Notes on the Revolution X/Now, Watch the Nikkei
Jude Wanniski & David Gitlitz
April 21, 1995



WHITE HOUSE & CONGRESS: The political atmosphere remains as tense as it was before Congress recessed for its Easter break. Things should ease up when Congress returns, with Republicans a bit less cocky and Democrats a bit more confident. My guess is the folks at home are telling both sides to calm down and work together for a change. Michael Kelly, the New Yorker’s superb political writer, in his April 24 report sees bipartisanship shaping up in the cozy relationship between Speaker Newt and President Bill: “When Gingrich talks about working with Clinton he sounds a lot like Clinton talking, in his April 7 speech, about working with Gingrich. Once the dust from the next hundred days’ war has settled, will the President and the Speaker have forged a separate peace? Their unexpected alliance would be strange to behold, but there is a certain logic to it. The job that Clinton outlined for himself in his April 7th speech would indeed be a difficult one. The President’s threat to veto Republican bills and the Speaker’s threat to shut down the government point up the hostility inherent in any such relationship. But Clinton’s understanding of how the balance of power has shifted has the virtue of realism -- and it also plays to the President’s natural strength. The flexibility of Clinton complements the inflexibility of Gingrich. Clinton’s abiding talent for believing equally in opposing ideas has made him a perplexing and frustrating figure to many voters. But that same trait may make him peculiarly well suited to the relationship toward which he and Gingrich may now be groping. Between the two of them, Gingrich and Clinton might just make a whole leader. Between the two of them -- who knows? -- maybe they’ll even balance the budget.” 

CLINTON: The President clearly has adjusted to the lessons of his first two years and the results of November 8. Coming into office, Clinton deferred to Hillary and political strategists James Carville and Paul Begala in interpreting the mandate. This led to gays in the military, national health insurance, and class warfare on taxes and spending. Carville and Begala have been retired and the script at home calls for Hillary making the beds instead of the decisions. The White House is letting it be known that Clinton is now consulting old pal Dickie Morris for political advice. He’s a Connecticut pollster who normally works for Republicans -- including Newt’s amigo in the Senate, Majority Whip Trent Lott. Clinton’s only hopes for re-election are if the Republicans nominate a slash-and-burn ideologue like Phil Gramm, who will scare the women and children with no help from the Democrats, or that he demonstrates that a Democrat in the White House is necessary to keep the congressional Republicans from overplaying their hand. This latter strategy is Clinton’s best option, which requires that he veto as little as possible, but that with each bill he signs into law, he claims that he has sanded its rough edges down. The more of these results he achieves, the more ground he will close in the polls against the GOP frontrunner, Bob Dole. 

TAX LEGISLATION: Clinton can make all the noise he wants against tax cuts for the rich as long as he signs the tax bill that will be sent to him later in the year. In the scenario described above, it is in Clinton’s interest to be able to say that while he had to sand down the rough edges of the GOP tax bill in the Contract, to make it fairer, he is willing to give the Republicans the capital gains tax cut that is negotiated in conference. A number of conservative Democrats might switch parties over capital gains if Clinton is perceived as playing the class warfare card. He’s better off getting the issue out of his hair and behind him, even finding a way to take credit for it. In the last few weeks, the sentiment at the Senate staff level has shifted from mildly negative to moderately positive on getting a tax bill that will be signed by the President. Dole remains publicly committed to passing the $500 kiddie credit that passed in the House Contract. But after Senate Finance Chairman Bob Packwood properly trashed the idea, we assume it will be converted into an increase in the personal exemption. A hurdle for the tax cuts will be the wording of the budget resolution that will emerge next month. Packwood, I think, will maneuver to make it unnecessary to collect more than 50 votes. 

McNAMARA & VIETNAM: The McNamara book will continue to make waves as it reopens the national debate over the Vietnam War. Paul Gigot’s column in this morning’s Wall Street Journal comes close to understanding why aging liberals are so furious with McNamara for his mea culpa -- making it perfectly clear that the liberal Establishment (and its voice at The New York Times) was an eager supporter well into the war. The digging has to get deeper before we thoroughly understand the war as the result of a failed experiment in political economy, initiated by liberals through the combined efforts of President Kennedy and the Catholic Church. The objective was to explore a “Third Way” between democratic capitalism and godless communism that could be used as a model in the developing world to keep poor nations from turning to Marxism-Leninism. It seemed a great idea at the time, one that I supported as a young JFK Democrat/Catholic and one that most moderate Republicans supported for this same reason. Capitalism as a model was not popular in the early 1960s and became even less popular in 1964 with the electorate’s massive rejection of the angry conservatism of Sen. Barry Goldwater, the GOP presidential nominee. As I described in my 1978 book, The Way the World Works, and in a letter that should run next week in the WSJ, the blueprint designed by the Kennedy administration was followed to the letter by South Vietnamese President Ngo Dinh Diem, a Catholic and a protégé of New York’s Francis Cardinal Spellman. The 1961 plan called for high taxes on the rich, including a 71% luxury tax that applied to almost all goods but staples, on top of a 70% income tax that Diem had inherited from the French. The new revenues were to finance social programs to win the minds and hearts of the ordinary Vietnamese. The program, followed by currency devaluations, wrecked South Vietnam, as it continues to wreck developing nations when prescribed by the IMF and World Bank (which McNamara headed after he left the Pentagon). There are important lessons to be learned from this review.

Jude Wanniski


The recovery of the dollar to better than 83 yen and the steady return of gold toward $390 the last two days has come at the same time that the Bank of Japan has shown a sudden inclination to provide the market with yen liquidity. On Thursday, the BoJ injected more than 4.5 trillion yen into the Japanese financial system, its largest single operation (add or drain) since the dollar fell below 90 yen more than a month ago. Today, it followed up with another 100 billion yen injection. We realize, of course, that all this could be an accident, the BoJ just following its routine internal guidelines for reserve market management. But the market’s welcome response to the pause in the yen drain -- which had, prior to this breather, totaled more than 10 trillion yen since mid-March -- should be instructive to even the most hidebound central bank technocrat. Most encouraging of all, the Nikkei index has rallied by nearly 600 points the last two sessions, and now sits just shy of 17,000. A sustained march of the Nikkei back to the 20,000 range could be in the offing if the BoJ has at last identified its massive deflation error and continues to provide the yen liquidity for which the market has been thirsting. Such a turn should also quickly patch up the holes that have appeared in the dollar’s reserve currency status, and reverse most of the gold price surge seen since early March, all of which would be good for U.S. stocks and bonds.

David Gitlitz