The Washington Post this morning reports that the Dole campaign is considering a tax plan as the centerpiece of the candidate's economic platform costing $600 billion over six years, with 40% or $240 billion of that amount "paid for" through feedback effects. There are no plans to unveil a final plan until trial balloons such as these get feedback effects of their own. The fact that the Dole campaign is flat broke is forcing him to stick to balloons. The fear within the campaign is that the Clinton camp would spend pots of cash on TV spots ridiculing the Dole tax cuts and that they would not be able to defend themselves. When Dole gets the nomination,- he also gets pots of cash from Uncle Sam which can be used to offset the barrage from the Clinton camp. There is almost no point in examining the specifics of the trial balloons, though, because there are so many as to make the exercise meaningless. Dole is scattering so many tax promises around on the campaign trail that he is beginning to sound like Boris Yeltsin. If he produces the kind of hodgepodge that is being discussed now, he would be cut to ribbons in a crossfire between Ross Perot and Clinton, which is likely to happen anyway.
The interesting development this week is the resurfacing of dynamic scoring, through "Laffer Curve" effects. In the one-day GOP congressional economic summit on Tuesday, the highlight was Don Rumsfeld's defense of dynamic scoring. Rumsfeld, who is now in charge of the economic area of Dole's campaign, has been described as a deficit hawk in the press, but in fact has always been a fan of the Laffer Curve. It was Rumsfeld who, as President Gerald Ford's chief-of-staff in 1974, turned the Ford Administration around from tax increases to tax cuts. It was Dick Cheney, his deputy at the White House, for whom Laffer drew his curve on that famous cocktail napkin. The Ford Treasury undermined the effort by pushing for a meaningless $50 tax rebate, but Rumsfeld got his first taste of supply-side economics at that time. I actually promoted Rumsfeld as Ford's running mate in 1976, but he lost out to Bob Dole. In 1978, when I founded Polyconomics, G.D. Searle, with Rumsfeld at the helm, became one of Polyconomics' first clients. His successful stint as CEO of General Instruments came through Ted Forstmann, another longtime Poly client, and Rumsfeld also is a founding director of Empower America, which Forstmann and Jack Kemp founded three years ago. With Rumsfeld "in charge," as much as anyone can be in charge in Dole's hapless campaign, there is at least some glimmer of hope that a growth agenda can get a credible foothold.
It was also remarkable that Wednesday's Washington Post carried a broadside against the "Return of the Supply Siders," by Lawrence Chimerine, who is among the 10 Worst Economists in the World. His piece is the same old voodoo huffing and puffing in denunciation of the law of diminishing returns - which is, after all, what the Laffer Curve represents. Although Chimerine denounced the idea that a tax cut can pay for itself 100%, he did advise Post readers that a tax cut could cover 35% of the revenue loss through economic growth!! This now has become the floor in discussion of tax cuts, which is why it is interesting to see today's trial balloon from the Dole camp upping that ante to 40%. Rumsfeld's problem is that Dole will not be comfortable carrying numbers into a debate unless they are certified by the Joint Committee on Taxation, which is run by bean counters who reject both the law of diminishing returns and the law of supply and demand in scoring capital gains. Under pressure to review its ridiculous methodology, Joint Tax may be able to add 40% economic feedback effects to the unlocking effects they have accepted in the past on capital gains. This would turn it into a revenue gainer — a tax cut that pays for itself in the first calendar year of its effectiveness. Larry Hunter, the chief economist at Empower America and one of the 10 Best Economists in the World, sees this as a hopeful sign for the economic debate in general. It may not be enough to overcome Rumsfeld's other problem with Dole — which is Dole's insistence that any tax plan have neutral distributional effects, so that he is not confronted by the fairness issue. This forces the larding-in of costly tax credits that have negligible economic effects. Still, it indicates the debate has loosened up under the pressures of the election year in a way that could put a capital gains tax cut into the platforms of all three parties.
At the GOP summit Tuesday, Kemp put forward the same simple three-point proposal he outlined in his June 18 Wall Street Journal op-ed: a commitment to draft a completely new federal tax system; an executive order to index capital gains; and an executive order to stabilize the gold price within a $30 band. The idea avoids all the issues that burdens the Dole hodge podge. It bypasses the scoring issues, the fairness issues, the flat tax versus VAT tax debate, and the problem of persuading voters that they can rely on a big-time promise that requires the cooperation of the President and Congress, when even itsy-bitsy promises in the past have been lost in the gridlock. The gold link would be controversial, except that Larry Hunter thought of inserting the $30 band, which simply makes de jure what Alan Greenspan has been doing de facto. It pre-empts the arguments of those who say the economy can't grow faster than 2.5% without causing inflation — which I was happy to see Newt Gingrich understood in his comments at the Tuesday summit. Indeed, there is nothing in the Kemp proposal to which President Clinton could strenuously object. When Ross Perot was trying to woo Kemp into the Reform Party last month, Perot even passed word to Kemp that he liked it. Indeed, Kemp drafted his WSJ piece so that it would appeal to all three presidential candidates. Remember that Perot's prime interest is in scrapping the current tax code, which he correctly views as the principal source of political corruption in the nation. The Dole trial balloons point in the direction of making the tax codes even more complex than they are.
What do these developments mean to the roller coaster on Wall Street? It could mean that the darkest days on the NASDAQ may now be behind us. As long as the GOP remained mired in its miseries with the Contract with America, there was no reason for President Clinton to compete on a growth agenda. This pointed to the worst possible outcome in November, with Clinton winning re-election with a mandate leading to four more years of gridlock. A weak effort by Perot, stressing austerity and his crazy aunt in the basement, would contribute to this result by prompting a low turnout at the polls by those who otherwise would vote Republican in the congressional and state races. If Perot mounts a growth agenda, which he can easily do, the prospects for 1997 become much, much brighter. Instead of all three candidates playing it safe and nibbling at the status quo, in one way or another all three would be competing in the realm of supply-side growth ideas. Even if Bill Clinton wins re-election, it would be with a voter turnout on November 5 that would produce a Republican Congress clearly committed to putting the economic horse ahead of the downsizing cart.
If this is the turn, I would mark the key event being an evening meeting two weeks ago of Kemp, Speaker Gingrich, Senate Majority Leader Trent Lott, and Sen. Connie Mack of Florida, chairman of the Joint Economic Committee. When Kemp was leading the supply-side revolution in the House in the late 1970s and early 1980s, Gingrich, Lott and Mack were his chief lieutenants. They have been meeting regularly ever since as "the Amigos." This most recent meeting was so unruly that it came close to breaking up, but ended happily with Newt giving the ball back to his old quarterback. This Tuesday's growth summit was the result.