A Giant Hoax Jude Wanniski December 11, 1996

Memo To: Franklin Raines, Director OMB
From: Jude Wanniski
Re: Capgains, CPI index

In your appearance on CNN's "Late Edition: on Sunday, December 8, you addressed these two issues.

1. You said you normally talk about cutting the capital gains tax when you want to bolster the stock market or get corporations to invest more. This is the way you should look at it. The stock market would rise with a lower capital gains tax, but it would happen for the best possible reason — that the real value of the nation's capital stock is rising. This means the real wages of ordinary people would rise, which is the opposite of what has been going on for the last 30 years. The stock market can also rise for bad reasons, when the Federal Reserve is excessive in its creation of dollar liquidity. This means asset prices will rise, but not asset values. In the last 30 years, the prices of the nation's capital assets have risen by 100%, but because of inflation, the value has declined by 40%. As the nation's budget director, you should be asking why this has happened. The budget problems we have had and continue to have were chiefly the result of the unprecedented inflation that followed the breaking of the link between the dollar and gold, which began in late 1966 and was completely severed in 1971. Only when you understand that process can you see how to best address the question of capital gains taxation.

2. The New York Times on Sunday more or less endorsed the idea of making a downward adjustment in the CPI, in accordance with the report of the Boskin Commission. Please note even that editorial complained that the Boskin team began their study with an enormous bias in that direction, and that they did not even look at those elements that suggest the Consumer Price Index is understated. Our own analysis suggests the CPI has been understated for the past 30 years. This is most apparent in housing and transportation prices, which cannot be reduced by the process of building superdiscount stores and fast-food chains that serve a population that can only make ends meet by moonlighting. In the last 30 years, with the CPI up by 350%, housing and transportation prices have risen by 1000%. Tuition is also up by 1000% and so are health care costs. The only way the Boskin team could arrive at its "expert" opinion that we have never had it so good is by a methodogy that asks us to believe we should accept the idea that people's tastes have changed — by which we mean they now prefer to eat hamburger instead of filet mignon. My 80-year-old mother used to be able to live on her Social Security check, but she now "prefers" to live with me, which means she saves the rent on her little apartment, which has climbed by 1000% in 30 years!!

What I'm trying to suggest, Mr. Raines, is that the Ruling Class that has created this huge financial mess over the past three decades is now trying to clean it up with a giant hoax. I'm not talking about Democrats. I'm talking about the Political Establishment. They propose that the poor and elderly pay the costs of their errors, and they think they can get away with it by having everyone agree that night is day and East is West. Alas, I'm afraid the Fix is In. It need not be. An elimination of the capital gains tax would kick real growth rates up to a level that would solve the budget problems of the Baby Boomers. Indexing the capital gains tax by executive order would be a good start.