The Republican Mania

When it comes to orgies, even Nero couldn’t hold a Roman candle to Washington tax lobbyists at one of their full-blown feeding frenzies. The danger is that the Great Treasury Raid now taking shape--K Street lobbyists are already sharpening their knives and preparing their demands--could threaten a U.S. economy that still has an unemployment rate of 4% and, so far this month, has produced 50 to 150 daily new highs for stocks listed on the New York Stock Exchange.

With the venal black hats already drifting into the Capitol’s corridors, it is not clear who the white hats will be or if their guns will even be loaded. Federal Reserve Chairman Alan Greenspan, a white hat no longer, all but gave his blessing to the assembling raiders in congressional testimony on Thursday. The Democratic leaderships in the Senate and House may be too busy lining up big donors for the 2002 elections to put on anything brighter than gray hats. And the new Treasury secretary, Paul H. O’Neill, who has expressed doubts about a big tax-cut bill, is already being pulled back into line by a big-contributor-oriented Bush White House.

But there’s an interesting possibility on Capitol Hill. Whitish-hat surprises could come from two new Republican chairmen of pivotal tax-writing committees: part-time Iowa farmer Charles E. Grassley, chairman of the Senate Finance Committee, and former California community college professor William M. Thomas, chairman of the House Ways and Means Committee. Both appear to have significant misgivings about a huge tax cut.

Meanwhile, the history is frightening. 2001 happens to be the 20th anniversary of the Great Treasury Raid of the Ronald Reagan era, which had its genesis in circumstances eerily similar to those today. The new Republican president in town had campaigned for across-the-board tax cuts but had neither the technical experience with tax lawmaking nor the political smarts to understand the inevitability of a feeding frenzy. This year, Texas Sen. Phil Gramm has already let the weasel out of the bag: The tax cut is to be bigger--not smaller--than the $1.3-trillion package that George W. Bush the Inexperienced offered during the campaign.

President Bush’s program does not yet have a name. In 1981, the Reagan tax plan that turned into a feeding frenzy was called the Economic Recovery Tax Act of 1981 (ERTA). It would have been better named the New Recession and Double-Digit Unemployment Act of 1981.

From inception through the ensuing Republican-Democrat bidding war (to do favors for the lobbies), greed was in the saddle. David Stockman, Reagan’s budget director, later admitted that the tax bill’s real objective was to reduce the top marginal rate for the well-off, but “in order to make this palatable as a political matter, you had to bring down all the brackets.” The tax reduction for business--an estimated $150 billion over five years--was described as the largest in the history of the federal income tax. Tax policy had become a trough.

Partly as a result, what in 1980 was a small federal deficit ballooned, and interest rates climbed like an elevator in the Empire State Building. The recession that Reagan administration planners said wouldn’t happen at the beginning of 1981 arrived with a vengeance by autumn 1981, as the Federal Reserve raised rates to cope with the effects of the tax stimulus on top of pre-existing inflation. By late 1982, a major recession pushed U.S. unemployment above 10%, a mark not hit since the 1930s.

What’s different this time is the form of economic pretense. Instead of saying that GOP policies can head off a recession, the Bush administration is saying that the United States is already in a recession, and--guess what?--Bill Clinton did it. Besides blaming the Democrats, the idea is to stoke enough economic fear to mobilize voters behind the upper-bracket-tilted tax cut as a remedy without paying too much attention to the details of which economic groups get the gold mine and which get the shaft.

Greenspan, who spent most of 2000 saying that a tax cut would be counterproductive and that paying down the U.S. debt was preferable, now seems to have taken off his white hat for a Wall Street gray homburg. He knows full well the dangers of another orgy like that of 1981, but in his Thursday testimony before the Senate Budget Committee, he seemed to go along with a rate cut even though he said it would not be effective in heading off any recession.

Unfortunately, this only makes part of the analogy to 1981 worse. That year, the chairman of the Federal Reserve, Paul A. Volcker, endorsed the outline of the Reagan tax cuts, but, as the scope of the orgy and size of the Republican-Democratic bidding war became clear, he tried to work behind the scenes to defeat the bill by saying the revenue loss and stimulus involved would force him to raise interest rates. The bill passed; he raised interest rates, and a severe recession was not far behind.

While a tax cut focused on ordinary Americans might make sense, ordinary Americans will not get much from the Bush tax package discussed during the campaign: About one-third of its benefits go to the top 1% of the population. The possibility seems to be growing that rate cuts will be enlarged further, giving corporations and lobbies another payoff a la 1981, of which Stockman later said “the hogs were really feeding.”

Which brings us to the two Republicans best positioned to kick them in the snout: Thomas and Grassley. When Thomas won his chairmanship, one tax-cut zealot, citing Thomas’ moderation, said that the Californian’s victory was the reason the stock market had gone down that day.

Grassley is an even better bet. He’s already telling the financial press that he won’t support any tax breaks for business, singling out the lobbying activities of the American Council for Capital Formation, which just happens to have been a prime architect of the 1981 excesses. He says, rightly, that breaks for corporations would take money that should go to ordinary folk.

What also makes Grassley so potentially important is that he’s the Senate’s No. 1 expert on pigs--both how you raise them (in Iowa) and how you kick them in the snout (in Washington). He has been a crusader against such waste as the Pentagon’s famous $1,868 toilet-seat cover and probably understands better than most how business and upper-bracket tax breaks are the highest priorities of big contributors and lobbyists. And he must know that his chairmanship and the tax bill is what he’ll be judged on by history, as well as by ordinary Iowans.

The forces working to crush Grassley into line unfortunately include the mania of the 20th-century Republican Party for extreme and even self-defeating tax cuts. The first example came in the early 1920s, when Congress wouldn’t cut income tax rates as much as Treasury Secretary Andrew Mellon wanted. He responded by launching a program of rebates, refunds and remissions of taxes to upper-bracket individuals and corporations, something almost unheard of before. More than $6 billion--a huge sum then--was paid out, and much of it, according to critics, flowed into the various stages of the 1920s stock-market bubble. These practices helped provoke the new tax burdens the New Deal imposed on wealth.

In 1947-48, when Republicans recaptured Congress for the first time in 20 years, their centerpiece was a reduction in tax brackets. President Harry S. Truman vetoed the rate-cut legislation on the ground that it was too favorable to the rich. When Congress passed it again over Truman’s veto, the feisty president made it a big issue in the 1948 presidential campaign, in which Republicans not only lost Congress but watched the GOP chairman of the House Ways and Means Committee get beaten in a safe Republican district in Minnesota.

These two episodes, plus the 1981 excesses, suggest that the Republican Party suffers from the fiscal equivalent of rabies. When power gives them the opportunity, they all but foam at the mouth over the tax issue on behalf of upper-bracket individuals and corporations, even when the economic or political risk ought to stop them.

For now, even though there’s no recession on hand, just a slowdown, this is the new drumbeat: cut taxes to stop the recession. Greenspan says a tax cut can’t accomplish this but, otherwise, he’s giving the White House enough support to suggest a repetition of Volcker’s ineffective, two-faced posture in 1981.

Then there’s Grassley. Anyone who has spent nearly a half century learning how to handle Iowa’s 300-pound and 400-pound hogs should be uniquely qualified to deal with the 185-pound-pinstriped variety in Washington.