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Records of the White House Office of Speechwriting (George H. W. Bush Administration)
Tony Snow Subject Files
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[Newspaper Clippings-Economics, 6/91-11/91]
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18
29
2
4
POLYCONOMICS, INC.
THE
Political and Economic Communications
August 19, 1991
GORBACHEV'S "BLIND ALLEY"
A month ago, I sent The New York Times an op-ed article arguing that the "hard liners" in the Soviet
Union have been right to resist the economic reforms that have been urged upon Mikhail Gorbachev by the
West! On August 2, the Times accepted the piece, in which I wrote that "Each of the planning efforts put
forward require a chaotic leap into the unknown They all require that the old system be demolished before
a new system is built The economy continues to disintegrate as more and more Soviet citizens observe the
unofficial erosion of the ruble and simply stop working. Western political leaders are understandably
concerned about a further collapse of the Soviet economy as another winter draws near."
The Times informed me last Friday they plan to run the piece sometime before September. The Soviet
"hard liners," we now see, were less patient, and Gorbachev is out of a job. In the statement reported by
Tass this morning on the coup d'etat, the "State Committee for the State of Emergency" quite correctly
observed: "The policy of reforms launched at Mikhail S. Gorbachev's initiative and designed as a means to
insure the country's dynamic development and the democratization of social life has entered for several
reasons a blind alley."
Financial markets around the world reacted badly, with Germany's stock market naturally taking the
biggest hit. The Soviet Union is seen to be a step closer to civil war. Russian President Boris Yeltsin calls
for civil disobedience. So far, though, western reporters note the people of Moscow seem strangely
composed. My guess is the people see this action by the security forces as being no worse than the path they
were on. There's no reasonable alternative to a temporary revival of the command economy while the
political leadership figures out what to do next. With winter now only several weeks off, the only mechanism
available to the country's leaders is the central planning apparatus and the expertise of the Communist Party,
such as it is.
The initial reaction in the West was that the coup represents a resurgence of the Communist dictatorship
per se. Not quite. As the text of the emergency committee indicates, the ruling power elite reaffirms its
commitment to "genuine democratic processes" as well as support for "private enterprise." My belief is that
these are, at the moment, the genuine expressions of the political establishment in Moscow. The West simply
has failed in counseling a realistic transition from one system to another. Gorbachev's fatal flaw was in
betting all his chips on Harvard and the seductive idea of a "Grand Bargain" of Marshall Plan proportions.
The Tass statement was emphatic on this point: "Only irresponsible people can bank on some aid from
abroad. No handouts can solve our problems; our rescue is in our own hands." President Bush's embrace of
Gorbachev at the London Economic Summit was ultimately meaningless, a photo opportunity at the end of
a blind alley. What happens next? There is only one correct solution to the USSR's transition problem, as
I have been insisting for two years; it is in the text of my NYT op-ed:
Perestroika's Problem
Mikhail Gorbachev continues to delay the USSR's movement to a market economy, not because of
opposition from "hard liners," but because each of the planning efforts put forward require a chaotic leap
into the unknown.
The central problem is this: More than 95% of the nation's wealth is held collectively, the land, the
housing stock and the state enterprises. Less than 5% is held by individuals in the form of claims against
the state ruble deposits in state depositories. The debate in Moscow is not whether to transfer most of
the collective wealth to private hands. That debate is over. It is how to manage the transfer, the
privatization.
86 Maple Avenue
Morristown, N.J. 07960
(201) 267-4640
FAX (201) 539-4025
Everyone understands the transfer can't occur without creation of a banking system, the means by which
commerce is arranged in a market economy. Neither banks nor other financial services, such as stock
markets and insurance companies, exist in the Soviet Union. They've not been needed when a central
apparatus has dictated the flow of resources within a framework of wage and price controls.
A banking system, though, cannot develop, either at a private curbstone level or through the network
of state depositories spread across the USSR, without a convertible ruble. A marketplace cannot come into
existence without a unit of account, a currency of known and predictable value in which contracts can be
made and accounts kept.
Each of the reform plans put forth so far, including those recommended by Western economists, have
a convertible ruble as an eventual target. But they all require that the old system be demolished before a new
system is built. The inference is that somehow a headlong plunge into a "free market" will sort things out
and the ruble will float to an unknown value that will then make it convertible.
Indeed, most Western economists seem to assume that if the Soviet government merely absents itself
from economic life, a marketplace will arise as if by magic, by an "invisible hand." That is a gross error:
what separates western capitalism from the law of the jungle is the visible hand of government in the
marketplace. Government can either dictate prices, or it must provide a yardstick, a unit of account, by
which individuals may set prices among themselves.
As it is, the ruble has specific meaning only within the old system, where its theoretical purchasing value
is close to that of an American dollar. Outside the old system, the ruble has no value whatsoever as a unit
of account and most recently traded in an Estonian auction at 77 rubles to one U.S. dollar. What value will
the ruble have after a leap into the unknown?
In a country where most wealth is held by individuals, in the form of real property and financial assets
tied to real property, inflation simply bails out debtors at the expense of creditors. Even in Eastern Europe
there remains considerable wealth held by individuals in the form of real property. In the Soviet Union,
individuals hold almost no real property or capital assets.
If the Soviet government were now to take the plunge, lifting wage and price controls and floating the
ruble, almost the entire stock of capital held by Soviet citizens their ruble deposits would vanish in
the ensuing inflation. The state would hold close to 100% of the wealth, its debt to its people wiped out.
How will the citizenry even make the down payments to acquire state assets in the privatization process?
More critically, what happens to the economic mechanisms necessary to the daily survival of the
population in the time it takes between the demolition of the old command apparatus and the creation of
a banking system around this worthless ruble? These are the questions the western critics of Gorbachev's
delays have failed to answer.
Yet the economy continues to disintegrate as more and more Soviet citizens observe the unofficial
erosion of the ruble and simply stop working. Western political leaders are understandably concerned about
a further collapse of the Soviet economy as another winter draws near. President Gorbachev has now
promised a convertible ruble by January and is racing to line up western support for a reserve fund of
perhaps $8 billion in hard currencies, to support the ruble against speculators when convertibility is
announced.
Critical details are still missing, though, most particularly the exchange rate at which the ruble will be
made convertible. The answer lies in making the ruble worth more, not less, which the government can do
by reaffirming the value of the ruble deposits held by Soviet citizens. This is a prerequisite to all other
reforms. By shouldering this burden of debt itself, even guaranteeing it in gold instead of repudiating it,
the state establishes the credibility of the ruble as a unit of account.
The effect on the Soviet economy would be immediate and dramatic. As soon as the Soviet state regains
the confidence of the people in its currency, the economic mechanisms will work well enough to see the
country through the privatization process to a market system, not to mention the coming winter.
Jude Wanniski
I
POLYCONOMICS, INC.
Political and Economic Communications
October 25, 1991
IS PRESIDENT BUSH SERIOUS?
In his press conference this morning, President Bush once again plugged his capital gains tax cut as
the key ingredient in his plans for economic growth. He asked the Congress to try it, and if it didn't
work he'd take all the blame, and if it did, he'd only take half the credit. Alas, he also said he would
do nothing to break the Budget Agreement, a signal to Democrats that he is not serious. Instead of
reading the President's lips, they are reading Treasury Secretary Nick Brady's, who is saying a tax bill
is a lousy idea and mere "political posturing." I talked last night to a Democrat who is close to the
action, and he offered to cover the bets of anyone who thinks there will be a tax bill this year. The
Democrats do not want one. Period. And the only way it can happen is if the President gets serious.
The President cannot get serious as long as he continues to put the Budget Agreement ahead of the
economy.
Theoretically, of course, the President can get the capital gains tax cut without busting the Budget
Agreement. Senator Phil Gramm of Texas and House Minority Leader Newt Gingrich have teamed
up on a package that meets all the administration's budget requirements. The Republicans in the
House and Senate who have fought each other for the last year trying to agree on a package are now
at the point of accepting the Gramm-Gingrich proposal, more or less. But it's not going to happen
as long as House Ways & Means Chairman Dan Rostenkowski refuses to go along with it. The
President can get nasty and jump up and down demanding the Congress send him a growth-oriented
tax package. He can insist on keeping them in session until Christmas until they deliver. But they
don't have to send him legislation he will want to sign. They can load up a Christmas tree of goodies
that breaks the Budget Agreement, including some version of Bentsen's $300 kiddiegrant, a puny
capgains cut and a 38% tax on rich people, i.e., the median income of registered Republicans. We go
around in circles once again. "All that's going on right now is a replay of last year's debate over the
Budget Agreement," one of Gingrich's aides advised me this morning.
Still, there is a sense I pick up at the White House that something is happening. A few reporters I
checked with, who have been skeptical, now tell me they will not bet against a tax bill. This is mainly
because the President is more serious than the rest of his team and is becoming more alarmed at the
prospect of going into 1992 with an economy still weakening. They tell me they think Darman will
soon be sitting down to negotiate with Rostenkowski and Lloyd Bentsen. But I still don't think
anything good will come of such talks. Darman has been talking to the Democrats for three years and
has not gotten anywhere with this inside game. Only if Darman switches to an "outside" strategy can
he get policy in motion. As long as he thinks the economy will grow okay without capital gains as
Michael Boskin does - we will go into 1992 without a tax bill. In a memo to Darman this morning
I warned that "You will have a truly frightening time as budget director next spring unless you get
a tax bill through before Christmas." I went on as follows:
The most critical point is that a DJIA of only 2900 is not discounting a profit stream off
the nation's capital stock sufficient to lower the unemployment rate in 1992. To get the
Dow up to 3400 or 3500 will be enough to do so, we reckon, and a 19.6% rate would do
that. A 15% rate, unindexed, but covering all past investments in real and financial assets,
would send the Dow to 4100 in short order, discounting a non-inflationary growth rate
in the range of 5%. Arguments I hear around the White House that a tax bill will be
inflationary fail to understand that only Fed-led expansions are inflationary in the first
instance.
86 Maple Avenue
Morristown, N.J. 07960
(201) 267-4640
FAX (201) 539-4025
A 15% capgains tax, which the President promised the people in 1988, would sharply
reduce inflationary expectations, i.e., the Fed would no longer be pressured by Brady,
Boskin, and you into an inflationary policy. Remember: The 1971 breakdown of Bretton
Woods occurred as the result of Nixon's doubling of the capital gains tax in 1969. Arthur
Burns flooded the banks with liquidity trying to get the economy going.
If you don't get a capgains cut by year's end, it will be seen throughout the country as
a failure by the Bush Administration. The Democratic contenders don't have to run
against the President. They can run against his team. There are very few people who
agree with me at this moment, but I believe the President will lose in 1992 unless you
become fanatical on a tax bill this year. (A Mario Cuomo/Jerry Brown liberal supply-side
ticket would do it.)
You're the only person in the administration who can save the economy and the
President in 1992, I believe. And I don't think you can do it unless you alter your
strategy, which remains the same "inside" approach you have followed without success
from the first days of the administration. Instead of sitting down with Rosty and Lloyd,
you have to think of the President working an "outside" strategy of your design. Develop
the growth package without consulting the Democrats at all. Then have the President
announce it on prime time, with the news that he will ask the Congress to stay in session
until it sends him legislation he can sign. I liked the idea he threw out in his press
conference this morning that Congress should try it and if it doesn't work he'll take all
the blame, and if it does, he'll only take half the credit.
It is with this kind of approach in mind that I recommended to you that the President
include in his address to the nation the concession to the Democrats of a 33% income tax
on millionaires. Instead of allowing the Democrats to deal the cards, he must do it. If he
makes the concession in the right way, following it with a call for the 15% capgains tax
that he promised the people in 1988 -- using the correct, supply-side arguments -- he
will have successfully limited the negotiating room left for the Democrats. They will not
be able to demand higher tax rates on millionaires, as you suggest, for they would be seen
by the American people as having upped the ante after the cards had been dealt.
Thereafter, every announcement of economic weakness or increased federal, state or local
deficit will leave the President in the position of being able to bang the Democrats
around at will. Knowing that, the Democrats will be in a position to compromise with
you when you show up at the Rosty & Lloyd Show.
Included in the President's speech to the nation should also be a section indicating he
is only making this tax concession to the Democrats because they have held this gun to
his head. He should state that in 1992, he will recommend that the Republicans in
Convention adopt a platform that phases out capital gains taxation altogether and brings
the top rate on income to 25%. If the President would give a speech like this, covering
both the economy's immediate needs as well as its long-term requirements, he would leave
no running room on tax policy for the Democrats.
If the President is serious enough himself, he can of course threaten personnel changes unless his
economic team gets behind a workable strategy. At the moment, for all the pretty talk from the Oval
Office about a growth package before Congress adjourns, I am taking seriously the odds against it.
Jude Wanniski
Lehrman
Bell Mueller Cannon,
111
Lewis E. Lehrman
Frank Cannon
Chairman
LBMC File
Managing Director
Jeffrey Bell
Ralph Benko
President
Vice President
John Mueller
Charlie Reid
Vice President
Research Director
Chief Economist
personal
October 24, 1991
The Honorable Tony Snow
The White House
Washington, DC 20500
Dear Tony,
Says here in the papers that your outfit has rediscovered the
existence of the U.S. economy. Thought you'd like to see Mueller's
most recent speech to the National Association of Business
Economists, also to the New York Society of Quantitative Analysts.
It reiterates that, looking back on '92 from Reelection Day, you
will be looking back on a 1992 of 3% range growth and 3% range
inflation. It gives more of our analytical context.
Don't let the good news discourage you from tax reform, especially
if indexing of capital gains and depreciation (which is hard to
paint as a windfall to the wealthy) are part of the mix, and would
moreover further help neutralize the stagflationary consequences
of the reserve currency system. Nevertheless, all the tax reform
proposals currently floating around amount to little more than
rearranging the furniture in the house when it is the foundation
-- monetary policy -- which needs a thorough overhaul. You will
see a statement of our position to the policy community shortly.
Also, I had an informal conversation with a gentleman who is part
of the Clinton and Kerry brain trusts, which I memoed for Bell, and
send along to you, complete with editorial comments, For What Its
Worth. If you share it, please do so discreetly and don't identify
me as the source.
Best,
Ralph Raph Benko
2111 WILSON BLVD., SUITE 416, ARLINGTON, VA 22201
Phone (703) 243-6955 Fax (703) 841-9146
Mueller
veniman Bell
Cannon,
Inc.
Lewis E. Lehrman
Frank Cannon
Chairman
Managing Director
Jeffrey Bell
Ralph Benko
President
Vice President
John Mueller
LBMC Report
Charlie Reid
Vice President
Research Director
Chief Economist
September 1991
The World Dollar Base and Business-Cycle Forecasting
by John Mueller
Vice President & Chief Economist
Recently I wrote at length about LBMC's
because, in addition to more conven-
"Rueffian Synthesis" and showed how
tional factors, we focus on an important
inflation can be broadly forecast more
aspect of the U.S. economy which is
than two years in advance (LBMC Report:
usually overlooked the implications
June/ July 1991). But the same ideas
of the dollar's use as international
are also helpful in forecasting business
money.
cycle turning points -- further in advance
than most forecasters seem to think.
In effect, the "reserve currency" system
extends the privilege of "printing money"
In November of 1988, by combining the
from the national to the international
World Dollar Base with more conventional
stage. By its nature, using the dollar
factors, LBMC predicted that inflation
as international money is inflationary,
would rise sharply in 1989 and 1990,
both for the United States and for any
peaking between 6% and 7% year-to-year
currency tied to the dollar.
in mid-1990; and that there would be a
mild recession in 1990. I'd like to explain
To describe the essence of the reserve-
why we thought so. And in doing so I'd
currency system I like to use a simple
like to pose the general question, "What
analogy. Imagine that everyone you met
do we know and when do we know it?"
accepted your personal check. Not only
regarding inflation and business-cycle
that; suppose that everyone carried
turning-points.
some of your uncashed personal checks
around in their wallets instead of money.
If LBMC has had some success in
forecasting the business cycle during the
This would have two results for your
turbulent last few years, I think it is
personal finance. First, you would no
2111 WILSON BLVD., SUITE 416, ARLINGTON, VA 22201
Phone (703) 243-6955 Fax (703) 841-9146
LBMC Report
2
September 1991
GRAPH 1
LBMC's World Dollar Base
US Monetary Base & $ Reserves, 6-mo. AR
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
85
86
87
88
89
90
91
AUG est MO 7.7% $Res 5.9% $Base 6.5%
SL Fed MO
+
$Reserves
$Base
longer need to carry any money yourself
is a net addition to dollar liquidity. If
-- only your checkbook. Second, when
the Bundesbank stuffed its vaults with
you received your bank statement every
greenbacks when it bought dollars, they
month, you would find a lot more money
would be withdrawn from circulation
in your account than you had saved. The
in the United States. But this is not
difference would be due to all the
what happens. When the Bundesbank
uncashed checks floating around. This
buys dollars, it takes those dollars out
arrangement would allow you to write
of the foreign exchange market, but
still more checks, to finance additional
immediately redeposits them in the
consumption or investment, without being
U.S. money market by purchasing, say,
overdrawn at the bank. It would no longer
a U.S. Treasury security. Germany's
be true that when you wrote a check,
dollar reserves increase, but without
the other person's gain would be equal
the United States losing any of its
to your loss. Moreover, the supply of
reserve money.
what people used as money would be
determined by the amount of your
The result is to add liquidity to the
outstanding uncashed checks.
dollar market. And the effect is the
same whether or not foreign central
The same is true of the United States.
banks "sterilize" their intervention in
It is supposed to be true that one country's
their home markets, and whether or
surplus is another country's deficit. But
not other currencies are also used as
this symmetry doesn't hold when one
international reserves. It is not far-
nation's currency is used as international
fetched to consider the intervention of
money. Any increase in dollar reserves
the Bank of England, the Bundesbank
LBMC Report
3
September 1991
GRAPH 2
World Dollar Base & Total Inflation
PCE Deflator year/year
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
40
45
50
55
60
65
70
75
80
85
90
$Base regression, lagged about 2 years
$ Base
+
PCE
or the Bank of Japan as equivalent to
of both inflation and business-cycle
open-market operations by the Federal
turning points in the United States.
Reserve Banks of London, Frankfurt and
Tokyo.
Graph 2 shows the relationship since
1940 between overall inflation -- in this
To measure the size of the inflationary
case as measured by the personal
impulse in the dollar market, LBMC has
consumption expenditure (PCE)
constructed what we call the World Dollar
deflator -- and changes in the World
Base. Our data are proprietary, but the
Dollar Base more than two years earlier.
concept is straightforward: the World
While the relationship is not perfect,
Dollar Base consists of U.S. reserve money
it is rather remarkable that one variable
-- that is, legal tender currency and
can "explain" three-fifths of the inflation
commercial bank reserves -- plus the
rate, more than two years in advance,
dollar reserves of foreign central banks.
over a span of 50 years.
However, when we look more closely,
Graph 1 shows the two components of
we find that the predictive power of
the World Dollar Base: the U.S. monetary
the World Dollar Base concerns not
base and foreign dollar reserves. The
so much inflation in general as the
graph shows that the World Dollar Base
dollar price of tradable goods --
often gives a very different reading of
particularly the prices of food and
monetary policy from watching only what
energy commodities. It is customary to
the Federal Reserve is doing. And when
explain any swings in food and energy
it does, we find that the World Dollar
prices as due to some special event --
Base is giving a more accurate prediction
for example, a drought in the case of
LBMC Report
4
September 1991
GRAPH 3
World Dollar Base & Commodity Inflation
PCE Food + Energy Commodities, year/year
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
40
45
50
55
60
65
70
75
80
85
90
$Base regression, lagged about 2 years
$ Base
+
Commodities
food prices, or OPEC policy in the case
economic policy that have occurred in
of energy prices. While these can be
the past half-century.
important at times, LBMC's research
indicates that these "supply shocks" are
The World Dollar Base is also helpful
far less important than conventional
in forecasting so-called "core" inflation,
wisdom supposes.
if only because the cost of food and
fuel goes into the prices of other goods.
Graph 3 shows the relationship between
But the rest of value of the ex-food-
the growth of the World Dollar Base and
and-energy marketbasket consists basi-
food and energy commodities since 1940.
cally of labor and capital services --
Despite the fact that the prices of these
either consumed directly or embodied
commodities are far more volatile than
in manufactured goods. These services
overall inflation, the World Dollar Base
are relatively sheltered from interna-
has consistently predicted about three-
tional competition, and are more sen-
fifths of the inflation in food and energy
sitive to the domestic unemployment
commodity prices over the 50-year period,
rates of labor and capital.
again more than two years in advance.
Over the past 30 years, the World Dollar
Graph 4 shows a simple model of
Base has predicted about two-thirds of
overall inflation, using only data known
food and energy commodity inflation two
at least two years in advance. Its chief
years in advance. The stability of this
ingredients are a forecast of commodity
relationship is striking when you consider
prices using the World Dollar Base,
the changes in exchange-rate regimes and
and a forecast of "core" inflation as a
LBMC Report
5
September 1991
response to commodity inflation and the
What central banks directly target are
rate of unemployed resources.
short-term interest rates. But interest
rates can influence the business cycle
The models LBMC actually uses for
by at least two different channels. The
forecasting inflation are more compli-
first is through the creation and ab-
cated, and also take advantage of data
sorption of "excess money."
known only a short time in advance. But
I find that constructing models using only
LBMC follows the French economist
data known 2 years in advance is a useful
Jacques Rueff in believing that busi-
exercise, because it forces you to simplify
ness-cycle fluctuations are not related
drastically and focus on fundamentals.
to the money supply but rather to
"excess money" -- money which is not
demanded for the exchange of wealth
What can we say about the business
at existing prices. By its nature, excess
cycle this far in advance? Over time,
money can only bid up the general
output is determined mostly by the
price level. But it doesn't bid up all
supplies of labor and capital and tech-
prices at the same time. Usually the
nology. Predicting business cycle turning
process begins with a rise in the price
points basically amounts to predicting
of financial assets, and then spreads by
changes in the unemployment rate of
arbitrage to the price of goods and
labor and capital. In LBMC's view,
services. This arbitrage process is char-
changes in unemployment and operating
acterized by an up-and-down fluctuation
rates are heavily influenced by monetary
in the utilization rate of labor and
policy.
capital. The process ends when the
GRAPH 4
Inflation Forecast: 2 Years Ahead
PCE Deflator, year/year %
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
Predicted
+
Actual
LBMC Report
6
September 1991
GRAPH 5
Monetized Federal Debt & Capacity Use
Monetized debt/CPI V. Util. rate, yr/yr
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
50
55
60
65
70
75
80
85
90
Debt scaled to util. rate, 1-year lag
Monetized deficit
+
Util. rate
excess money has been fully absorbed by
LBMC's prediction that there would
a rise in the general price level.
be a mild recession in 1990 was based
partly on our tracking the inflation-ad-
justed World Dollar Base (and partly
Practically speaking, most "excess" money
on our reading of fiscal policy). Graph
is associated with monetizing government
6 shows the relationship between chan-
debt, which usually has little connection
ges in industrial production and in the
with exchanges of real wealth. Graph 5
World Dollar Base one year earlier.
shows that there has been a close relation
As we saw what was happening to the
between fluctuations in capacity utilization
real World Dollar Base in 1988 and
and inflation-adjusted changes in U.S.
1989, we forecast that industrial output
Treasury debt monetized by the central
would fall to zero at the end of 1989.
and commercial banks a year earlier.
Then in January 1990 we argued that
there would be a "W-shaped" recession
-- the first "V" in output would be
followed by a temporary rise in mid-
The World Dollar Base plays a central
1990, followed by a second, deeper "V"
role in the creation of excess money,
in the second half of 1990. At the end
because almost all of any increase in the
of 1990, we argued that the recovery
World Dollar Base involves the purchase
should begin in the second quarter of
of U.S. Treasury securities, either by the
1991, and be stronger than expected
Federal Reserve or by foreign central
by the consensus at the time. Obviously
banks. And nowadays, most of the
we didn't predict the war with Iraq,
monetized Treasury debt is monetized by
but the recession began before the war
central banks.
and would have occurred without it.
LBMC Report
7
September 1991
GRAPH 6
I said that "excess
LBMC's World Dollar Base & Output
money" leads business-
$Base/CPI (1-yr lag) V. Indust. Prod'n
cycle turning points by
13%
12%
about one year. But, as
11%
Graph 7 shows, "excess
10%
money" itself can be
9%
broadly predicted the
8%
7%
better part of a year
6%
beyond that, by observ-
5%
4%
ing the behavior of
3%
central banks. This al-
2%
lows us to make a fairly
1%
0%
educated guess about
-1%
the rate of unemployed
-2%
labor and capital resour-
-3%
-4%
ces -- and broadly speak-
-5%
ing, whether we will be
86
87
88
89
90
91
92
in recession or recovery
AUG est: 5.0% year/year
$Base/CPI yr/yr
+
Production yr/yr
-- almost two years in
advance (Graph 8).
Recently there has been quite widely
its near-relative, the monetized Federal
voiced concern that slow growth of M2
debt, have given signals quite different
will either prevent economic recovery or
from M2. And they suggest, to us at
cause another recession in 1992. But in
least, that the recent concern over M2
recent years the World Dollar Base and
is unfounded. M2 has grown slowly
GRAPH 7
Real Monetized Treasury Debt
Actual vs. predicted, year/year
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
-10%
-11%
55
60
65
70
75
80
85
90
Prediction 10 months in advance
LBMC Prediction
+
Actual
LBMC Report
8
September 1991
GRAPH 8
Utilization Rate: Almost 2 Years Ahead
Year/year change
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
60
65
70
75
80
85
90
LBMC Prediction
+
Actual
because there has been little demand for
rates, because they change the present
most of it; but both the World Dollar
value of tax deductions for depreciation.
Base and the monetized Federal debt
suggest that there has still been quite a
bit of "excess money" sloshing around
LBMC publishes what we call a Capital
over the past year. Both point to somewhat
Return Index, which is an effort to
stronger-than-exepcted economic growth
measure the total impact of Federal
in the second half of 1991, followed by
taxation of capital. The index is based
a slowing of the growth rate in the middle
on an estimate of the marginal tax rate
of 1992 but not another recession. In
on a representative mix of plant and
fact, we expect the current recovery to
equipment, including Federal taxes on
last into 1994.
corporate profits, personal income and
capital gains. (The index is expressed
as the year-to-year change in 1 minus
the marginal tax rate on capital.)
There is at least one other major channel
by which monetary policy can affect
Graph 9 shows that changes in LBMC's
fluctuations in output, and that, oddly
Capital Return Index lead fluctuations
enough, is by affecting marginal tax rates.
in capacity utilization by about a
A fair amount of attention has been paid
year-and-a-half.
to the fact that inflation can affect tax
rates, for example because capital gains
Some argue that there can be no
are not indexed for inflation. But relatively
economic recovery because of Federal
little attention has been paid to the fact
tax increases legislated in the budget
that interest rates also affect marginal tax
deal of 1990. But by our estimate, the
LBMC Report
9
September 1991
GRAPH 9
LBMC's Capital Return Index
1-Tax on Capital vs Util. change y/y
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
55
60
65
70
75
80
85
90
Index lagged 1-1/2 years
Lagged LBMC Index
+
Util rate change
marginal tax rate on capital has still fallen
be below average for a postwar recovery.
a bit, because those statutory tax increases
Of course, it's not reasonable to expect
were more than offset by recent declines
a stronger-than-average bounceback
of inflation and interest rates. This does
after a milder-than-average recession.
not take into account
state and local taxes,
but recent changes in
GRAPH 10
state and local taxes
Capacity Utilization
don't appear large
enough to have turned
Total industry, %
86%
the index negative.
85%
What does all this tell
us about the course of
84%
the current economic
recovery? We think it
83%
still suggests a recovery
82%
stronger than the con-
sensus expects -- a
81%
solid 4% real GNP
growth rate in the
80%
second half of 1991
rather than the con-
79%
D
sensus 2-1/2%. Our
forecast is considered
78%
86
87
88
89
90
91
92
93
94
optimistic, but it would
August: 80.0%
Actual
LBMC Forecast
LBMC Report
10
September 1991
GRAPH 11
Capacity utilization
bottomed out just
LBMC's Growth Forecast
over 78% in March
Industrial Production, Q/Q SAAR
9%
of 1991 and has
8%
climbed to 80%.
7%
We think it will rise
6%
X
to a temporary
5%
4%
plateau of 81-82%
3%
in mid-1992, and
2%
then surge to about
1%
85% by the end of
0%
1993 (see Graph
-1%
-2%
10). This implies
0
-3%
that the first surge
-4%
of growth will be
-5%
followed first by a
-6%
-7%
temporary slow-
-8%
down in the middle
-9%
B
of 1992, then a
-10%
a
second wave of ex-
-11%
85
86
87
88
89
90
91
92
93
94
pansion at the end
of 1992 and the
Actual IP
LBMC Forecast
beginning of 1993
(Graph 11). Not only don't we expect
Unfortunately, our analysis suggests that
another dip into recession; the odds are
inflation will once again be accelerating
that this recovery will last through most
by the first half of 1993. The World
if not all of 1994.
Dollar Base points to a sharp surge in
food and energy commodity prices at
the end of 1992 and the first half of
1993. Rising commodity prices and
We expect CPI inflation to continue to
rising capacity use should lead to an
decline, from its 1990 peak of 6.3% to
acceleration of ex-food-and-energy in-
a low of about 3% at the end of 1991
flation at around the same time. We
and the start of 1992. The World Dollar
therefore expect CPI inflation, after
Base points to continued disinflation of
falling to a low of 3%, to rise to a
food and energy commodities for the rest
peak of about 5% year-to-year in the
of 1991 and most of 1992. At the same
middle of 1993.
time, "core" inflation should be subdued.
Unemployment is coming down, but is
Typically, such a rise in inflation would
still close to 7%. And manufacturing
induce the Federal Reserve to raise
productivity is rising, as it typically does
the Federal Funds target, now at
in the early stages of a recovery. As a
5-1/4%, to 8% or higher in 1993. If
result, year-to-year CPI inflation should
so, we can expect inflation-adjusted
stay in the low-3% range through most
money growth to slow sharply and
of 1992 (Graph 12).
effective marginal tax rates to rise even
LBMC Report
11
September 1991
GRAPH 12
without changes in tax
law. Depending on the
exact timing and size
LBMC's CPI Forecast
of the response,
Consumer Prices, Year/Year Change
another mild reces-
7.0%
sion is possible in
1995.
6.0%
Considering the
amount of speculation
5.0%
and uncertainty
regarding next
4.0%
month's or next
quarter's numbers,
this may sound hope-
3.0%
lessly long-range. But
if past experience is
2.0%
any guide, taking the
peculiarities of the
dollar standard into
1.0%
account permits us to
get the "big picture"
0.0%
broadly right, much
86
87
88
89
90
91
92
93
94
further in advance
August: 3.8% (Down 0.6%)
than most people
LBMC Model
+
CPI
think.
Confidential note,
Bottom line is that he thinks that the candidate (especially if
Clinton or Kerry) will not polarize to the left on social values
issues, and that they will choose for a theme a moderate "new
paradigm" one. [It sounds to me like Dukakis redux, plus some
empowerment/social responsibility themes, with average sniping at
Bush's conventional shortcomings. In short, something pleasing to
the readers of Doonesbury, and a recipe for a Bush sweep.]
Doesn't think abortion will be a leading issue, esp Clinton and
Kerry, new paradigm stuff will be, choices available to parents,
opportunity to people acting responsibly, workfare -- training and
education for two years, then you have to hold a job; college
tuition + national service. Certainly not for 'condoms in the
schools' stuff. Harkin only likely to try to polarize, doesn't
think it'll get him the nomination.
Abortion will become central if Roe is overturned, but not because
candidates will make it central. He would advise campaign to
support federal legislation setting up a federal right to abortion
in order to make Bush veto, which he thinks would hurt him.
Agrees campaign will turn on values because it embodies character.
Sees the quasi-consensus on foreign, defense, economic policy
(though he sees less of it on economic, and is sure the Republicans
will try to portray the Democrats as dangerous extremists,
"something they're very good at".)
But
he
doesn't
see
a
polarization on social issues, or the Democratic candidates
actively polarizing to the left unless the overthrow of Roe forces
the issue. Thinks Bush's "extreme" position on abortion issue will
be made something of to make a point on his character, but he
doesn't see Clinton or Kerry, or anyone (except maybe Harkin)
trying to lead with social values issues as a key salient of their
campaign. Notes that Dukakis didn't, Hart didn't until he ran out
of money and had to energize the zealots, thinks everyone has sort
of learned that that's not a winning strategy.
Thinks -- and I had a hard time following him here -- that the
issue in people's minds on abortion is the existence of a right,
not the qualifications on the right, and if Roe is overturned, that
will be very harmful to Bush (especially if Thomas is the swing
vote) because people will see it as a constitutional right which
they had has been taken away. He acknowleged my point about the
popular support for restrictions, and that Roe's overturn wouldn't
ipso facto criminalize abortion, just clean the slate for the
states or federal government to decide what the policy ought to be.
But he couldn't understand why I couldn't understand that the
salient here is the taking away of a right ('of a woman to govern
her own body for the first three or six months of a pregnancy'),
to which the restrictions are a subsidiary issue. I couldn't
understand why he couldn't understand that there's another way to
see it, but didn't press it.
#
LBMC file
Economy
Tentman Bell Mueller Cannon,
Watch
Inc.
Lehrman Bell Mueller Cannon, Inc.
October 1991
Lewis Lehrman, Chairman
Frank Cannon, Mg. Director
2111 Wilson Blvd. Suite 416
Jeffrey Bell, President
Ralph Benko, Vice President
Arlington, Va. 22201
John Mueller, VP/Economist
Charles Reid, Dir. of Research
(703) 243-6955
1991 Second Half
1992 First Half
Comment
Growth
4% real GNP
Growth slows to 2-
Growth picks up
growth in 4th Q.
3% at mid-year.
again late in 1992.
Inflation
CPI 3.5% yr/yr avg.,
3.1% yr/yr avg.,
3.1% avg. in 1992,
3.7% annualized.
2.3% annualized.
5% peak in 1993.
Interest Rates
30-yr. T-Bond yield
Yield bottoms
Yield hits 8-1/2% in
just below 8%.
around 7-1/2%.
early 1993.
Stocks
Stocks move
Rally continues:
DJI at 3,700 near
generally higher.
DJI hits 3,300.
Election Day 1992.
Dollar
Dollar rises V. DM,
Dollar peaks above
Real bond rates
DM2.00.
favor U.S.
stable to down V. yen.
Stop Us If You've Heard This Before
How soon we forget. "The predicted
make sure that there is enough money in
economic boom never came to pass." "It
the economy." These statements were
is clear that nothing of the sort has oc-
made by Members of Congress between
curred or will occur." "Today the Ad-
June and September of 1983 7 to10
ministration seems content to sit back
months after the recovery began. As we
and let the deficit eat into the fragile
said in September's LBMC Report, "Not
economic recovery." "Now, economic
only don't we expect another dip into
decline threatens." "In order to maintain
recession; the odds are that this recovery
the slight recovery that we have, we must
will last through most if not all of 1994."
Copyright © 1991 by Lehrman Bell Mueller Cannon, Inc., Arlington, Va. All rights reserved. This
work may not be reproduced in whole or in part without the express prior written consent of the
copyright owner. The information contained herein has been obtained from sources which we
believe to be reliable, but we do not guarantee its accuracy or completeness.
October 1991
2
Economy Watch
Growth. We've argued that, though
Bonds. After rallying strongly, 30-year
below average, this recovery will see
Treasury bonds have bounced around an
two surges of capacity use -- in 1991 and
8% yield. We expect them to stay there
1993 -- with near-trend growth in be-
for a month or two, then rally again on
tween (see graph). After industrial out-
continued low inflation numbers. We
put zoomed at an 8% rate, data for
look for a 7-1/2% bottom in yields in
September raised fears that the recovery
mid-1992. But we continue to expect the
had stalled. Too
jump in infla-
soon, we think.
A Blip Down on the Way Up.
tion to drive
We see one
yields up 100
more upsurge
Capacity Utilization: 2 Years Ahead
basis points by
before the in-
Total industry: Actual vs LBMC forecast
early
1993
86%
dustrial
slow-
(Sections
3.1
down
we've
85%
& 3.2).
been
talking
84%
about
takes
Stocks.
Still
hold
(Section
83%
bullish
on
2.5). The initial
bonds
and
82%
report of 2.4%
firmly expect-
real
GNP
81%
ing continued
growth in the
recovery,
80%
3rd quarter was
we've
raised
1 point lower
79%
our
sights
than
we
slightly
on
78%
predicted, but a
stocks: We ex-
rise in lean in-
77%
pect the Dow
85
86
87
88
89
90
91
92
93
94
ventories and
Jones
In-
Model shown unsmoothed.
steady-to-
Actual
+
2-year Forecast
Current Forecast
dustrials to hit
stronger per-
3,300 by the
sonal spending should contribute to
Spring of 1992. We see a peak on the
faster 4th-quarter growth (Section 2.6).
Dow of about 3,700 by the end of 1992
(Sections 3.3 and 3.4).
Inflation. We still see CPI inflation
falling to a low of about 3% year-to-year
Dollar. With inflation falling in the
at the end of 1991 and staying there for
U.S. but stubborn in Germany, real
most of the next year. The reasons: con-
bond yields favor the U.S. We see the
tinued commodity disinflation and slow
greenback rising over DM2. The yen is
growth of labor costs in the initial stages
less sensitive to bond rates, and Japan's
of recovery. But the CPI should bounce
international payments are helped by
back to peak near 5% year-to-year in
this year's fall in energy prices. So we
mid-1993 (Sections 1.4 & 1.5).
look for a firmer yen (Section 3.5).
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
3
October 1991
1.0. The Outlook for Inflation
1.1. LBMC's World Dollar Base
keeping growth of U.S. currency and
bank reserves in high single digits. But a
Explanation. The world's central
firm dollar implies that this won't be
banks and basic commodity markets
matched by foreign central bank pur-
operate on a "dollar standard." So
chases of dollar assets. The recent surge
Lehrman Bell Mueller Cannon, Inc.
and slowdown in the World Dollar Base
uses what we call the "World Dollar
should contribute to continued
Base" as a key forecasting tool. In prin-
economic recovery in coming months,
ciple, the World Dollar Base com-
followed by a temporary slowdown of
prises the U.S. monetary base
economic growth in the middle of 1992
("high-powered money") plus the dol-
(see Section 2.1). It also implies a spike
lar reserves held by foreign central
of commodity inflation in late 1992 and
banks to back their domestic currencies.
early 1993 (see graph on next page).
When the World Dol-
lar Base grows, it adds
to liquidity in the dol-
LBMC's World Dollar Base
lar market. The first
effect is on financial
US Monetary Base & $ Reserves, 6-mo. AR
35%
markets, then output;
in the longer run,
30%
prices (especially raw
materials, food and
25%
energy prices).
20%
Latest. The 6-month
growth rate of the
15%
World Dollar Base
has settled down in
10%
the 7% range after its
5%
earlier surge. We ex-
pect growth to stay in
0%
single digits for the
time being. With
-5%
good inflation news,
another round of in-
-10%
terest-rate cuts by the
85
86
87
88
89
90
91
Federal Reserve is a
SEP est MO 8.4% $Res 5.7% $Base 6.7%
strong
possibility,
—
SL Fed MO
+
$Reserves
0 $Base
Lehrman Bell Mueller Cannon, Inc.
October 1991
4
Economy Watch
LBMC's World Dollar Base & Commodities
CPI Food & Energy Commodities, yr/yr %
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
60
65
70
75
80
85
90
$Base scaled to commodities, 2-yr + lag
$Base
+
CPI Food & Energy
1.2. Commodity Prices
spike in energy prices in the first half of
1993, as recent monetary easing has its
Explanation. The World Dollar Base is
maximum impact on energy markets and
useful in predicting overall commodity
as supplies tighten.
inflation two years in ad-
vance. Of course, specific
Gasoline: Producer Price
commodity prices also
& forecast (1982 = 100)
100
reflect relative scarcity. For
example, due to its impor-
90
tance and semi-cartelized
market, energy supply must
80
be analyzed separately. We
use the price of gasoline as a
70
benchmark.
60
Latest. The energy futures
markets have risen since last
50
000
month, lifting their forecast a
bit above one incorporating
40
85
86
87
88
89
90
91
92
93
94
the World Dollar Base (see
Futures price adjusted for interest
0
PPI gasoline
+
10-22-91 Futures
LBMC forecast
graph at right). We expect a
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
5
October 1991
1.3. Labor Costs
Nonfarm Unit Labor Costs
Year/year change
5.0%
Explanation.
Labor-intensive
4.5%
goods are not priced like com-
modities. So LBMC's inflation
4.0%
models contain a monthly proxy for
3.5%
wage costs.
3.0%
Latest. Employment tends to be a
2.5%
lagging indicator of output. That's
2.0%
one reason why labor costs continue
to moderate in the early stages of
1.5%
recovery: firms don't rehire
1.0%
workers as fast as demand for their
0.5%
product picks up. This lowers unit
85
86
87
88
89
90
91
labor costs.
2nd Q 1991: 2.5% saar, 3.9% y/y
Labor costs
1.4. LBMC's PPI Model
rise to the 3% range in 1993, as com-
modity prices rebound (see Sections 1.1
Explanation. LBMC's PPI Model
and 1.2) and labor costs pick up again as
forecasts producer price inflation for
capacity use rises (see graph on page 2).
finished goods. The
model is based on
LBMC's PPI Forecast
separate forecasts of
Producer Prices, year/year %
8%
PPI sub-indexes for
7%
food, energy, and
other goods.
6%
5%
Latest.
Producer
4%
prices fell 0.3% in
3%
September (up 0.1%
after seasonal adjust-
2%
ment). As a result,
1%
year-to-year PPI infla-
0%
tion fell to 0.8%.
-1%
Year-to-year PPI in-
flation should average
-2%
about 2% in 1991 and
-3%
1% in 1992. But we
85
86
87
88
89
90
91
92
93
94
September: 0.8% (Down 1.2%)
expect PPI inflation to
—
LBMC Forecast
+
PPI
Lehrman Bell Mueller Cannon, Inc.
October 1991
6
Economy Watch
LBMC's CPI Model
Based on sub-indexes, year/year %
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
Month-ahead forecast shown.
LBMC Model
+
CPI
1.5. LBMC's CPI Model
about 3%. CPI inflation should average
4.3% year-to-year in 1991 and 3.1% in
Explanation. Like our PPI Model,
1992. But we expect the CPI to rise to a
LBMC's CPI Model is based on
peak of about 5% year-to-year in mid-
separate explicit forecasts for the food,
1993.
energy, and ex-food-and-
energy sub-indexes.
LBMC's CPI Forecast
Consumer Prices, Year/Year Change
Latest. The CPI rose
7.0%
0.4% in September (also
0.4% after seasonal ad-
6.0%
justment). This cut year-
on-year inflation to 3.4%.
5.0%
A 0.4% rise in "core" in-
4.0%
flation raised fears that
improvement had stalled.
But we look for improve-
3.0%
ment in October's num-
bers, and an overall CPI
2.0%
rise of only 0.2%. We still
expect year-to-year CPI
1.0%
inflation to fall to a low of
86
87
88
89
90
91
92
93
94
September: 3.4% (Down 0.4%)
/
LBMC Model
+
CPI
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
7
October 1991
2.0 The Outlook for Growth
LBMC's World Dollar Base & Output
2.1 "Real" World Dollar Base
$Base/CPI (1-yr lag) V. Indust. Prod'n
13%
12%
Explanation. The level of output is
11%
10%
mostly determined by supply factors; but
9%
business-cycle fluctuations are partly re-
8%
7%
lated to "excess" money -- money not
6%
demanded to exchange wealth at exist-
5%
4%
ing prices (see "The Rueffian Synthesis"
3%
and "The World Dollar Base and Busi-
2%
1%
ness-Cycle Forecasting," June/July &
0%
September 1991 LBMC Reports). A
-1%
-2%
good measure of "excess" money is
-3%
Treasury debt monetized by the banking
-4%
-5%
system (graph below). In recent years,
86
87
88
89
90
91
92
SEP est: 5.3% year/year
increases in the World Dollar Base have
-
$Base/CPI yr/yr
Production yr/yr
formed the bulk of such monetization.
September. Though moderating after
Latest. After inflation, LBMC's World
the earlier surge, this growth cannot be
Dollar Base grew 5.3% year-to-year in
described as "tight."
Monetized Federal Debt & Capacity Use
Monetized debt/CPI V. Util. rate, yr/yr
12%
10%
8%
6%
.4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
60
65
70
75
80
85
90
Debt scaled to util. rate, 1-year lag
Monetized deficit
+
Util. rate
Lehrman Bell Mueller Cannon, Inc.
October 1991
8
Economy Watch
LBMC's Capital Return Index
1-Tax on Capital vs Util. change y/y
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
55
60
65
70
75
80
85
90
Index lagged 1 year
Lagged LBMC Index
+
Util rate change
Lehrman Bell Mueller Cannon, Inc.
2.2.LBMC Capital Return Index
Latest. LBMC's Capital Return Index
rose slightly in September -- up almost
Explanation. The LBMC Capital
2% year-to-year, mostly due to the posi-
Return Index is a monthly indicator of
tive effects of falling inflation and lower
the supply-side effect of Federal tax
interest rates.
policy on the return to capital. The
LBMC Capital Return Index
index includes Federal taxes on
Average Marginal After-Tax Return yr/yr
8.0%
corporate income, personal in-
7.0%
come, and capital gains. When the
6.0%
marginal tax on capital falls, the
5.0%
index rises. Even without changes
4.0%
in tax law, the tax rate changes
3.0%
each month with the expected in-
2.0%
flation rate (since capital gains are
1.0%
not indexed for inflation), and with
0.0%
interest rates (which alter the
-1.0%
value of tax deductions for
-2.0%
depreciation). Thus monetary
-3.0%
policy and effective marginal tax
-4.0%
86
87
88
89
90
91
92
93
rates are related.
SEPTEMBER: 1.9% year/year
LBMC Index
LBMC Forecast
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
9
October 1991
2.3.
LBMC Labor
LBMC Labor Return Index
Return Index
Average Marginal After-Tax Return yr/yr
3.0%
2.5%
Explanation. The LBMC
Labor Return Index charts the
2.0%
change in the marginal return
1.5%
to labor after Federal income
1.0%
and payroll taxes.
0.5%
Latest. The supply-side effect
0.0%
on labor of Federal tax policy
-0.5%
remains slightly negative in
-1.0%
1991, largely due to a rise in the
top income and Medicare tax
-1.5%
86
87
88
89
90
91
rates on January 1.
Latest month: -0.7% (unchanged)
+
LBMC Index
2.4. "Real" Federal Debt
expect inflation-adjusted growth of debt
to the public to peak in coming months
Explanation. We've come to the view
as the recovery proceeds." A declining
that Federal deficits have no major im-
percentage of a large debt will still mean
pact on growth unless they are
a large deficit, however.
monetized (see Sec-
tion 2.1). But they
LBMC's Federal Debt Model
can affect the com-
Debt to Public/CPI, 6-mo. SAAR
14.0%
position of output.
13.0%
Under floating ex-
12.0%
change rates, a non-
11.0%
monetized deficit can
10.0%
attract foreign capi-
9.0%
tal, causing the dollar
8.0%
to appreciate. Addi-
7.0%
tional domestic con-
6.0%
sumption
or
5.0%
investment financed
4.0%
by the deficit tends to
3.0%
be offset by a decline
2.0%
in net exports.
1.0%
0.0%
-1.0%
Latest. As we ar-
85
86
87
88
89
90
91
92
93
94
gued last month, "We
Public debt ex bank bailouts
Model
+
Real debt to public
Lehrman Bell Mueller Cannon, Inc.
October 1991
10
Economy Watch
LBMC Growth Model: Almost 2 Years Ahead
Change in Utilization Rate, year/year
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
LBMC Model
+
Util. rate
2.5. The LBMC Growth Model
We expect quarterly growth rates in in-
dustrial production to register 3-4% in
Explanation. LBMC's Growth Model
the 4th quarter and 5-6% in the 1st
begins with a forecast of the rate of
quarter of 1992. The quarterly rate
change in capacity utilization, based on
should slow in mid-1992, before
the LBMC indexes for government
rebounding at the start of 1993. We an-
monetary and fiscal policies. This is
ticipate that the economic expansion
combined with a forecast of industrial
will last into if not through 1994.
capacity to produce a
LBMC's Growth Forecast
forecast of industrial produc-
Industrial Production, Q/Q SAAR
tion.
10%
9%
8%
Latest. Industrial produc-
7%
6%
tion rose 0.1% in September,
5%
4%
and August was revised
3%
B
B
2%
down. However, manufac-
1%
turing, which accounts for
0%
x
-1%
90% of the index, rose 0.5%,
-2%
-3%
but was offset by a large fall
-4%
-5%
in utilities. The quarterly
-6%
growth rate for the third
-7%
-8%
quarter registered 6.2% (we
-9%
-10%
forecast 6% back in
-11%
85
86
87
88
89
90
91
92
93
94
February).
Actual IP
LBMC Forecast
Economy Watch
11
October 1991
LBMC's GNP Proxy
Real GNP ($1982) Quarter/quarter SAAR
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
Real GNP
+
LBMC GNP Proxy
2.6. LBMC's GNP Proxy
growth to peak close to 4% before slow-
ing in mid-1992. Real GNP should rise
Explanation. LBMC's Monthly GNP
about 0.9% 4th-Q-over-4th-Q in 1991,
Proxy is based on industrial production.
and 3.3% in 1992 However, planned 5-
While the output of goods is only about
year revisions to GNP accounts - and a
two-fifths of GNP, on average it accounts
switch to emphasis on GDP (Gross
for more than four-fifths of changes in
Domestic Product) will probably
real GNP over 6-month periods -- and
change the numbers significantly.
more than 2/3 of the
Real GNP Growth
quarterly real GNP growth
$1982, Q/Q SAAR
rate (graph above).
7%
e
6%
Latest. The government's
5%
initial estimate of 3rd-
4%
quarter real GNP growth
3%
was 2.4% close to the con-
2%
sensus, and about 1 point
1%
00
less than we predicted.
0%
Lower inventories con-
-1%
tinued to subtract from
0
GNP, though not as much as
-2%
the previous quarter. We ex-
-3%
85
86
87
88
89
90
91
92
93
94
pect quarterly real GNP
1991:III: 2.4%
Actual GNP
+
GNP Proxy
LBMC Forecast
Lehrman Bell Mueller Cannon, Inc.
October 1991
12
Economy Watch
3.0. The Outlook For Financial Markets
LBMC's Treasury Bond Model
Yield on 30-Year Treasury Bond
15%
14%
13%
12%
11%
10%
9%
8%
7%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
Month-ahead forecast shown
LBMC Forecast
+
30-year T-Bond
3.1.
LBMC
Treasury
Bond
pect the yield to say there several weeks,
Model
then dip below 7-1/2% in mid-1992 on
low inflation and temporarily slowing
Explanation. LBMC's Treasury Bond
recovery. The yield should average just
Model is designed to forecast the
under 8% in the remainder of 1991 and
monthly average yield of the 30-year
about 7.6% in 1992. But we see yields
Treasury Bond. The forecast is based on
rising with inflation in early 1993.
LBMC's
forecasts of the
LBMC's Treasury Bond Forecast
30-year Treasury Bond Yield
economy,
9.8%
central
bank
9.6%
9.4%
policy and in-
9.2%
vestor expecta-
9.0%
tions
about
8.8%
inflation and the
8.6%
8.4%
dollar.
8.2%
8.0%
Latest. The 30-
7.8%
year
T-Bond
7.6%
yield
bounced
7.4%
7.2%
around 8% in
87
88
89
90
91
92
93
94
October. We ex-
LBMC Model
+
30-year T-Bond
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
13
October 1991
LBMC's Corporate Bond Model
Moody's AAA Corporate Bond Yield
16%
15%
14%
13%
12%
11%
10%
9%
8%
78
79
80
81
82
83
84
85
86
87
88
89
90
91
LBMC Model
+
AAA Yield
3.2. LBMC Corporate Bond
Bond Model sees the AAA corporate
Model
bond yield averaging 8.9% in 1991 and
8.4% in 1992.
Explanation. The LBMC Corporate
Bond Model is
LBMC's Corporate Bond Model
designed
to
Moody's AAA Bond Yield
forecast
the
10.6%
medium-term
10.4%
trend in the yield
10.2%
of Moody's AAA
10.0%
Corporate Bond
9.8%
index. The AAA
9.6%
yield forecast is
9.4%
based on a varying
9.2%
markup over our
9.0%
forecast for the
8.8%
Treasury
bond
8.6%
8.4%
yield.
8.2%
8.0%
Latest.
The
87
88
89
90
91
92
93
LBMC Corporate
LBMC Model
+
AAA Yield
Lehrman Bell Mueller Cannon, Inc.
October 1991
14
Economy Watch
3.3. The LBMC Liquidity Index
The LBMC Liquidity Index gives
as a Long-Term Stock Guide
relatively few buy and sell signals. But
in the past using this method has made
Explanation. The LBMC Liquidity
possible higher returns than buy-and-
Index is a monthly indicator of li-
hold. For the chart below, buy-and-hold
quidity growth in the U.S. economy.
would have yielded 284% in capital
The banking system, led by the Fed,
gains (ignoring dividends and foregone
supplies liquidity, while growth or in-
interest), but following the Liquidity
flation "absorbs" liquidity.
Index would have yielded 519%.
The LBMC Liquidity Index serves
Between signals, the Long-Term Index is
as a useful guide for strategic stock
not intended as a guide for short-term in-
investment. When the Liquidity Index
vestments. For our near-term outlook, see
turns positive, it acts as a major "buy"
the following section.
signal for stocks; when the Liquidity
Index turns negative, it acts as a
Latest. LBMC's Long-Term Liquidity
major "sell" signal.
Index shows liquidity still rising rapidly,
signaling a long-term "buy."
LBMC Liquidity Index & Stocks
S
Dow Jones Industrial Average
3.500
s
3.000
S
S
S
2.500
Buy
2.000
B
1.500
1.000
B
0.500
B
B
0.000
B
-0.500
-1.000
-1.500
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93
SEPTEMBER: 7.4%
DJI ('000)
+
Index X 10
Forecast
Lehrman Bell Mueller Cannon, Inc.
Economy Watch
15
October 1991
3.4. LBMC Liquidity Index as a
to eight months. Being based purely on
Medium-Term Stock Guide
liquidity, the index does not directly in-
clude such influences on the stock
market as valuation, taxation, leverage,
Explanation. The Liquidity Index used
exchange rates or investor expectations.
in Section 3.3 as a long-term bull/bear
market indicator can also be used to
Latest. The lagged effect of liquidity is
gain important information about
positive (see graph), and with a some-
shorter-term stock market moves.
what larger bond rally in prospect, we've
raised our view of stock performance
In this section the LBMC Liquidity
over the next year. We see the Dow
Index is rescaled for comparison with
Jones Industrials hitting 3,300 in the
the year-on-year increase in the Dow
first half of 1992. And we expect the
Jones Industrials. The LBMC Liquidity
Dow to reach a peak of about 3,700 by
Index leads the stock market by about six
the end of 1992.
LBMC Liquidity Index & Change in Stocks
Index sized as regression on DJI y/y
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94
DJI y/y
+
Index, 8-mo lag
Forecast
Lehrman Bell Mueller Cannon, Inc.
October 1991
16
Economy Watch
LBMC's Yen/Dollar Signal
Based on Yen/Dollar Trend Model
320
300
280
260
240
220
200
180
160
140
120
100
80
60
40
20
o
-20
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
Yen/$
+
LBMC Model
Buy/sell
Section 3.5. LBMC's Yen/Dollar
Latest. We continue to expect a
Forecast
recovery of the dollar against the
European currencies, as real bond rates
Explanation. LBMC's Yen-Dollar
move to favor the U.S. But the dollar
Trend Model is designed to help deter-
remains a long-term "sell" against the
mine turning points in the yen/dollar ex-
yen, though we expect a brief bounce
change rate. The basic factors in the
upward before the dollar renews its
forecast are central bank policy and the
decline. Main reasons: continued Fed
terms of trade. The top graph shows
easing and this year's fall in oil prices.
how the model can be used
as a buy/sell signal. A buy (or
LBMC's Yen/Dollar Trend Forecast
Japanese Yen per U.S. Dollar
sell) is indicated when the
165
model's rate of change turns
160
positive (or negative); the
155
zero line is shown here as
150
100. The graph below trans-
145
lates the economic fun-
damentals of the model into
140
a forecast for the actual
135
yen/dollar rate, taking into
130
account the "bandwagon ef-
125
fect" of trend-followers. The
120
forecast "band" reflects the
115
confidence limits of a 1-
87
88
89
90
91
92
month-ahead forecast.
September average: 134.8
LBMC forecast
+
Yen/$
Lehrman Bell Mueller Cannon, Inc.
11111
SpecialReport TAX FOUNDATION
OCTOBER 1991
Survey of State Tax Rates and Collections
Economics /Taxes IGeneral
Rates for FY'92 Rise Sharply; Collections for FY'90 Break $300 Billion
by Gregory S. Leong
Thirty states have enacted tax increases
their cigarette excises. The bulk of the new
that will raise a total of $17 billion in new
revenue will not come from higher excise
revenue in FY1992, making FY'91 the biggest
rates, however, but rather from higher sales
revenue-raising year in history at the state
taxes in six states, and higher personal income
level. In addition to hiking tax rates, states
taxes in eight states.
increased taxes indirectly by broadening tax-
able bases, extending temporary hikes, and
Individual Income Taxes
conforming to federal tax rates. They also
Connecticut was the only state to enact a
enacted a host of "non-tax" revenue-raising
new broad-based income tax this year. Law-
measures, such as higher fees and accelerated
makers there repealed taxes on capital gains,
collections, that will bring in approximately
dividends, and interest income, replacing
$2.4 billion more in FY'92 revenue.
them with a flat 4.5 percent income tax. All
Gasoline and tobacco were the most
told, the state's FY'91 tax package is expected
popular targets as 23 states hiked the amounts
to net $1 billion in new FY'92 revenues. With
they collect at the pump and 14 states raised
this new tax system, Connecticut joins six
Figure 1
Percentage Distribution of State Government Tax Collections by Source
Fiscal Year 1990
Alcohol
1.1
Death and Gift
1.3
Severance
1.6
Type
Tobacco
1.8
of Tax
Property
1.9
Total State Tax Revenues = $300.5 Billion
Public Utilities
2.2
Insurance
2.5
Other
2.6
Licenses
6.3
Motor Fuels
6.5
Corporate Income
7.3
Personal Income
32.0
General Sales
33.2
0
5
10
15
20
25
30
35
Source: Tax Foundation (see table 3).
Percent of Total State-Level Collections
Gregory Leong is Director of Special Studies at the Tax Foundation.
SpecialReport
2
State Rates and Collections
Table 1
Major State Taxes and Rates
as of August 1, 1991
General Sales
Gasoline Tax
Cigarette Tax
Property
State
Corporate
Individual
and Use Tax
(per gallon)
(per pack of 20)
Tax
Alabama
5% (F)
2 to 5% (F)
4% (a)
11 cents
16.5 cents
Alaska
1 to 9.4
none
none
8
29
X
Arizona
9.3
3.8 to 7
5 (a)
18
18
X
Arkansas
1 to 6.5
1 to 7
4.5 (a)
18.5
22
X
California
9.3 (c)
1 to 11 (c)
6 (a,d)
15 (b)
35
Colorado
5 to 5.2 (d)
5 (c)
3 (a)
22
20
Connecticut
11.5 (f)
4.5 (g)
8 (d)
23 (b)
40 (b)
Delaware
8.7 (w)
3.2 to 7.7
none
19 (I)
24
District of Columbia
10 (f)
6 to 9.5 (f)
6
18
30
Florida
5.5 (c)
none
6 (a)
4 (w)
33.9
X
Georgia
6% of taxable net
1 to 6
4 (a)
7.5 3%
12
income
of retail
Hawaii
4.4 to 6.4
2 to 10
4 (a)
24.8 to 32.5 (v)
40% of wholesale
Idaho
8
2 to 8.2
5
22 (v)
18
Illinois
4.8 (h)
3 (h)
6.25 (a)
19 (d,w)
30
Indiana
3.4 (i)
3.4
5
15
15.5
lowa
6 to 12 (F,j)
.4 to 9.98 (c,F)
4 (a)
20
36
Kansas
4.5 (f)
3.65 to 5.15 (k)
4.25 (a)
17 (b)
24
Kentucky
4 to 8.25
2 to 6
6 (a)
15 (e)
3
Louisiana
4 to 8 (F)
2 to 6 (F)
4 (a)
20
20
Maine
3.5 to 8.93
2 to 8.5 (o)
6 (d)
19
37
Maryland
7
2 to 5
5
18.5
16
Massachusetts
9.5 (e,m)
6.25 (n)
5
21 (e)
26
Michigan
2.35
4.6
4
15
25
Minnesota
9.8 (c)
6 to 8.5
6.5 (a,d)
20.25
43
X
Mississippi
3 to 5
3 to 5
6
18 (d)
18
X
Missouri
5 to 6.5 (d,F)
1.5 to 6 (F)
4.225 (a,d)
11
13
X
Montana
6.75 (f,s)
2 to 11 (F)
none
20
18
X
Nebraska
5.58 to 7.81
2.37 to 6.92
5 (a)
23.71 (v)
27
Nevada
none
none
5.75 (a,b)
18
35
New Hampshire
8
5 (g)
none
18
25
X
New Jersey
9 (f,t)
2 to 7
7
10.5
40
New Mexico
4.8 to 7.6
1.8 to 8.5
5
16.2
15
New York
9 (c,d,e,f,u)
4 to 7.875 (d,p)
4 (a)
8
39
North Carolina
7.75 (f)
6 to 7.75
4 (a)
22.6 (v)
5
North Dakota
3 to 10.5 (c,F)
2.67 to 12 (F,q)
5
17 (d)
29
Ohio
5.1 to 8.9
743 to 6.9
5 (a)
21 (v)
18
Oklahoma
6
.5 to 7 (k,F)
4.5 (a)
16 (e)
23
Oregon
6.6
5 to 9 (F)
none
20
28
Pennsylvania
12.25
3.1 (d)
6 (a)
12
31
Rhode Island
9 (f)
27.5 % of modified
7
26 (e)
37
Federal Income tax
South Carolina
5
2.5 to 7
5 (a)
16
7
South Dakota
none
none
4 (a)
18
23
Tennessee
6 (g)
6 (g)
5.5 (a)
21 (w)
13
Texas
none
none
6.25 (a)
20
41
Utah
5
2.55 to 7.2 (F)
5 (a)
19 (w)
26.5
Vermont
5.5 to 8.25
28% of federal income
5
15
18 (b)
tax liability (d,o)
Virginia
6
2 to 5.75
3.5 (a)
17.5
2.5
Washington
none
none
6.5 (a)
23 (I)
34 (d)
West Virginia
9.15
3 to 6.5 (c)
6
15.5
17
Wisconsin
7.9
4.9 to 6.93
5 (a)
22.5 (I)
30 (e)
Wyoming
none
none
3 (a)
9 (I)
12
(X) Indicates property tax levied.
income from interest and dividends. Additional
at varying rates.
(F) Allows federal income tax as a deduction.
changes in deductions also added in 1991 for CT.
(q) Election to be taxed on 14% of taxpayer's federal
(a) Local taxes are additional.
(h) Additional 1.5-2.5% personal property replacement tax
income tax liability.
(b) Future increases scheduled under current law. As
imposed.
(r) Additional county transportation tax levied.
of October 1, 1991, CT gas tax -25 cents, and
(i) A supplemental net income tax is imposed at 4.5%.
(s) 7% rate for corporations using "water's edge"
cigarette tax 45 cents.
(j) Franchise tax is 5% of taxable net income.
apportionment.
(c) Alternative minimum tax is imposed.
(k) In KS and OK, higher rates may apply to taxpayers
(t) A 7.25 corporation income tax is imposed on
(d) Future reductions scheduled under current law. CT
deducting federal income tax.
entire net income of foreign corporations not subject
sales tax drops to 6% October 1, 1991.
(I) Tax rate is periodically adjusted administratively.
to the corporation business tax.
(e) Alternative methods of calculation may be required.
(m) Excise tax is imposed equal to the greater of (a) $2.60
(u) Small business taxpayers are subject to a lower rate.
(f) Corporate surtax is imposed, CT 20%, DC 5%,
(includes surtax) per $1,000 of value of MA tangible
(v) Includes additional taxes or fees. Hawaii gas rates
KS 2.25%, NJ 375%, NY 15%, NC 4%, ME
property not taxed locally or net worth allocated to MA,
include county rates.
10%, MT 5%, RI 11%. CT surtax scheduled to
plus 9.5% (includes surtax) of net income, or (b) $400.
(w) Additional tax or surcharge imposed.
decrease to 10% in 1992 and be eliminated in
(n) Tax of 12% on income derived from interest,
Sources: Compiled by Tax Foundation from survey of
1993.
dividends, and capital gains.
state revenue offices and data reported by
(g) In NH and TN, rates apply to income from
(o) Income surtax imposed, ME 5-15%, VT 3-6%.
Commerce Clearing House through July 1,
dividends and interest. In CT, lower rates applied to
(p) Qualified taxpayers may elect to pay alternative taxes
1991.
SpecialReport
5
State Rates and Collections
income taxes, insurance taxes, and sales
digious revenue producer for state gov-
taxes grew the fastest, jumping 159 per-
ernments is corporate income taxes,
cent, 138 percent, and 131 percent
which have been increasing rapidly and
respectively.
represented 7.3 percent of total collec-
tions in FY'90, or $22 billion. The remain-
FY'90 Collections Reach All-Time High
der of FY'90's revenue was garnered
State tax revenues broke the $300
mostly from motor fuel taxes and li-
billion mark for the first time in FY'90,
censes (see table 3 and figure 1).
rising 5.7 percent from their FY'89 level
of $284 billion, and providing 58 percent
Tax Burden Per Capita
of total general revenue for the states.
Based on FY'90 tax collections, the
Severance tax, property tax, and death
average state tax burden per capita rose
and gift tax grew the fastest, but most of
$62, from $1,148.52 in FY'89 to $1,211.14
the new funds were clearly due to per-
in FY'90. Alaskans pay the highest per
sistent growth in collections from the
capita taxes in the country, $2,811.49 per
mainstays of state government finance,
resident. Hawaii ($2,106.78), Delaware
personal income taxes and general sales
($1,695.59), and Connecticut ($1,602.62)
taxes. They rose 8.2 percent and 6.6 per-
rank two-three-four in taxes per person.
cent respectively. Together these two tax
Taxpayers in New Hampshire
sources accounted for more than 65 per-
($536.67), South Dakota ($718.52), Texas
cent of the tax pie - $99.7 billion from
($866.36), and Tennessee ($870.38) will
sales taxes and $96.1 billion from per-
shoulder the lightest per capita state tax
sonal income taxes. The third most pro-
burdens (see table 4 and figure 2).
Figure 2
State Tax Collections Per Capita by State
Fiscal Year 1990
NH
WA
$537
$1,525
#50
#8
MT
ND
VT
ME
$1,060
$1,183
$1,271
$1,073
#16
OR
#33
#35
MN
#23
$980
$1,559
MA
#39
ID
#6
$1,557
$1,131
SD
WI
NY
#7
#25
$719
$1,341
$1,591
WY
#49
#13
MI
#5
RI
$1,348
$1,220
$1,229
#12
IA
#19
CT
#18
PA
NE
$1,193
$1,603
$1,113
NV
959
#4
#21
NJ
OH
#28
UT
#43
IL
IN
$1,317
$1,054
$1,350
#15
$1,128
$1,101
DE
$1,026
CO
#36
#10
CA
#38
#27
#30
$1,696
WV
$1,459
$932
VA
#3
KS
MO
$1,243
#9
#45
$1,077
KY
#17
$1,067
$965
$1,156
#34
MD
#32
DC
#41
#24
$1,349
NC
$3,807
#11
TN
$1,186
OK
$870
#22
AZ
$1,105
AR
#47
$1,194
NM
#29
$962
SC
#20
$1,329
#42
$1,128
#14
#26
MS
AL
GA
$931
$945
$1,093
LA
#46
#44
#31
AK
$2,811
TX
$968
#1
$866
#40
#48
FL
HI
$1,027
$2,107
#37
.00
#2
Source: Tax Foundation
Special Report
4
State Rates and Collections
line tax in the nation: the combined state-local
tional taxes for every man, woman and child.
tax ranges from 24.8 to 32.5 cents per gallon.
Eight other state governments will extract
Rhode Island (26 cents), Nebraska (23.71
over $100 per capita in new state taxes in
cents), and Connecticut and Washington (23
FY'92:
cents) follow closely behind. Florida levies the
lowest rate, 4 cents; but gasoline is also subject
Pennsylvania
$277.91
Delaware
$141.86
California
$220.70
Rhode Island
$130.35
to a 6.9 percent general sales tax. Alaska and
Maine
$216.63
Nevada
$116.99
New York have the next lowest rates at 8 cents.
Vermont
$160.10
Arkansas
$112.60
On cigarettes, the largest tax increases
were enacted by Pennsylvania and the Dis-
Meanwhile, four states bucked the rev-
trict of Columbia, which raised their rates 13
enue-raising trend by passing measures that
cents to 31 cents and 30 cents per pack respec-
will bring in less revenue in FY'92, but not
tively. Minnesota had been imposing the
very much less. Montana will spare its taxpay-
highest rate in the country 43 cents per pack
ers $5.88 per capita; New Jersey, $2.59 per
- but fell to second on October 1, 1991, when
capita, Michigan, $1.08 per capita, and North
Connecticut's increase to 45 cents took effect.
Dakota, 16 cents per capita in FY'92. In all the
(See table 1 for more details.)
states which passed any kind of new revenue
measures this year, the average additional tax
Additional Tax Burden Per Capita
burden will be $62.84 per capita for FY'92.
Five states - California ($6.6 billion),
Trends in State Tax Collections
Pennsylvania ($3.3 billion), New York ($1.2
billion), Connecticut ($1 billion), and Texas
This year's $17 billion increase in FY'92
($799 million) account for more than 75 per-
taxes, following on the heels of the $9.5 billion
cent of the net $17 billion tax increase (see
increase in FY'91, has perpetuated the 1980s'
table 2). However, a per capita analysis gives
trend of escalating state taxes.
a clearer picture of what these additional tax
Moreover, state tax collections grew at an
revenues mean to the average taxpayer.
average rate of 8.6 percent in the 1980s, out-
While California's $6.6 billion increase is
pacing inflation by more than 3 percentage
by far the largest total tax hike, the heaviest
points and personal income by 0.6 percentage
additional per capita tax burden will fall on
points. During the decade, state tax
taxpayers in Connecticut. There, a one billion
collections rose 119 percent, from $137.1 bil-
dollar tax hike translates to $315.02 in addi-
lion in 1980 to $300.5 billion in 1990. Personal
Table 3
State Government Tax Collections By Type
Fiscal Years 1980-1990
($Billions)
Percent
Percent
Change
Change
Type of Tax
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989 (a)
1990
80-90
89-90
Total
$137.1
$149.8
$162.6
$171.5
$196.9
$215.9
$228.1
$246.5
$264.1
$284.4
$300.5
119.3%
5.7%
General Sales
43.2
46.4
50.4
53.6
62.6
69.6
74.8
79.2
87.1
93.5
99.7
131.0
6.6
Personal Income
37.1
40.9
45.7
49.8
59.0
63.9
67.4
76.2
80.1
88.8
96.1
158.9
8.2
Corporate Income
13.3
14.1
14.0
13.2
15.5
17.6
18.4
20.5
21.6
23.9
21.8
63.6
-8.8
Motor Fuels
9.7
9.7
10.5
10.8
12.4
13.3
14.1
15.7
17.2
18.1
19.4
99.6
7.2
Licenses
8.7
9.5
10.1
10.7
12.0
13.8
14.9
15.9
17.0
17.7
18.8
116.3
6.2
Other
3.2
3.4
3.7
3.9
5.2
6.0
6.4
7.1
7.4
7.7
7.8
142.8
1.3
Insurance
3.1
3.3
3.5
3.9
4.1
4.5
5.5
6.3
6.9
7.4
7.4
137.7
0.0
Public Utilities
3.4
4.3
4.9
5.7
5.9
6.2
6.0
6.0
6.2
6.2
6.5
93.5
4.8
Property
2.9
2.9
3.1
3.3
3.9
4.0
4.4
4.7
5.0
5.3
5.8
100.5
9.4
Tobacco
3.7
3.9
4.0
4.0
3.9
4.4
4.5
4.6
4.8
5.1
5.5
47.1
7.8
Severance
4.2
6.4
7.8
7.4
7.2
7.2
6.1
4.0
4.3
4.1
4.7
11.7
14.6
Death and Gift
2.0
2.2
2.4
2.5
2.2
2.3
2.5
3.0
3.2
3.5
3.8
86.7
8.6
Alcohol
2.5
2.6
2.7
2.7
2.9
3.0
3.1
3.1
3.2
3.1
3.2
29.2
3.2
(a) 1989 figures revised.
Source: Department of Commerce, Bureau of the Census; and Tax Foundation computations.
SpecialReport
3
State Rates and Collections
states which use a flat tax rate for all income.
Twenty-three states enacted higher ex-
Seven other states raised individual in-
cises on motor fuels this year. California and
come tax rates: Rhode Island and Vermont,
Rhode Island enacted the largest increases,
which base their income taxes on federal tax
six cents per gallon. Hawaii added five cents
liability, hiked their rates; California, Massa-
per gallon and still imposes the highest gaso-
chusetts, Nebraska, and North Carolina
raised their marginal rates for top income
earners; and Pennsylvania raised its flat rate
Table 2
from 2.1 to 3.1 percent.
Rates in three states, Kansas, Oklahoma,
Projected Fiscal 1992 State Level
and South Carolina, dropped for FY'92. South
Net Revenue Gains and Losses
Carolina, as a result of prior legislation, en-
Resulting from 1991 Enactments
acted the final phase of income tax reduction,
Revenue
Per
lowering the bottom marginal rate from 3 to
State
($Millions)
Capita (a)
2.5 percent. Alaska, Florida, Nevada, South
Alabama
$172.0
$42.57
Dakota, Texas, Washington, and Wyoming
Alaska
1.0
1.82
Arizona
9.1
2.48
retain the distinction of being the only seven
Arkansas
264.7
112.60
states which levy no individual income tax.
California
6,568.0
220.70
Colorado
-
-
Tennessee and New Hampshire exempt
Connecticut
1,035.5
315.02
wages and salaries but tax income from inter-
Delaware
94.5
141.86
est and dividends.
Florida
51.1
3.95
Georgia
-
-
Hawaii
48.0
43.31
Corporate Income Taxes
Idaho
12.7
12.61
Illinois
817.0
71.47
Six states — Arkansas, Kentucky, Minne-
Indiana
42.7
7.70
sota, Nebraska, North Carolina, and Pennsyl-
lowa
13.6
4.90
Kansas
-
-
vania - raised corporate income tax rates for
Kentucky
-
-
FY'92 while two states, Colorado and West
Louisiana
315.0
74.65
Virginia, lowered them. Pennsylvania en-
Maine
266.0
216.63
Maryland
90.1
18.84
acted the largest percentage increase, 44 per-
Massachusetts
-
-
cent, and consequently has the highest mar-
Michigan
(10.0)
(1.08)
Minnesota
287.7
65.76
ginal corporate tax rate in the nation, 12.25
Mississippi
-
-
percent, slightly above Iowa's 12 percent.
Missouri
-
-
Iowa is followed by North Dakota (10.5 per-
Montana
(4.7)
(5.88)
Nebraska
17.3
10.96
cent), and Minnesota (9.8 percent). (This rank-
Nevada
140.6
116.99
ing is based solely on marginal tax rates and
New Hampshire
61.7
55.62
does not take into account surtaxes or alterna-
New Jersey
(20.0)
(2.59)
New Mexico
27.1
17.89
tive minimum taxes, where imposed.) Five
New York
1,200.0
66.70
states continue to avoid corporate income
North Carolina
616.9
93.07
North Dakota
(0.1)
(0.16)
taxes altogether: Nevada, South Dakota,
Ohio
122.1
11.26
Texas, Washington, and Wyoming.
Oklahoma
-
-
Oregon
92.6
32.58
Pennsylvania
3,302.0
277.91
Sales and Excise Taxes
Rhode Island
130.8
130.35
South Carolina
10.6
Among the six states that increased their
3.04
South Dakota
-
-
sales taxes for FY'92, California imposed the
Tennessee
5.5
1.13
largest rate hike, from 4.75 to 6 percent. Con-
Texas
799.0
47.04
Utah
4.9
2.84
necticut, which had the highest sales tax in the
Vermont
90.1
160.10
nation last year, 8 percent, reduced its rate to 6
Virginia
33.2
5.37
Washington
10.7
percent. As a result, New Jersey and Rhode
2.20
West Virginia
-
-
Island now have the highest sales tax rates in
Wisconsin
284.7
58.20
the nation, 7 percent, followed by Minnesota
Wyoming
-
-
District of Columbia
44.5
73.32
and Washington, 6.5 percent. Five states -
$17,048.2
-
Alaska, Delaware, Montana, New Hamp-
(a) Based on latest available population data, June 1990.
shire, and Oregon - do not impose a sales
Source: National Conference of State Legislatures, and
and use tax.
Tax Foundation survey of revenue departments,
legislative officials, and governors' offices.
SpecialReport
6
State Rates and Collections
Taxes Per $1,000 of Personal Income
Table 4
Taxpayers paid a national average of
Total State Level Tax Collections Per $1,000 in Personal
$64.87 in state level taxes per $1,000 of per-
Income and Per Capita Tax Burden
sonal income earned. The average effective
rate, therefore, of taxes per $1,000 of personal
Fiscal Year 1990
income is 6.49 percent. Thirty-one states and
Personal
Total Tax
the District of Columbia surpassed this na-
Per $1000
Rank
Per
Income (b)
Revenue
State
of Income
Per Capita
Capita (a)
($Millions)
tional average rate. Alaska, second only to the
($Millions)
District of Columbia, led the states with an
Total
$64.87
-
$1,211.14
$4,632,380
$300,488.6
Alabama
63.76
44
945.29
59,907
3,819.5
effective rate of 12.9 percent, nearly double the
Alaska
129.20
1
2,811.49
11,969
1,546.4
national average. By comparison, taxpayers
Arizona
73.27
20
1,194.13
59,732
4,376.8
in New Hampshire paid 2.6 percent of their
Arkansas
67.65
42
961.80
33,423
2,260.9
California
70.16
9
1,458.98
618,850
43,419.2
personal income in state taxes, only one-fifth
Colorado
49.57
45
931.71
61,916
3,069.4
of Alaska's rate. The ten states with the high-
Connecticut
63.20
4
1,602.62
83,355
5,268.0
Delaware
84.62
3
1,695.59
13,349
1,129.6
est taxes as a percentage of personal income
Florida
55.27
37
1,027.17
240,459
13,289.5
are:
Georgia
64.49
31
1,092.62
109,765
7,078.2
Hawaii
104.02
2
2,106.78
22,446
2,334.8
Alaska
12.9
Minnesota
8.3
Idaho
74.61
25
1,131.11
15,262
1,138.7
Hawaii
10.4
Wyoming
8.2
Illinois
55.55
27
1,127.72
232,071
12,890.5
Indiana
65.26
30
1,100.55
New Mexico
93,494
6,101.6
9.3
Washington
8.1
lowa
69.17
21
1,193.15
47,897
3,313.1
West Virginia
9.0
Kentucky
7.7
Kansas
59.89
32
1,077.26
44,562
2,669.0
Delaware
8.5
Wisconsin
7.7
Kentucky
77.44
24
1,156.13
55,019
4,260.7
Louisiana
67.29
40
968.42
60,730
4,086.7
The lowest percentages are paid by tax-
Maine
73.90
16
1,271.14
21,120
1,560.9
Maryland
61.70
11
1,348.99
104,543
6,450.1
payers in:
Massachusetts
68.78
7
1,557.26
136,226
9,369.1
Michigan
66.52
19
1,220.34
170,534
11,343.4
New Hampshire
2.6
New Jersey
5.4
Minnesota
83.21
6
1,558.65
81,948
6,819.3
South Dakota
4.5
Tennessee
5.5
Mississippi
73.11
46
931.08
32,770
2,395.9
Colorado
5.0
Missouri
5.5
Missouri
55.16
41
965.23
89,535
4,939.2
Montana
71.04
33
1,073.36
Texas
12,074
857.7
5.2
Florida
5.5
Nebraska
55.66
43
958.53
27,182
1,512.9
Virginia
5.4
Illinois
5.6
Nevada
67.85
15
1,317.39
23,335
1,583.3
New Hampshire
25.82
50
536.67
23,060
595.3
Outlook for State Taxpayers
New Jersey
54.06
10
1,349.76
193,008
10,433.9
New Mexico
93.43
14
1,329.34
21,556
2,014.0
While Americans are struggling to make
New York
72.38
5
1,590.54
395,336
28,614.6
North Carolina
73.23
22
1,186.48
107,403
7,864.7
ends meet in a recessionary economy, state
North Dakota
69.48
35
1,059.97
9,745
677.1
legislatures have handed them a whopping
Ohio
60.34
36
1,054.32
189,537
11,436.4
Oklahoma
$17 billion tax hike. Despite the size of the
71.57
29
1,105.31
48,581
3,476.9
Oregon
57.13
39
980.15
48,762
2,785.9
increase, demands for more state-level funds
Pennsylvania
59.59
28
1,112.61
221,850
13,219.7
are already being heard, as state governments
Rhode Island
65.23
18
1,229.05
18,906
1,233.3
South Carolina
74.73
26
1,128.40
52,646
3,934.4
try to simultaneously keep up with federal
South Dakota
45.27
49
718.52
11,047
500.1
spending mandates and satisfy their own
Tennessee
55.09
47
870.38
77,052
4,245.0
Texas
51.70
48
866.36
284,678
14,716.5
wish-lists for higher spending. This perpetu-
Utah
72.87
38
1,026.20
24,263
1,768.0
ates a trend of the 1980s - higher taxes and
Vermont
67.85
23
1,183.00
9,812
665.7
higher spending at the state level. And with
Virginia
54.02
34
1,066.77
122,178
6,600.5
Washington
80.88
8
1,525.29
91,774
7,423.1
no robust recovery in sight, it is a trend which
West Virginia
90.44
17
1,243.25
24,655
2,229.7
will cause an increasing amount of pain to
Wisconsin
76.59
13
1,340.57
85,620
6,557.7
Wyoming
82.23
12
1,348.39
7,438
611.6
state taxpayers.
Exhibit: Dist. of Col.
157.43
3,806.74
14,675
2,310.3
(a) Population as of June 1990.
(b) Personal income is the sum of the State estimates. It omits the earnings of Federal civilian and
military personnel stationed abroad and of U.S. residents employed abroad temporarily by private
The Tax Foundation, a nonprofit, nonpartisan
U.S. firms.
research and public education organization, has
Source: U.S. Department of Commerce, Bureau of the Census, Bureau of Economic Analysis, and
been monitoring tax and fiscal activities at all levels
Tax Foundation computations.
of government since 1937.
Tax Foundation
470 L'Enfant Plaza, SW, Suite 7400
Washington, DC 20024
(202) 863-5454
11/04/91
16:17
201539 4025
POLYCONOMICS
001
POLYCONOMICS, INC.
Political and Economic Communications
November 4, 1991
THE BUSH RECESSION
Morris ("Hawkeye") Mark of Mark Partners, one of our Wall Street clients, called us at 3 p.m.
Friday, pointing out that at 2:46 p.m. the Dow was up five points in a strong market and the long
bond was up a half point. At 2:51 p.m., the Dow was off 19 and the bond down a quarter. What kind
of typhoon could, in five minutes, blow 24 points off the Dow and three quarters of a point from the
30-year Treasury? At 2:46, says Morris, a report came across his screen that President Bush, in Texas,
was insistent that the Fed lower interest rates! It's bad enough that the bond market quivers and the
dollar slides practically every time a reporter puts a microphone under the nose of Nick Brady or
Michael Boskin. For the President to be flogging the Fed on the eve of its FOMC meeting and
Treasury refunding is unconscionable, further evidence of the bankruptcy of this Administration on
economic policy.
Before Friday afternoon was out, we talked to three other clients and an official at the Fed in
Washington who also noted the connection between the President's comments and the bond selloff.
As we know, the financial press, with rare exceptions, is incapable of making such connections on
its own, I called an editor at The Wall Street Journal, and an item making the connection appears at
the bottom of the editorial page today. There is a bit of a discrepancy on the exact times, with the
broad tape carrying a headline, "Bush Calls For Lower Interest Rates, Fitzwater Says," logged at 2:32.
But there should be no doubt that Typhoon Bush was responsible for Friday's selloff. Two weeks ago
I yelled at Boskin for his Fed bashing, pointing out that the 30-year Treasury takes a nosedive
whenever he's quoted. He claims to be taken out of context. He is taken out of context at least twice
a week. It of course does no good to explain to the Treasury Secretary -- as I did in his office early
in 1989 -- that when you are trying to persuade your creditors to lend you lots of money, you should
not be threatening to cheat them through an inflation. Ten days ago I wrote the President a three-page
letter, urging him to make a personnel change at Treasury if he hopes to get the economy on track.
1, of course, sent a copy to Secretary Brady as well.
The only thing holding together the economy, as much as it stinks, is the good sense at the Federal
Reserve to continue resisting the pleas of the Administration to inflate. The fed funds rate continues
to drift lower, but only coincident with a decline in the price of gold, now at $356. The Fed is clearly
not adding liquidity faster than the market is demanding it. There is simply less demand for liquidity
for transaction purposes because there are fewer transactions. The dollar is being hammered against
the Deutschemark only because the Bundesbank is not taking seriously the sharply declining gold
price in D-mark as a demand for more liquidity in that currency, due to the continuing, surprising
expansion of the East German sector.
In his Texas speech Friday, President Bush did a lot of yelling and screaming about how the
Democratic Congress has prevented the U.S. economy from expanding. Alas, I now agree with Senate
Majority Leader George Mitchell: The Bush Administration is, at least in fiscal policy, looking more
like the Hoover Administration. As much as the President favors economic growth in principle, he
has for three years in a row made the budget his highest priority. It was possible 10 blame the
Democrats in 1989. In 1990, it was possible to divide the blame, as the White House and Congress cut
their budget deal. In 1991, the President has once again decided the preservation of his Budget
Agreement is more important than negotiating 3 growth package with the Democrats. He has taken
three called strikes, the bat never leaving his shoulder, and now he would like a fourth pitch in 1992.
Maybe. In The Wall Street Journal this morning, we read that Budget Director Richard Darman
believes there may be a capital gains tax cut next year, if the economy hasn't recovered on its own!
86 Maple Avenue Morristown. N.I. 07960 (201) 267-4640 FAX (201) 539-4025
11/04/91
16:18
201539 4025
POLYCONOMIC
002
Two weeks ago I called a Pennsylvania client who had introduced me to Richard Thornburgh in
1978 when Thornburgh was running for governor. I told him I didn't think Thornburgh could win
his race for the Pennsylvania Senate seat as long as he was defending the economic policymaking of
George Bush. As much as the people of Pennsylvania might prefer him to Harris Wofford, a
traditional liberal Democrat, it would send the President the wrong signal if they elected Thornburgh.
On the other hand, if Thornburgh, even in the closing days of his campaign, aligned himself with the
growth faction in the Administration, publicly disagreeing with the Hooverian policies of Brady,
Darman and Boskin, the voters would almost have to vote for him, to send that signal. David Duke
would not have defeated Republican Governor Buddy Roemer in Louisiana this September if Roemer
had given the voters the slightest opportunity to use him as a protest message to the Bush
Administration. With 70% of the nation now responding to polls saying the country is on the wrong
track, why would anyone line up behind candidates who are lined up behind George Bush?
The Journal carried an article last week indicating that Art Laffer and I have given up on President
Bush and have now embraced former Gov. Jerry Brown as the supply-side "torchbearer." The article
was the result of Brown telling the reporter that he has consulted us for advice. (The reporter, whom
I've known for more than 25 years and have never, ever telephoned, described me in his article as a
"self-promoter.") The same article points out that I've also been trying to persuade New York's Mario
Cuomo to jump into the race, which suggests I'm awfully fickle or about to commit political bigamy.
The fact is that at the moment, we have no choice but to look for an alternative to President Bush, to
talk to any Democrat who looks to us for counsel, or to any Republican that might be thinking of
jumping into the GOP primaries next year. I've not spoken to Art Laffer in several years, but I
understand it is as imperative for him as it is for me [as it is for all of us] to find a political solution
to the mess the country is in. If we can't find the solution on the GOP side, there is only one other
party left.
In his front page column in Barron's this week, Editor Alan Abelson, who read the Journal article,
finds all this very amusing. The column opens: "Jerry Brown and Jude Wanniski. Governor Moonbeam
and Mr. Moonshine. Together at last. It was destined to happen: The conjunction of touchy-feely
politics with feel-good economics. There hasn't been so perfect a union since Laurel met Hardy."
Actually, Jerry Brown and I have not even held hands yet, let alone committed strange
bedfellowship or political union. We don't know each other well enough. But it might come to that.
It's always possible President Bush will get back on track, with a little marriage counseling. Even if
he doesn't change course, at the moment he's still more likely to be re-elected than any of the
alternatives that have emerged among the Democrats. On matters foreign and domestic, he is still
more likely to do the right thing more often, eventually, than the opposition we've seen to date.
Foreign economics excepted, his foreign policy team is as good as it gets. He has been, and remains,
excellent on trade issues. His appointments to the Supreme Court, especially that of Clarence Thomas,
have been laudable. We also cannot forget that he reappointed Alan Greenspan to the Fed, over the
objections of Nick Brady, and that it is Greenspan's resolve which is holding things together on the
monetary side. Unfortunately, when you add up all his good points and throw in all his good
intentions, the fact remains that the economy stinks, it's not getting any better, and he's to blame.
Jude Wanniski
Economics / Regulation
THEDISTRICTLINE
The Cornrow
For the clients of living-room braiders, who
avoid the exam entirely, the hazards can in
Tangle
clude infections from dirty combs and un.
washed hair.
Taalib-Din Abdul Uqdah Leads
Uqdah's solution is separate braiding acad
emies-similar to the unofficial one he oper
the Fight for the Right to Braid
ates as part of his own business-where stu-
dents would complete a 750-hour minimum
"A
II I need," argues Taalib-Din Ab-
program, learning cornrowing techniques as
dul Uqdah, "is shampoo and con-
well as a basic knowledge of chemicals in
ditioner, a comfortable place to
order to recognize their effects. Currently,
sit, and a comb." But the outraged proprie-
Uqdah offers a three-month, $2,400 braid-
tor of Cornrows & Co.-a salon that special-
ing course that, he says, trains braiders
without forcing them to learn "offensive"
izes in hairweaving, braiding, and natural
haircare for the African-American woman--
procedures. Without credentiais, however,
charges that city regulators are requiring
he can offer students nothing but % certifi-
him to have much more than that. All Uq-
cate and a fairly certain guarantee that they
can find full-time work either with him or
dah wants to do is make beautiful braids and
with another salon.
offer an alternative aesthetic for black wom-
The founders of the D.C. area's two other
en. Instead, he's waging a pitched political
braiding salons studied under Uqdah, but
battle with D.C. regulators, officials, and
bowed down and took the board's cosmetol-
cosmetologists, to save his business and
ogy exam. Cecelia Hinds, founder and own-
change what he believes is an outdated, even
discriminatory, law.
er of Uniquely You Braiding Gallery, says
that Uqdah's reform would have made set-
"The present cosmetology act is outdat-
ed," rages Uqdah, who owns the 12-year-old
ting up a shop easier for her five years ago.
Cornrows & Co. with his wife, Pam Ferrell.
"I tried to get licensing for braiding," says
"[The law] hasn't been revised since 1938,
Hinds, "but I had to go through the normal
channels There are a lot of braiders that
back when African-Americans weren't even
would like to be legit that don't want to go to
allowed in beauty salons. It's a congressional
cosmetology school." A new law aimed ex-
law. With any law that was passed in '38, it
plicitly at braiders, she says, would allow
was not the intention of Congress to include
them to set up "bona fide businesses."
black people in general, and hair braiding in
particular."
Licensing, Uqdah says, will give home-
braiders "a legitimate way to come out of the
Current city statutes, Uqdah contends, re-
quire would-be braiders to complete
basement, to come off the back porch and
start their own franchise."
lengthy, expensive programs offered by cos-
metology schools; programs that teach bud-
n large part, Uqdah's current crusade is
ding beauticians how to straighten hair with
aimed at preserving his business.
sodium hydroxide, how to curl hair with
ammonium thioglycolic acid, but not how to
Staunchly resisting the current licensing
braid. His solution-a separate license for
process, he has contacted officials represent-
braiders-would open up career opportuni-
ing both former Mayor Marion Barry and
ties for the many D.C. women who cornrow
Mayor Sharon Pratt Dixon, asking them to
call off the DCRA hounds-bur to no avail.
in their homes and would win credibility for
In addition to DCRA's efforts to shut him
'dos that have come under attack.
It would also help Uqdah out of a jam. For
down, both the Board of Cosmetology and
the past decade, he has refused to obtain a
the Board of Barbers oppose the Jarvis'
license and has defied efforts by the D.C.
D.C. regulations
Darron Montgement
Uqdah bill. They charge that Uqdah and
other braiders should have formal cosmetol-
Department of Consumer and Regulatory
have Uqdah tied
Affairs (DCRA) to close down his shop.
up in knots.
ogy licenses.
The two boards have authored their own
DCRA recently slapped him with a $1,000
fine for "operating an unlicensed beauty
bill-which rather vaguely adds braiding to
shop" and failing to have a licensed manager
the "definition" of cosmetology but does not
St. NW, at least two other D.C.-area salons
ing to a separate industry with its own regu-
on the premises. Uqdah appealed the DCRA
set up a separate license. Under this mea-
specialize in braiding: Twists and Turns on
lations, licensing avenues, and training acad-
sure, Uqdah and his salon would still be vio-
decision, which was upheld by the adminis-
Georgia Avenue NW, and Uniquely You
emies. Hearings were held on the Jarvis bill
lating the law.
trative court of the D.C. Board of Appeals
Braiding Gallery in Riverdale, Md. Accord-
in May 1990 before the Committee on Con-
and Review.
But breaking the law, as Uqdah sees it, is
ing to Uqdah, Cornrows & Co. has grossed
sumer and Regulatory Affairs. Although the
a necessary tactic. Indeed, a noble tactic.
Uqdah has no intention of paying the fine.
over $2 million in the last 10 years, and his
bill died in committee, Jarvis reintroduced it
He remains philosophically opposed to the
"They told Rosa Parks and all those people
five braiders do 25 to 30 heads per day. In
in July of this year, and it's currently await-
standard cosmetology-school curriculum-
down in Montgomery: 'It's the law. They
1988, he told City Paper that his client base
ing review.
told us to sit on the back*of the bus. I'm not
which, he asserts, encourages black women
was 6,000; this year, he ups that number to
More than an economic necessity, Uqdah
to reject their own assets and to destroy their
sitting on the back of the bus. I'm not buy-
"well over 20,000 people."
urges, a pro-braiding law would mark a po-
hair.
ing into that old nonsense." Not only does
But Uqdah knows that the style does not
litical breakthrough for the District. "If the
"Our purpose is to redefine standards of
he plan 10 stay open; he wants to spread the
enjoy universal acceptance. Far from it: Cor-
District passes a hair-braiding law, it will be
beauty,' Uqdah declares, "10 re-educate the
wisdom. He and his wife have recently dis-
porate America and other forces of assimila-
the first out of all states," he exhorts. "So
African and African-American woman on
tributed "Gallery of An Styles," an 80-page,
tion regard these tidy cranial furrows as a
with the struggle for statehood, that would
proper care and maintenance of her hair and
full-color catalog featuring 55 different hair-
hostile expression of "blackness." Uqdah's
give [D.C.] some credibility."
that of her child." That means rejecting
styles. Soon to come is Thunderhead, a video
attempts to protect a woman's right to be
"If you change outdated laws, other states
perms, relaxers, curls, and other artificial
that teaches parents how to dress their child-
braided led him in 1988 to pay the legal fees
will look to you and say the District is re-
treatments and accepting the "nappy, kinky,
ren's hair that, they hope, will reach people
of three women who sued the Hyatt and
sponsible."
overcurly, thick, coarse, i't-get-a-comb-
around the world-who knows, even alter
Marriott hotels for requiring them to aban-
Currently, to become a licensed braider,
through" hair with which most black wom-
the image of the nation's capital.
don their cornrows. The women, patrons of
an individual must learn about everything
en are born. Braiding, he argues, is the ideal
"Wouldn't it be nice for a change," Uqdah
Cornrows & Co., are just a few of many vic-
but the craft itself. Like any other stylist, a
treatment for African-American hair.
speculates, "for Washington to be known as
tims of black and white employers' anti-
nascent braider must spend nine months
"I'm for social change," Uqdah declares,
the braiding capital of the world instead of
braiding policies. "Those officials did not
completing 1,500 hours of instruction at a
"that's what braiding is."
the murder capital of the world?"
take what we do seriously," says Uqdah, a
local cosmetology school like the D.C. Beau-
-Ruth M. Bond
large, vehement man in his late 30s.
ry Academy or the National Institute of Cos-
c
ornrows, woven and worn primarily by
Even some African-Americans, he ac-
metology, paying from $3,000 to $4,000.
African-American women, arrange the
knowledges, react with surprising hostility
There, students learn how to shampoo hair,
hair in neat rows of thin, tightly knit
toward cornrows, Africa's 4,000-year-old in-
press hair with a hot comb, create wet curls,
braids that hug the scalp. A braider's skillful
digenous hairstyle, brought 10 this country
dye and bleach hair, chemically straighten it,
fingers work like knitting needles to inter-
by slaves. These victims of mainstream fash-
and do manicures and facials.
twine hair into loops and twists, then lay
ion, Uqdah believes, see braids as "part of
them out in swirling patterns-omate, intri-
What they don't learn, Uqdah charges, are
our history that they would like to forget"
cate designs that can take as much as six
the skills-and hazards-of braiding. A mo-
and favor chemically treated "Caucasian"
hours to complete. Styles are sometimes
tivated student can receive cursory braiding
coifs.
instruction, but it's not a required part of
adorned with beads or loose strands of col-
"The biggest problem for most folk is they
the curriculum nor included on the board
ored hair, synthetic or real. When hair is too
have confused integration with assimila-
short or damaged, braiders add extensions to
exam. According to Uqdah, the industry's
tion," says Uqdah.
cavalier attitude toward braiding leads to
enhance a person's own tresses.
Taking his cause to the D.C. Council in
problems like traction alopecia-more com-
The steady popularity of the hairstyle
1985, Uqdah persuaded Councilmember
monly known as balding-which results
lends urgency to Uqdah's crusade. In addi-
Charlene Drew Jarvis (D-Ward 4) to draft
when a hairdresser braids hair too tightly or
tion to Cornrows & Co., located at 5401 14th
legislation that would formally elevate braid-
too soon after it's been chemically treated.
80CTOBER 4, 1991 WASHINGTON CITY PAPER
THE NEW YORK TIMES INTERNATIONAL Japan MONDAY, NOVEMBER 4, 1991
Ogata Journal
Japan's Unlikely Rebels: The Fabled Rice Farmers
By DAVID E. SANGER
Special to The New York Times
OGATA, Japan - When this village
on the edge of the Japan Sea was
created as a giant national experi-
ment 25 years ago, It was called fron-
tier land in a nation with no frontiers.
Farmers were lured from all over
the country with promises of vast,
cheap land and a stake in a new
Japan. It was here, they were told,
that the Japanese would teach them-
selves how to rival America's biggest
farms and case the country's perpet-
ual worrles about its over-rellance on
foreign-grown food.
It did not turn out that way. In the
privacy
new Japan, fiber optics and comput-
crs proved a lot more Important than
rice and soybeans. A generation of
sphere.
Japanese fed on McDonald's ham-
burgers eat far less rice than their
parents did, and now Japan produces
much more rice than it can consume.
have
a
And that has started a series of
your
skin's
events that have transformed Ogata
from a rural utopia into a: bitterly
divided community
At its core, the argument centers.
on those who think the Japanese Gov:
ernment is saving the fabled Japa-
nese rice farmer - descendants of
the men extolled in song and swathed
colours.
in nationalistic myths - and those
who think it is dooming him to extinc-
tion.
David Sanger/The New York Times
Japanese rice farmers are required to keep produc-
an extreme mark-up. In Ogata, at a "rebel" rice
Farmers Flout the Law
tion within strict quotas and to sell at set prices to
processing operation, farmers are evading the sys-
Ogata is the site of a rice rebellion,
the Government. Rice is then sold to consumers at
705-3444.
tem and selling directly to Japanese families.
one Tokyo is eager to put down before
it spreads throughout the country:
Nearly half the farmers here have
from foreign embassies in Tokyo. The
alike are risking the ruin of rural
openly flouted the law that requires
CHINA
diplomats are drawn here because
them to keep their rice production
OKKAIDO
Japan.
they sec the Ogata rebellion as evi-
"They are spitting into the heav-
within strict quotas and to sell their
dence for their case that Japan must
ens, and it will fall back on them,"
Inc.
entire crop to the Government, at
give in to the inevitable, and crack
Ogata
said Seiki Miyata, the Mayor of
Government-set prices. It is then sold
open its market for rice.
Ogata, which was created by filling in
to long-suffering consumers at up-
It is a move being desperately op-
Japan's second largest lake. "Japan
ward of four or five times the world
posed by farmers, the Agriculture
is not prepared to liberalize these
market price.
Ministry and the many politicians
markets. If we do, it will destroy rice
Until now, the price-fixing system
who depend heavily on Japan's ex-
growing, and with It all of our villages
has worked because Japan has Im-
traordinarily influential farm vote.
and our towns."
posed a ban on all foreign rice, a
If Japan sticks to its position, many
In truth, Japan's farming villages
percnnial irritant in its relations with
JAPAN
the United States.
Tokyo
here fear, it will be blamed for scut-
and towns are fading out already. At
But on the edge of town here, Kyojl
tling the global trade talks known as
the agricultural high school in Akita,
GATT - something that Japanese
there were 286 graduates in March
Suzuki and his fellow farmers have
officials fear as much as farmers'
"Forty-seven of them went to univer-
decided to produce as much rice as
they want and sell it for whatever
protests. The new Prime Minister,
sity," the principal, Yoshimitsu Ike-
they can. "We've lived under the
The New York Times
Kiichi Miyazawa, has hinted recently
da, said the other day. "The rest went
A rice rebellion in Ogata has the
that he will continue Japan's hard
to work: But the number who started
thumb of the Government for years
RUISEWEAR
line against opening the rice market.
to work as farmers is zero."
now," Mr. Suzuki said the other day,
while his colleagues bagged their rice
Japanese Government worried.
Eventually some of those will drift
for direct delivery to their customers,
'Spitting Into the Heavens'
back to agriculture if they take over
the family farms. But they hesitate
evading the Government system.
rice is scarcely any cheaper than the
Among the many disputes that
We try not to say we will be farmers
"We've had enough.'
Government's, and he is not cager for
trouble relations between America
because the image is not so good,
Last year, Mr. Suzuki said, his band
foreign competition either. But price
and Japan, rice can seem pretty triv-
said Takashi Tamura, a student at
of rebel farmers sold $4 million worth
ASHIONS
of rice, despite what he called a cam-
is not the-issue, he says. He argues
ial. Measured in dollars, it pales next
the school. "We're told it is not so
that the real problem is that Japan's
to automobiles or supercomputers,
easy to find a wife."
palgn of harassment, by Government
agents.'
overregulated agricultural markets
and one could argue that it is hardly
Meanwhile, in the country that cel-
are an example of economic planning
worth the passion expended by either
chrates "wa," or harmony, Ogata re-
Grass-roots rebelltons of any kind
gone wild.
side. But it is futile to argue that point
mains a decidely unharmonious
are rare in Japan, and not surprising
here: The Government has promoted
place. At the new year's party, oppos-
ly Mr. Suzuki has not quite got the
He and his friends are getting a lot
much of the mythology about how
ing groups will not cat at the same
hang of being a free marketeer. His
of visitors lately who agree, mostly
Japan has long fed its own and how its
table.
&
food security" would be threatened
"We have two villages really, exist-
by imports.
ing. side, by, side, says, Shinichiro
Sakamoto, one of those who has vocif-
Here in Ogata, the farmers who
SEMI-ANNUAL SALE!
erously argued against opening the
have abided by Japan's rules say
*
market. "These days, we don't talk to
foreigners and next-door-neighbors
each other very much.'