Deal of the Century?
Jude Wanniski
November 17, 1994


Soon after President Bush was inaugurated in 1989, speculation began to spread on the Beltway grapevine about "a deal of the century" between the Republican President and the Democratic Congress. The deal would involve major spending cuts and serious "revenue enhancements" that would balance the budget. It would be negotiated by the smartest man in Washington, OMB director Dick Darman, who would first have to persuade the President to break his "read my lips, no new taxes" promise. It took a year for Darman to accomplish this feat and pull off his Big Deal.

We may now be about to see unveiled a different kind of "Deal of the Century," between a Democratic President and Republican Congress: Tax cuts on international trade in exchange for tax cuts on domestic capital formation. If it happens, we won't have to wait a year. We might see it within the next several days, perhaps in time for Thanksgiving. It is an idea first suggested to the White House in an off-hand fashion by Senate Minority Leader Bob Dole on February 26, 1994, a Saturday morning, in Boca Raton, Fla. Dole, a guest at the Polyconomics annual conference, spoke prior to White House counselor David Gergen, but stayed to hear Gergen. In the course of his remarks, Gergen exhorted the conference to lobby Republicans in Congress on behalf of the GATT treaty -- specifically urging them to persuade the GOP to waive the budget requirement that the tariff reductions be paid for by spending cuts. He specifically noted that it should be clear the tariff cuts would pay for themselves by promoting increased economic activity. Whereupon Senator Dole asked if he might put a question to Gergen. It was essentially this: "You believe GATT's tariff cuts will pay for themselves, which thereby justifies a waiver; we believe a cut in the capital gains tax will pay for itself, and you do not. How about a deal? You waive the budget requirement on capgains and we will waive it on GATT." Gergen, a bit flustered, said he would of course like to see action on capital gains, but that there wasn't much support elsewhere in the White House.

Well, President Clinton is now returning from his big trade powwow in Jakarta, Gergen at his side. They have promised the world that the GATT Treaty will be approved in the U.S. Congress, showering benefits on all mankind if it is, producing incredible disasters if it is not. And they are several votes short of the 60 they need in the U.S. Senate in order to waive the budget rule that requires spending cuts to match the revenues lost by the tariff cuts. Particularly hostile to the idea of passing the GATT in the lame-duck session that will convene after Thanksgiving are Sen. Jesse Helms [R-NC], who will soon be chairman of the Senate Foreign Relations Committee, and Sen. Phil Gramm [R-TX], who has just announced his intent to run for President in 1996. They prefer to postpone the vote until January, when the 104th Congress convenes in Republican garb. The fellow who will decide whether or not GATT passes is none other than Bob Dole, soon to be Senate Majority Leader, who is playing his cards close to his chest while awaiting the President's return. Dole has expressed concern about the sovereignty issue that attends formation of a new World Trade Organization, as part of this GATT Treaty, and has thus far withheld his support for it. 

In the House, Speaker-to-be Newt Gingrich saved GATT from certain defeat prior to the elections by promoting this lame-duck session. He has now announced his support for GATT as is, which leaves Dole at the top of the Republican power pyramid, the Shadow President, to negotiate with the President. Meanwhile, in this land of strange-bedfellowship, Jack Kemp has embraced the idea originated by Bob Dole, his erstwhile adversary, and is promoting it among his old allies now in power positions in the House. His most important convert, as of yesterday afternoon, is Rep. Dick Armey [R-TX], who is soon to be House Majority Leader. Gingrich cannot withdraw his GATT support, of course, but Armey is still footloose, and he immediately grasped the importance of the idea. Instead of having to fight for a capital gains cut next year by changing the scoring methods, which he believes can be done, but would spill a lot of blood, a Dole handshake with Clinton on a double waiver would more easily accomplish that. It would also demonstrate to the American people that they were pretty smart to elect a Republican Congress willing to work with a Democratic President who has been going in the wrong direction. Armey, I'm told, thinks the idea is irresistible.

Dole has answered early press inquiries about the idea only with the response that he is thinking about it. My guess is that the longer he thinks about this idea (which, remember, was his in the first place), the more likely he will conclude that it is an idea whose time has come. To paraphrase Don Corleone, it is now an offer the President cannot refuse. If he did, the failure of GATT would be on his hands, and fail it would, with the American people noting that it was the President's refusal to compromise with the Republicans that wrecked not only GATT, but any chance of comity during the next two years. Insofar as GATT is a growth vehicle for Big Business, which has most of its capital gains behind it, and insofar as an indexed 50% exclusion on capital gains taxation is a growth vehicle for Small Business, which has most of its capital gains ahead of it, the President's refusal to deal would have All Business mad at him. If the President agreed, even Jesse Helms and Phil Gramm would be hard pressed to oppose passage of GATT in the lame-duck session, with Clinton's handshake as good as money in the bank to the GOP on capgains. 

Kemp advises that he will advance the idea at the annual dinner festivities of Empower America, tonight in New York City. Among the several hundred celebrants are several GOP governors, including Christie Whitman of New Jersey, John Engler of Michigan, Tommy Thompson of Wisconsin, and Governor-elect George Pataki of New York. Along with this epistle, the Kemp event ensures the idea will be in sufficient circulation to be discussed at the Republican Governor's conference in Williamsburg, Va., next Tuesday, which will be attended by Gingrich and Dole. 

What would this Deal of the Century do to the financial markets? We should have a surge on Wall Street, I think. It would have to break through the Treadmill at the Federal Reserve -- with Wayne Angell now calling for another rate hike in December and Henry Kaufman talking about a 7% fed funds rate before Alan Greenspan breaks the back of the economy. But the demand for dollar liquidity spurred by a Deal of this magnitude would be enough to do the job, and then some. 

What would this Deal of the Century do to the country? We could have the kind of bipartisan celebration we should have had when the Cold War ended. What a nice picture we would have at Thanksgiving, of Democrats and Republicans sitting down together for turkey and trimmings, finally ending the gridlock, working things out, sharing credit. Maybe even saying a prayer of thanks.