The Post-Cold War World After One Year: An Assessment of Where We Stand Jude Wanniski January 4, 1991

Executive Summary: With communism no longer a distraction, the global forces of State Corporatism in 1990 dominated the forces of Entrepreneurial Capitalism almost everywhere on earth. In the emerging integrated Europe, Japan and the United States, the Power Elites wrested control of policy away from those advocating dynamic growth. Slow growth, even a modest global recession, is accepted as somehow being necessary. It is difficult to see how the trend can soon be reversed unless it comes from President Bush, who in 1990 abandoned the area on the political spectrum which he occupied in '88 and '89 to join the Democratic forces of statism in bipartisan consensus. The standard that now applies East and West, even with the defeat of communism, even when the debate is wholly within the capitalist framework, we will find this argument: economic policies that benefit everyone should not be undertaken if, in the process, a few benefit excessively. In this essay, the inherent intellectual equality of the races is reaffirmed, with an explanation of the economic and political forces that have produced the underclass. A counter-reaction to the statists is to be expected soon, or modest economic decline will surely mushroom into a more serious depression.

The Post-Cold War World After One Year: An Assessment of Where We Stand

A year ago in December, "The Week in Review Section" of The New York Times asked me to write a short prognosis on economic policymaking in the 1990s for the Christmas Eve edition. The Times asked Robert Reich of Harvard to do the same, from his more liberal vantage point. Oddly enough, we both pretty much said the same thing.

My forecast was that, with the collapse of Communism, the new dialectic will involve two forms of capitalism. We will see entrepreneurial capitalism pitted against state corporate capitalism, "what we used to call fascism," I said. I use the term as it was originally used by Italian nationalists in 1919: a political arrangement by which an elite corps of Government, Business, and Labor make the Big Decisions on centralized national industrial plans. By entrepreneurial capitalism I mean a system that puts economic opportunity and decision-making into the hands of the broadest number of people --implying greater free market allocation of resources in an international setting and lesser allocation by the state. Robert Reich foresaw a contest between "cosmopolitan capitalism, in which national boundaries are irrelevant; the free market reigns supreme," and "national capitalism, in which governments join with the private sector to advance national interests." Okay. Round One.

Here we are a year later, having experienced the first year of the '90s, contemplating the second, and it seems painfully clear entrepreneurial capitalism lost the first round of the decade here and around the world in the contest with the Power Elite. Except for a few bright spots, particularly in Germany and to a lesser extent in Mexico, the State almost everywhere drained resources from the People.

In a good year, politicians will keep their political promises, which is the only way democracy can work. (The Wanniski Theorem: For democracy to work, politicians have to keep at least as many promises as they break.) In a good year, the State will keep the value of money steady instead of cheating the People out of the value of their savings. In a good year, the State will use fiscal policy to encourage growth at the grass roots instead of increasing the burden of taxation on capital and labor. In a good year, the State will use its regulatory powers wisely and judiciously. Trees grow from the ground up, not the top down. This is what entrepreneurial capitalism is all about. This is what "The New Paradigm" and "empowerment" are about. For these causes, 1990 was a miserable year.

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The inherent contradictions in capitalism that Karl Marx spotted more than a century ago have more to do with political power than economic flaws. It is a fact that mature capital has more obvious and direct political power than entrepreneurial capital, and unless it is checked, it will attempt to smother its competition. General Motors has more clout than Acme Motors. In this regard, the most "fascist" economic legislation of the century was the Smoot-Hawley Tariff Act, the culmination of a nationalistic power play in 1929 by Corporate America and Organized Labor, the A. F. of L. With the Wall Street Crash of 1929 that the tariff act triggered, my Soviet friends tell me, Josef Stalin was sure Marx was right and capitalism was spent as an historic experiment.

What Marx did not foresee, though, was the strengthening and resiliency of the democratic process in providing checks to the political power of the Elite. Earlier in the century, it was the Progressive Republicans who led the assault on Corporate Giantism with Teddy Roosevelt's trustbusting -- scattering the political power of the trusts. Democratic capitalism bounced back during WWII, but with the help of Marxist-Leninists, to defeat Nazism, a grotesque form of fascism. In the Cold War, capitalism bested its Marxist-Leninist ally, a variation of Marxism. Now, it is almost as if, with the end of Cold War competition, corporate capitalism in 1990 could feel free to exercise its raw political power over its longtime Cold War ally, entrepreneurial capitalism -- reveling in this internal contradiction.

Where does this end, though? If the United States does not take the lead in breaking the grip of Established Capital on the system, it is difficult to see where else in the world that drive might now come from. Europe seems quite content with the sluggish growth arranged by national industrial policies, as evidenced by its reluctance to budge, in the aborted GATT negotiations, on the colossal agricultural subsidies of the community. European integration in 1992 seems an historic imperative, but Margaret Thatcher resisted the details of monetary union out of fear of a centralized political power and European nationalism dominated by Germany. Japan, under pressure from the corporatist forces in the U.S. government, actually spent 1990 struggling to slow its economy, and it is officially aiming at slowing it further in 1991. What are we to think? Japan is the model for the industrial planners, the state of the art in state capitalism: Big Government and Big Business hand in hand doubling the size of the economy every eleven years without any noticeable encouragement of an entrepreneurial class. Do we need entrepreneurs? Even the way Japan arranges its tax structure on capital gains favors the growth only of established enterprise, the Big Guys, not new initiatives from the grass roots.

Economic decline always seems to lead to conflict, at least pushing and shoving over borders, clashes over trade and currency policies and immigration, and at worst, outright war. Would Adolf Hitler have been thrust into power if not for the poisoned economy of Germany in the early 1930s? Would Saddam Hussein, the paradigm of the fascist expansionist dictator, have invaded Kuwait in August of 1990 if the Iraqi economy been thriving within a growing world economy instead of pressed between low oil prices and its Arab creditors? Nor does continued economic decline in the United States and slow or no growth in the rest of the world in 1991 make it any easier for the United Nations to deal with Saddam Hussein, just as, during the Great Depression, economic weakness sapped the will of the democracies in dealing with the Third Reich. Economic convulsions in the Soviet Union in the months ahead could trigger the same kind of climate as deadlines approach in the Middle East.

It was also a dismal year for entrepreneurial capitalism in the Soviet Union and Eastern Europe, not to mention China. I've fretted for years that when the Communist Bloc finally folded its command economy experiment it would turn to Keynesian industrial planners of the worst kind for advice. Poland led the way with its "big bang" a year ago, designed by Harvard Keynesian Jeffrey Sachs. It began with a 90% devaluation of the currency to spur growth -- and a lather of taxes to fight inflation. As a result, Poland is a mess, and still the impresarios of Corporate Capitalism urge the "Polish solution" on the Soviet Union. This was the specific recommendation of the International Monetary Fund, World Bank, OECD joint report issued this month. Mikhail Gorbachev has resisted the "big bang" for the USSR on the grounds that unlike Poland, with its homogenous people, his diverse empire would not sit still for such turmoil and would fly apart. In 1991, we can expect Gorbachev to do the "big bang," coupled with an authoritarian crackdown to hold the empire together. The recommendation of Federal Reserve Governor Wayne Angell in Moscow last year, of a monetary reform and gold ruble, was made explicitly to enable transition to a market economy without the anguish of a "big bang," thereby solving Gorbachev's political problem. So far, though, none of the Eastern European countries have experimented with supply-side monetary and fiscal policies, with the inevitable result they are taking shape as corporatist oligarchies with a democratic sheen.

Germany's Chancellor Helmut Kohl -- who should be "Man of the Year" — beat back the Establishment in exchanging Deutschmark for Ostmark at a one-to-one rate. This was the one truly bright spot for the People over the State in 1990. Even so, the Establishment browbeat Kohl into limiting the one-to-one exchange to 4,000 Ostmark per family, the remainder at two-to-one. The argument was that a limitless exchange at one-to-one would be too expensive and make too many East Germans "rich." The State's beancounters also argued that integrating East Germany would be "inflationary," and the tax cuts planned for 1991 were thus deferred to 1995. The concessions will only mean it will take longer to get East Germany up and running.

My advice to Soviet economic policymakers throughout 1990 was explicitly to follow the Jeffersonian model — getting the State's assets into the hands of the People as rapidly as possible, through outright grants of property or sales at deep, deep discounts, and a sharp appreciation of the ruble to restore the value of the 500 billion ruble "overhang" — the accumulated savings of the Soviet people. Even "conservative" Western economists have argued with me that the proposal would make a relatively small number of Soviet citizens "rich" and therefore should not be done. I still see modern history books that complain of Alexander Hamilton's 1790 monetary reform, which lifted the value of U.S. debt from 15 cents on the dollar to $1.20 by 1792, on the grounds that a lot of "speculators" got rich in the process. We find, for example, in Bragdon & McCutcheon's "History of a Free People," published in New York by Macmillan in 1981, that "Hamilton argued that in paying its debts at par, the United States would give notice to its citizens and to the world that its promises were good," and noted his program "was an immediate success in restoring the credit of the United States," but:

There was another purpose in addition to sound finance behind Hamilton's policies. He believed in government by the wealthy, and distrusted the people. All his measures were designed to attract men of property to the support of the federal government, because then they would be selfishly interested in its survival. Funding the domestic debt at par put millions of dollars into the pockets of speculators who had sent agents throughout the country buying the old bonds from people ignorant of their value.

The historians can't resist throwing a shadow over Hamilton's accomplishment by attributing dark motives to him, as if it was his intent that the wealthy would primarily benefit through insider trading of bonds. I'm reminded of David Rockefeller's complaint that Michael Milken's 1987 income of $550 million was excessive, and assume that Mr. Rockefeller, our foremost champion of corporatism, was immensely pleased with the 1990 disposition of our foremost celebrant of entrepreneurial capitalism. Milken, after all, accumulated great wealth by speculating in the potential of entrepreneurs who could not borrow a dime from Chase Manhattan — buying their debt at low levels and pumping enough capital into them to make it all work. A relatively small number of entrepreneurs became extremely wealthy in the process, but they are essentially the people who created almost all the 20 million new jobs that came into being in the last decade.

If Mr. Rockefeller could wave a magic wand that would lift the underclass and house the homeless, but in so doing make a few dozen people billionaires overnight, would he wave it? The point is that even with the defeat of communism, even when the debate is wholly within the capitalist framework we will find this argument: Economic policies that benefit everyone should not be undertaken if, in the process, a few benefit excessively. This is essentially the "fairness" argument successfully deployed by Congressional Democratic leaders this year in forcing President Bush to abandon his bid for a cut in the capital gains tax. There was almost no discussion about the beneficial effects of such a cut to the masses of people, from dynamic effects on capital flows and entrepreneurial economic activity to the lifting of values on virtually all capital assets.

The Bush administration simply allowed the Democrats to hammer away at their point that the cut would only make the rich richer. Treasury Secretary Nick Brady and Budget Director Richard Darman, both wealthy men, supported the cut half-heartedly, as did the other millionaires in the Cabinet. Housing Secretary Jack Kemp, the most ardent advocate of the tax cut in the Cabinet, has a net worth not much larger than the value of the clothes on his back and the equity in his home. Lars-Erik Nelson wrote of him in Liberal Opinion Week, November 26: "Kemp may be the only person in the country who loves capitalism because of what he thinks it can do for poor people."

Kemp isn't quite alone. On The Wall Street Journal's op-ed page of December 13, one of Wall Street's most respected financiers, Ted Forstmann, challenged the "fairness" argument with precision: "The capital gains tax is not a tax on wealth. It is a tax on one's ability to improve one's lot by creating wealth. Taxing capital gains does not much affect the wealthy, who have their capital gains behind them, and are principally concerned with maintaining their wealth. Its real impact is to suppress the initiative of Americans who are not yet wealthy, but have the talent and drive to create wealth, and thus benefit the economy." Forstmann proposes a substantial cut in the tax and no tax at all on assets held for three years.

Indeed, those who are principally concerned with maintaining their wealth, power and status are most likely to be aligned with the interests of State corporatism and the Old Paradigm. There is much support in this power elite for slow growth, which is less disruptive to the social strata than explosive, entrepreneurial growth. The ideal would be to maintain the Fortune 500 roster exactly as is, with perhaps a bit of shifting within the list from year to year. A respected journalist, Robert Samuelson of Newsweek, last year seriously argued that a low capital gains tax would cause economic inefficiencies because many of the big corporations would lose some of their best people to small new enterprises, most of which would ultimately fail. Of course, the two of every five start-up enterprises that survived in the '80s created all of the 20 million new jobs; the Fortune 500 shed employes as they were driven toward efficiencies in order to compete in this vibrant, entrepreneurial climate. Would Newsweek's Samuelson prefer that the Sam Waltons and Bill Gates's and Steve Wynns stayed where they were, on someone else's payroll?

This kind of thinking is widespread among economists who serve the liberal wing of the Democratic Party, to whom it is obvious that the more businesses that start, the more that will fail. Given that the more of a thing you tax, the less you get of it, the highest tax on capital gains will produce the fewest gains. And a zero tax on the gains of all capital assets -- not only publicly traded shares — would produce the greatest gains of capital. A zero tax would produce the most capitalism -- which in one sense produces the greatest economic inefficiencies. Isn't that obvious when we observe that the return on investment on high capitalization stocks are higher than on the low-cap stocks. The ROI on low, low-cap stocks, those beyond the Wilshire 5000, is negative!!! As a class, perhaps the most reckless capitalists of all time have been American oil wildcatters, and it remains a fact that more resources have been spent in exploring and producing oil and gas in the United States than has been realized from the sale of those resources. Obviously, in a static analysis, entrepreneurial capitalism is most inefficient.

The zero tax proposed by Ted Forstmann, who by the way almost surely would have been Treasury Secretary in a Kemp administration, would unleash a burst of entrepreneurial capitalism of epic proportions. Institutional investors, who now manage 75% of the nation's capital stock and find it inefficient to devote time and energy to low-cap stocks, would be swamped with new issues. But so what? With a zero tax, individual players would come swarming back into the stock market. As it is, with a confiscatory tax on capital gains, individuals are forced to invest through pension funds, which escape capital gains tax. Or they simply turn cash over to asset managers, to divide up among the blue-chips. With no tax, the individual would once again find it possible to "take flyers" in risky little enterprises — private as well as public entities — and the occasional bonanza would more than make up for all the losers, the "dry holes." As the value of all capital assets would rise, individuals could collateralize the increase to start their own enterprises.

This, after all, is what Milken did in creating the "junk" market; if you pool enough high-yield securities, you can more than offset the riskiness of any one issue. Hundreds of enterprises in the early 1980s that could not raise equity capital, with PE ratios in the dungeon, through Milken found institutions willing to supply risk capital through the debt market. By 1986, with the stock market up by $2 trillion from its lows and PE ratios out of the depths, Milken was in the lead in urging the equitizing of debt. Through it all, he turned out to be an unexpected enemy to the State corporatists, causing much entrepreneurial capitalism to be committed. To Mr. Rockefeller, and other captains of industry who in one form or another are protecting their inherited wealth and established power, the mechanism itself had to be smashed and Milken put away. The regulators were then turned loose throughout the financial services industry in a modern reign of terror, as a warning to all those who would supply capital to entrepreneurs. In all previous periods of economic distress in American history, government worked actively with financial institutions to keep a capital flow available. Not this time. All borrowers are suspect. All lenders are suspect. Red lines are being drawn around entire states, collapsing values as surely as if the government was devaluing the currency or levying higher tax rates. Only the blue chips need apply. If we can eventually winnow the Fortune 500 down to 50, so much the better, so much less waste!

Buyers and sellers are suspect too. It is no longer even safe for an entrepreneur to sell out, take the cash and hide. On The New York Times business page 1 -3, we find that the Federal Bankruptcy Court is mulling a report out of Brooklyn College Law School of the 1988 Revco bankruptcy, which followed its 1986 leveraged buyout. The report argues that banks, investment banks, lawyers and shareholders who benefitted from the LBO drained capital from Revco in a "fraudulent conveyance" and might be forced to give the money back. The story gave me the willies: If you buy Polyconomics from me and subsequently wreck it, the creditors can come after me for "fraudulent conveyance" and I might have to cough up to satisfy your creditors! In this zero-sum world, there is no transaction that is safe. All it can attract is a swarm of lawyers, a condition that is not hospitable to entrepreneurial capitalism.

The captains of finance who sit atop the Big Banks would like it even better if they could persuade Congress, as they have persuaded the Bush Treasury Department, to reorganize banking law. How much more efficient it would be if there were only a small number of Big, Big Banks, like there are in Japan? Then, we might see stamped out all those inefficient little country and community banks that are still able to sneak out little dollops of capital to fledgling entrepreneurs, when the regulators are not looking. With banking "consolidated," regulatory power that is now divided up "inefficiently" can also be put in the hands of a single Czar, perhaps at the Treasury. We would move in the direction of a reductio ad absurdum, an economy operating at the peak of efficiency, with one Big Bank, one Regulator, and one Big Company, the Fortune 1: General Amalgamated, Ltd., Inc.

We do not wish to get Ted Forstmann in trouble with the Big Guys, but must quietly point out that his zero capital gains tax would push everything in the opposite direction. Elevator operators and manicurists would be playing the stock market instead of the Pick Six Lotto. The Corporate Elite would express alarm, just as it did in the 1920s, when elevator operators and manicurists were committing capitalism — at least until the Captains of Industry won enactment of Smoot-Hawley. We note the Government of Taiwan periodically warns of excessive stock speculation by its little people. Instead of one Big Bank allocating the nation's capital to one Big Company, forty or fifty million Americans would be opening accounts at Merrill Lynch and Paine Webber and placing their bets — little bits of capital — in all kinds of odd nooks and crannies, searching out potential gushers in the dreams, skills and talents of individual men and women, potential that would die with them simply for the lack of capital. The right combination of capital and labor is exactly what produces robust growth, from the ground up.

Some of the biggest relative losers in this fluorescence of entrepreneurial capitalism would be asset managers, many of them clients of Polyconomics. Happily for some reason, asset managers as a class seem to be more able to distinguish between relative loss and absolute gain than are budget directors, bankers and captains of industry. Former Treasury Secretary William Simon, who unwittingly helped wreck entrepreneurial capitalism in the Nixon years, still speaks for the Old Guard when he announces, as he did on David Brinkley's show 12-16, that a recession now and then is good for the economy. It shakes out the excesses. It punishes the weak and inefficient and all those who didn't have the foresight to put away a few million for a rainy day. Our current Treasury Secretary, Nicholas Brady, another New Jersey boy from the corporatist corner of Wall Street, on the same day told "Meet the Press" that a recession would be Hno big deal."

We must understand that Mr. Simon, Mr. Brady and other princes of Corporatist Capitalism live at the very top of the economic pyramid, at a level that almost invariably stays above water. The "no big deal" recessions that drown the folks at the bottom of the pyramid, shaking off the excesses, are beyond their field of vision. In Japan, at least, the corporatist model is so committed to lifetime employment through thick and thin that the very notion of a "no big deal recession" is anathema. The lofty captains of industry and finance cannot afford to indulge in the kinds of shake-outs that provide buying opportunities for Mr. Simon. Mr. Brady is now leading the Old Guard campaign within the Bush Administration to abandon any attempt to cut the capital gains tax. Mr. Brady wishes to pour all his energy into his banking initiative. Then the Federal Deposit Insurance Company will never again be threatened with insolvency as we might have only a few Big Banks that will never again make any bad loans to anyone. The Comptroller of the Currency will see to that.

It is this mindset that has given Capitalists such a bad name. The inherent weakness of capitalism is that Capitalists have a natural inclination to destroy their weakest competitors through the exercise of political power. The tendency is at a peak when the economy is in decline, the equivalent in biology of eating one's young for survival. They can accomplish this by using the State to deny their competitors access to the capitalist market and to fresh sources of capital. Capitalists thus understand that capitalism is such a good thing that it should be denied to their competitors, by any legal means. If the legal means do not exist, political power should be deployed to change the law or the regulatory process. When Karl Marx published Capital in 1867, it certainly looked more or less like that to him:

Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price), thus contains within it the germ of automatic progression. Over-taxation is not an incident, but rather a principle. In Holland, therefore, where this system was first inaugurated, the great patriot, De Witt, has in his "Maxims" extolled it as the best system for making the wage-earner submissive, frugal, industrious, and overburdened with labour. The destructive influence that it exercises on the condition of the wage-labourer concerns us less however, here, than the forcible expropriation resulting from it, of peasants, artisans, and in a word, all elements of the lower middle-class. On this there are not two opinions, even among the bourgeois economists. Its expropriating efficiency is still further heightened by the system of protection, which forms one of its integral parts.

Democracy tends to counter this weakness of capitalism by dispersing political power, "empowering" the young, the weak, the "have nots," by giving them access to capitalism through political power. American democracy only tends to counter the weight of the Power Elite because the Big Guys find it relatively easy to gain simultaneous control of both political parties. An early lesson in this regard was imparted to me in 1962. As a young political reporter in Las Vegas, Nev., I wondered why the major hotel/casinos stayed aloof from partisan courthouse politics, and asked one of the most powerful men in the industry why this was so. "It's much easier to wait for the elections and then buy the winner," he laughed. The "buying" was accomplished not simply by cash bribes, but by throwing business to the friends and associates of the winners. This is why "term limitation" is essentially a hopeless reform idea, a weak antidote to the restrictive campaign finance laws which benefit the Power Elite at the expense of entrepreneurial capitalism.

In his recent Wall Street Journal essay, "The Challenge of Political Reversal," 12-17, Irving Kristol touches on this problem. "It is an iron law of democratic politics that no two political parties can for long occupy the same space on the political spectrum. So coercive is this law that the notion of 'governing by consensus,' always seductive to those who wield executive power, is also always a will o' the wisp."

This is the awkward condition we now find ourselves in with the Bush Administration. In his first two years, the President has drifted further and further from his democratic mandate of 1988, reversing himself so thoroughly on taxes that he has delivered the victory he won for entrepreneurial capitalism to the corporatists. He campaigned against raising taxes but then did so. He campaigned for a capital gains tax cut, and now announces that he will probably not ask Congress to consider one again. In "exchange," the Democrats promise not try to pass a surtax on the incomes of millionaires, for which they never received a mandate anyway.

The Bush Administration and the Democratic Congress now occupy the same space on the political spectrum. Yet the White House — most particularly chief of staff John Sununu and OMB's Darman — somehow have persuaded themselves that it was Rep. Newt Gingrich who betrayed them and the President by not joining in their abandonment of the 1988 GOP platform. We can hardly blame Senate Majority Leader George Mitchell for having achieved total victory for his side of the political spectrum these last two years. Mitchell correctly saw his party's role as being obliged to challenge and test the Bush agenda. Throughout most of 1989 and 1990, Mitchell and the other Democratic leaders assumed they would eventually have to give ground on capital gains. There are plenty of Democrats — politicians and economists — who are privately distressed at winning so thoroughly on this issue.

Unless the President soon has a change of heart, he will be sealed off thoroughly from the growth wing of the GOP — unable to raise the capital gains issue in his re-election campaign in 1992. Who would believe him? In 1988 his campaign team of Lee Atwater, Roger Ailes and Bob Teeter had positioned George Bush as a true read-my-lips Reaganaut, leaving Jack Kemp almost no room on the growth band of the political spectrum, except as a Bush skeptic. In 1992, the President would be unable to present himself with any credibility as the leader of the GOP's growth wing. In any event, the economy cannot really revive without a substantial capital-gains cut. This is true no matter what variety of capitalism the U.S. will practice in the 1990s. President Bush would be a sitting duck for either a GOP challenger such as Kemp or for a Democratic challenger facing a divided GOP with a sullen, stay-at-home conservative wing. New York Gov. Mario Cuomo, for one, has mastered the art of giving his political base all the soak-the-rich rhetoric they crave while practicing supply-side fiscalism.

If President Bush does not revive a serious campaign for capital gains in January, Cuomo has given clear indications he will occupy that space on the spectrum -- with a capital gains cut targeted to "the middle class" coupled with a payroll tax cut and millionaire's surtax. With Virginia Governor Doug Wilder --an attractive, growth-oriented black as his running mate, Cuomo would have the makings of a formidable campaign. The Democrats are now preparing to introduce a new Civil Rights bill as H.R. 1 in the new Congress, tempting President Bush and the GOP into a fight over racial quotas. It was already clear in the few days that William Bennett was thought to be the new chairman of the Republican National Committee that the Democrats were relishing the idea of the GOP getting tangled up with the politics of race. The Democrats were not happy with the recent trend of younger Afro-Americans drifting toward the new growth-oriented GOP. For the Republican Party to abandon capital gains and at the same time get trapped into a black/white race debate would, for the Democrats, almost be too good to be true.

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At a black-tie charity affair I attended at the Waldorf a few months ago, the talk at one table of New York City's elite turned to racial conflict and what to do about it. The discussion about the black underclass seemed especially despairing and I sadly observed that the climate in the last few years had become such that if the 1500 people in the room were asked by secret ballot if they thought blacks were inherently inferior to whites, a majority would answer in the affirmative. "Why would you need a secret ballot?" a distinguished looking gentleman asked quietly, buttering his roll. I quickly let the subject drop, wary of the discussion that might follow.

In the months since, though, I've reflected on the subject again and again, thinking back to my early insights of supply-side economic theory in the 1970s and how especially liberating they were on this question of race. In the same way Jack Kemp believes entrepreneurial capitalism will do wonders for poor people, he and I and most other supply-siders believe it is the only answer for black Americans. Even operating at the peak of efficiency within a corporate capitalist framework, Japan is hard pressed to handle its handful of Asian minorities. State capitalism almost demands a clubbiness within the Power Elite that involves racism of one form or another. At its most extreme form in the 20th Century, after all, state capitalism gave us the Third Reich.

Entrepreneurial capitalism is what made the United States the Land of Opportunity. In a New World, which has ALL of its capital gains in front of it, no accumulated wealth to protect, there was no political force to stand in the way of the entrepreneur. Except, of course, in the South, where great wealth was held in the form of African slaves. Throughout the centuries of American development, as wealth accumulated in the hands of white Americans through the gains of capitalism, black Americans lived on their labor alone. And it is a very hard thing for labor to create wealth without capital. It can be done, and it occurs to me that it should be no surprise that a people denied capital would be forced to develop themselves with labor alone. That they should dominate those professions where the labor component is highest and the capital component the lowest — professional sports, except golf, polo and yachting, and the performing arts — especially music — where skin color is not a drawback. Most non-financial capital available to white Americans has simply been the hand-me-down tools and experience of father to son.

It was not really until after World War II that black Americans could seriously begin to piece together little bits and pieces of capital from their own resources, via black churches and black lodges and credit unions. Still, it had been noted in the first war that black conscripts from the North scored higher on intelligence tests than white conscripts from the South. It takes a lot of time to put together the raw material of capitalism when you have none to start with and cannot borrow at less than usurious rates. Still, headway was made by blacks in the 1950s and into the mid-1960s, where we can say black Americans held roughly one half of one per cent of the nation's wealth. Progress ended here with the one-two punch of Lyndon Johnson's Great Society program, aimed at eliminating poverty by redistributing income to blacks from whites, and Richard Nixon's all-out assault on entrepreneurial capitalism.

It was LBJ and the liberal Democratic experiment with socialism for the blacks, primarily as a political attempt to bind them to the party, that cut deeply into the one form of capitalism readily available to blacks — the father-to-son handing down of artisanship and primary business skills. The price black America paid for the welfare state was the demolition of the black family, as mothers with children were rewarded if unemployed fathers abandoned the family. Still, the '60s saw general economic expansion and the civil rights revolution which came in the aftermath of the Watts riots. It wais President Nixon, though, taking his cues from corporate America, who unwittingly shut off the other forms of capital to black America. In 1969, Nixon doubled the capital gains tax. In 1971 he took the nation off the gold standard. The nation as a whole suffered greatly from both of these blows and is suffering still. Those who suffered least, at the top of the pyramid, have weathered the last generation successfully, protecting their relative wealth. Those at the bottom, without capital or wealth, have been decimated by the experience.

To gain capital by one's own bootstraps, one must first labor, and with the product of that labor, after paying taxes and subsistence, save. A lower class family becomes a lower middle-class family by having something left over at the end of the year after all the bills and taxes are paid. The first savings are in cash, in a cookie jar or under the mattress. Then comes a savings account that pays minimal interest. The next step to the middle class is to have sufficient savings to invest for short-term income purposes: an automobile, an education, a home, provide immediate rewards as well as future rewards. Beyond this form of capital lies investment in future goods, which could be starting a business by one's self or with others, or investing in the debt or equity of others. This literally means investing capital for capital gains, the essence of capitalism.

Sharon Pratt Dixon, the new mayor of Washington, D.C., is eloquent in arguing that the government is not the answer to the problems of African Americans. The answer, she says, lies in bringing capitalism to the inner city. If anything, with the purposeful destruction of the Mjunk bond" market by the Power Elite, blacks are in a worse position now than at any time in the last generation to find sources of capital. There is, after all, not one investment grade black company in the world. It's all junk. Michael Milken was one of the few dependable sources of capital to black entrepreneurs, and with Milken salted away, a red line around everything black and Hispanic, Ms. Dixon has very little to work with. The primary source of capital in her community in recent years has been generated via the drug trade.

The doubling of the capital gains tax in 1969, to 48 percent, simply shut off the incentives to invest for those with capital to those who needed it. It also sharply reduced the incentive to invest in a business with one's savings and sweat. As if this were not bad enough, President Nixon in 1971 was persuaded to devalue the currency, a zero-sum practice that steals from the poor to give to the rich. The poorer classes, after all, are those who have all their capital in liquid forms, cash or passbook savings. Inflation for these people amounts to the government's taxation of their past labors. Those at the top of the pyramid have their wealth in the equity of physical assets, which rise in value with inflation, and also routinely have debt against those assets, which fall in value in an inflation. The favorite country club chatter of the 1970s was in describing to one another how much the value of one's home and boat had risen, and how low the payments were on the mortgages. The people at the bottom of the pyramid, far from the country clubs, were wondering what suddenly had happened to the value of their labor and savings.

Around the world, currency devaluation is now the favorite form by which the rich steal from the poor. How can the working poor ever have an incentive to save a few pennies, or pence or pesos if the government reduces their value as soon as they are dropped in the cookie jar? Yet our Treasury Secretary, who sees a no-big-deal recession looming, also sees the falling dollar as no big deal.

The liberal Democrats and their champions in the press of course agree completely with currency devaluation. There is never enough. Nor is The New York Times completely satisfied that President Bush will not push a capital gains cut in the new Congress. In its Christmas Day edition, it editorialized in favor of the President abandoning his "philosophical" commitment to it. It must be snuffed out of his mind or the editors of The Times will rest uneasily. Once again, the newspaper parrots the argument of the Keynesian economists that a lower capital gains tax encourages people to convert ordinary income into capital gains income. The economists can never explain how this is possible, only that they learned it in school. The examples cited always involve investing dollars that have passed through a tax gate somewhere in the past.

The only way it is "possible" to convert ordinary income to capital gains is for a businessman to take no taxable income for his work effort, instead reinvesting his profits in the enterprise, hoping some day the enterprise would increase in value and be sold with a capital gain that will face a lower tax rate. This is also known as "sweat equity," the most basic form of capitalism. British Keynesians from the first World War until the Thatcher era lived with a system of confiscatory income tax and negligible capital gains tax, which was perfectly suited to the preservation of wealth while at the same time inhibiting new entrants to the capitalist class. That is, if your income is taxed so thoroughly that you cannot make an investment for untaxed capital gains, the social status quo is protected.

A decade ago, I recall traveling with an Australian rancher who told me of the fearsome income taxes he faced, but did not pay. How did he manage? No capital gains tax, he advised. He lived on his expense account, as owner/manager of the ranch. His biggest headache every year was trying to figure out what capital improvements to make to the ranch, to chew up the otherwise taxable profits, but would also add value that could be realized upon sale of the property. "There are only so many fenceposts and irrigation ditches that one can justify," he said. The system provided a nice life for him and his family, with a nice bundle of untaxable wealth when and if he unloaded the ranch at a respectable price. This is precisely the kind of activity that irritated the British socialists of the London School of Economics, who wished to equalize all income. The essence of this irritation comes through in the Christmas editorial of The New York Times.

In 1991 we have to expect a counter-attack by the forces of entrepreneurial capitalism. To remain on the defensive, permitting the power of the State to advance in every corner of the world, could too easily mushroom into widespread economic depression. With a little luck and leadership from Washington, the world could still turn back on a dynamic growth track that would swamp the problems of global poverty, the homeless and the underclass, and racial and ethnic conflict. All the way around, though, 1990 was a devastating year for the forces of growth against the massed political might of the statists. It could have been worse, and perhaps it will be. At least, as the second year of the decade beckons, we know where we stand.

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