The Clinton/Lott Government III
Jude Wanniski
January 8, 1997


GINGRICH: The conventional wisdom is that Gingrich will never again be as powerful as he once was. On the assumption that knowledge is power, though, Gingrich has been given the opportunity by the American people to rebuild himself as a wise and powerful Speaker instead of an imperiously powerful Speaker. Newt’s acceptance speech in winning the Speakership by the skin of his teeth was excellent in tone and content. He came closer than ever in persuading me he finally understands why he made such a mess of the 104th Congress and will not repeat his mistakes. That kind of knowledge represents real power. In the next several weeks, the Democratic Establishment will continue to hammer at Newt from every angle, trying to goad him into the kind of outbursts that punctuated his 1995-96 learning curve. His partisan allies in the House and in the press corps will encourage him to fight back and savage House Minority Whip David Bonior, who is in charge of goading Newt. In his speech, Gingrich wisely put race relations in America at the core of his personal agenda, making reference to a breakfast he had two years ago with Rep. Charlie Rangel of New York, who is now the most powerful black member of Congress. The long-ago breakfast was supposed to establish a communication link between the GOP leadership and the Congressional Black Caucus, but that critical link dissolved under the pressures of the Gingrich Revolution. By openly signaling to Rangel, who sat in the front row and nodded approvingly, Newt correctly identifies a path to bipartisan harmony that would, if he sticks to it, neutralize Bonior. By the way, Bonior is only doing his job, the mirror image of the job Newt performed when he was House Minority Whip.

CLINTON: The Bonior/Democratic drumbeat against Newt will fade away when it becomes clear that the GOP congressional leadership is not going to press its advantage in tearing up the Clinton White House over its fundraising activities and the indictments that Special Prosecutor Ken Starr is likely to produce soon on Whitewater. The President’s vulnerability, like Newt’s, is actually enhancing his influence over party politics and policy -- liberating him from the far left. Just as Gingrich is free to reach out to the Black Caucus to offset Bonior, Clinton is free to reach out to the tax reformers in the GOP, via his December 27 meeting with Chairman Bill Archer of the House Ways&Means Committee. At the “secret meeting,” Archer and Clinton agreed to work together to produce broad-based tax reform in the next four years -- an idea Gingrich yesterday encouraged in his acceptance speech. Bob Novak’s Monday column broke the story of the “secret meeting,” which was not in the interest of either Clinton or Archer to keep secret. Republican activists care much more about getting broad-based tax reform than they do about dragging a lame-duck President through the mud on moth-eaten scandal stories. That is, as long as Clinton encourages major tax reform, he has a GOP constituency that will work to downplay the scandal stuff.

TAX REFORM: White House Press Secretary Mike McCurry threw cold water on the idea that there could be a deal on Archer’s idea of a consumption tax to replace the income tax -- in response to the Novak column. This isn’t important, though, in that nobody really thinks it is possible to do what Archer would like to do. It is possible, however, to produce a broad-based tax reform out of a divided, but harmonious government -- a new tax system that would incorporate the primary interests of both parties. Indeed, it might be easier to produce a broad-based tax reform that has as its primary objectives economic growth and simplicity than it would be if one party controlled both executive and legislative branches. That is, if there is a harmonious balance of power, there could more easily be a modus vivendi in producing a new tax system. Such a system would be more progressive than the Republicans want, but less progressive than the Democrats want. The fact that President Clinton is a lame duck increases the chances of tax reform, because there are no reasons the Republicans have to prevent him from getting a share of the credit. If there isn’t broad-based tax reform in the next four years, it’s possible the current system will be with us for the next ten. The Novak column on the Archer-Clinton meeting made it clear that both men have a gleam in their eye about going down in the history books for achieving a historic reform. It can happen, but only if Archer is prepared to work with the ranking Democrat on Ways&Means, Charlie Rangel.

BONDS & GOLD: The divergence between the Treasury long bond and the price of gold continues to widen. Gold inched down to $356 today from the $383 range it had maintained for a few years to late November, when it began its slide. The long bond yield had been as low as 6.35% when gold was at $370 in early December, but is now back up to 6.82%. As David Gitlitz reported to you Monday, it is the long bond that now seems cheap to us, not gold. There almost has to be a convergence, unless there is some new variable that has come into play which has eluded us. Yes, when Greenspan testifies before the budget committees later this month, he can still fudge in his comments about the stock market, the level of reported economic growth, and expected inflation. But we think he has been surprised by the swift decline in the gold price and now has to wonder what it might take to keep it from slipping much below $350. Fudging won’t do it. He will have to alert the markets in some way that he does not want the dollar to deflate below that point. There will have to be more voluminous injections of liquidity into the banking system, actions that most likely would be incompatible with a 5.25% fed funds rate. Meanwhile, bonds are still burdened with the idea that Greenspan might tighten even with gold falling. If tomorrow’s PPI number and Friday’s employment report are not robust, a bond rally should commence.

SOCIAL-SECURITY REFORM: It really isn’t worth your time to read through the complex and varied recommendations that came out of the 13-member SS commission. Privatizing Social Security is not a reasonable idea at this point in history, any more than it is reasonable to think of privatizing welfare. This is because all such commissions are given problems to solve in a slow-growth or no-growth economy, and their solutions never can be acceptable to the masses of ordinary people who must be wary of any reduction in the social safety net. An entitlement commission that may emerge out of discussions between the President, Senate Majority Leader Trent Lott, and Speaker Gingrich has to be able to ponder positive-sum solutions that can be possible in a rapidly growing economy. The best possible solution to the actuarial deficits in the system is a high growth path that recaptures the efficiencies lost in the last 30 years of economic contraction. Not only could the current benefit levels easily be maintained as far into the next century as the actuarial eye could see, but surpluses also would appear again on the horizon, permitting steady trimming of the employe-employer payroll tax rates.