The Wall Street selloff yesterday and today, especially in the small cap, high-tech stocks that had recently recovered from their lows, is entirely due to the turmoil in the ranks of House Republicans. The budget deal, with its tax cuts designed to produce more rapid capital formation, is again threatened. Where it seemed grooved toward a presidential signature earlier this week, with a 20% capgains tax and liberal IRAs, it must now await a decision by the President on whether or not he will go for the blood in the water. House Minority Leader Richard Gephardt -- who leads the Forces of Darkness (F.O.D.) on Capitol Hill which are urging a Clinton veto of the tax bill -- was immediately at the President’s ear, urging him to exploit the weakness in GOP ranks evidenced by the coup attempt against House Speaker Newt Gingrich. Albert R. Hunt of The Wall Street Journal, who is the spokesman for the Forces of Darkness in the national press corps, in Thursday’s WSJ argues that “Clinton Holds the Cards on the Tax Cut,” and should veto the legislation until the Republicans agree to eliminate the “outrageous provisions” that would steal from the poor and give to the rich. The Forces of Darkness would of course ridicule any connection between the sudden weakness on Wall Street and the threat to the “outrageous provisions.”
What the F.O.D. are aiming at is the 20% capgains rate, believing that if they can force the threat of a veto, they will be able to get Congress to agree to a 40% exclusion, which would bring the rate down to only 24%. The way the Senate-House conference has been moving has been to go with the 20% and give up on the indexation of prospective capgains. The F.O.D. now see in Republican disarray a way to take another whack at capgains. Of course, the big reason for the attempted coup against Newt by backbench insurgents has been Newt’s willingness to help the President slice the salami on the Republican side. On our Polyconomics website this week, we listed the 10 most dangerous people in the world, and named Gingrich as No. 6, right behind No.5, Treasury Secretary Bob Rubin. The news that as many as 20 Republicans were ready to vote to “vacate the chair,” which would bounce Newt if all Democrats voted with them, continues to hang in the air. It is not possible to see any resolution to this problem now that there is blood in the water, with the resignation of Newt’s protégé, Rep. Bill Paxon, who was complicit in the coup. (I’ve been arguing here for months that Newt should simply stand aside in favor of a caretaker Speaker, Rep. Henry Hyde of Illinois, the only member of the House who has the prestige to preside over this motley crew.)
On the bright side, the public eagerness of Gephardt to exploit the GOP weakness may have a positive effect on Republican ranks. Armey, who knows Newt has been off his rocker, is said to have resisted the coup on the grounds that it would threaten the budget deal and tax cuts. He may be able to play a constructive role in rallying the ranks against Gephardt, who should have kept his head down, with Newt hopefully shutting up for the duration. In addition, I continue to point out the political importance of Jack Kemp’s meeting with the President this week, urging bipartisanship on the tax issue for the good of the country. It could not have come at a better time. Kemp is now in Africa, selling tax cuts to Nelson Mandela and other heads of state, but by putting his thumb on the big scale in the Oval Office, he may have done enough to keep the President from going for blood. As the leader of the GOP’s growth wing and one of its least partisan senior members, Kemp’s role in the last stages of negotiations on this budget deal could be decisive.