A Dismal Day in Washington
Jude Wanniski
July 25, 1991


Twenty-four hours of 100-degree heat and 70% humidity was all I could handle, especially slogging through the Beltway political inertia. It was hardly worth the effort, except to again confirm what we have been saying for several weeks: Washington is in a state of suspended animation, not quite brain dead, but getting close.

Budget Director Richard Darman a few weeks ago had invited me to come by, so we spent more than an hour kicking over old times and discussing the state of the world economy, which doesn't seem to have him very concerned over the near term. Yes, yes, there will be a capital gains tax cut down the line, probably in the first six months of the second Bush Administration! But he's more into worrying about health and education reforms he believes are essential for the long term, given the quality decline in education and soaring healthcare costs. I reminded him of the soaring costs of the credit crunch, now spreading beyond the thrifts and banks into the insurance industry. I asked why no one in the Administration has echoed Fed Chairman Alan Greenspan's repeated public observations that a capgains cut would bring relief on the credit crunch, by lifting the value of capital assets. He insisted he agreed with this line of reasoning, but had no answer on the Administration's silence, except to repeat his disagreement with me on the tactics necessary to get legislation passed in a divided government. We parted in friendly fashion and I was left with the impression that he is more worried about the recession than the official White House line and is mulling over contingencies. He's surely even more worried with the bad numbers on durable goods and unemployment released yesterday and today.

Vice President Dan Quayle's office was another stop, around the corner from Darman's on the second floor of the Old Executive Office Building. I chatted with Bill Kristol, chief of staff, about my impressions of Darman's current thinking. The Vice President ambled into Kristol's office and we continued the discussion. I repeated my criticism that nobody in the Administration was backing up Greenspan's views on the credit crunch. Quayle, at least, had gone to the trouble of understanding the Greenspan arguments, but my general impression is that he's not going to take the lead on that line of attack, which can get complicated, but will wait for Darman or Nick Brady, who are immobilized. We also focused on the Soviet Union, its imploding economy, and the emerging political scenario there, especially with the President preparing for his Moscow mini-summit next week. My concern is that the Administration at least consider the possibility that the "hardliners" in Moscow have been right in rejecting the various economic "reform" proposals concocted by Western economists who do not know what they are doing. Quayle had to run off to another meeting before we could develop this discussion in depth, but I promised to send him some reading material. In parting, I inquired about the state of his golf game. He made a face indicating it was in recession.

Late lunch with Federal Reserve Governors David Mullins and Wayne Angell, salads and iced tea all 'round at "Maison Blanche," a block from the White House. The Fed is officially not as cheerful about the economy as the Administration, notwithstanding Greenspan's fairly rosy congressional testimony a few weeks ago. We talked about the "topic of the week," as I put it, the possibility of a "double-dip" recession. I advised them we have been telling our financial and industrial clients: No, the economy will creep along, as long as the Federal Reserve doesn't try to help it any more by lowering short-term interest rates. If it does, the gold price will rise along with bond yields, and the stock market will plunge to a lower trading range anticipating another dip in the recession. Neither gave me any argument, and I was pleasantly surprised to find the level of appreciation Mullins has for our arguments on capital gains and the credit crunch. He is a protege of Nick Brady, after all, and is only a little paperwork away from being sworn in as Vice Chairman. Angell, of course, has thus far been alone at the Fed in publicly backing up Greenspan on capgains. As both Mullins and Angell were once professors of economics and finance, most of the lunch was on a theoretical plateau, including a discussion on how to develop a banking system in the USSR. On the way out of the restaurant, I decided I felt marginally better about the Fed, insofar as Mullins may not contribute to a "double dip" by allowing the Administration to browbeat the Fed into easing.

Michael Boskin's office is across the street, on the third floor of the E.O.B. The President's chairman of the Council of Economic Advisors brooded about the continuing "credit crunch," as if the only remaining problem in the economy is the excessive zeal of bank examiners, which is also the standard line out of Treasury. I repeated my admonition that nobody in the Administration is backing up Greenspan's argument on capital gains, and that I'd talked to Darman about this earlier in the day. I told him I was absolutely baffled that the talk of the town was double-dip recession and the worsening credit crunch, but that Darman and Brady were refusing to back up Greenspan, because capgains is a political no-no. I told him: "It's not like you have to cite Wanniski, the Morristown bombthrower, as the authority, for goodness sakes. You can cite the Chairman of the Federal Reserve!" Yes, yes, he indicated. But not him. His job is complaining about bank examiners.

In his mid-year appearance the following day before the Joint Economic Committee, Boskin generally allowed the committee Democrats to use him as a punching bag in one of the most feeble presentations by a CEA chairman I've ever witnessed. They demanded to know what he is advising the President to do about the recession, growing unemployment rolls, and the credit crunch, and when he came back with his "overzealous bank examiners" line he was justifiably subjected to ridicule. The Fed, he said, should not ease at the moment, which I took as a small victory, but he left himself plenty of room to beat up on the Fed next week or next month on M2 money growth, after it is painfully clear the recovery is as anemic as we've been saying it would be: 2% during the next four quarters.

Adding more liquidity than the market demands would ignite inflation expectations, and higher inflation expectations would damage the economy in two ways. First, higher long-term interest rates would raise borrowing costs and abort the fragile housing recovery in particular. More ominously, higher long-rates would increase the financing cost of all real estate investment, while higher inflation expectations associated with higher rates would increase the expected real capital gains tax on all risk assets. The result would be a decline in risk asset values, including real estate as well as equities, and more pressure on bank balance sheets. Greenspan is right: the credit crunch stems from bank capital problems more than from overzealous regulation. An attempt to inflate M2 under present conditions would set in motion a vicious cycle: excess bank reserves heightening inflation expectations, inflation expectations lowering asset prices, lower asset prices pinching bank capital ratios, poorer capital ratios reducing lending, and less bank lending reducing M2 growth. If Brady has his way, the recovery will abort.

In late afternoon, across town on Capitol Hill, I got a bit of good news from Brad Johnson, Governor Cuomo's counselor in Washington. Cuomo would address the American Stock Exchange Thursday morning, today, and endorse a capital gains tax cut. Not as bold as I'd like, he told me, but it's a start. Alas, on the "Today" show this morning, Cuomo said nothing about a growth agenda and came across as a tired, old liberal. His Amex speech, though, did unveil a puny capgains cut. He needs work.

The final event of my hot and humid day in the nation's capital was dinner with Gueorgui Markossov, the Soviet Embassy's Political Counselor, Mischa Belakindis, a Lithuanian economist and Soviet emigre with the WEFA Group, and John Taylor, who is leaving the Council of Economic Advisors to return to Stanford next month. Markossov offered brilliant insights on "The End of Ideology" in the USSR, but not much promising on the economic front in Moscow. He dismissed my fears that the coming winter would bring major civil unrest unless the decline of the ruble is arrested and reversed. The ruble was 6 to the dollar last winter, 27 to the dollar April 2, and traded recently in an Estonian auction at 77. If the distribution system clogs at 6, it will break down at 77, I suggested. Gorbachev now promises "internal convertibility" by January, but there is no indication of how they plan to proceed. The dinner broke up when Markossov had to return to the Embassy to do some paperwork on his country's application for IMF membership. A rather dismal note on which to end a dismal day.