The Top of Wall Street
Jude Wanniski
April 6, 1999


We've been writing about the inverted pyramid in the equity market for almost three years now. It is wonderful to be enjoying the view from the top of Wall Street -- the Polyconomics pension fund is up 50% since the technology stocks began their current tear in November. Yet it continues to be of great concern to us that those at the bottom of the equity pyramid are being shortchanged as a result of suboptimal monetary and fiscal policies of the U.S. government. The unemployment rate has fallen to its lowest level in three decades. This is a result of those at the top of the pyramid hiring those at the bottom, who are encouraged by rising real wages. There is, though, a meager level of capital formation taking place at the bottom, which we can detect in the Russell 2000 index, which remains well below its best level of 1997. Those of us who happily are at the top sometimes find it hard to believe that this general euphoria does not extend throughout the U.S. economy. Without capital, those at the bottom can have little hope of climbing toward the upper tiers. Instead of attracting capital from those who have it, they are forced to save out of current low incomes to accumulate a capital stake, and the progressive tax system continues to make it progressively harder for them to do that.

Those who are waiting for the lower capitalization stocks to catch up with the Nifty 50, where capitalizations are soaring, are not likely to find the answer anytime soon in superior monetary policy. At least it may not get worse. One reason for the across-the-board market euphoria in the last several days, we think, is the result of startling admissions from the Federal Reserve Open Market Committee that it does not understand "inflation" as well as it thought it did, and that perhaps economic growth is not its primary cause. Fed Chairman Alan Greenspan seems to have been giving tutorials at the FOMC, with this being a step in the right direction if the Fed is ever going to turn to a golden price target. Those who make their livings at the bottom of the pyramid do so more with their hands than their heads (relative to those above). The monetary deflation continues to burden commodity producers here as well as abroad, and the burden will not abate if the gold price continues to inch its way down in the $270s.

The only hope is on tax policy, yet there is not much hope there without a bipartisan supply-side breakthrough. We can be fairly sure the Congressional Budget Office will produce a bigger revenue projection later this spring, but the cultural conservatives may take the first tax bite out of that apple, I'm afraid. I'm assured that the Coverdell-Torricelli bill, which would boost low-cap stocks, is getting the serious attention of Senate Majority Leader Trent Lott. It is really the only decent, bipartisan tax vehicle on the radar screen. Supply-side purists may not care for targeting, but this is the best I think that can be expected without another national election. The provision that widens the brackets by $10,000 between 15% and 28% marginal tax rates is an enormous assist to capital formation in the lower tiers, as are the exemptions on capital gains and interest and dividends. Congress is out on extended Easter recess until next Tuesday, so there will be more to report upon their return.