Walking the Treadmill with President Bush
Jude Wanniski
August 14, 2002


As long as I knew that Polyconomics would not be represented at President Bush`s economic exercise in Waco yesterday, I did not expect any fresh or useful ideas to emerge, and as far as I can tell there were none. The event was of course staged to show that Mr. Bush was concerned enough to break away from the golf course to discuss the state of the national economy. In the 1991 recession, his father spent the month of August on a golf cart, stopping occasionally to tell the cameras that all was well, or soon would be. This was after signing the tax increase he vowed he would never sign. Young George W. Bush will not sign any tax increases or agree to repeal what remains of the tax cuts he signed onto last year. None of this will help the financial markets out of sticky stuff caused by the monetary deflation that nobody has noticed but a few gold-standard supply-siders. What President Bush has going for him is that nobody in the Democratic Party has noticed either. Not one of the contenders for 2004 has anything constructive to say about the economy, unless you count their suggestions that he repeal his tax cuts for the rich.

When I learned from Ludwig von Mises in 1982, reading Human Action, that a monetary deflation is so rare in history that when one occurs almost nobody recognizes it; it did not occur to me that one would show up and only I would recognize it. I`m getting to feel genuinely sorry for President Bush that his economic team can only advise him that the "V-shaped" recovery they promised him is just around the corner. If he picked up the Wall Street Journal this morning and read the lead editorial, "After Waco," he would find the editors recommending he lock himself in a room with the "brain trust" that designed his original economic plan and have them put their thinking caps on. Mr. Bush should be able to pick up the WSJ and find the editors had put their thinking caps on, after several capless years. The best they can do is argue that the financial market is different than the real economy, and the real economy is growing even though the capital stock is stuck in the mud.

The best thing that happened to Wall Street in the last week was the statement from President Bush that he will not only consult with Congress before taking any action in Iraq, but also that he will employ the "diplomatic" option. We`ve since discovered that it was Secretary of State Colin Powell and his deputy, Richard Armitage, who flew to the Crawford ranch to brief the President on the difficulties that would arise if the diplomatic option was not exhausted before military action should be considered. Equities rose sharply on the first reports of this breakthrough and continued rising on Friday. The news that House Majority Leader Dick Armey has broken ranks with the War Party also had a positive effect. Did the Waco participants factor in the cost of a war on the nation`s economic future? I don't think the subject even came up.

A confusion over Baghdad`s willingness to permit the return of weapons inspectors has been weighing on Wall Street this week, with Defense Secretary Don Rumsfeld and the war hawks denouncing Iraq`s "rejection" of the possibility that the inspectors would be allowed to return. On the "NewsHour" last night, Iraq`s ambassador to the UN, Mohammed Aldouri, essentially said the U.N. inspectors will be welcomed without preconditions. The idea of a "rejection," the Ambassador told me today, came from an Iraqi minister who spoke in Arabic on Al Jazeera, by which he meant he believed the inspectors had "finished" their work in 1998 before they left. The letter sent from Iraq`s foreign minister to U.N. General Secretary Kofi Annan two weeks ago did not mention preconditions as far as I could see, but Aldouri told me another letter is being sent to the U.N. to make it clear the inspectors can come ahead for 60 days and do what they have to do to complete their work. My guess is that these corrections in the news reporting are again slowly calming down the markets fear of the risks that would be associated with a go-it-alone war with Iraq.

With corporate earnings having such a long way to go against remaining deflationary headwinds, we still see little chance of a robust equity market on the near horizon. That would take a few serious changes in personnel and policy in Washington, and not with the same "brain trust" that still has been unable to understand how the economy has gotten into the mess it is in.