Dark Before the Dawn?
Or Just Dark?
Jude Wanniski
February 10, 1999


Watching the Wall Street slide of the last few days, especially the collapse of the Internet stocks and the record high point-losses on NASDAQ, the cliche about the American people wanting to get the impeachment process behind us makes more sense than ever. Washington has to get back to business. It has been our hypothesis that the swings and swoops in the Internet stocks reflect market assessments of their near-term and long-term valuations. They are infants that may some day grow into giants, but if the near-term economy looks inhospitable, the future of these babies must be discounted sharply. The news about the near term has been discouraging on all fronts, with the political establishment celebrating a “booming economy” in a way that points to negative actions on monetary and fiscal policies. We continue to keep a wary eye on the low-cap Russell 2000, down more than 10% YOY, reflecting the erosion of commodity prices under the hammer of the Fed’s monetary deflation. The world economy is in a mess and the men who created it are on the cover of Time magazine this month, celebrated as the committee of three to Save the World: Alan Greenspan and his henchmen at the Treasury, Bob Rubin and Larry Summers. The only good news around is that the Senate will vote tomorrow and this nasty, distracting chapter of our political history will finally be over -- although the janitors will be around for a while mopping up the mess. Here are some thoughts about darkness and dawn:

POST IMPEACHMENT: One way we might think of the outcome is that the Senate Democrats hung together in the form of a battered wife who has tried to persuade her angry relatives, the Republicans, that her husband really is a good guy underneath it all. We bought that argument up to a point and now would vote to convict on both counts, but I’ll accept the verdict the way I did in OJ’s criminal trial. At least we don’t have to worry about the fellow lurking in the shadows ready to take over, Mr. Gore. Clearly one of the reasons the electorate held its nose with the President is total uncertainty about what kind of job Gore would do as President. The polls showing him being easily defeated in 2000 by either George W. Bush or Elizabeth Dole underscore that wariness about removing Bill Clinton. Can the process be put behind us? There naturally will be some hard feelings for a while, but Henry Hyde and the House managers conducted themselves with civility and the Senate at least was bipartisan in its civility. Nobody got out of line. There will be incentive in both parties to find legislative ways to move forward. 

TAXES: The House Republicans are so sure that they lost seats last November because the President scared the voters about Social Security that there now is not a single voice in the House calling for supply-side tax cuts. At the recent House GOP weekend retreat, a participant tells us there was no discussion about lowering marginal tax rates or cutting the capgains tax or basic tax reform. The assumption is that because the President has vowed to veto any tax cut until Social Security is saved, why bother? The GOP “moderates” are focusing on getting rid of the marriage-tax penalty, which of course has no growth effects. House Ways&Means Chairman Bill Archer is mystified that with the GOP in control of the House, albeit by a narrow margin, there is no talk at all of helping business with tax policy. In the Senate, it says something that Budget Chairman Pete Domenici is the leading champion of supply-side tax cuts, a teeny 10% across-the-board cut phased in over several years. Sen. Bob Torricelli [D-NJ] has teamed with Sen. Paul Coverdell [R-GA] on a serious bipartisan tax proposal that would have solid supply-side effects. It would expand the 15% bracket and exempt the first $5,000 in capital gains from taxes, as well as the first $500 in dividends. Torricelli says it would “cost” $500 billion over 10 years, but it easily would add several trillion dollars to real domestic output over that period. It’s promising to see Torricelli making these arguments among Senate Democrats, but he says it will be a while before he can bring the White House and Democratic caucus aboard. A better bet this year is an expansion of the Roth IRA.