The Republican Congress Jude Wanniski May 23, 1997

In his last chess game with Big Blue, Gary Kasparov lost not because the computer played brilliantly, but because he made a stupid blunder, the kind a high school whiz might make, not the world chess champion. He simply made a few moves early in the game out of sequence, and from then on he knew he could never recover, even if Big Blue were a PC Jr. The Republicans have been in control of Congress for almost 2½ years now, but because they made a stupid blunder early in the process, the “little computer” in the White House continues to grind them down, and no matter how hard they try, the internal logic of the contest forces an inevitable conclusion. The blunder, of course, was to not fix the budget process by permitting the computers at the Congressional Budget Office to score tax rates of different kinds according to their likely effects on economic growth. The stupid blunder belongs to House Speaker Newt Gingrich, who allowed his protégé, the new Budget Committee Chairman, John Kasich, to decide to eliminate economic growth as a factor in scoring tax receipts. The stupid blunder also belongs to House Majority Leader Dick Armey, who has a Ph.D. in economics, and who had to know at the time that this one step would force Congress into a tax cuts vs. spending cuts argument that would lead, at best, to stalemate, and at worse, to checkmate -- which is what happened. 

Now, Senate Majority Leader Trent Lott’s fingerprints are on the blunder. He is acting as if everything were swell, that the budget deal he and Newt negotiated with the President is a peach, and it is now up to House Ways&Means chairman Bill Archer to find a way to squeeze $200 billion worth of tax promises out of $85 billion on the table. This morning’s Wall Street Journal tells us “Archer Faces Daunting Task in Divvying Up Tax Cuts,” which suggests there may only be $75 billion on the table. We reported on Monday that the problem of covering a 50% exclusion on capital gains and prospective indexation easily could be accomplished if the Congressional Budget Office were to project its economic growth effects or if the Joint Tax Committee were to score its unlocking effects. For every 0.1% that the capgains cut adds to economic growth over five years, the positive revenue flow would be $30 billion. Considering the fact that the Republicans control Congress and the congressional bureaucracies, this should not be hard to do -- but it is.

All it takes is a letter from Lott, Gingrich, Archer and Senate Finance Chairman Bill Roth to June O’Neill, staff director of CBO, and O’Neill would be required to score the growth options. Such a letter would not force CBO to score a capital gains tax cut as if it would produce higher growth than is assumed in the current model. It would only require the scoring be done. CBO had already kicked up its revenue estimate by $78 billion over five years because of the growth effects of balancing the budget by 2002. It did so by assuming lower interest rates. If CBO came back and said it found no growth effects, O’Neill could then be brought before the Joint Economic Committee to explain how she managed to find no revenue gains. In his recent testimony before Senate and House Banking committees, Fed Chairman Alan Greenspan posited that elimination of the capgains tax would produce higher federal revenues via rapid productivity increases. 

I’m told that Chairmen Archer and Roth would be delighted to sign such a letter to O’Neill, but there is some hesitancy from Lott and Gingrich. There are even suspicions that in order to get the President to agree to this miserable budget deal, they had to agree to not request any growth scoring of capital gains. The belief on Capitol Hill is that the Republican leadership is totally driven by fear of a Presidential veto and a government shutdown, resulting from a dispute over capital gains. In the negotiations with the White House, while the GOP was fussing over the numbers, the White House fussed only about policy. This is because the race for the Democratic presidential nomination has already begun. House Minority Leader Dick Gephardt has already announced his opposition to the existing budget deal because it contains benefits for “the rich.” If the President wants to hand off the Oval Office to his Veep, Al Gore, he will presumably threaten to veto a budget reconciliation which, on static scoring, benefits “the rich” more than the “middle class.” Never mind supply-side arguments that elimination of the capgains tax would yield greatest economic benefits to the poor, for the same reasons cited by Greenspan. 

In order to play this corrupt and cynical game, Treasury Secretary Bob Rubin and his Deputy, Larry Summers, have to publicly lie through their teeth in stating that a capgains tax cut will be bad for the economy. (May God have mercy on their souls.) If Lott and Gingrich go along with the charade, refusing to make the request of CBO, there is no chance we will see anything more than a skeletal capgains cut. The Capitol Hill reporter for the PBS "Nightly Business Report" says he heard a number as low as $5 billion over five years allotted to capgains! Most of the $75 billion on the table will be chewed up by the $500 kiddie credit, another incredible blunder by Newt, just to keep the Christian Coalition at his side during his ethical problems. (Before we get rid of this new entitlement, Newt’s fine will cost closer to $300 billion than $300 thousand.)

There is always the chance that Lott and Gingrich have simply been too busy of late to focus on the scoring problem. It may be the rumors of their determination to choke off all internal opposition to the swell deal they cut with the President are baloney. They are certainly acting very uptight. At the CATO dinner last week, Dick Armey tore into both Steve Forbes and Cato President Ed Crane for their recent criticisms of the GOP budget deal. Others tell me Lott has been defensive too, while Newt continues to talk as if there were nothing else to be done. His job is over, and it is up to Archer to produce the silk purse out of the sow’s ear. 

The best news this week was the exasperation expressed by The Wall Street Journal, which has spent the best part of the last 2½ years making excuses for its blundering friends in the GOP. On Tuesday, the lead editorial ripped into Alan Greenspan for even thinking of raising interest rates. On Wednesday, the lead editorial ripped into Kasich, for his failure to get capgains scored properly. On Thursday, it ripped into Trent Lott for trying to close the GOP gender gap at the expense of the Air Force, by cozying up to Kelly Flinn. It seemed like the first three-day stretch in five years with not one editorial aimed at President’s impeachment over Whitewater. If the Journal can keep up this pace, we may yet see the GOP leaders exhibit some courage.

Fear of Clinton’s magic veto is completely misplaced. If the CBO comes up with more money to grease the budget deal, the President is not going to veto it because Al Gore doesn’t want to defend it against the class warfare arguments of Dick Gephardt. Dick Morris is right when he says Gephardt is “God’s gift to Al Gore,” enabling Gore to seem the more moderate of the two, where Gore at one time was well to Gephardt’s left. The GOP should simply forget about the President for the next several months, as he heads back to the golf course, and produce a finished budget that they can be proud of. Clinton won’t veto it, but if he does and the government shuts down, he’ll take the blame, not the Republicans.