After the market closed Friday, the DJIA down 171 points, we learned that House Speaker Newt Gingrich had been privately telling friends on Wall Street that they can forget a cut in the capital gains tax this year. We have been unable to confirm this second-hand report, but have reason to believe it is accurate. There had been nothing on the news wires about the GOP decision to once again throw in the towel on capgains relief -- as it has several times since 1987. In as much as Gingrich fed the news directly in the market bloodstream, though, it explains the market plunge much more readily than the employment report, which showed that the vast majority of jobs added to the economy in February were part-time positions. As David Gitlitz reported during Friday’s sell-off, the jobs report “also allowed the equity markets to discount a rapidly clouding outlook for pro-growth policy and political changes.”
Because we believe the financial markets, both stocks and bonds, have been anticipating some form of capital gains relief in the resolution to the budget impasse between Congress and the President, it is likely there would be a further correction upon a formal statement from the GOP leaders that they had given up. Without any means of converting high market expectations into a burst of real economic activity, we almost certainly would be facing negative growth into the heart of the presidential campaign. The Republicans already are planning to label the distress the “Clinton Crunch,” but it is far more likely this time that the GOP Congress will take the blame for its failure to deliver. Campaigning in Florida this past weekend, Steve Forbes blasted his own party leaders, not the President, for the problems emerging: “Over and over, the capital gains tax has been compromised away. This time, Americans believed the Republican leadership would keep its word...Capital-gains tax cuts are not tools for a political power game. Congress is playing with the futures, jobs, livelihoods, and savings of millions of Americans. Friday’s stock market decline is a clear sign that the market is losing confidence in Washington’s ability to keep its promises. Only with that tax cut can we get America moving again.”
There technically remains a chance to revive the tax cut when the two-week relief on the debt limit expires March 29. It seems clear that Forbes and Jack Kemp, who is campaigning with Steve, will keep up the heat over this period -- blaming the GOP for putting its budget-balancing differences ahead of economic growth. Unless Gingrich and Senate Majority Leader Bob Dole send President Clinton capgains legislation that he chooses to veto, they will be tagged with the economic distress that follows. The 104th Republican Congress, already sporting a 25% “approval rating,” would not have much of a record going into November. Because the problems are more clearly associated with the Senate Republicans -- particularly Dole’s close ally Senate Budget Chairman Pete Domenici of New Mexico -- we might even get the recession labeled correctly as the “Dole Recession.” Indeed, each time promised capgains relief has been scuttled in the past decade, Bob Dole has played a central role in the scuttling.