Russian economy is not ready for privatization which has been our point for years. There is so little wisdom emanating from any of the global capitals of the West, it is thrilling to see some finally emerging in the capitals of the East. The recent collapse of the government of the Liberal Democratic Party in Japan is, as we have suggested, largely the result of the LDP's maddening subservience to every whim of the American political establishment in recent years. The President is walking into a hornet's nest and would be well advised to do some heavy listening. We can't count on that, though. His political counselors are now cheering the foray into Baghdad, which has won modest general approval. They may well be encouraging him to "stand up to the Japanese," as a means of further demonstrating his grit. This line of reasoning, popular around the Commerce Department, overlooks the fact that Japan is our principal foreign creditor, not an Arab terrorist. The best we can hope for out of Tokyo is an agreement to permit the yen to weaken from its excruciatingly deflationary level. This has been another source of animus toward the U.S. among the newly assertive nationalist forces in Japan.

We continue to watch the sorry developments in Eastern Europe and Russia with anxiety. The New York Times has recently been campaigning to persuade its readers that Poland is a great success story, an advertisement for "shock therapy." In Sunday's magazine, the Times extolled the wisdom of Harvard's Jeffrey Sachs, the shock therapy architect, and wondered hopefully if he will be proven as successful in Russia. The author, Dr. Peter Passell, was the anonymous Times editorial board economist who four years ago promoted Sachs to the Poles and Russians as an economic savant. Passell's boss was then Jack Rosenthal, editor of the editorial page. Rosenthal is now editor of the magazine and Passell is the chief economic columnist. How convenient that the Rosenthal/Passell team would now conclude that their boy Jeff has been a success. This is how the Establishment works, folks. Nowhere do we learn that two governments have fallen in Warsaw because of the counsel of young Dr. Frankenstein, although the Times does occasionally note that living standards in Poland are half what they were before Rosenthal and Passell began boosting Jeff Sachs and his electrodes.

Heaven help the Russians, too. In The Wall Street Journal yesterday we learn that "Russia's Economy Shows Signs of Turnaround as Inflation Eases." Hey, good news! The monthly observed inflation rate has fallen to 19% from 25%! This means there is more room for shock therapy! Jeffrey Sachs's friends at the IMF, World Bank and U.S. Treasury, it seems, have persuaded Boris Yeltsin to free the price of coal on Thursday, July 1. Also, "Export quotas for energy and certain other commodities are due to be raised in September, which should drive up the price of oil closer to world levels and bring in more hard currency." By this process, Russia is being turned into a vast slave labor camp, exporting resources that have been priced beyond the reach of ordinary people, to pay off the loans to the big Western banks. Isn't it nice how the banks get their favorite newspapers to tell us how wonderful things can be with a little old-fashioned, mind-bending austerity?

The good news on this threshold of another Independence Day weekend is that the American political establishment is having an extremely hard time persuading the American people that they should be bolted to their chairs for a little shock therapy here. Isn't democracy terrific?