How gratifying it has been in recent weeks to have so many of you congratulate us on our 1989 performance. We've had a lot of good years, or we would not have survived almost 12 years in this dangerous game of tracking the ebb and flow of the financial markets, the swirls and eddies of the national economy. But we're especially proud of 1989 because it was such a difficult year to follow.
I happily give all the credit to Alan Reynolds. In recent years I've introduced him as the second best economist in the world, after Bob Mundell, but Alan in '89 led the league in hitting, slugging, RBIs and stolen bases. If I knew of a better economist anywhere, Nobel Prize winners included, I'd acknowledge him or her. But there isn't a soul I know of who saw through the myriad variables early in the year and stayed with them. When the PPI came in at 1% in both January and February, most of you and many of us at Polyconomics questioned his assertion that inflation was under control, that the dollar would strengthen over the year, that long-term interest rates would decline as well. Barron's last week cited Alan's long-bond forecast of 7.8% as the best of those it surveyed. His January 4 forecast of a 2500 Dow without capital gains and 3000 with the cut was made at a time when almost nobody gave capgains a ghost of a chance in '89. He adjusted the forecast in May to 2800 without a cut in the capital gains tax, on the strength of the administration commitment to capgains. After the October 13 nosedive, he reaffirmed the 2800 forecast and even I shook my head in disbelief. As it happened, he was off by 50 points and only one trading day!!! Just last month The New York Times surveyed a gaggle of Wall Street economists on the price of gold, when it was $418, and to a man they said it was headed higher, to $450 and above. Alan said it was going south, and it is in fact closing in on $390 as I write.
The most important piece Alan did in '89, though, was "Time to Cut the Capital Gains Tax," March 15, which he began to work on in November, anticipating the Bush Administration would need such a report if it was going to make a serious run at it. The essay, which remains the state of the art on the subject, circulated widely in the Bush Administration, on Capitol Hill, and among Washington business lobbyists. Its powerful arguments thoroughly displaced those in circulation at the White House. Most importantly, they reinforced the conviction of the President himself that the objective was key to the long-term health of the economy, with much greater importance to the federal revenue stream than he had believed. This critical point also turned Senator Bob Packwood, ranking Republican on Senate Finance, from a very lukewarm supporter to an avid one, and did the same for House Minority Whip Newt Gingrich. Without their enthusiasm, the push would have broken down much sooner. Now, I'm convinced, the momentum built up last year will carry through to success this year.
The most important work Alan will do in 1990, I think, is the report on Mexico that has been occupying us for almost a year. If we're right, the report will appreciably change the way Mexico thinks about itself and dramatically change the way we think about Mexico. This would be a key step toward pushing the supply-side revolution through Central and South America. We would like to do a similar project for the USSR, but must get through Mexico first, which will take two more months of writing and revision. We also have to tend to Alan's forecast of 3300 on the Dow in 1990, with "much better gains if we get a good capital gains tax bill."