Everything's OK
Jude Wanniski
November 14, 1984


At least for the moment.  There is plenty of anxiety in the air and in the markets.  But that's because Stockman, Dole & Co. are making all the noise on fiscal policy and the Fed has paused on the path of monetary ease.  Stockman is up to his old tricks, pumping up the deficit projections and leaking to his pals in the press, creating clouds of uncertainty.  But he's still spinning his wheels.  By all accounts, Jim Baker and Dick Darman, his old allies, are not part of his schemes this time around, and Ed Meese is an open adversary of any plan to sneak tax hikes into the budget strategy.  Baker and Darman seem persuaded that tax reform be kept on a separate track, revenue neutral, with Stockman not permitted to make Last Resort tax-hike deals in his quest for spending cuts. Dole pooh-poohs idea that the flat-tax idea can make any headway in the new Congress, because of special-interest opposition.  But the White House crew is feeling RR's landslide produced a clear mandate for tax simplification/reform and they're serious about getting it through in '85.  I'd felt, like Dole, that a "Kemp-Bradley" bill would get hung up by lobbyists.  But the level of energy behind the idea is higher than expected, perhaps reflecting RR's enthusiasm, Don Regan's interest, and sense that Congressional Democrats might be more receptive than believed prior to elections.  Bradley seems very receptive to compromise with Kemp.  Odds are still against, of course, but if White House insists on the separate track and throws itself behind the project, this colossal achievement could be had.

The Fed's pause this week is a bit worrisome, but it's still pointed in the right direction.  Fed's "asymmetry" in July, its announced bias toward tightness, in September shifted to a bias toward ease.  September's 9-to-3 vote was to ease, with minority wanting more aggressive ease.  Although Nov. 7 FOMC meeting did not (yet) produce discount-rate cut, drop in fed funds rate, signs of weakening economy continue.  We doubt the pause will last much longer at the Fed, perhaps a telephone vote will finally tilt toward growth forces and a more aggressive stance will become evident. If so, watch gold price climb back toward $400 by year's end, fueling solid rallies in stocks and bonds as deflation pressures end, dollar weakening, bolstering European economies now in weak condition.  White House high command watching Fed very carefully, expecting help soon, not next month, which led to Regan's pre-election critique and could bring more of same unless help comes.  One more bad number, maybe industrial production, could do it.

Another hopeful sign:  White House sends out word it's looking for supply-side economic types for second-term slots.

Hang in there.  Things aren't as sour as they might seem. So far, everything's okay.