What's Wrong With the Democrats Jude Wanniski January 24, 2004

Memo: To Website Fans, Browsers, Clients
From Jude Wanniski
Re On the eve of New Hampshire's primary

Last spring, as I looked over the field of Democratic presidential candidates, I decided to write Polyconomics' clients a letter summarizing my views on how the 2004 elections seemed to be shaping up. This was a few weeks before I wrote a memo on the margin here on how former Vermont Governor Howard Dean might be a formidable candidate because of his views on the Iraq war, but that he would have to get better informed on economics to go all the way. On the eve of voting in the New Hampshire primary, it's clear at least to me that Dr. Dean's collapse in the polls began with the Iowa debate three weeks ago when he announced that his highest priority was balancing the federal budget by raising taxes. As he continues to lose ground, he is reportedly stressing his experience in budget balancing in Vermont, reminding me of the fanatic who doubles his speed when he loses sight of his goals. He's honest, but it is the last thing Democratic voters want to hear.

Here is my client letter of June 5, 2003, "What's Wrong With the Democrats."

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Over the Memorial Day weekend Adam Clymer of The New York Times wrote two articles about the two national political parties. The first observed the GOP seems confident of an extended period of dominance. It seems assured of President Bush’s re-election in 2004 and control of both houses of Congress at least for the balance of the decade. It has plenty of money and a finely honed message of lower taxes and a muscular foreign policy that provides the unifying themes that voters understand The second told of a dispirited Democratic Party, impoverished in both money and ideas -- a party struggling to find a message that might unify its varied factions while at the same time pulling back voters who have left the party and now think of themselves as Republicans. A veteran political correspondent who has been tracking the parties since the 1960’s, Clymer could find nothing in sight to change this picture, always excepting the possibility of GOP policy blunders.

If the Republican Party were doing everything to perfection in all aspects of domestic and foreign policy, there would be nothing to worry about. When the governing party is falling short of perfection, it needs a push in the right direction from the loyal opposition, or it will stray further away from an optimum path. This is especially true when the governing party bears new responsibilities in managing international affairs for the entire world. A quick review of history will help us understand what’s wrong with the Democrats now. It would be difficult to explain the problem without this kind of long view, because political parties do not easily learn from their mistakes. Eventually they do, but in this case it may take several more years.

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The GOP had dominated the presidency and Congress from its earliest days, from Lincoln’s election in 1862. It took occasional vacations, with time out for Grover Cleveland and Woodrow Wilson. It reached its zenith in the Roaring Twenties with the supply-side economic policies of Harding and Coolidge. This ended with the election of Herbert Hoover in 1928 and his calamitous Smoot-Hawley Tariff Act, which triggered the Crash of 1929 and the Great Depression. Franklin Roosevelt and the Democrats swept the 1932 elections. Their policies were not much better and the Depression deepened, but in 1936, FDR faced a GOP that blamed the Depression on his failure to enforce Smoot Hawley! The Republicans were totally crushed in 1932, and the only reason the Republic was saved from even worse travails in the next few years was the resistance of congressional Democrats to higher tax rates on capital. The 1936 debacle finally persuaded the GOP that Smoot-Hawley was a blunder. They “admitted” it by nominating Wendell Wilkie, an avowed internationalist, as their presidential candidate. Republicans have been the low-tariff party ever since.

In 1952, the GOP establishment nominated Dwight Eisenhower over Senator Robert Taft, the heartland Republican who argued for lower income tax rates – pushed to 91% at the top during the war years. Eisenhower also promised tax cuts, but won primarily with a promise to bring the war in Korea to an end. He quickly dropped his plan to cut tax rates, arguing they needed to be as high as they were because of the budget deficit brought on by war expenditures. In 1954, the GOP lost complete control of Congress and while Ike was re-elected in 1956, Democrats became dominant in Congress once again, this time for decades. The economy of the last Eisenhower years was sluggish: Congress gridlocked over tax issues; the Federal Reserve tried to get things moving with easier monetary policy. This only brought about a drain in Treasury’s gold reserves. The market was not asking for more liquidity, but lower tax rates. The WWII top rate on incomes from capital was still at 91% ten years later.

After a slow start in 1961 trying investment tax cuts for industry, John F. Kennedy in ’63 proposed income tax cuts at the top bracket to 65%. Following the pattern established by Eisenhower, Republicans fought the cuts as being fiscally irresponsible. The cuts were passed in 1964, after JFK’s assassination, with the Republicans now following Sen. Barry Goldwater’s lead as the party of “Fiscal Responsibility,” which to the voters had come to mean the party of higher taxes. The GOP was crushed almost as badly in 1964 as it was in 1936, defeated by Democrats who had rallied behind the JFK tax cuts. Lyndon Johnson now confronted budget surpluses brought on by the expanding economy and the lower tax rates. His party liberals argued for “guns and butter” -- the Vietnam War to save the world from communism and the Great Society welfare programs to close the income inequality gap at home. As the Democrats had total control of government in the wake of the Goldwater debacle, they moved further and further away from JFK’s supply-side economic policies – including JFK’s firm commitment to the gold standard.

It was only when smashed in the ’64 elections that the Republican Party decided maybe it had been doing something wrong. A group of Young Turks in the House -- led by Gerald R. Ford of Michigan, Melvin Laird of Wisconsin, Charles Goodell of New York, and Donald Rumsfeld of Illinois – decided the party had to change direction. After overthrowing the Party leadership and installing Ford as Minority Leader, they stitched together an agenda of economic and social ideas that soon became known by the Old Guard as the “Constructive Republican Alternative Proposals,” (CRAP). The program of these “moderates” was consciously designed to emulate the Democratic programs, but to offer “better Republican management” that would be just a little less ambitious and less costly. (In the Clinton years, as we shall see, this became known as “triangulation.”)

Meanwhile LBJ’s “guns and butter” strategy had run through the budget surplus. The fiscally responsible GOP minority then persuaded LBJ to adopt a “Vietnam War Tax,” a surtax on incomes. The stock market fell from its 1966 highs while the body count in Vietnam hit new highs. We may think of Richard Nixon as a “conservative Republican” in his early years, but he was always identified with the Eastern Establishment and was allied in the post-Goldwater era with the Young Turks. In 1968, he ran against the war and the war tax and defeated Hubert Humphrey, a “tax-and-spend social liberal.” The voters retained the divided government it had begun in 1952, giving Democrats control of both House and Senate. As Eisenhower had done in 1952, Nixon delayed asking for an end to the war tax and instead accepted a higher capital-gains tax. The stock market fell further and Nixon accepted the idea of his demand-side economists that the economy could expand only if the dollar were freed from its gold link. Watergate followed, with Jerry Ford becoming President in ’74, just in time to fight inflation with Whip-Inflation-Now buttons. Ford also promised higher taxes and continued price controls on oil and gas to fight inflation – exactly the opposite of what the economy needed.

In 1976, President Carter campaigned against the oil-and-gas price controls and against a “tax system that is a disgrace to the human race.” Once elected, he decided to retain the price controls, fight a cut in the capgains tax, add credit controls, and urged an increase in the money supply to produce a cheaper dollar for export gains. In three years, the price of gold tripled, at one point hitting $850 per ounce. Commercial interest rates shot over 20%. Economic malaise took over. So did Ronald Reagan.

To learn from this exercise in political history, it is important to note, as Adam Clymer did in his article on the Republicans, that this was the critical turning point in the fortunes of the GOP. A former New Deal Democrat turned Republican, Reagan had studied economics in college, when classical supply theory was still being taught. He knew it would be a good thing for the economy to sharply lower the tax rates on income that had been pushed to stratospheric levels by inflationary bracket creep. He also knew the answer to inflation would be to stabilize the gold price, and while he was denied his appeal for a return to gold, his policies in 1982 produced the long bull market in stocks and bonds – but only after the Fed was forced to abandon the experiment with monetarism that began in late 1979 during the Carter administration. The 1984 election was especially instructive in that the Democratic nominee, Walter Mondale, promised to raise taxes to balance the budget and lost 49 states, winning only his home state of Minnesota.

In 1988, George Bush campaigned on a no-new taxes pledge and a promise to cut the capital gains tax to 15%. He reversed himself on both and was defeated by Bill Clinton, who promised a middle-class tax cut. As President, he instead promoted a national health insurance scheme that went nowhere and pushed through a tax increase that passed the Congress without a single Republican vote. In 1994, Newt Gingrich proposed a “Contract with America” that included a promise to cut the capgains tax to 15% as one of its ten points. The electorate gave the GOP control of Congress for the first time since 1954. Instead of delivering on capgains, Gingrich concentrated his fire on producing a constitutional amendment to balance the budget, which failed by one vote.

Clinton, who had seemed destined to be another one-term president, asked the advice of Dick Morris, a political strategist who had clients in both parties. Morris advised that Clinton should shadow the Republicans on policy. On foreign policy, drop smaller bombs on Iraq than the GOP wanted. On domestic policy, propose “targeted” tax cuts instead of tax cuts for the rich. In 1996, he rolled to re-election over Republican Sen. Bob Dole, who had made a career out of opposing supply-side economics and supporting fiscally responsible tax increases. Gingrich had called him “the tax collector for the welfare state.” Dole asked Jack Kemp to be his running mate, then ignored all of his advice, choosing a tax plank that Kemp had earlier criticized. Clinton’s re-election moved him in the right direction. The 1997 tax act was a compromise that did cut the capgains tax to 20% from 28%, with Clinton accepting other supply-side measures including a new Roth IRA configuration and liberalization of the estate tax. In 2000, the Clinton Treasury added an incredibly powerful growth measure that went unnoticed, eliminating all capital gains taxes on an individual’s primary home of less than $500,000. This was the equivalent of a $1.4 trillion tax cut, one that has carried the national economy these past two years as homeowners could capitalize the tax savings. The stock market boomed, but to this day the Democrats continue to confuse the success of the Clinton years with the 1993 tax increases and believe they can follow in his footsteps by being the party of Fiscal Responsibility.

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In the spring of 1987, Jack Kemp’s inner circle of political advisors met with him in a private room at the GOP congressional club to brainstorm plans for his presidential bid. Except for me, there was universal agreement that he should run as an extension of President Reagan as a supply-side tax cutter. My proposal, which was unanimously rejected by the group, was that Jack should think of Reagan as Philip of Macedon, who had brought peace and prosperity to his region, while thinking of himself as Alexander the Great, who would extend those ideas to the known world. I simply meant Kemp should offer the American people a bigger vision of what the United States could achieve for all the world, while not in the least neglecting further supply-side reforms at home. The argument that defeated this idea was that “All politics is local.” The electorate, it was asserted, would be confused with a pitch that would be international, not domestic.

Perhaps my idea was then premature, as the Cold War had not yet officially ended. But there is now clearly a political vacuum at the top of the world, as the Democrats have effectively conceded to the Bush/GOP approach without an argument. That is, the USA is the Boss of the world and really does not need any advice from the United Nations or its chief Cold War allies in Europe, France and Germany. It is certainly clear that the USA can act unilaterally and pre-emptively if it believes there is an immanent threat to its national security. As the failure to find weapons of mass destruction in Iraq is now demonstrating, the Republican Party President Bush may have pulled the trigger too quickly, perhaps misled by its intelligence gatherers. Although the United Nations Security Council voted unanimously last fall to resume weapons inspections in Iraq, it flatly refused to agree the inspections had failed and that only war could put down the threat. In retrospect, the UN’s caution seems to have a validity it should have been given at the time by leading Democrats.

The Democratic Party can be excused for believing the President had the goods on Saddam’s hiding places, but there was never pressure from any Democrat to pursue those leads with the UN inspectors. Diplomacy was said to have failed although it had not. If even one serious Democratic presidential candidate or congressional leader had made these arguments, there might have been debate to slow the rush to war. Instead, they seemed cowed by the President’s support in the public-opinion polls on questions of national security. Only Senator Robert Byrd of West Virginia, 85 years old and the most senior Democrat in Congress, has spoken out forcefully on the responsibilities of the loyal opposition to challenge the party in power. All he asked is that it prove its case before committing the nation’s blood and treasure to a war against a nation swarming with UN weapons inspectors and clearly no immediate threat to anyone.

In this situation, Democrats should have had a natural advantage in arguing the case for more diplomacy through the UN machinery before force was employed. They did not because, unlike Byrd, they had no philosophical anchor. This is a problem that exists across the board for Democrats that does not hamper the Republicans. On all important matters, Ronald Reagan took positions because he believed they were good for the country, not because opinion polls showed one position was more popular than another. Like Reagan, George W. Bush sets an objective because he believes it is the right one, and drives toward it without checking the polls from one day to the next. He may have been misled on Iraq, but because there was no drag from the Democrats, he can rightly say what’s done is done and we must now proceed as best we can. Where it had been assumed he would be a patsy for Israeli Prime Minister Ariel Sharon in the “road map” negotiations, Mr. Bush again acts as if he fully believes in what he is doing to produce a genuine Palestinian state and is prepared to face down right-wing Jewish opposition both in Tel Aviv and at home if he must.

He did the same in his two tax-cut proposals, believing the first would work in 2001. When it did not, he changed his economic team and last month pushed through his second, rejecting polls that showed the voters were dubious about it and rejecting the Democratic arguments that it was not only “fiscally irresponsible,” but would “benefit the rich.” This second round of cuts in taxation of capital are already working beautifully. The stock market now rallies just as it has whenever tax rates on capital are lowered, and the Democrats watch from the sidelines nervously worrying about their recent promises to undo the tax cuts as soon as they come to power! All their recent political energies are being funneled into demands that low-income Americans who pay no income tax be given a tax rebate. They are scraping the bottom of the barrel.

The answer, they seem to think, is to set up new “think tanks,” on the theory that the GOP has lots of think tanks that churn out new ideas for Republican politicians. The Reagan Revolution did not come out of the conservative think tanks, which were back then populated by monetarists and conservative Keynesians. It came out of The Wall Street Journal editorial page, which broke out of the intellectual box it had been in for decades. It not only fostered the supply-side ideas that now dominate fiscal policy in Washington, but also provided the bulletin board for the Reagan objective of defeating international communism, not only containing it. Of course the latter could not have happened without the former, as demand-side policies had strangled the U.S. economy and led such notables as Henry Kissinger wondering if capitalism would survive.

If the Democrats are going to become respectable again, they also will have to climb out of their tattered, battered intellectual box. Instead of anguishing that the Republicans have grabbed off all the good ideas and nothing is left but prescription medicine, kiddie credits and fiscal responsibility, Democrats should be asking themselves what are the right things to be doing, for the world as well as for the USA. I’d suggest they swing all the way back to where they began to lose their way, and re-examine the promise of the Kennedy administration, promise that evaporated with his death. If JFK were back today, he would find plenty of great ideas sitting around that Republicans do not seem all that interested in.

The most important he would immediately identify is the floating U.S. dollar, which for 30 years has acted like a wrecking ball to living standards here and around the world, ever since Richard Nixon cut it loose from its gold anchor. There is nothing the President could do that would benefit all mankind that would be easier to do than anchor the dollar to gold with an executive order. There is no talk at all of doing this in the GOP because Fed Chairman Alan Greenspan enjoys his life managing the wrecking ball and because the monetarists still hope for a comeback with their theories on how to manage a floating dollar. The Democrats are not interested mostly because they believe President Clinton did as well as he did because he left Alan Greenspan alone.

The New York Times should be the bulletin board for international monetary reform, a really big idea that would everywhere help the poorest people the most, as they are always the first to get whacked by the wrecking ball. The Times, though, has no new economic causes these days. It drones on and on about global warming and how to close the “income gap” by taxing the rich and giving to the poor. The GOP “think tanks” have no interest in fixing the dollar as their supporters would rather build zillion-dollar anti-ballistic missile systems or preserve their loopholes in the Canary Islands.

The Republicans forever talk about simplifying the federal tax codes. But this is also too big of an idea for their Party to take seriously. When Senator Arlen Specter [R-PA] last month proposed a Sense of the Senate resolution to merely study the idea, every Democratic presidential contender in the Senate, plus Sen. Hillary Clinton, voted against it. When Ross Perot began his presidential bid in 1989 as an independent, he had said the very first thing he would do as President would be to take out a fresh sheet of paper and on it write a new tax code. Before he spent a dollar on advertising, he was the talk of the entire country and led both Republican Bush and Democrat Clinton in the poll match-ups. He was set back not by this pledge, but by the other eccentricities of his campaign.

Steve Forbes came out roaring in 1992 with his flat-tax proposal and for a brief moment looked like he might be able to ride it all the way. His heavy-handed attacks on Bob Dole did him in, though, not tax reform. He came across not only as a rich kid, but a mean rich kid. The Times, we recall, had a brief fling with the “flat tax” idea that year. When Jerry Brown picked it up and won the Connecticut primary with it, the Times suddenly worried that their man Bill Clinton might be in trouble. It editorially attacked Brown for having the wrong kind of flat tax, and that was the end of that.

Is there too much poverty in the world? Maybe that’s because the International Monetary Fund and the World Bank spread their message of higher taxes and weaker currencies all over the planet, egged on by the Big Banks and the Harvard economists they employ. If JFK were back, I could imagine him promising the poorest countries of the world to reform these two corrupt international financial institutions. As a Democrat, he could do it. The Republican bankers will always find a way persuade GOP leaders that it should leave well enough alone. There will always be poor people, after all. When African nations that had been getting along just fine until the IMF came along, and now are slaughtering each other for what’s left, the NYTimes editorial page demands the Congress appropriate emergency food aid and maybe some monitors.

There’s lots to do, in other words. There is plenty to keep both political parties energized for as far as the eye can see, taking turns every eight years or so, to replenish the batteries and think up new ways to make the world a better place. It’s the way things used to work. There is still time for the Democrats to get some practice for next year’s campaign. I’m afraid there is nobody in the current crop who has what it takes. The Party may have to crash bigtime before it gets out of the box.