The stock market decline began last week with President Clinton's mini-press conference in the Rose Garden, when he announced projections of a $39 billion surplus in this fiscal year compared with the $10 billion deficit his administration anticipated in January. The Dow Jones Industrial Average was flat when he made this statement, but it immediately began to soften as the President said there could be no tax cut this year inasmuch as the surplus revenues would be needed to strengthen the Social Security system. Maybe there could be a tax cut next year, he said cheerfully. The DJIA trailed off by only 30 points in the next two hours as the market digested this piece of information. It did not go into free fall until Gene Sperling, Chairman of the President's National Economic Council, went before reporters in the West Wing just after 2 p.m. In the next hour, the DJIA fell by 120 points. As John McLaughlin put it Sunday on NBC's "The McLaughlin Group," Sperling "took everything back" by making it clear the conditions under which the cheerful President would support a tax cut could not be met, now or next year. McLaughlin then asked his TV panel if there would be a tax cut this year and what kind. The only sentiment he found was for a family tax cut of the kind urged by the Christian Coalition. He himself predicted there would be no tax cut this year of any kind.
No matter that everyone in Washington, including the President, knows that the revenue surplus this year could conceivably reach $100 billion, not the $39 billion he touted. And where the President now advises the cumulative surplus could reach $1.4 trillion during the next ten years, he is well aware of the projections of Jack Kemp at Empower America that with reasonable growth assumptions, the cumulative surplus could be $1.34 trillion in the next FIVE years. We reported this to you in "The Politics of Surplus," April 30, and Robert Novak relayed it in his Washington Post column on May 25, for the President to read.
Meanwhile, House Speaker Newt Gingrich, who has discussed the projections of surplus with Kemp, has been telling anyone within earshot that he wants the surplus to be devoted half-and-half tocutting tax rates and "strengthening" Social Security. He says he aims to cut the payroll tax by two points and dedicated to privatizing pah of Social Security, eliminating the so-called "marriage penalty" in the income tax, "cutting the capital gains tax to 15% from 20% and reducing the holding period to 12 months from 18, and to eliminating the federal estate tax! Thus far, this is more happy talk. Newt knows the pay-as-you-go rules of the House that he permitted to be extended last year will prevent Congress from doing anything as smart as enacting the tax agenda he describes. Unless he is willing to fight the budget balancers in his own party to eliminate PayGo, the President will be able to kill any supply-side tax cut by insisting itfvill prevent the salvation of Social Security. Because of PayGo, House Budget Chairman John Kasich has been proposing a $150 billion tax cut over five years by cutting that amount from federal spending programs. Kasich, of course, can't get anywhere with that idea, because the Democrats will cut him to ribbons when he has to specify the spending cuts — some of which are bound to come out of the school lunch program. Having hit this third rail in 1995, the Republican leadership wants nothing to do with it. The lead editorial in the NYTimes today insists that Kasich be honest and specify his spending cuts, which it says it will oppose sight unseen.
What we have is a total abdication of leadership in both parties, as the President and the GOP congressional leadership are clearly taking the steps that can only lead to another budget stalemate this year. The financial markets can easily see through the happy talk about tax cuts. The President's team at the White House and Treasury have put out the word to their friends in the press corps that 1) the economy is so healthy that it does not need a tax cut (Al Hunt of The Wall Street Journal), and 2) it doesn't matter if the stock market falls because it only benefits the rich anyway (Margaret Carlson of Time). The real aim of the President and Democratic leadership in Congress is to retake the House of Representatives in November. This becomes increasingly possible when the House Republicans behave more and more like Barry Goldwater, who died last week at age 89. The Arizona Senator is now being fondly remembered by liberal intellectuals as perhaps the greatest Republican of the modern era — for having led his party to its worst defeat in our time. In all the eulogizing of Goldwater this weekend, not one mention was made of his "leadership" in opposing the Kennedy tax cuts of 1964, months before he officially became the GOP's kamikaze presidential candidate.
It's hard to believe, but the Republicans who could find the courage under Reagan to cut tax rates amidst growing deficits, now can't find the courage to cut tax rates amidst swelling surpluses. The PayGo rule, which is simply a rule of the Congress, can be over-ridden by a simple majority in the House. If the House were to pass a budget resolution this week or next, it could write in the tax cuts out of the projected surpluses and automatically override PayGo. The White House, via Sperling, last week indicated it would oppose this kind of maneuver, threatening a veto on the grounds that the GOP will undermine Social Security. Kemp is advising Gingrich to take the challenge, and if the President vetoes a big tax cut, Republicans could run in November on the plea to voters to send another 40 Republicans to the House to override the veto. If the Democrats knew the GOP would follow this line of attack, they would throw in the towel. There would be a problem getting 60 votes in the Senate, which would require four Democrats, but there are bound to be four who are up for re-election this year who will not want to vote against a tax cut when even the President is projecting a trillion-dollar surplus ahead.
Kemp is making the correct argument that Social Security can't be "saved" by hoarding the surplus instead of investing it in higher levels of economic growth. That's because the demographics are clear: Two workers will have to support one retiree. The only way to do that is by setting an objective of higher real wages and a lower cost of capital, cutting tax rates accordingly. In another 50 years, with enough capital, one worker could support one retiree, with no change in the retirement age. The Democrats are not the only barrier to this solution. Kemp has to overcome the agenda of the Christian Coalition, which thinks it can strengthen the family by using the projected surplus to end the "marriage penalty," a nice, expensive idea that has trivial effects on capital formation. The equivalent last year, remember, was the $500 kiddie credit demanded by the Christian Coalition, which is dedicated to replacing liberal social engineering with conservative social engineering and has no interest in economic theory that does not deliver the goods up front.
The leader of the GOP's growth wing, Kemp is in roughly the sabe position Reagan was, in 1976, when the party was going off the rails. This week, if he can't lead Republicans away from the budget path they seem to be choosing, the picture looks dismal. We really have to assume the Republicans will chicken out, cowed by the President's threats about Social Security and by the cultural conservatives and budget balancers. The voters who gave the GOP control of Congress in 1994 and again in 1996 (with a smaller margin) will have no reason to send them back for a third time if they can't, for goodness sakes, deal with prosperity. We should know how it all turns out by Friday.