Clinton/Lott Government IX/Fedwatch Jude Wanniski and David Gitlitz May 9, 1997

BUDGET DEAL: In case you did not notice, Speaker Newt Gingrich is quoted in this morning’s WSJournal to the effect that he may have to replace Rep. Bill Archer, the most senior Republican member of the House, as chairman of the Ways & Means Committee. This is because Archer, among the most principled members of Congress, has refused to bend his knee in all particulars to the budget deal that Newt negotiated with the White House. Archer and Senate Finance Chairman Bill Roth, both of whom were cut out of the negotiations, want to include expanded IRAs in the $35 billion promised to the President for his college tax credits. The White House is demanding it get the money free and clear, which means whipping Archer into line. If it came to a vote of the House Republican Conference, I think Newt would be bounced, not Archer, and deservedly so.

GINGRICH: Newt’s statement is evidence that he remains off his rocker and should stand aside as Speaker of the House, as I contended in a client letter of March 31, “Everything Wrong at Once.” As I put it then, Newt has become psychologically crippled as a result of the meatgrinder he has been through for the past two and a half years. In The Washington Times today, Newt is continuing to bloviate about a new scheme to pay off the national debt -- even after friends pleaded with him to drop the absurd idea. He is determined to write the scheme into this year’s budget reconciliation, which would require tax revenues to rise 1% faster than spending every year for 22 years. The Times reported on his Wednesday speech to the National Religious Broadcasters, in which he said second offenders who import drugs should be put to death: “If you sell it we’re going to kill you, if you’re an importer.” Also, “Mr. Gingrich proposed using the military and spy satellites to help find drug traffickers and suggested religion-based rehabilitation programs for those who are caught.” He is drawing up a “Tour Guide to the Faith of Our Fathers,” a pamphlet for visitors on the religious memorials and writings of the founding fathers. I’m not saying Newt is crazy, but that he has lost control of himself and is able to say or do anything in his current state of mind -- one of the most important men in the world, a loose cannon on deck!

ARCHER: If we are to get a decent tax cut out of the mess Gingrich hails as a monument to his leadership, it can now only come from the Texan who chairs the Ways & Means Committee. Archer not only is committed to delivering on a meaningful cut in the capital gains tax, but also indexing gains. He believes it is impossible to index retroactively via the legislative process. The people in charge of the scoring process insist indexing would cost too much money -- when of course it would instead flood Treasury with revenues for as long as the eye can see. If he were willing to lend support to the small but growing band of Reaganauts in Washington who are pushing stratagems, that could lead to dynamic scoring by the Congressional Budget Office and the Joint Tax Committee. This is the only way to legislatively broaden the tiny pool of projected revenues that was agreed upon by the Senate and House budgeteers. Kenneth Kies, director of Joint Tax, is an Archer appointee who has been doing everything he can to block dynamic scoring, which undermines Archer’s efforts. At CBO, June O’Neill is blocking dynamic scoring of capital gains, which leads to the nonsensical projections that the higher the capgains tax, the sooner the budget would be balanced.

LOTT: Now that Archer has been threatened with dismissal by the eccentric Speaker, we practically have to rely upon Senate Majority Leader Trent Lott to regain some control of GOP congressional leadership. This is a tall order, as every time Lott seems to be getting things under control, Newt loses it again. Lott undoubtedly would like to see a change in personnel at CBO, as would everyone we talk to, but Ms. O’Neill is under the patronage of House Budget Chairman John Kasich, who is Newt’s protégé. I wouldn’t be at all surprised if Kasich were unhappy with O’Neill, but there seems insufficient pressure so far to make a change. I must assure you that at this level, policy is personnel. Members of the GOP leadership scarcely have time to get from one meeting to the next, let alone manage policy. O’Neill and Kies think of themselves as gladiators on behalf of budget balance and smaller government, not as technicians in over their heads.

CLINTON: Lott insists he has not spoken to Dick Morris in many months, but Morris makes it clear he has been getting advice to the President. As has so often been the case, it is good advice, with Morris pointing out that the President’s fate in the face of all those special prosecutors bearing down on him and Hillary depends on how well he seems to be governing. In that sense, those Republicans who would like to see an impeachment or indictments at the First Family level are not at all anxious to see a satisfactory solution to the budget deal. In other words, just as it was in the President’s personal interest to get the “budget deal” as it stands, it is in his interest to see that it holds together. With a budget breakdown, especially one attributed to White House and Democratic stubbornness on spending, Clinton would be more vulnerable to charges at some level of criminality. When A.M. Rosenthal of the NYTimes threw in the towel on Clinton this week, it was another ominous straw in the wind. I remain ever hopeful that Clinton can skate across the thin ice he appears to be on, although he may soon have to walk on water. If I were he, I would sign an executive order indexing capital gains, which would make me very popular, very fast.

Jude Wanniski

FEDWATCH: Alan Greenspan’s NYU speech last night was seen by the Associated Press as a signal of another upcoming rate hike, while John Berry of the Washington Post thought “Greenspan Hints Fed Will Let Rates Stand.” Because Fed staffers are known to leak stuff to Berry, his version apparently played a role in the long bond’s fast start this morning, up nearly three-quarters of a point in early trading before falling back. A close reading of Greenspan’s text, though, adds little to what we already know about the immediate policy outlook. It was less an overview of the current policy framework than an ex-post rationalization of the quarter point rate hike on March 25. Clearly stung by criticism of the move, Greenspan tried to refute the notion that the Fed wants longer unemployment lines. Gone is his February/March concern about “job insecurity” and worker “quit rates” having only a temporary dampening effect on real wages and therefore inflation. Instead, he now is concentrating his rhetoric on “excessive credit creation,” without offering any insights into how he judges whether growth of credit may be considered excessive at any given time. “It was a small prudent step in the face of the increasing possibility that excessive credit creation, spurred by an overly accommodative monetary policy, might undermine the sustained economic expansion,” he said about the 25 basis point funds rate increase. In short, while at one time we could rely on Greenspan to maintain a consistent perspective on the factors determining the value of money, he is becoming a moving target, prone to shifting with the prevailing winds.

 David Gitlitz