Notes on the Revolution XII/Fedwatch
Jude Wanniski & David Gitlitz
May 11, 1995



TAX CUT: By now the budget story has become incredibly complicated, but at least the tax cut is still alive. Chairman Bob Packwood of Senate Finance has put together a maneuver that isnít pretty but may get us something on capital gains later in the year. This dipsy doodle gets the Republicans past the Democratic minefield on Medicare, the biggest threat to a tax cut this year. Conservatives complain about postponement of the Contractís tax cut, with the spending cuts up front. Given the budgetary constraints Congress has imposed on itself, though, we cheer Packwood for pulling this little bunny out of his hat. The idea is that the spending cuts will balance the budget by 2002 and that this fiscal frugality will produce sharply lower interest rates, 2% below where they would be otherwise. This will save $170 billion in debt service over the stretch, says the Congressional Budget Office -- a gift from its new director, June OíNeill. Once Congress has the $170 billion in its hot little hands, it promises to do the tax cuts!! What kind? Will there be capital gains relief? What else do you expect to find at the end of a rainbow? Will balancing the budget cut 2 points off interest rates? Not necessarily, but we will take the gift anyway. Now Ms. OíNeill should go back to the computers and ask what will happen to economic growth if interest rates are 2 points lower. If it gets baseline growth up to 3.2% for the period from the 2.2% in the assumptions, we get another $160 billion in tax revenues and could cut tax rates again! Itís a funny route, but if it gets us there, letís go. 

FED APPOINTEE: President Clinton is planning to nominate Alicia Munnell, an assistant Treasury Secretary, to the Federal Reserve seat being vacated by John La Ware. The Joint Economic Committee of Congress today sent a letter to the President, signed by 10 GOP Senators, including Chairman Al DíAmato of Senate Banking, essentially telling him to forget it. Ms. Munnell, a Robin Hood economist, has left a paper trail that will destroy her if she ever shows up for hearings. The worst of it is her advocacy of a 15 percent tax on pension assets -- which puts her in the Dracula category to every pension fund manager in the nation. The White House may think they will be able to fight for Ms. Munnell to a winning finish, as they appear to be doing with Dr. Henry Foster for Surgeon General. However, Ms. Munnell would not get a single Republican vote for confirmation from Senate Banking, and after her views on taxing pension funds were aired for an hour or two, she might not get any Democratic votes either. I remain amazed that the President does not name a black banker to the seat. They have the perfect candidate in Citicorpís Bob Wilson, a brilliant young international banker whose mother, Margaret Bush Wilson, was chairman of the NAACP in the late 1970s. The White House had taken the position that a nationwide search had not turned up a qualified black. Senate majority Leader Bob Dole early last year urged the White House to name a black banker, given the paranoia in the black community about availability of capital and credit. When asked on national TV if he had a suggestion, he mentioned Wilson, a lifelong Democrat who had worked for New York Mayor David Dinkins. If there was a search, Wilson was never contacted, although he had indicated he would be willing to take a steep pay cut to join the Fed. He would be confirmed unanimously, Iíd bet. Nobody would ask him if he were pro life or pro choice. The Congressional Black Caucus appears to be letting the White House get by on this critical appointment because of Clintonís backing of Foster for Surgeon General, an appointment with almost no importance. On Fed matters relating to minorities, by the way, Governor Larry Lindsay is the designated hitter. 

HENRY FOSTER: If I were a United States Senator I would vote for Henry Foster without hesitation. Heís not only a good man with excellent credentials; he presented himself as well as could be expected at his confirmation hearings. He is by no means an abortion advocate although he has performed some legal abortions. The Christian Coalition is making a big deal out of his nomination, though, and its professional lobbyists have invested too much to pull back. The original leaders of the Christian coalition, who started the whole thing 2000 years ago, would not crucify a fellow on an erroneous assumption, even on the grounds that he had become a symbol of that assumption. The lobbyists are demanding Fosterís head on a silver platter as their price for support of Bob Dole or Phil Gramm in the presidential sweepstakes. There is no way Dole can deliver that head without supporting a filibuster. From what we hear, there is serious talk about abolishing the office of Surgeon General in order to moot the issue. 

JAPAN TRADE SANCTIONS: The White House has gone forward with its modern version of Smoot-Hawley. In case you did not notice, Senator Dole joined with Sen. Robert Byrd [D-WV] in sponsoring Sen. Res. 118 in support of the President. Another GOP presidential hopeful, Senator Phil Gramm, joined in the 88-to-8 vote, and we hear Lamar Alexander backed the sanctions too. In a joint statement issued today, Jack Kemp and Malcolm Forbes Jr. of Empower America denounced the sanctions, which Kemp warns ďput[s] us on a dangerous course which could ultimately lead to a trade war with Japan.Ē We print Forbesí statement in full. Note it does not even mention economics: ďOur government has decided to punish Japan for refusing to order its citizens to buy more auto parts from American manufacturers. This is an act of supreme arrogance, the act of a bully. It is unworthy of a great nation. Imagine the situation reversed. Imagine the Japanese government demanding that President Clinton order Detroitís big three auto companies to buy more auto parts from Japanese producers. Our people would be so outraged at this foreign intrusion into our private lives that there would be demand for a suspension of diplomatic relations. It is wrong for the federal government to bully our own citizens and we resent it when it happens. It is equally wrong for the federal government to bully the citizens of our Asian trading partner. I urge President Clinton to reflect on the seriousness of what he has done, apparently on the advice of overzealous political appointees.Ē

Jude Wanniski


Gold is back under $385, the dollar above 85 yen, and the long bond yield hovers at the 7% mark for the first time in more than a year. These elements reflect several factors converging to reduce the risk to dollar liquidity. First, signs of a sharp growth slowdown have led to an abrupt reappraisal of the likely course of Fed policy. The market now expects the next move to be a rate cut, as indicated by the disappearing spread between federal funds and Euro-dollar futures. The Euro-dollar premium was more than 100 basis points in late January and dropped to less than 50 basis points soon after the Fedís last rate move in February. Federal funds, though, have been trading at the 6% target, suggesting that the Fed is carefully rationing its provision of reserves to the banking system to prevent a weakening funds rate from encouraging expectations of an early rate cut. Once expectations of falling rates are reflected in the funds market, we should see the Fed draining reserves to keep the rate at target. Expectations of tight conditions in the market for dollar liquidity are reflected in the receding gold price. As an indication of the relative attractiveness of dollar-based assets, gold has also been aided considerably by the apparent termination of the Bank of Japanís deflationary draining of yen liquidity. In the last two weeks, the BoJ has on net injected more than 1 trillion yen into the financial system. Overall, the BoJ since mid-April has reversed about half of the drain of 10 trillion yen that it effected over the previous month. Thus does the dollar trek back toward 90 yen, perhaps 100.

David Gitlitz