Notes on the Revolution XVI
Jude Wanniski
July 5, 1995


ARCHER: The lead item in this morning's Tax Report on the front page of The Wall Street Journal is probably the reason Wall Street in general and NASDAQ stocks in particular are off on another tear. House Ways & Means Chairman Bill Archer has made it perfectly clear that if there is going to be a capital gains tax cut in this Congress, the effective date will be 1/1/95. Archer undoubtedly learned this axiom of capital gains from Wilbur Mills, who was Ways & Means chairman when Archer arrived in Congress in 1970. Mills understood that when business people believe chances are high that the capital gains tax will be cut, they will postpone asset sales to the effective date. Real economic activity will be postponed as a result, and the gains to be had by enterprise gearing up to a higher level of economic activity would be lost By vowing to make last January 1 the effective date, Archer is practically guaranteeing it, in the sense that he knows many people in the business community will gamble on his word and proceed with redeployment of assets as soon as possible. Even if Senate Finance Chairman Bob Packwood is neutral on the issue, he would defer to Archer's pledge in a conference committee. Knowing Archer, a genuine Texan as good as his word, I would personally count on a 1/1/95 effective date in assessing my own portfolio.

MAJOR: U.K. Prime Minister John Major was given an enormous opportunity to rebuild his government along growth lines in time for elections in 1997. The impressive showing of John Redwood, who came out of the blue to attract a third of the Conservative MPs, on the surface appears a display of division in the party and weakness at the top. In fact, if Major had not had the Redwood challenge, or if he had defeated him badly, the Old Guard in the government would have insisted on business as usual. As it is, Major can now shuffle his Cabinet in the direction urged by Redwood. Tory backbenchers have been pleading for a capital gains tax cut for four years. In his campaign for re-election as party leader, Major listed it as a high priority. If he kicks it away, Redwood will be back. If he uses this opportunity to revive the Thatcher revolution, which aborted after Maggie raised the capital gains tax in 1988, Major may be able to bring the Tories back from their low point in the polls in time for the '97 national elections. Lady Thatcher stayed neutral in the election, but pointed out afterward that Redwood's showing was evidence enough of his wisdom in standing for the leadership post.

CEA: The Republican Congress has been threatening to shut off financing for the Council of Economic Advisors, more to irritate academic economists than anything else. It is actually a great idea. President Clinton's new chairman, Joseph Stiglitz, has made a name for himself in the profession by trying to prove that markets are inefficient and have to be managed! Dr. Alicia Munnell, who wants to tax pension funds, is another new CEA appointee. Hold on to your wallets. In the 30 years I've been familiar with the workings of the CEA, it has done more harm than good by a factor of 100-to-l. The GNP would be at least $2 trillion higher if the CEA never came into existence after WWn. At least $1 trillion of that can be chalked up to Nixon CEA Chairman Herbert Stein. It was Stein who helped persuade President Nixon to go off the gold standard in 1971, two years after he helped persuade Nixon to double the capital gains tax. In today's Wall Street Journal, Stein argues that capital gains is today undertaxed! Like so many other Ph.D. economists who have served at the CEA, Stein does not believe risk-taking has much to do with economic growth. Now a resident scholar at the American Enterprise Institute, Professor Stein has authored a new book on economics, which I recommend you not read, sight unseen. By the way, he believes elimination of the CEA is an "ugly" idea.