A Democratic White House Scenario Jude Wanniski September 24, 1991

Executive Summary: President Bush at the moment seems practically unbeatable in 1992, especially if the Democrats approach the contest in traditional fashion. As an exercise in political philosophy, this paper examines how a hypothetical Democrat could arrest his party's erosion at the presidential level. The "income class" spectrum should be abandoned as an analytical framework, replaced by an axis coincident with an opportunity spectrum, with established wealth and achievement on one end and those who aspire to wealth and achievement on the other. Democrats cannot compete with the President on foreign policy experience and credentials, but they can on imagination and initiative. In a unipolar, post-Cold War world, foreign policy can more nearly approximate the extension of a domestic agenda. President Bush is more vulnerable on the economy, but not with the usual zero-sum, soak-the-rich solutions. The traditional Democratic constituency – labor, minorities, the young, the disadvantaged – has access to income, but almost no access to capital. A horse race metaphor is used to explain why economic policymaking should focus on the longshots, not the frontrunners. The Democratic contender should advocate elimination of the capital gains tax as well as lower payroll taxes, with a new, increased top income-tax threshold at a higher rate. The party must abandon its reliance on easy money as a policy instrument, reviving President Kennedy's formulas of sound money and greater rewards for risk-taking as central features of entrepreneurial capitalism. Unlike President Kennedy, whose foreign economic policies were dominated by the elites, the Democratic nominee should offer this distinctly American message to the world at large.

A Democratic White House Scenario

From 1932 to 1964, the Democratic Party won seven of nine presidential contests. The Republicans have won five of six since and, according to virtually universal expert political opinion, will win again in 1992. The experts, in fact, have been arguing for some while that the national electorate, as scattered among the 50 states, has crystallized into a GOP "Electoral Lock" on the White House, even as local electorates continue to deliver Democratic majorities to the U.S. Congress and most state governments. Disheartened Democrats also contemplate demographic trends that show younger voters increasingly identifying with the party of the "successful Presidents" they have known, Ronald Reagan and now, George Bush. It begins to seem that the Republican Party may become even more dominant as the Ruling Party than it was in the seven decades after the 1860 victory of its first presidential candidate, Abraham Lincoln, a period in which the GOP won 14 of 18 presidential elections. This thinking is becoming conventional wisdom.

As an exercise in political philosophy, this paper will examine how the Democrats can arrest the erosion of their party on the presidential level. It will suggest how a hypothetical Democrat might win his party's nomination next year, and then the Presidency, by defeating President Bush. I proceed from the assumption that the nation and the world is best served by a Democratic Party that can at least vigorously compete for the approval of the national electorate. That is, pro forma competitions which systematically result in GOP landslides will inevitably produce soft, weakened leadership in the Executive Branch, as common sense tells us will happen when one football team knows it can score at will on a regularly scheduled competitor. Such a team need not change personnel, devise new plays, or even practice. The Bush Administration may well hold this attitude.

The most critical of my observations is that the Democratic Party is trapped in a conventional wisdom that no longer has relevance in the post-Reagan era, a belief that the political spectrum falls along an axis coincident with income class. Franklin Roosevelt's New Deal was built on this wisdom, which was relevant at the time. There was rough accuracy to the rule-of-thumb that the Democratic Party was the party of the lower income classes, the "party of the people," the party of labor, while the GOP represented the more affluent, the middle class and above, the party of management and property. The most vivid example of a Democratic bid for the White House along this axis was George McGovern's 1972 promise of a $1,000 "demogrant" to everyone in the lower middle-income class and below, an idea the electorate spurned. By clinging to this obsolete income-class guideline, the party is unable to reach the primary concerns of today's electorate. It is thereby entrusted by the voters only with the secondary, legislative role, which is to check the negative impulses or excesses of the party that controls the White House.

The political spectrum has in fact shifted to a new axis, on which the Democrats must now focus. Insofar as it is two-dimensional, it comes close to the line that divided the political parties prior to the New Deal, those of established wealth and achievement and those aspiring to wealth and achievement, not "rich" and "poor" as much as old, established and conservative, versus young, evolving and adventurous. The cleavage along a fault line of capitalism is between the entrepreneurs and the corporatists. Both are as legitimate and fundamental as political impulses as father and son, mother and daughter. At the moment, President Bush and the GOP embody both of these impulses at once, at least to a degree, while the Democratic Party has come to be dominated by centralized, established, corporatist influences that bear mostly on what has come to be called "The Beltway," the center of political power, as opposed to the dispersed, grass roots of political power.

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In the 70 years prior to the Great Depression, as the party of growth and opportunity, the Republican Party also embodied both political impulses, representing unfettered entrepreneurial capitalism as well as the entrenched Establishment. Teddy Roosevelt's Progressive Era was a distinct victory for entrepreneurial capitalism, trustbusting in order to decentralize and thus dilute the growing political power of the corporate giants. In this period, the Democratic Party was dominated by those outside the Establishment, representing the newly enfranchised immigrant class, the defeated Dixie, and labor and agrarian interests that had to defend against the political power of the corporate and financial giants.

The monetary deflation that followed the Gold Standard Act of 1873 was the most notable example in this era of how political power could be used destructively within the legitimate framework of the democratic system. A decision had to be made in 1873 on what the dollar/gold exchange rate would be upon return to the gold standard, suspended in 1861 with the onset of the Civil War. Established wealth insisted the gold price be reset at the pre-Civil War rate of $20.67 per ounce, even though it had floated to $40 during the war and its aftermath. The beneficiaries in this zero-sum contest were the eastern banks that had bought government bonds prior to the Civil War. The losers were the workers and farmers who had incurred debt in the cheaper greenbacks and had to pay off their debts in gold. The Federal Reserve Act of 1913, the first year of the Democratic administration of Woodrow Wilson, grew out of the outrage felt at the grass roots, given voice by William Jennings Bryan. The progressive income tax was another outcome.

The Progressive Era had been an attempt by the Republicans to meet the complaints of the Democrats, and thus adjust through internal reform. The administrations of Harding and Coolidge were most emphatically dominated by the entrepreneurial spirit, and the Twenties roared. The Democratic Party was so dispirited in 1928, given its chances of winning the White House again, that it put up a sure loser, a Catholic northeastern governor, against Herbert Hoover. As Commerce Secretary in the Coolidge Administration, Hoover had lived cheek by jowl with the captains of industry, and as President gave them all the security and protectionism they desired in the Smoot-Hawley Tariff Act, perhaps the high-water mark of U.S. corporatism in this century.

The measure, we now know, triggered the Crash of 1929, ushered in the Great Depression, and, ended the GOP's dominance as the party of economic growth. With the Democrats rushing to fill the void, the Republican Party remained in the grip of narrow nationalism and corporate power for another decade, only beginning to emerge with the nomination of Wendell Wilkie in 1940 and the post-war international bipartisanship of Senator Arthur Vandenberg. But it was not until an ex-Democrat of the Depression won the Republican nomination in 1980 that the Party was once again dominated by its entrepreneurial wing. The election of Ronald Reagan filled a void that had opened in both parties, John Kennedy being the last Democrat to represent an entrepreneurial agenda. Jimmy Carter, the Georgia peanut farmer, ran as the grass roots candidate, but gave the White House keys to the Democratic Establishment on Inauguration Day, 1977.

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The seeming invincibility of George Bush is the first element the Democrats contend with as they contemplate a contest against him. If they examine him in traditional fashion, he is unbeatable.

In foreign affairs, he certainly seems unbeatable. The President has the respect of the nation and the world for his international leadership. His rich experience in foreign affairs prior to his presidency has been evident in his surefootedness in managing the nation's international agenda. A Democrat who probes for weakness in the way President Bush has played the cards that have been dealt him abroad will only seem small and petty, quibbling over trivial differences. And there is no Democrat available who can match the President on foreign policy credentials. It is useless to try. His vulnerability can only be found in areas beyond direct attack, areas that have little to do with management credentials and everything to do with imagination and vision. On foreign policy, to contest President Bush for the support of the voters, the Democratic contender has to elaborate a vision of a new world economic and political order that strikes a chord that rings true. For the electorate to be willing to replace a successful manager of international affairs, it has to be persuaded the new President is capable of providing a deeper dimension of leadership initiative.

In domestic affairs, he seems less formidable. The economy has not performed well since the Bush presidency began and at this writing remains technically in recession, with the resources needed to address critical domestic concerns steadily shrinking. Yet by traditional analysis, the President appears unassailable here as well. The economy seems to be inching its way out of recession and the consensus reckons that it will grow steadily, albeit slowly, into the foreseeable future. The conventional wisdom that serves Democrats as well as Republicans offers no answers on how to get the economy moving at a faster clip, given the constraints of the budget and the limitations of monetary policy. Democratic pollsters find the public marginally unhappy with the President's management of the economy, but the pollsters are unable to offer specific counsel on what should be done to find favor with the voters. Several specific sectors are of more concern to the public, the polls indicate — health care, education and the environment especially. As in the past, there are Democratic hopefuls willing to draw up laundry lists to take to the voters. With the federal budget deficits soaring during the recession well past the $300 billion level, though, the Democrats seem bound hand and foot by a Budget Agreement the Congress made last year with the White House that forecloses programmatic solutions. 

The first thing our hypothetical Democrat should do in our scenario is drastically discount the importance of public opinion polls — on the grounds that they simply rediscover conventional wisdom, which is a blind alley. In the same way, the traditional political strategems that can be bought from the professional political industry inside the Beltway should be avoided. Jimmy Carter, Walter Mondale and Michael Dukakis have squeezed the last drops from that lemon. Our Democrat has to literally "throw away the book" on how to be elected and write a new one.

Another metaphor that is apropos is that of a diamond cutter. If the diamond is struck at a wrong angle, it turns to powder — as McGovern found with his "demogrant." If precisely the right cleavage line is struck, though, the rough stone becomes gems. The electorate knows at which line it should be struck, but is as inarticulate as a diamond. The political leader whose analysis and instinct lead him to the correct insight, to the margin where all change takes place, can slice across the "Electoral Lock" and harvest votes that cannot resist his appeal. The candidate has to be willing to sharpen his agenda to a knife edge! This does not mean a single issue candidacy. It means a knife edge that identifies in a stroke the concept of the campaign. 

In January 1980, Ronald Reagan conceptualized the campaign he was about to begin as one in which he would represent the interests of Main Street business. When told only three CEOs of the Fortune 500 had endorsed his candidacy at that point, Reagan said he would be happy to have his opponents share the other 497. "I've got to be the candidate of the shopkeeper, the farmer, the independent, the entrepreneur. There are a lot more of them."

The appropriate concept for a Democrat in 1992 would include these small business interests, but extend to the traditional Democratic coalition of labor, the minorities and the disadvantaged in a different way. The concept is that a government's primary role is to provide a context in which all Americans can realistically aspire, if they choose, to become "shopkeepers, farmers, independents and entrepreneurs" or in any other way develop their innate, God-given potential. The concept is thus more inclusive than Reagan's -- which in the general election of 1980 was directed from the top of the opportunity ladder, not much below its middle rungs. The two Reagan campaigns never once directly addressed the aspirations of black America, for example.

The Democratic candidate is free to embrace this concept where President Bush is constrained. The President himself may be able to verbalize support for such ideas, but his administration has already been frozen into the old paradigm. Unlike Reagan who was born into a relatively poor, Democratic family, George Bush was born to wealth and Establishment Republicanism, grafting on to himself the experience of entrepreneurial capitalism in his Texas days as an oil independent. His administration, though, is dominated by Establishment, country club Republicanism. Where Reagan's cronies in his "Kitchen Cabinet" were for the most part self-made businessmen who had started from scratch, President Bush remains most comfortable with Fortune 500 corporate bureaucrats, gentlemen schooled in the Ivy League.

There is nothing wrong with John Akers, president of IBM, or Paul O'Neill, president of Alcoa, the President's closest friends in the corporate world. Nor is there anything terribly wrong with Nicholas Brady, Richard Darman, Robert Mosbacher, Vice President Quayle and James Baker III. I like them all. But none of these gentlemen have in their experience the raw aspirations of those at the bottom of the opportunity ladder. Insofar as a second Bush administration would be dictated by the President's predilection for surrounding himself with people he feels comfortable with, it can only remain more or less frozen in its current posture.

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Contrary to the assertions of the Beltway Democrats, ordinary Americans are not suffering from a shortage of income but a shortage of capital that is, the financial means to achieve their aspirations. For example the after-tax earnings of an 18-year-old entering the workforce on a full-time basis in 1982 rose by a full 50% by the time he or she turned 25 in 1989, at the end of the Reagan economic boom. The "average non-supervisory wage" fell because the labor force was flooded with 20 million entry-level workers between 1982 and 1989, not because workers already in the labor force suffered a decline in real earnings. In terms of current consumption* Americans are much better off than they were a decade ago. The average car, for example, now costs only 17 weeks of average pay, against 21 weeks average pay in 1981.

The ability of households to acquire capital — to buy a home, start a business, finance a college education, secure retirement income -- has deteriorated. After inflation, the capitalization of traded equities and the price of U.S. housing stock has fallen since the 1987 peak, and along with it the net worth of households. The number of businesses incorporated each year, a rough sort of "opportunity index," has fallen each year since 1987; during 1987-1991, it fell by almost 10%. That is the first time that the number of new business incorporations fell for more than a single year since the data were first collected in 1947. By this measure, the ability of Americans to climb the opportunity ladder has deteriorated since 1987. Joshua Smith, chairman of the President's Commission on Minority Business, reports that there were fewer black-owned businesses by the end of the 1980s than at the outset, which is no surprise, since those at the bottom of the opportunity ladder suffer most when the ascent is blocked.

While Americans have higher incomes, their ability to acquire long-term assets, particularly homes, has deteriorated. The percentage of American households is roughly the same today as it was in 1984, but that reflects the aging of the population. Younger people find it harder to purchase homes. The monetary instability of the 1980s is the prime culprit. Inflation expectations built into the yield of long-term securities, such as home mortgages, push the cost of owning a home out of the reach of younger Americans.

The electorate knows what is ailing it. Traditional Democratic income redistribution schemes are less appealing then ever, because what the electorate needs is not increased income but increased opportunity. Governor L. Douglas Wilder's talk about Washington's fiscal irresponsibility comes closest to the mark, because Americans associate their inability to acquire capital with poor management of the country's fiscal and monetary policy. Budget-cutting austerity is not the answer, though, and Wilder has not yet found the fault line in the diamond.

A Democratic Presidential candidate might express himself as follows in striking the fault line with a specific domestic agenda: "As President, I will break down the barriers to opportunity that prevent ordinary Americans from fulfilling their aspirations, by lifting the tax burdens that crush middle-class families, the working poor, and small enterprise. I will bring the personal income-tax exemption back to where it was a generation ago in terms of real purchasing power, to $5,000. I will let America's struggling small business grow again, phasing out the capital gains tax in a way that both creates capital and helps make it accessible to those who cannot now get it, those at the bottom of the ladder of opportunity. I will cut Social Security taxes, which the Republican administration have used to put the burden of the deficit on America's poorest workers. And I will raise the tax rate on incomes over $1,000,000 to 35%. No Beltway bean-counter is going to tell me that we can't afford to restore opportunity to ordinary Americans. Our Federal deficit is out of control because the Republicans have failed to stimulate economic growth. Given the chance to pursue their dreams, the people whom the Republicans have written off will make the American economy the wonder of the world."

The issue of capital gains taxation is emblematic of the new fault line in U.S. politics, as it can be seen as a tax on opportunity, not a tax on wealth. In both 1989 and 1990, the President faced the same critical choice on the direction of the economy: Will he fight for a cut in the capital gains tax? Or will he opt for budgetary fiscal "responsibility"? In both cases, the weight of advice from his Ivy League team swamped the Texas experience that led him to his capital gains position in the first place. In 1990, he even abandoned his no-new-taxes pledge to achieve a Budget Agreement celebrated by Establishment Republicans, an agreement that locked in the current recession. The recession produced budget deficits so embarrassing they have been scrupulously ignored by both political parties and the Establishment press.

The Democratic candidate who would be President cannot be bound by such constraints. He must be willing to denounce the Budget Agreement even to the point of chastising those in his own party who were behind it. Congressional Democrats are already chafing under its constraints, threatening to break it even prior to 1993. President Bush has no choice but to defend the agreement, unless he is willing to acknowledge his error and that of his economic team. His economic team will certainly not do so, which makes the team as much of a target as Bush for our hypothetical Democrat. The President must defend the Agreement, just as Herbert Hoover in 1932 defended the Smoot-Hawley Tariff Act and his "budget balancing" tax increases of that year. There is no way President Bush can win such an argument with the broad electorate. He might still win re-election, but this argument alone will cut into his plurality.

In 1980, the concept of Reagan's campaign was one of economic growth and the cutting edge was his pledge to cut income-tax rates by a third, replicating the Kennedy tax cuts that brought the economic boom of the mid-1960s. Reagan, in fact, was shameless in identifying his tax plank with JFK's. In 1992, the concept of economic growth through the fulfillment of individual potential must embrace a host of policy actions directed at economic, social and cultural concerns, some of which will be enumerated in this paper. But the concept should have as its cutting edge the elimination of the capital gains tax. The Democratic candidate should be shameless in identifying this plank with both Reagan and JFK. (In 1989, GOP proponents of a capital gains tax cut argued that President Kennedy favored this idea; Senator Edward Kennedy insisted that if his brother were alive in 1989 he would have changed his mind.) As a party, the Democrats have fought any differential on capital gains taxation because of the party's domination by the corporate Establishment. The "fairness" argument was developed along the axis of the old political spectrum, the old paradigm of rich and poor. It can most easily be abandoned by a Democrat who argues against any capital gains tax at all, on the grounds that the absence of the tax is most beneficial to those who aspire to wealth and achievement, as shopkeepers, farmers, independents and entrepreneurs.

Ted Forstmann, whose career on Wall Street is the embodiment of entrepreneurial capitalism, argued in his Wall Street Journal essay, "Blame the Tax Code, Not Milken, for Junk Bonds," 12/13/90, that those who are at the bottom of the opportunity ladder have most to gain from elimination of the capital gains tax, and that those of wealth and status have the least to gain. By definition, they are already wealthy. "The capital gains tax is not a tax on wealth. It is a tax on one's ability to improve one's lot by creating wealth. Taxing capital gains does not much affect the wealthy, who have their capital gains behind them and are principally concerned with maintaining their wealth. Its real impact is to suppress the initiative of Americans who are not yet wealthy, but have the talent and drive to create wealth, and thus benefit the economy." That is, a high capital gains tax prevents capital from flowing to the bottom of the opportunity ladder, where risks are high. A capital gains differential permits capital to flow down to lower rungs on the ladder. Elimination of the tax, as Forstmann argued by this logic, makes the most sense if the objective is to get capital to the grass roots under the ladder.

Imagine a horse race, with the favorite going off at even money, another at 2-to-l, another at 5-to-1, another at 10-to-l, another at 20-to-l, and the longest shot at 40-to-l. Imagine the 40-to-l horse wins, but when the bettors arrive at the pari mutuel window to collect, an IRS agent is on hand to skim all but $4 from a $2 bet. If the reward for risk-taking is confiscated, two things happen. Bettors stick to the front-runners, and long-shots never enter the race. In the extreme, there is only one horse and one bettor in the race. This, in fact, was the impulse behind the Soviet experiment with communism 70 years ago. If there is no risk-taking, there is no failure. All rewards are equal when there is only one company, one chairman, one board of directors, one bank. The distress associated with capitalism -- financial panics, bankruptcies, unemployment, poverty — can be avoided. In the United States today, as well as in most of the world, even as we celebrate the collapse of Communism, economic policy making in general favors the frontrunners and discourages the longshots. For the fourth consecutive year, new business start-ups in the U.S. have declined. Banks, which are a primary source of capital, have narrowed their flow to the most "creditworthy," those at the top of the heap. African-Americans and Hispanic-Americans, as classes the longest shots in the economy, are almost completely cut off from capital sources.

A number of potential Democratic nominees have already made a bow in the direction of "business" interests by advocating a capital gains differential. Former Massachusetts Senator Paul Tsongas, the first declared Democratic candidate, has done so and argued that it is "idiotic" for the Democratic Party to oppose a differential. New York Governor Mario Cuomo has also, although advocating a higher rate for shorter holding periods, a 10% rate for investments held more than seven years. And Arkansas Gov. Bill Clinton is persuaded that the Democrats ought to promise at least targeted capital gains tax rates. Forstmann's position, of a zero rate after a three year holding period, is the best for a Democrat who has embraced the concept of the campaign I have outlined above. The Democrat does not need to throw a bone to the Fortune 500 crowd, which President Bush will have locked up anyway. It is easier to campaign for a zero rate because that is where Forstmann's logical arguments lead. A Democrat who takes that pure position also leaves no doubts in the minds of the voters that he is serious, and would fight, as George Bush never did, for the mandate he would receive.

A campaign pledge of this nature, as a cutting edge, will work to the Democrat's advantage even if, somehow, President Bush and the GOP platform decide to match it. Having campaigned for a 15% rate in 1988 and then done so little to get it through the Congress, the President's credibility is not high on this issue. What is even more important is the argument behind the policy pledge, insofar as a zero rate guarantees a maximum flow of capital to the aspiring -- labor that can not now get capital -- the young, the minorities, the disadvantaged. Instead of this potential coalition being forced to drift to the Republican Party, where there is now a weak commitment to a small cut in the capital gains tax, for the wrong reasons, the coalition would be pulled back toward the Democrats, at least at the top of the ticket. A great many younger Republicans running for House and Senate seats, not constrained by the position the White House has frozen itself into, would jump on this growth bandwagon. In fact, I can imagine our Democrat nominee could win the White House even as the GOP gained in the House and Senate, correcting the political imbalance in both executive and legislative branches.

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A campaign is not waged simply on a cutting edge issue, however. The objective has not to do with taxation, but with economic growth in a setting of traditional values. The Bush Administration has frozen itself into a position whereby it can now rationalize the benefits of slower growth, just as the Democratic Old Guard, representing Establishment capitalism, justifies a low growth rate. The 1990 Budget Agreement now has the President forced to argue against an extension of benefits for the long-term unemployed, in a recession caused by the Bush Administration's hapless economic policy. The President's position is typical of Establishment thinking in both parties, which is how the Budget Agreement came to be in the first place. Our hypothetical candidate can use this issue to rally the party's traditional blue-collar supporters, who have to aspire to a paycheck before they can aspire to wealth and status.

The Bush Administration has also steadfastly opposed a cut in the payroll tax, which Budget Director Richard Darman at one point hoped could be used to pay off the national debt! The Democratic platform should embrace at least the concept of New York Democratic Sen. Daniel Moynihan's plan, committing itself to chipping away at the payroll tax in 1993 and doing more as the economy expands in the future. At the turn of the twentieth century, the Establishment insisted the work week could not possibly be reduced to five days from six, in many cases from ten hours per day to eight. As the twenty-first century approaches, there are again dark warnings that the work force will soon be too small to support the retired. The answer to a labor shortage, though, is capital. It is the only answer. With enough capital, the aim in the next century could be to further reduce the retirement age, at the same time supporting the retirements of an ever-aging retirement population with adequate public and private pensions.

The Democratic position that developed out of New Deal Depression mentality is that because there are too few jobs to go around, the elderly should be forced to retire sooner than they desire, by making their Social Security payments conditioned on retirement. This is another mercantilist concept that somehow became embraced by organized labor. It is a zero-sum concept that can only be understood by thinking of sons requiring the retirement of their fathers. It should be addressed in the 1992 campaign, with the Democrats liberating themselves from this millstone, freeing the elderly to work if they choose, without suffering a tax penalty.

In the same way, the Democratic position has also been anti-growth in its taxation of families. Forty years ago, when the general price level was a tenth of what it is today, the personal exemption was $500 for everyone in the family. Today it is not much more than double that level, which means the tax consequences of having children are much heavier. The impulse is also Malthusian, the idea there will be more jobs to go around if there are fewer people being born. The growth wings of both Democratic and Republican parties now favor dramatic increases in the personal exemptions, but confront Establishment arguments that the economy cannot afford such extravagance.

Democrats now contemplating a run against George Bush are somehow tempted to run against Ronald Reagan in the 1980s even though they could not come close to defeating him in that decade. The term, 'The Excesses of the Eighties," is the primary banner raised against that objective. It is an Establishment term, reflecting the upheavals that threatened the Establishment with the threat of rampant entrepreneurial capitalism. A low growth rate for the Democratic Old Guard serves the status quo, keeping blacks and minorities and the disadvantaged dependent upon the old paradigm, the welfare state, the liberal plantation. The usual stable of Democratic economists also insist that economic growth is inflationary, which then suggests slow growth is not. Slow growth also seems to serve the environmental cause, at least on the surface. The extreme Malthusian model would suggest that if all work stops, so will all internal combustion engines, instantly solving the problem of global warming.

A growth Democrat who would win in 1992 has to be able to argue that economic growth, of the kind that flows from an entrepreneurial dynamic, would be so bountiful that it would provide its own clean-up resources. In blasting away the rationale for the Budget Agreement, the debate shifts away from balancing the budget in the shortest period of time to doubling the size of the economy in the shortest period of time. A Democratic vision can anticipate an extra $5 trillion of GNP providing resources for a great variety of public purposes. The resources do not necessarily have to flow through governmental budgets, but can be directed through the regulatory process. This was the intent of the Democratic platform in 1988, but the idea has little appeal in an economy that is stagnating; all "mandated benefits" subtract from a stagnant pool and lead to further economic contraction. In Japan, where the economy has been doubling every 11 years, the government can mandate environmental and other public benefits — health care and education included — that are seen as contributing further to the commonweal.

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In the same way, a growth concept permits a Democratic nominee to deal with national security and defense spending issues in a reasonable way. A campaign based on the prospect of feeble economic growth pushes the Democrats in the direction of stripping the Pentagon budget to pay for the "middle-class programs" their pollsters tell them they must come up with. Even if the Pentagon budget remains constant in dollar terms as the economy is growing to $10 trillion from $5 trillion, it of course falls by half as its real burden on the economy.

To deal with the argument that growth is inflationary, a Democratic nominee who argues for growth usually finds himself arguing that some inflation is acceptable. The great inflation of 1968-82, the worst by far in the history of the United States, occurred while both political parties were dominated by the corporate elites, country club Republicans and limousine liberals. The last Democrat who pledged to keep the dollar "as good as gold" was John Kennedy. Lyndon Johnson's economists talked him out of the London gold pool. Richard Nixon's economists talked him into explicitly devaluing the dollar, devaluation being synonymous with inflation.

Inflation is always acceptable to debtors, and the biggest debtors who sought and found inflation relief in this period were, besides the U.S. Government itself, the Establishment debtors, those with the best credit ratings who are always able to borrow from the system. Those hurt the most by the inflation, as a class, were black Americans, who find it difficult to borrow from the system in the best of times. The inflationary spiral did not begin to end until Ronald Reagan was elected, with determination to restore the integrity of the dollar. From its earliest days, the Bush Administration has been on the other side of the issue, not by much, but enough to embrace the idea of an "acceptable" level of inflation. It has been President Reagan's appointees to the Fed who have resisted the incessant pleas from the Bush Treasury and White House for easier money. Sound money is far more important to a nation than simply as a commercial vehicle. Unstable money breaks the linkages between effort and reward, throwing windfall gains to debtors in an inflation, windfall gains to creditors in a deflation. Work effort and saving are demeaned, time horizons truncate, a premium is placed on financial manipulation and wizardry. Richard Darman's phrase "now-nowism" is throughout history observed as coincident with an unstable monetary standard.

A Democrat who has a dynamic growth package built around a zero capital gains tax is also in perfect position to commit himself to zero inflation -- to a dollar that holds its value over time in terms of gold and/or other commodities that are sensitive to inflationary impulses. The closest the Reagan administration got to this position was in September 1987, when then Treasury Secretary Jim Baker shocked the Establishment by telling the International Monetary Fund in Washington that he favored stabilizing the dollar against a basket of commodities, including gold. In the following weeks, Establishment economists outside and inside the administration pushed Baker into a posture of dollar devaluation, resulting in the Wall Street Crash of '87.

Eminent economists who serve the interests of the Establishment by advocating dollar devaluations and cheap money abound, in both Democratic and Republican circles. Martin Feldstein, who has been a Bush favorite for many years, has never let up on his incessant calls for a cheaper dollar. Feldstein has also seriously argued the United States might have been better off if the 13 original states had 13 different currencies. In his September 11 New York Times Economic Scene column, "Currency Muddle: Less Is More?" Peter Passell makes essentially the same argument and quotes Harvard's Richard Cooper to the effect that the 15 republics of the USSR may be better off with separate currencies, permitting individual currency devaluations. Cooper, a manic devaluationist, was Under Secretary of State for Economic Affairs in the Carter Administration. President Carter did not actually become an inflationist until his inauguration, when the Establishment urged him to place C. Fred Bergsten at Treasury. Bergsten, a friend of Cooper's, has been the most vocal devaluationist of the past quarter century.

For this reason, a Democratic presidential hopeful may have to go beyond pledging to simply fight inflation. To persuade the voters of his seriousness, he might have to seek a mandate the Establishment would find difficult to break, a formal pledge to the international monetary system to which President Reagan and Jim Baker were moving in 1987. Again, President Bush would have the option to take the same position, but the fact is he would be taking a position on behalf of sound money after three years of pressing for ease. The advantage would be with the Democratic contender, who can easily explain his position as being consistent with the concept of his anti-Establishment campaign. The position is also consistent with massive savings on federal spending for debt service.

A candidate who is going to eschew public opinion polls as a guide to his campaign must have an internally coherent concept of governance, as Reagan did. If you have an internally coherent concept of governance that you believe will "cleave the diamond," you cannot be distracted by the kibitzing of pollsters beyond narrow limits of use. President Bush was at his best after Saddam Hussein invaded Kuwait, acting by instinct and principle without checking the polls — which would have told him to do nothing.

A Democratic campaign that resembles a Reagan campaign on capital gains taxation and hard money would, by itself, seem almost Republican, even though the accompanying rhetoric would be tailored to the Democratic base. There is plenty of room once the candidate moves beyond the economic cutting edge to take distinctly traditional Democratic positions. He could be avowedly pro-choice on abortion, anti-choice on education, opposed to capital punishment, in favor of affirmative action, and pledged to name a liberal to the Supreme Court. (It is getting to the point a liberal will be needed on the Court, just to add a bit of variety.) On taxation, he could recommend a 35% income tax bracket for incomes above $1 million and an end to a variety of programs one might characterize as corporate socialism — the various tax breaks, credits and subsidies that the Establishment has been successful in squeezing from the Beltway at the expense of the taxpayers. Vice President Quayle has recently struck a responsive chord in the electorate with his arguments for legal reforms that address the avalanche of litigation that is swamping the courts and pulling too many of the nation's best and brightest young men and women into the pursuit of legal careers and the cornucopia of contingency fees. A Democratic presidential contender who is asked about this controversy would do well to cherry-pick this populist position from the Vice President instead of automatically seeing a chance to win the support of the lawyers, who surely know of the need for reform.

*****

An area vital to the chances of the Democratic candidate who would defeat George Bush involves the issue of race in America. The nomination of Judge Clarence Thomas is helping to crystallize a debate that has been taking place within the black community, adding to it a fresh impetus and intensity. Observant Democrats have noticed a small, but steady erosion of their party's hold over the black electorate. Just as the leaves of a tree are the first to shake and quiver as a big storm approaches, we see significant agitation at the top of the community, debates and fall-outs among black America's intellectual layers.

Shelby Steele, in The Content of Our Character: A New Vision of Race in America, defines the emerging framework of a new perspective: "I think black Americans have made, collectively, one of the greatest contributions to American life that could possibly be made through the civil rights movement....On the other hand, I think we have over-relied on collective action to take us further....We do have more opportunities to advance, educationally and economically than we did before....It's now time...[for] stronger emphasis on individual responsibility and individual initiative. That's where our future lies."

Clearly, entrepreneurial capitalism offers the only avenue for advancement of black America. It was in the period between 1977 and 1982, when the Steiger Amendment cut the capital gains tax from 49% to 28%, that the largest expansion ever of black-owned businesses occurred --a mammoth increase of 50%. The Bush administration, though, is vulnerable on its laggard efforts to nurture and encourage growth at the grass-roots level. One of the particularly distinct features of the economic expansion of the Reagan years was precisely the rapid and large growth of small entrepreneurial ventures, an increase of 65.4%. It was also during that period that almost 90% of all jobs created in the industrialized world were within the United States, where 20 million new jobs were added. More importantly, 95% of these jobs were created by half a million growing companies, while the Fortune 500 companies lost a fifth of their jobs. These rates of growth came to an end last year under the Bush Administration.

Within the administration, Housing and Urban Development Secretary Jack Kemp has worked tirelessly to advance a set of policies for attacking and eliminating poverty. But even here the administration is vulnerable because empowering the poor won't work by itself. Empowerment alone will not create jobs or augment earnings at the lower end of the wage scale, and it won't bring capitalism to the inner city. It's hard to have capitalism without capital. There's no less desire for economic advancement within the black community than there is elsewhere. But without access to seed capital, black entrepreneurs seeking to start or expand an enterprise and provide employment haven't the resources or incentive to take on the risks involved, with millions remaining caught in a poverty trap.

There is a certain sterility, though, to the debate outside the African-American community over the issue of urban poverty. Washington Post columnist William Raspberry sharply identified a nasty consensus on the problem among conservatives and liberals, "The Ecology of Urban Poverty," 2/13/91. Smug conservatives assert that the poor are poor because of their own choices -- "they prefer government handouts to hard work...ignore opportunities to better themselves...place too little value on education, have too many babies, refuse to form stable families," etc. On the other side of coin, is the knee-jerk response of the "blacks as victims" activists — racism is responsible for urban poverty. Both are saying "members of the underclass are immune to the mechanisms -- hard work, thrift, inculcation of decent values -- that have lifted previous generations of the black poor out of their misery," i.e., it's their own fault.

Here, both the Democrats and Republicans are vulnerable. But the prize will go to the candidate who listens and who absorbs the appropriate lessons from the debates now taking place within the African-American community. As long as Bush remains comfortable with a slow growth road, which merely compounds and exacerbates the worst problems of the African American community, and with a capital gains tax rate that effectively prohibits aspiring and ambitious black entrepreneurs from access to capital, GOP advances there can be reversed and brought back into the Democratic party. But it would simply be wishful thinking to assume that such can take place while the Democratic candidate mouths the standard old line that the GOP is the party of tax breaks for the rich. That line doesn't sell as well anymore. There are simply too many citizens, having gone through the economic expansion of the last decade, who have aspirations of becoming "rich" and now reject the failed zero-sum income redistribution schemes that are part and parcel of most Democrats' policy baggage.

* * * * *

A presidential campaign based on a coherent concept, as opposed to a programmatic laundry list, need not be all that specific. In his astonishing campaign for the presidential nomination in 1976, Jimmy Carter was criticized constantly for his fuzziness on the issues, signaling only non-threatening populist impulses. As he sharpened his message, he lost a series of late primaries to California Governor Jerry Brown. In the fall campaign, his enormous lead over President Ford dwindled steadily as his early populist themes were overtaken by the Establishment advisors who crowded into his campaign after the convention.

The conventional wisdom among the political pros has been that a Democrat who opposed Operation Desert Shield would practically be an automatic loser to Commander-in-Chief Bush. I've disagreed with that position, especially as those who opposed the action in advance on a cost/benefit calculus were reflecting the deliberations of the electorate at large. Once the decision was made, the electorate clearly swung behind the President, and so did those Democrats in Congress and in statehouses who had expressed reservations. The electorate in 1992 will be interested in a candidate's philosophy, wishing to know how cost/benefit analyses might be made in future crises abroad in assessing vital national interests. Statements by a political figure that suggest he would never use force to defend an interest the electorate considers vital can, of course, be used effectively against him. No Democrat in the field at present as an announced or prospective candidate seems to fit this mold.

As Ronald Reagan demonstrated by his successful candidacy, the electorate does not require foreign policy credentials in its selection process of a national leader. Credentials can be a plus, as in the case of George Bush. But far more important, I believe, is a candidate's philosophy as it is communicated to the voters regarding national security and the global political economy. In 1980, George Bush was Ronald Reagan's principle rival for the GOP nomination, and on foreign policy his extensive credentials were trumped by the voters' appreciation of Reagan's philosophical bent, his values as they came across to them. As harsh as Reagan might be in characterizing foreign adversaries, he still appeared non-threatening to the electorate, in control of his emotions and his trigger-finger, in a way Senator Gold water did not in his 1964 campaign.

In the post-Cold War world, our Democratic nominee can practically stipulate that President Bush has superior skills in managing the mechanics of foreign affairs. The United States is in a rare position, similar to the period immediately after World War II, where its global leadership is unchallenged. The entire world political economy, now including the Soviet Union, looks to the United States for guidance on international arrangements in the period ahead, in the new world order. This is not the strong suit of President Bush, who will tend to look to the Establishment for answers, waiting for the cards that will be dealt him instead of dealing the hand himself.

Here we have all the furniture we need in this new world — a United Nations, a G-7, an International Monetary Fund, a World Bank, a World Court. It is suddenly plain that in this new world they all have to be rearranged in fundamental ways and the United States is the only nation in a position at the moment to initiate the process of change. A half century after the war, Germany and Japan obviously have to be drawn up to higher formal levels of responsibility in these global arrangements. The International Monetary Fund and World Bank are as intellectually exhausted as the Kremlin, creating more problems than they solve with every step. Having been created in 1944, they have by now become creatures of the Establishment, interested least in economic development, most in serving as collection agents for the multinational banks. None of these mechanisms need be scrapped, but in "a new world order" require a U.S. President who looks at them as furniture to be rearranged, not as institutions cast in marble. If President Bush were to have the power to name a world cabinet of these international institutions, his tendency would be to do the same thing he has done at home — appoint his old chums, men of wealth and privilege who have a strong sense of noblesse oblige. That will not cut it anymore. The global electorate is not interested in the redistribution of wealth any more than is the U.S. electorate. People everywhere want the opportunity to realize their individual potential, but all too often find their own elites, through the control of the apparatus of government, preventing any advance up the ladder of opportunity.

A Democratic contender who looks at the citizens of the world as an extension of the American electorate can make headway in attracting votes at home. President Kennedy failed in this regard. That is, he was the last Democratic leader of the entrepreneurial wing of his party, representing the aspirations of those eager to achieve a piece of the American Dream. Abroad, though, the Kennedy administration looked upon the developing world through the lens of the old paradigm. Vietnam was an exercise in Establishment noblesse oblige, as was the Peace Corps. The IMF and World Bank became, respectively, a collection agent for the Western banks and a welfare agency to distribute resources through low interest loans. When, in these last few years, the Communist bloc turned to the West, pleading for advice on how to make the transition to capitalism, the Bush administration automatically assumed these empty marble institutions would step forward to do the job.

In the post-Cold War world, the American electorate, I believe, is prepared to see its President deploy abroad the same policy he deploys at home. The formulas that are developed to generate a new wave of dynamic, entrepreneurial capitalism at home should be offered to the world at large. The tax, monetary and regulatory policies we deem appropriate to inspire prosperity and achievement at home should not only be reflected in the approach of the international agencies of the U.S. government. U.S. leadership should also be devoted to reshaping the international institutions to reflect this philosophy. The U.S. electorate, at the moment discouraged, frustrated, even angry at the meandering, purposeless direction of the ship of state, awaits a Democratic candidate who can at least awaken President Bush to the need for change, and failing that, who is prepared to take the helm himself.