In Washington, May 12
Jude Wanniski
May 13, 1981


I had several separate meetings with Treasury, OMB, White House officials.  My general impressions follow.  There is great anxiety over bond markets, interest rates, fear of sharp recession on horizon.  Volcker and the Fed are getting the blame, "monetary mismanagement."  Volcker had separate meetings Monday the llth with Stockman and Baker, aggressively defending his stewardship of the Fed, complete with (seasonally adjusted) charts showing a steady rate of growth of money supply.  While preparing for eventual Volcker meeting with Reagan, senior WH staff baffled by theoretical arguments. "Is money too tight or too loose?"  Supply-siders and monetarists dominate internal discussion, and are now loosely allied around idea of "managing the Fed balance sheet" and "getting monetary base under control." Treasury's Sprinkel making positive sounds about gold and first discussion of gold standard appearing in senior staff memos. "Discussion finally began opening up in last three weeks," says one. A rising influence is OMB's Larry Kudlow, backed by Stockman's revived interest in monetary policy.  Kudlow an effective briefer, circulating in wider loops, arguing against Fed "fine tuning," making Lehrman case for shutting down open-market window, opening discount window at penalty rate.  Treasury's Regan joins anti-Fed chorus, hopes for opening soon that will permit RR appointments to Fed. Regan surprisingly aware of argument that a "demand side" monetary policy will thwart a "supply side" fiscal expansion.  Asked several spots for my advice, I suggested a Reagan blue ribbon committee to study current turbulence in financial markets are report to President in two weeks (chaired by George Shultz, vice-chaired by Lew Lehrman, plus bankers, academics, Arthur Burns, etc., on idea that Lehrman would now dominate discussion, everyone else being baffled these days). Lehrman's Morgan Stanley "case for gold standard" (May '81) now circulating at the top WH circles.  Lot of ferment, all to the good.

A "compromise" on taxes is in the cards.  Either a Dixiecrat-GOP coalition in the House, or a "Grand coalition" with Rostenkowski aboard, RR gets more action by staying mum, refusing to budge from Kemp-Roth. But a deal is on the horizon, everyone sensing that a bill could be shaped that would benefit everyone, Democrats and GOP. Skeptics doubt "grand coalition," but I bet there will be a big, front-loaded two year tax bill, 10-10 starting July 1, '81, plus Brodhead maybe down to 45 percent maxtax, gift & estate tax exclusion to $600,000, 70 percent exclusion on capital gains, modified 10-5-3. All this for less than $50 billion. Yells and screams from liberals, but I told WH politicos that it would pass in landslide, 350 votes plus. Clearly, RR could not be talked into deferring across-the-board cuts into 1982 (which I passed on to Rep. Gramm, leader of the Dixiecrat taxcutters). (Kemp suggests top marginal tax rate of 46 percent, par with top corporate rate, then move them down together). The drift is excellent, in other words.  Things can happen very rapidly in D.C. in this climate, so we will watch closely and keep you tuned in.