Still in the Trading Range
Jude Wanniski
October 15, 1997


It really does not seem that we can expect enough good news that will take Wall Street much higher before the end of the year and there isn’t enough bad news lurking on the horizon to cause a major correction before 1998. Congress badly wants to do what it has to do and get out of town for the balance of the year, and while haste often means the bad guys can put bad stuff into law when there is a rush for the doors, there is nothing in the works that could shake the pillars even if it snuck in. If there is more good news about tax and regulatory policy that might propel the bull market beyond 9000, we are not likely to see it before Congress reconvenes in January. At the moment, the Beltway chatter on tax reform is uniformly irritating. Republicans think they have found a winner in beating up on the IRS, which most likely will mean that IRS bureaucrats will find sneaky ways to take bites out of Republican businessmen. They don’t have to do it with audits. They can do it with “regs.” A little reg here, a little reg there, and pretty soon the business lobbies will be begging the GOP leaders to back off. 

The Federal Reserve might raise interest rates in November or December, but it would take some unforeseen event for that to happen. The larger problem is that Greenspan has made so much noise about vigilance against inflation, he is closing off discussion about the deflation under his nose. The longer gold stays at $325 instead of moving back up to $350 where it belongs, the more damage Greenspan’s management of the dollar does here and throughout the world economy. Its effects have been overwhelmed thus far here at home by the cut in the capital gains tax, but there will be a steady erosion of world commerce until there is a complete adjustment to the deflation. There is no excuse for the pounding Greenspan personally has given the bond market lately, except if he were to say he has been misunderstood in his public pronouncements, which he has not done. His speech yesterday to Cato was okay, but obscure enough so that financial reporters had to be given hints that he was criticizing the IMF and World Bank for encouraging the developing world to impose controls on capital. His remarks on gold yesterday were not helpful, as he purposely downplayed gold’s deflationary signal by insisting we went off the gold standard in the 1930s. There is nobody on the House Budget Committee smart enough to figure out how he was manipulating them, for what greater good we know not. In any event, we can expect Fed policy to stay on hold through the rest of the year, and the markets to bounce around in a narrow range, trying their best to figure out what’s next.

The President might not get “fast track” for trade agreements, and that would be fine with us. A lot of our free-trade friends insist it is protectionist to be against fast-track. President Clinton really, really wants it, both because the corporate fat cats think they paid for it in last year’s campaign, and because Treasury Secretary Bob Rubin, who represents fat-cat interests, badly wants to extend NAFTA. The White House does not seem to have the votes, and Bob Novak reports today that they can’t understand why the GOP is not delivering more votes for its corporate fat cats. President Clinton does not see that the GOP is steadily shifting in the populist direction, and NAFTA could turn into a major burden for ordinary folk. When we were negotiating to get tariff rates down from 40% or 30% or 15%, the free-trade argument has validity. When it is at 4-6%, it is not protectionism but the equivalent of a sales tax to come into our market. Yes, the negotiations might produce a good agreement, but let the President and his team do it on slow track, and then bring it to the Congress for vigorous debate. He may have a more difficult time paying off his campaign contributors, but what the heck. The financial markets should have no problem with the defeat of “fast track,” and the markets would not advance if it passed. If I were the GOP leadership, I would come up with the votes only if I got, say, an elimination of the capital gains tax or an executive order indexing past gains. Elimination of even a small trade wall against labor inputs will throw the burden of adjustment onto low-income workers in tradeable goods. If they can add capital to the capital/labor ratio while they are in effect adding foreign labor, our workers can still come out ahead. To simply add foreign labor via extension of NAFTA enables the major corporations who export high value-added product, made by high-income workers, to make out at the expense of the folks at the bottom. Adding up the aggregates might even be a net benefit to the economy as a whole, but with lots of small losers and few bigger winners.

For the balance of the year, there will be other opportunities for the two political parties to figure out what’s next. A year ago at Christmas, the President and House Ways&Means Chairman Bill Archer talked about tackling fundamental tax reform. The President is now saying no, for strategic reasons, spreading the word through his minions, including Dick Morris, that the tax code is fine as it is. Novak reports that the President is wary of taking on a “comprehensive” task such as tax reform, because of how he got burned with Hillary’s health-care reform. Don’t believe a word of this. The Democrats are not going to allow themselves to go into next year’s elections defending the status quo on taxes, which is the root of all evils in campaign financing. If the Democrats go into next year’s elections blaming the GOP for killing campaign finance reform, and the GOP can blame the President and his party for refusing to co-operate on tax reform, the Democrats will lose lots of seats in the House and more in the Senate.

A major problem shaping up for the GOP, though, is Archer’s determination to replace the income tax with a national sales tax. That requires getting rid of the 16th Amendment, for starters, and then requires a federal collection system that can never be made to work, with the best computers devised. If it passed, it would quickly become a Value-Added Tax, which would turn the United States into another big Europe, with lots of big corporations and the death of entrepreneurial capitalism. We now note with some alarm that the sales tax idea is making steady inroads in Republican ranks -- even among people who know exactly why it is such a terrible idea. They think it helps them run against the ugly IRS, which is what they think the electorate wants. 

We can’t absolutely guarantee that the financial markets will stay in this 5% range, dancing from the left foot to the right, pessimism, optimism. Unless Greenspan and Rubin get more serious about the problems in Southeast Asia, the weakness there can spread. Rubin thinks his only answer is to pour $17 billion, for starters, into the troubled countries, so they can pay their foreign creditors, his old colleagues on Wall Street included. They will ask Congress to pony up for an IMF replenishment, too. The real answer, as Greenspan knows well, is to fix the dollar gold price and help the Asians lock into it through their domestic monetary policies. Or, as I wrote to Malaysia’s Anwar Ibrahim yesterday, the Asians can figure it out for themselves. Now that would be good news, enough to get us up and over 9000.