Playing the Budget Game
Jude Wanniski & David Gitlitz
November 14, 1995


The resumption of Treasury auctions was the most important development in the high-stakes poker game between the President and the GOP leadership. It marks the end of that hand of cards, with the President winning a large pile of political chips. It is clearly House Speaker Newt Gingrich who lost the hand, miscalculating the problems he created when he publicly blustered a willingness to default on the national debt in order to cash in his Contract With America. The $5 trillion national debt is a far more important Contract with America’s creditors than that which the GOP promised last fall, and the public was properly horrified. A slightly mystified senior White House official asked last night why we thought the Republicans had so clearly lost public support. Until Newt sounded off on default, we responded, the public was not taking seriously the Democratic whinings about GOP excesses in cutbacks to widows and orphans and school lunch programs. It was simply a tactical error by Gingrich, whose central program of budget reforms was lost in the process. The error was not a mortal one by any means. With Gingrich, a political leader who takes more and bigger risks than the rest of the team combined, one has to expect occasional losses. 

Now that the public sees the administration can deal with the national debt via cash management, there are only a few more chips President Clinton can squeeze out of Newt’s pile on the debt issue. Treasury Secretary Bob Rubin can be expected to remind the voters from now until Christmas, if need be, that it is costing taxpayers some extra amount by having the debt handled in this fashion. It has been suggested to Newt and the House Republican freshmen that they get this unnecessary burden off their backs by sending the President a clean bill raising the debt ceiling by some substantial amount. It is now clear the “gun held to the President’s head” is no longer loaded, and the Republicans now sound silly when they point out that their threat was empty. If they were to simply shed the issue, they would be able to get back to their central message, and the public would shift its critical eye to the President. On that score, Gingrich and Dole have wisely pushed Chairman Pete Domenici of the Senate Budget Committee to the fore in handling the stopgap funding impasse, as he is the most likable and least threatening of the crew. 

To this point, the White House cannot be blamed for taking political advantage of the Republican blunders in the battle over public perceptions. But the Administration is coming perilously close to overplaying its own hand. Yesterday’s bond market rally assured the public that the President and Treasury took the correct action to maintain the nation’s unblemished credit rating. But Gingrich and Dole are shifting attention back to their turf -- getting spending under control. Gingrich’s offer to drop the Medicare premium issue from the CR negotiations was the proper tactical move, which put the ball in the President’s court. Now, Clinton is upping the ante, suggesting that all CR spending levels be increased. If he keeps this up, the Republican message will again resonate with a public that has fresh doubts about whether Clinton has a genuine commitment to solving the problem or is simply seeking partisan advantage for his reelection. As House Majority Leader Dick Armey commented this morning: “The fact of the matter is Pete Domenici went to the White House and offered them a different provision on Medicare and they turned it down. And they said, ‘This is about spending.’ They gave it no consideration because, quite frankly, they don’t want to lose what they think is a political issue.”

In the current crisis atmosphere, it’s worth remembering that this battle is over short-term, stopgap measures. A more substantive confrontation, over the seven-year budget reconciliation package, still lies ahead. The Republicans, to a significant extent, set themselves up for their current embarrassment by failing to complete work on the reconciliation and appropriations measures before this crisis point was reached. Now, Gingrich is attempting to lure Clinton into acceptance of a seven-year timeline to budget balance as a condition of the CR agreement. The Republicans, for now, are balking at the White House response -- that Congress accept the Administration’s more optimistic economic assumptions to ease the path to budget balance. Gingrich, of course, has his 70 freshmen to think about. But the makings of a deal along these lines are not difficult to fathom, if Gingrich can persuade his back-benchers that, in the final analysis, a less austere package is better than nothing. 

At this moment it appears that the major casualty of the Contract will be capital gains indexing. Today’s 18-point drop in the NASDAQ composite (the Dow was essentially flat) can be seen as entrepreneurial America discounting the Republican leadership’s performance in defending one of the Contract’s crown jewels. As presidential contenders and senior tax-writers, Dole and Sen. Phil Gramm have more to answer for than any other Republicans on this. For anyone considering putting capital at risk, the reported postponement of indexing’s effective date until 2002 is tantamount to having no indexing. The disappointment is mitigated to some extent by our knowledge that the 1996 presidential race will provide a referendum on outright elimination of capital gains taxation.