Driving Down the Stock Market Jude Wanniski January 22, 2003

Memo To: Glenn Hubbard, chairman, President’s Council of Economic Advisors
From: Jude Wanniski
Re: War, war, war!!!

You know I am in complete agreement that President Bush’s plan to end double taxing of dividends would be great for the stock market and terrific for the economy. But it would not stand a chance if President Bush decides to pull the trigger on Iraq next month, which seems to be the message coming out of the White House with more ferociousness every passing day. I’ve advised my clients that if Mr. Bush were to really do so without the support of the United Nations and the U.S. Senate, the Dow Jones Industrials would now be a few thousand points lower. And that the Bush tax plan would be deader than a doornail as the costs of the war would drive budget deficits through the roof, at all levels of government, here and around the world. I’m actually more optimistic, believing the White House is doing what it can to scare Saddam’s inner circle into a palace coup and that when that fails, Mr. Bush will be back on the diplomatic track. I don’t think he has any choice, because the White House did make commitments to the Senate Democratic leadership on October 9 in order to win their support for the resolution authorizing the use of force. People do forget that the President had to assure the Senate that he would go to the United Nations and seek a diplomatic solution, and only if that failed would he come back to the Senate with a report on the failure. He also promised a status report in 60 days, but it is now 90 days and no report has been made.

Back in early October, when the DJIA hit bottom at 7200, I advised Polyconomics’ clients that the rally that began then was the result of the White House agreement with the Senate Democrats. As I believe diplomacy will clearly not have failed in the weeks ahead, as Iraq bends over backwards in its cooperation with the UN inspectors, it is probable that Wall Street will soon be relieved and that you could then have some confidence the President’s tax proposal will be able to go forward. Here is the October client brief I mentioned:

Oct 11 2002
JWBrief: A Saddam Rally

There is no doubt this is a Saddam rally. In order to win over the Senate doves, the administration has agreed to let diplomacy prevail over a unilateral pre-emptive strike. The tough talk from the administration on how they are already planning the post-Saddam regime masks the fact that there are now enough assurances given to the Senate that weapons inspectors will return to Iraq, unfettered. This dramatically reduces chances of military action after the November elections, or next year for that matter. Here is Senate Majority Leader Tom Daschle in the heart of his statement of support:

"First: Instead of giving the President broad and unfocused authorization to take action 'in the region,' as the Administration originally sought, this resolution focuses specifically on the threat posed by Iraq. It no longer authorizes -- nor should it be used to try to justify -- the use of force against other nations, organizations or individuals that the President may believe threaten peace and stability in the Persian Gulf region. It is a strong and focused response to a specific threat. It is not a template or model for any other situation.

Second: This resolution expresses the deep conviction of this Congress, and of the American people, that President Bush should continue to work through the United Nations Security Council in order to secure Iraqi compliance with UN resolutions. Unfettered inspections may or may not lead to Iraqi disarmament. But whether they succeed or fail, the effort we expend in seeking inspections will make it easier for the President to assemble a global coalition against Saddam, should military action eventually be needed.

Third: This resolution makes it clear that, before the President can use force in Iraq, he must certify to the Congress that diplomacy has failed, and that further diplomatic efforts alone cannot protect America's national security interests, nor can they lead to enforcement of the UN Security Council resolutions.

Fourth: This resolution protects the balance of power by requiring the President to comply with the War Powers Act and to report to Congress at least every 60 days 'on matters relevant to this resolution.'"

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It seems most unlikely this will now unravel as the Pentagon hawks have pushed every possible button to head off the inspectors and still have been outflanked by Colin Powell. The CIA has been going public on the pressures they have been facing from the Pentagon, with stories like this one in the LATimes undermining their latest efforts.