For all of you who are wondering why the stock market did not shoot up when GATT zoomed through the Senate last night by a 76-24 margin, we need only remind you that GATT, in and of itself, is not going to do all the wonderful things its proponents have insisted it will do. It's not going to do as much damage as its opponents have argued either, which is why in the final analysis that I accommodated myself to this victory for the corporate establishment. Where I had hoped that the Republicans would be able to get a bankable commitment from the White House on capital gains next year -- which would have assured the financial markets that chances of passage would be nearly 100% -- we got only wispy straws in the wind that cannot be considered bankable.
For all his efforts, Senate Minority Leader Bob Dole could only extract from Treasury Secretary Lloyd Bentsen a letter promising that he will smile while he examines what the GOP enacts on "capital formation" next year, which may be worth nothing at all if Bentsen leaves his post at Treasury. We did get some fairly positive signals from Dole that he would press the case for capgains with the Clinton Administration at the appropriate time, but these were delivered with a disappointing casualness that could not be banked by the capital markets. We might look upon this as a gesture more than a bond -- valued like a "political derivative."
We also got a brilliant GATT speech from Senator Bob Packwood, who will be chairman of Senate Finance one month from now, which tells me he will be a powerful ally on the right side of this issue. It may help you to know that it does weigh on Packwood's mind that when he was Finance chairman in 1986 he supported the increase in the capgains tax to 28% from 20%. He did so because Sen. Bill Bradley [D-NJ] insisted upon it as the price for cutting the top income-tax rate to 28% from 50%. It seemed an okay deal at the time to Packwood, and I also swallowed hard and advised taking it, on the grounds that we could fix it in the next Congress. Alas, a few weeks after the deal, the voters gave back control of the Senate to the Democrats. Senator Bradley, who is still on Finance and still in denial on the role he played in creating the recession that followed, will fight tooth and nail to prevent a capgains exclusion. A year ago, when I began to see the possibility of the GOP regaining Senate control, I encouraged Packwood, who I've known and admired since 1966, to resist calls for his resignation over the sexual harassment charges against him -- charges that now seem quaint given those leveled against the former governor of Arkansas by Paula Jones, star of this month's Penthouse.
What we gained with Packwood, though, we lost with Sen. Phil Gramm [R-TX], who undercut Dole's initiative to get something bankable on capgains from the President and who now threatens to fight any attempt in Congress to introduce a dynamic scoring on capgains. [See Paul Gigot's Wall Street Journal column today, surprisingly admiring of Gramm's disdain of the Laffer Curve.] Gramm called me earlier this week to say that I was wrong to interpret his opposition to the Dole initiative as being motivated by his presidential ambitions. And I acknowledged I could see how he believed Dole had already flubbed the initiative when it was actually still alive. There were voices around Clinton -- at Treasury and the White House -- who were receptive to Dole. GOP strategist Bill Kristol dumped on the Dole idea last Tuesday morning and The Washington Post reported Jack Kemp saying he would vote for GATT even if the Dole initiative failed. Dole, with whom I spoke that night, could not be blamed for giving up too soon. He did well to get what he got out of the White House.
Gramm will be a thorn in the side of the financial markets from now on, I'm afraid, as he has talked himself into the hair shirt with the wing-tipped collar once worn by Herbert Hoover. If there can be no dynamic scoring on capital gains or any other tax proposal, the GOP will have to pay for any changes by throwing out widows and orphans into the snow. The House Republican "Contract With America," which is designed to avoid arguments about scoring, will be in trouble once the American people see the social costs of the domestic "shock therapy" being planned. The balanced-budget amendment is the GOP equivalent of Bill and Hillary's universal health-care scheme. Both get 80% popularity ratings in the polls when discussed in the abstract, but get negligible support when explained in the concrete. The White House can hardly wait for the new Speaker of the House, Newt Gingrich, and new Majority Leader, Dick Armey, to get to the specifics. As long as the GOP runs from the Laffer Curve it can never balance the budget.
This does not mean that all tax cuts "pay for themselves." It is ironic that President Clinton seems to believe the GATT tax cuts will pay for themselves via increased economic growth. It's likely that those developing nations with sky-high tariffs will enjoy revenue increases when they adopt the GATT tariffs. The United States, though, already has the lowest tariffs in the world. The Laffer Curve, remember, is nothing more than the law of diminishing returns. When you cut a tariff to 50% from 100% ad valorem, you are almost certainly going to see more, not less revenue. When you cut to 2.1% from 2.2%, you are almost certainly going to see a revenue decline. The greater benefits of GATT to Americans will occur through slightly lower prices of goods imported from a healthier developing world.
We made similar arguments in New Jersey three years ago when the Republicans gained control of the state legislature. We advised the leaders at that time to eliminate the capital gains tax. Instead, they cut the state sales tax by a penny, which is about what we did with GATT. Capital gains is the one tax that produces the highest revenues at zero, which President Clinton might understand if he asked Alan Greenspan about how this is possible. (Three years ago, I had lunch with House Speaker Tom Foley, who told me he agreed that a capgains cut would spur the economy and pay for itself, but that the nation should not do it because it would mean some people would get rich much faster than others. It wouldn't be fair. Good bye and farewell, Mr. Speaker.)
When all is said and done with this lame-duck session, I'd say we came out ahead, although well behind the possibilities that seemed within reach two weeks ago. Not quite Santa Claus, but not quite a turkey. Something in between.
The market's response to today's jobs data, showing payrolls expanding by 350,000 in November, should give the Fed pause before it reflexively raises rates once again. The 30-year bond going up more than a point, the yield dropping to 7.92 by mid-afternoon, tells us that long-term creditors may now have fully discounted the risk of a rising price level and are not asking that signs of economic strength be wrestled down with additional rate increases. After initially jumping by about 10 basis points on the news, the short end of the yield curve fell back smartly, with the 3-month bill at 5.60, up just slightly from yesterday's 5.58. This should also muffle to the clamor for another Fed rate move. As it is, signs of slowing are in the news as well, with factory orders declining 0.4% in October and the leading indicators dropped 0.1%. The market appears to have been cheered by the Fed's decision today to buck analysts expectations and forego replacing an expiring repurchase agreement -- the first time since mid-October that it has allowed a repo to lapse without executing a new liquidity injection. As a result, more than $8 billion has been drained from the system since the close of business Wednesday. With gold down to $378 and the dollar at 100 yen, we again have a glimmer of hope that the Fed's treadmill has at least begun to slow.