Down to the Wire on Christmas Eve?
Jude Wanniski
December 12, 1995


The only question that really nags at us, as to whether there will be a budget this year, is what is the President’s intent? Because we are 90% sure he wants a budget -- knowing the economy will be better for it in 1996 -- we are 90% sure there will be one. The President has been so effective in playing his cards that he continues to leave the impression that he has not made up his own mind, and perhaps he hasn’t. The only reason he wouldn’t want a budget is if he thought that the Republicans might make some last minute mistake that will allow him to push the whole mess into 1996 and deal with it then, to his political benefit. The continued delays in fussing about the numbers leads us to believe we will go right down to the wire before we know for sure whether we have a deal. The deadline is Saturday December 23, bumping against Sunday, Christmas Eve. 

The report that House Speaker Newt Gingrich and Senate Minority Leader Bob Dole were cheered by their Sunday telephone conversation with the President was a bit of good news. So was the report of the Congressional Budget Office that revised economic assumptions will yield $135 billion more in revenues over the next seven years. Even at that, the CBO projections are ridiculously low, showing a puny 1.8% growth rate in 1996, for example. The differences separating the Congress and the White House are so narrow that it is becoming obvious to honest Democrats that the President can’t bluff much longer with the cards he holds. In its lead editorial this morning, The New York Times twisted itself into a pretzel trying to show the damage that will be done to old folks because of the difference between Clinton’s $1.68 billion spending on Medicare and the GOP’s $1.65 billion. The Washington Post has been twitting the President for his “Medigoguery” for months. The Democratic establishment -- already worried about the thin ice the President has them skating on in Bosnia and Whitewater -- does not want to see him overplay his hand on the budget and wind up with a 1996 recession for which they are blamed.

The results of today’s special election in California, for the Democratic House seat vacated by retired Rep. Norman Mineta, will almost surely help remove another budget obstacle. The Democratic candidate, Jerry Estruth, pinned all his hopes in beating the Republican, Tom Campbell, by asking the voters to elect him in order to send an anti-Gingrich message to Washington. If successful, House liberals would make the case to Clinton that he could dynamite the Gingrich Budget, with its tax cuts for the rich, and coast to re-election next year. By late accounts, Campbell should win the race easily, causing the entire political class to realize that Gingrich’s very high negative ratings have no political utility. The American people feel negative about Newt the way parents feel negative about a brilliant son who pouts because he didn’t get a pony for Christmas, not the way people feel negative about the local serial killer. President Clinton, who has had high negatives himself, will understand the meaning of the California election, which will strengthen Newt’s hand at the bargaining table.

The GOP will put a seven-year balanced-budget plan on the President’s desk this Friday, which he almost surely will veto. If there is no separate continuing resolution, those parts of the government that have no appropriation bills already passed will shut down. The President really doesn’t have much bluffing room left after that. Republicans can always send up CRs for two- or three-day periods, interspersed with budgets making small adjustments that the President either vetoes or signs. The only thing Clinton gains by forcing the issue past Christmas Eve into 1996 is the likelihood there would be no retroactivity in the tax cuts. Inasmuch as the Republicans promised retroactivity on capital gains to January 1, they would still get credit from all those who sold assets on that promise. The President, who knows deep down that practically everyone who sold on that promise is middle-class, would get all the blame. He is much better off politically if the entire capgains package goes into effect in a big budget reconciliation that he helped “improve,” than if he fouls things up at the last minute.

It really is to the President’s benefit not only to have the economy booming in 1996, but also to be seen as not having fought to block the reasons for the boom. In other words, the electorate is smart enough to know who gets credit and who gets blame. The financial markets are as giddy as they are today because of Newt’s Contract With America -- most especially the provisions on capital gains and the solid GOP commitment to them. The DJIA blue chip stocks are up 40% year-over-year and the NASDAQ composite is up 47%. These numbers would be impressive even in a moderately inflationary environment, but with the dollar price of gold in the $380 range year-over-year, these numbers are spectacular. They are telling us of a real economic boom on the way, as soon as the people who comprise the real economy are absolutely certain the President will sign the budget. 

The financial markets, remember, only sell pieces of paper called stocks and bonds, which are valued according to expectations about the future. Most people don’t see this linkage. In today’s New York Times, for example, columnist Russell Baker is wondering why Wall Street is booming while so many people are being thrown out of work. The answer is that the expectations of growth will not become growth until we meet the future. There has been some real economic growth this year because of the steadiness at the Federal Reserve. There has also been some inventory buildup in anticipation of future economic growth. This is small potatoes compared to what appears on the near horizon, the production and sale not of pieces of paper, but of real things that people desire: Capital goods and services and consumer goods and services. The simultaneous boom on Wall Street in stocks and bonds is predicting an enormous new wave of business incorporations in 1996, as a flood of fresh capital hits the real economy. 

These are little businesses that will sprout all over the place, occupying commercial real estate, buying office furniture, computers and software, advertising in newspapers, magazines, radio and TV and on the Internet. They will be hiring people who will be needing apartments and homes and better transportation. The Federal Reserve is already reporting upward pressure on wages in entry-level jobs. The year should produce spectacular gains in real wages, with the minimum wage left behind in a bidding war for labor. One forecaster in this analytical game, LBMC, is actually predicting recession for 1996 that it says is baked in the cake, which is the same term the firm used in 1991, when it predicted a 1992 boom that would carry George Bush to easy re-election. Their assessment, according to a column last week by Bob Novak, is based on a decline in factory employment earlier this year -- a concept that has no predictive value in terms of GNP. It is difficult to imagine real GNP climbing next year by less than 4 or 5%, unless the Fed wrestles it to the ground with a monetary squeeze that sends gold into steep decline. We will happily worry about crossing that bridge if and when we get to it.