Still Nervously Bullish
Jude Wanniski
September 11, 1987

In my "Reagan Rebound" letter of August 3, I warned that we would have to expect that "Congress will be more, not less, protectionist come September." The bull market of 1929 ended the day after Labor Day, when Congress reconvened after its August recess, reflecting the special pleadings of special interests in their home districts. This was repeated this year, although the stock market slide this time began two weeks earlier, with reports from the Western White House that the Howard Baker team had decided it was unrealistic to expect legislative victories. The NY Times of August 23 said the Baker group "decided that the White House would be better off avoiding vetoes and reaching a compromise with Congress on several important domestic bills, such as those on trade, welfare and insurance for catastrophic illness." A White House compromise on trade would be a disaster, and with Treasury Secretary Jim Baker on vacation through Labor Day, the forces of darkness dominated the news and sent stocks and bonds tumbling. On Labor Day, I had a deep sense of foreboding, and actually had a dream that night in which I stepped into an open elevator shaft; the market's free fall the next morning was no surprise.

I spent September 9-10 in Washington, taking soundings at the White House and on Capitol Hill, and was much relieved to find an ample reservoir of free-trade resolve. If Howard Baker and his deputy, Ken Duberstein, had all the cards, there would surely be a trade compromise. But Jim Baker is less likely to "cut a deal," and he is still in charge, very much aware of the implications of protectionist legislation on the markets. The IMF meeting in Washington later this month will bring his counterparts in foreign ministries and central banks together to fortify his free-trade resolve, at a critical time. The conference bill is expected to emerge late in October or in early November, and it is almost certainly going to be too tough for Baker or even Special Trade Rep Clayton Yeutter who was surprisingly strong in talking up a trade-bill veto in a Washington Times interview this week; most Democrats and plenty of Republicans believe protectionism is politically popular, so they see no need to dilute the bill to win JBIII's and the President's approval. It's helpful too that Fed Governors Johnson and Angell are making the case that the trade bill threat has been putting upward pressure on interest rates and that passage would mean a severe tightening of credit in order to keep the dollar from collapsing against currencies and commodities. House Minority Whip Trent Lott told me he believes a Reagan veto would be easily sustained in the Senate. I spent almost two hours with Senator Bradley and, can report him rock solid on free trade, which suggests to me he would bring along other Democrats in support of a veto of anything more than a stripped down bill. CEA chairman Beryl Sprinkel and OMB Director Jim Miller each assured me they were solid. White House political director Frank Lavin told me he is aware that a bad trade bill will bring a weak economy in 1988, which will be bad for the GOP at all levels.

There's always a chance the bad guys will figure a new wrinkle on how to win over JBIII and the President, which is why we're still nervous. But there's no longer the sense that we're standing over an open shaft.