Bear Tracks
Jude Wanniski
December 9, 1996


To find that Alan Greenspan actually believes it is possible for “irrational exuberance [to] unduly escalate asset values” is reason enough to worry about the value of financial assets. When The Wall Street Journal and Henry Kaufman two weeks ago raised concerns about a Wall Street “bubble” we reassured you that the Fed Chairman knew better. His comments Thursday night, which produced shudders around the globe, is direct evidence we all have been unduly exuberant in our assessment of Greenspan. We’re reminded that he is very much Establishment in his bias against a level of economic growth that puts upward pressure on wages, and that he will get behind any idea that promises a smaller budget deficit. All of these elements are in the air again, helped along considerably by the sinister report of the Boskin Commission last week that the Consumer Price Index overestimates inflation -- a report cooked up by the Establishment at Greenspan’s urging. We don’t see a Bear quite yet, but these are its tracks.

Yes, an irrational exuberance can drive up the value of a single stock or commodity, especially when information about these assets can be influenced or manipulated. No, it is not possible for all global assets to rise because of irrational speculation, or even the significant fraction that trades on Wall Street. Leftist economists, of the John Kenneth Galbraith variety, are always eager to compare stock corrections with the Tulip Mania and the South Sea Bubble. The idea of irrationality in the financial markets opens the excuse for government control of those markets and the economy that underpins them. When Alan Greenspan joins in this kind of nonsense, it is prudent for global investors to increase the risk premia on all real and financial assets. As the keeper of the world’s key currency, the dollar, Greenspan arguably is the most powerful single person in the global economic realm.

Imagine the global markets if suddenly Greenspan were replaced by Galbraith. It is Galbraith who argued that the Crash of 1929 was caused by speculative excess, a bubble, when in fact it was caused by the Establishment’s support of Smoot-Hawley. (It will take a century, at least, before the Establishment will acknowledge that boo-boo.) New York Times financial columnist Floyd Norris, whose influential column appears on page one of the Sunday “Money&Business” section, yesterday said flatly: “The Fed Tries to Deflate a Bubble.” Norris reminds us that “Historians [Galbraith] have blamed the Fed for sitting by when stock prices went up beyond any rational basis in 1928 and 1929. Perhaps the Great Crash could have been avoided had speculation been stemmed earlier.” Sunday a week ago, Norris co-authored a lengthy front-page article about how the very rich have learned to “escape” and “avoid” a capital gains tax by cleverly collateralizing their assets, instead of selling them. Imagine that!

More bear tracks appeared on CNN’s "Late Edition," when the Clinton Budget Director, Franklin Raines, opined that we don’t need a capgains tax cut because you only need capgains tax cuts to boost the stock market, and it is already up! Sen. Pat Moynihan, ranking Democrat on Senate Finance, came on the show to boast that Mr. Raines was once his student! Raines, Moynihan and Senate Budget Chairman Pete Domenici all cooed about the prospect of cutting the inflation index. On "Meet the Press," Treasury Secretary Bob Rubin had the same gleam in his eye, saying something has to be done to correct for the fiscal irresponsibility of the years 1980 to 1992. Is the fix in?

Maybe not. The weekend’s only relief was the revelation on "Fox News Sunday" that Senate Majority Leader Trent Lott has not been persuaded by the sinister Boskin report that inflation has been overstated. The Republican Party has just spent two years arguing that the economy is not nearly as good as President Clinton says it is. It still takes two breadwinners in an ordinary family to make ends meet. Except for Senator Lott, GOP congressional leaders are drooling over the prospect of cutting every Social Security benefit year after year as far as the eye can see. This clever political ploy has the extra added benefit of raising income tax rates on ordinary folks every year, by the amount of the CPI adjustment. House Budget Chairman John Kasich, one of the bright stars in GOP firmament, on "Meet the Press" Sunday made it clear he has been suckered by the Boskin crowd, arguing that the CPI can’t be accurate, because it gives tobacco products ten times the weight of a cellular phone. According to Professor Michael Boskin and his team of “eminent economists,” which is what he calls himself, the average American is much better off than he or she was 30 years ago, after you adjust the CPI from plus to minus. If my 80-year-old mother would only take housing costs, transportation costs, health and medical costs, movie tickets, restaurant prices and groceries out of her shopping basket -- and replace them with cellular telephones and laptop computers, she would realize why she is really better off than she was when she could still afford to live on her CPI-adjusted Social Security check.

Who is this Michael Boskin? He is the Stanford economist who served as President Bush’s chief economic advisor in the Dick Darman administration. It was Boskin and Darman who persuaded Bush to break his read-my-lips promise not to raise taxes. It was Boskin who persuaded Bush to appoint Larry Summers, the smartest bad economist in the world, to be chief economist at the World Bank, from which he dispensed poisonous economic advice to the developing world and the “Shock Therapy” that undermined the Russian economy. Because of this yeoman service on behalf of the Establishment, Boskin became the favored academic economist of Sen. Domenici, who was responsible for putting the Boskin Commission on the map. Domenici tried to persuade Boskin to chair Bob Dole’s economic task force in the recent presidential campaign, but Boskin handed off to his Stanford colleague, John Taylor, who then produced the disastrous 15% tax cut plan that helped sink the Dole campaign. Taylor rejected the supply-side plan favored by Jack Kemp and Steve Forbes.[See my “Problems With the Dole Tax Plan,” August 5, 1996: “I’m afraid it will not do {Dole} any good politically...{he} will run into the buzz saw that Newt Gingrich encountered on Medicare and Medicaid.”]

Where do the bear tracks lead? It could be the Republicans for the umpteenth time will allow themselves to be suckered with a Democratic bait-and-switch. Remember when Domenici in 1982 bought the idea of giving the Democrats one dollar of tax increase for two dollars of spending cuts? We can almost smell the GOP being presented with a promise of some feeble cut in the capital gains tax, with no indexing, the “rich” fleeced anyway by the alternative minimum tax and the closing of various loopholes that now allow the “rich” to collateralize their assets instead of selling them. In exchange, all the White House will ask is that the Republicans put themselves in the position of taking “credit” for fixing the Consumer Price Index. I’m not a racist, folks, but I am coming to believe that Republicans at birth have a missing political gene.

Ironically, a large part of the GOP problem is the fear they will be suckered again. Despite retaining control of Congress, the Newt House Republicans were so thoroughly had by Clinton and Dickie Morris last year that they are now afraid of their own shadows. They are going to give the President the first moves instead of behaving as if they have a mandate, when they clearly have more of a mandate than the President. They increased their strength across the board, on balance, and the President still couldn’t manage 50% of the popular vote. Our continued bullishness on the 105th Congress rests on the shoulders of Trent Lott, who is on the alert and loaded for bear. On the weekend talk shows, we cheered as our hero even fired a few shots across Greenspan’s snout.