Helping Tim Russert Jude Wanniski December 12, 1996

Memo To: Tim Russert, NBC "Meet the Press"
From: Jude Wanniski
Re: Future deficits

Bob Rubin & most of your guests continue to talk about the need to deal with enormous deficits in Social Security and Medicare, etc., based on current assumptions. No one ever talks about those assumptions. If small changes are made in those assumptions, the problem goes away. The problems all accumulated because of the inflation that began 30 years ago, when we broke the dollar/gold link. When the incomes of the elderly were protected against inflation and the incomes of the workers were not, the divergence opened up, and projects outward into an enormous gap during the next 30 years. The problem is solved if real wages can climb for the next 30 years at a rate that closes the gap. The only way this can happen is if risks to capital formation are reduced. This can occur by preventing the dollar price of gold from rising, and by increasing the rewards to the risk-taking that is the key ingredient to capital formation. This can be done by lowering the capital gains tax, which was ballooned by the 30-year inflation, and has never been corrected. Thirty years ago, 95% of Americans never faced a capital gains tax at all. When gold went from $35 to $350, it not only pulled all prices up, it also dragged ordinary people into the higher brackets where they encountered the capital gains tax. The tax on ordinary income was lowered in the Reagan years and protected against inflation. The tax on capital formation came down in 1981-83, but was pushed back up in 1987, and left unprotected against inflation.

By the way, Rubin still has little idea what happened to the U.S. economy during the past 30 years and little appreciation of what happened for the last four. He really seems to think the years 1980-92 were years of "fiscal irresponsibility," which are being corrected by the Clinton team. The deficits followed the inflation which began when LB Johnson closed the London gold pool (1966) and Nixon closed the gold window (1971). The peak of the gold price was in March 1980, when Carter was President. The deficits that followed were inevitable and necessary, to prevent a Great Depression. They did not occur because of the Reagan tax cuts or massive increases in defense spending. They occurred because the prices of everything the government bought went up in the wake of the gold price surge.

A CPI adjustment would be a terrible thing. It would cause the tax on ordinary income to rise steadily because of the smaller indexing adjustment. It thus produces a weaker economy at the same time that workers who are retiring are being cheated on Social Security. The same economists who talked Nixon into going off gold, which caused the problem, are now trying to persuade the American people that they are better off than ever before, and their CPI adjustment is too generous. John Kasich has been sucked into the Giant Hoax. On one hand, he understands how it now takes two workers per family to make ends meet. On the other, he thinks inflation has been less, not more. East is not only East. It is also West.

I take the trouble to write to you on these matters because you have been getting more serious in your conduct of "Meet the Press." You can make a difference if you can begin to learn more about economic theory and history, not merely accepting the conventional Establishment line.