If the Republican congressional leaders cannot come to budget terms with President Clinton and the Democratic congressional leaders by tomorrow, Senate Majority Leader Trent Lott says the Republicans will start from scratch on their own budget. On CNNís "Late Edition" on Sunday, he said the resulting budget would not be as good as that which might come from an agreement this week. Itís possible, though, that a better budget might result from this fresh start. Even if they squeeze into the budget resolution all the competing spending and tax interests, the process will be so tight that it would be a miracle if it works out as planned. If the price that Trent Lott has to pay to get spending concessions from the White House is his support of the chemical weapons treaty, which is what he appears to be doing, his own standing in the party will have been damaged in the process. Iím not sure the treaty is a bad thing or a good thing, but I wouldnít trade my vote on it for a budget deal. The political forces at work in the diabolical budget mechanism that Congress has imposed on itself seem inevitably to lead back to stalemate.†
Budget reconciliation, which implements the guidelines established by resolution, will be extremely difficult with so little tax-cut money in the pool. It would be nice if Republicans could give up on the $500 kiddie tax credit that chews up so much of the budget, even with the Christian Coalitionís willingness to have it phased in and made available only to poorer working families with kids. Newt Gingrich, who never should have given it to the religious lobby in the first place, is now stuck with it. Plus, the deal with Bob Dole to finance his $300,000 ethics penalty means we will not have a new Speaker who can start fresh and throw out the kiddie credit. With little more than $100 billion in the tax-cut pool, thereís not much chance of getting the capital gains tax cut, estate-tax relief, the Presidentís college tax credit, and a kiddie credit scaled back from its original $200 billion cost over five years. The Republicans are yelling at the President for not squeezing more money out of ďdomestic discretionary spendingĒ or Medicare, but Mr. Clinton has no room to maneuver. It does no good to yell at him when the only reason he was re-elected was to protect his constituency from the GOP budget-balancers.
If a deal canít be made, the Republicans at least can map out a budget strategy that enables some common sense to enter the budgeting process. This cannot happen as long as it is put in the hands of the budget chairmen. As much as we admire Chairman John Kasich of the House Budget Committee for telling it like it is, he has been less than effective in his few years on the job. It was Kasich who hired the hapless, inexperienced June OíNeill to head the Congressional Budget Office soon after the Republicans won control of the House for the first time in 40 years. This was inexperience squared. Kasich was also responsible for deciding the budget would be scored ďhonestly,Ē via static analysis, which means that the CBO cannot project the growth benefits of tax cuts. If this rule were in place in 1920, the Twenties would not have roared. If it had been in place in 1964, the Kennedy tax cuts would not have jet-propelled the mid-1960s and the Reagan tax cuts would not have boomed the 1980s.†
If there is no deal by tomorrow, the GOP leadership really must consider writing a budget resolution that essentially reduces the power of the budget chairmen, who are driven by static, austerity models, and that puts the initiative in the hands of the finance chairmen -- Bill Archer of House Ways & Means and Bill Roth of Senate Finance. All the budget technicians I know who are growth-oriented, inside and outside government, tell me this is the only way we can produce a growth budget that President Clinton can sign. The budget resolution itself is a silly document, part of the silly process, in that it has no force of law and is not even signed by the President. All it does is give the budget-balancers the whips they need to force compliance on their terms. It can be drawn up, but it should be done with so many blanks and asterisks that it becomes meaningless for narrow compliance purposes by the separate Congressional committees.†
This puts power back in the hands of the tax-writing committees. If Ways & Means can begin the process with a tax bill, Archer has the power to instruct the Joint Tax Committee to be realistic in assessing its revenue effects. Joint Tax canít make macroeconomic assumptions about the growth effects of tax changes, the job CBO is supposed to do. But it can stretch the fabric it gets from CBO to produce a roomier suit of clothes. With bigger revenue numbers than are now being used, say $150 billion instead of $100 billion over four years, Congress would be able to provide better and more productive tax cuts without taking all the money out of the Presidentís hide. The technicians who suggest this approach advise me the reconciliation process would then go much easier. The President still might be under pressure to veto reconciliation from Democrats who want more spending. If Congress sent it to him in mid-September, though, and then adjourned prior to the start of the October 1 fiscal year, the President would have to call Congress back into session to pass continuing resolutions in order to prevent a government shutdown -- on the argument that Congress was not spending enough money in fiscal Ď98. This would be most unlikely, especially given the roomier suit of clothes provided by the tax scoring, for both taxes and spending.
As another option available, the President can get around the stalemate any time he wishes by his power of executive order. This morning, I sent him a letter urging him to consider the two executive orders that Jack Kemp recommended last June 18, on the Wall Street Journal editorial page. I pointed out to Mr. Clinton that Kemp offered his bipartisan plan at a time when he thought himself permanently out of elective politics, and that it was designed so it could easily be done by either Clinton, Bob Dole or Ross Perot. The first executive order would index capital gains. The other would stabilize the dollar gold price in a narrow range around $350. There may be some complaints from bureaucrats about indexing, I told the President, but there is no theoretical opposition by the party ideologues, including those who are opposed to cutting rates. Most of the opposition to stabilizing gold would come from the floaters in the Republican Party, I said. Democrats would appreciate the reduced power of the Fed to close down the economy because too many people are working.† It would make a lot of ordinary Americans very happy if he signed such orders. At the very least, I suggested he ring up Kemp to kick the idea around.†
The continued split-level performance of the stock market is evidence to us that the markets see little prospect of a meaningful cut in the capital gains tax in these budget negotiations, no matter how much GOP leaders swear up and down that there will be one sometime this year. The blue-chip top of the market is flying on the brighter prospects that the Fed will be seeing fewer signs of robust expansion. The entrepreneurial bottom of the market continues to sag on the dim prospects of robust expansion anytime soon. As Iíve tried to make clear in this letter, though, there are still avenues open to the forces of growth. It wouldnít take much to get the bottom of the market catching up with the top.