Clinton Stands Pat/What Kind of Growth?
Jude Wanniski and David Gitlitz
August 30, 1996


In accepting his party's presidential nomination in Chicago last night, President Clinton gave Bob Dole and Jack Kemp an opening wide enough to drive an army through on the way to a GOP victory in November. The President is obviously bemused by assurances of those all around him that he has such a wide lead over Dole, and the U.S. economy is so strong, that he can play the cards he has to win easy re-election. The lengthy list of tax cuts and new initiatives he displayed was so trivial that it seemed more appropriate for a nominee running for Mayor of America. Earlier this summer, Maureen Dowd of The New York Times was the first to note the President's fascination with "itsy-bitsy^ plans and "teeny-weenie" ideas, in her column titled "Honey, I Shrunk the President." At the time, his biggest idea was that all school children should wear uniforms to suppress their individuality. His most ambitious goal set forth last night was that by the year 2000, all third-grade children should be able to read at what used to be the first-grade level.

His most liberal advisors, which include White House Chief-of-Staff Leon Panetta and his deputy, Harold Ickes, successfully fended off the pleas of Clinton's most masculine, least motherly advisor, Dick Morris. Morris had begged Mr. Clinton to pre-empt the GOP growth issue with a serious cut in the capital gains tax. At least the chance of such an initiative had been built into the stock market, which has fallen yesterday and today to some extent on the sudden departure of the Clinton campaign's most masculine, least motherly advisor. With Mr. Morris out of the picture, except for those which soon will be appearing in your favorite magazines, the President will be totally committed to the static strategy that was laid out at the Chicago convention. In terms of any strategy on offense, President Clinton plans to run out the clock on the 20th Century. He is stuck with the defensive strategy that seemed perfect just a month ago, which Teddy Kennedy spelled out last night, a campaign against Dole, Kemp and Gingrich. Alas, Dick Morris was the fellow who designed the strategy of running against Dole and Gingrich. Of all people, he knew best that with Kemp aboard, it had to be amended, or it could lose.

There are already plenty of Old Guard Republicans who are arguing that Kemp has already served his purpose, getting a bounce out of San Diego. They say the tax cut idea has already flopped and that Dole should change the topic of conversation to character, morality, call girls, and crime in the streets. For his part, Kemp is clearly trying to get the campaign to up the ante to draw bigger, bolder goals, to make the distinction between the two teams so distinct that there could be no possible confusion or blurring when the voters hit the booths on November 5. If there is anything we know the American people want, it is change, big change, from where we have been headed to where we have to go. We should not only be scrapping the 83-year-old tax code, but also the 83-year-old monetary system. A target date of January 1, 2000, is not unreasonable. On the Labor Day weekend of 1980, when Ronald Reagan wanted to shoot for a gold dollar, he allowed his advisors to talk him out of it, and Kemp went along with them. Unless Kemp takes this lead this Labor Day and sells that goal to the top of the ticket, he will give up half his arsenal of necessary change. He does not have to sell "a gold standard," but has to win a commitment to a new monetary system that can be worked out between '97 and 2000.

The polls show Clinton ahead of Dole by 13 points, with Perot trailing at 7%, without a running mate. The numbers should be tightening up even a week from now, as the country gets to think about itsy-bitsy change and a thorough reorganization of the government. A month ago, it looked like there would not be a dime's worth of difference between the two parties. Now, there's a world of difference, which is the way two-party democracy is supposed to work. For the first clues to where the campaign is headed, tune in Evans&Novak tomorrow at 5:30pm EST, with Dole campaign manager Scott Reed on the firing line.

Jude Wanniski

WHAT KIND OF GROWTH? Today's New York Times takes Bob Dole to task for making "hallucinatory" remarks disparaging the current strength of the economy, as if there is nothing more to be said about growth after yesterday's report that now puts second quarter GDP expansion at 4.8%. The Times' editorialists ought to take a look beyond the headline number, though. If they did, they would find that the largest component of yesterday's revision from the initial 4.2% second quarter growth estimate was accounted for by a reduction in imports. It is only from the twisted perspective of the Commerce Department's national income accounts that lower imports which the NIP A tables register as higher growth of net exports would be read as a sign of strength rather than weakness.

Indeed, it's advisable to keep some perspective in the midst of today's turmoil in the equity and fixed income markets. Despite growing apprehension that scattered signs of vitality will be perceived as inflationary at the Fed and met with a rate hike sooner rather than later, the best guess is for growth at no better than a 2.5-3% rate over the second half of this year, with a marked slowing early in 1997. The markets reacted sharply to today's reports suggesting surprising strength in manufacturing, but chose to overlook weakness in personal income and consumption. This is no boom, folks. As for inflation, it was instructive to observe the behavior of gold prices while stock and bonds were in the grip of a near panic. Here, there was no evidence of investor sensitivity to the need to hedge against an unexpected rise in the price level, as spot gold dropped below $387 for the first time in two weeks. Even the Chicago purchasing managers report whose increased headline business activity number sent a shiver through the market - indicated a reduction of inflationary pressures in the "prices paid" component.

Still, the response of markets which must remain acutely sensitive to the ever-shifting outlook for Fed policy is certainly not irrational. When the objective of policy is consistently expressed as a fine-tuning of the economy's growth rate, reactions to "good news" will usually be bad, at least initially. A noon-time interview today on CNBC with Fed Gov. Larry Lindsey helped illustrate why that's the case. Lindsey acknowledged there was no sign in any data of even incipient inflation pressures. Nevertheless, he said, the recent indications of strength made policymaking a "tough call," suggesting that the warning signals at the Fed are now "flashing yellow." The FOMC's "asymmetric" July directive, he reminded viewers, meant that the Fed is "more likely to move up than down," a stance which he considers "appropriate."

We have little doubt that Alan Greenspan is extremely reluctant to make the Fed a political issue before November 5, especially since he appreciates better than anyone at the central bank that growth accompanied by gold price stability is not inflationary. Our chips remain on the chairman, although as a consensus-seeker rather than a strong-arm leader, the pressure on him to bend is probably intensifying.

David Gitlitz