The Bush Recession
Jude Wanniski
November 4, 1991


Morris ("Hawkeye") Mark of Mark Partners, one of our Wall Street clients, called us at 3 p.m. Friday, pointing out that at 2:46 p.m. the Dow was up five points in a strong market and the long bond was up a half point. At 2:51 p.m., the Dow was off 19 and the bond down a quarter. What kind of typhoon could, in five minutes, blow 24 points off the Dow and three quarters of a point from the 30-year Treasury? At 2:46, says Morris, a report came across his screen that President Bush, in Texas, was insistent that the Fed lower interest rates! It's bad enough that the bond market quivers and the dollar slides practically every time a reporter puts a microphone under the nose of Nick Brady or Michael Boskin. For the President to be flogging the Fed on the eve of its FOMC meeting and Treasury refunding is unconscionable, further evidence of the bankruptcy of this Administration on economic policy.

Before Friday afternoon was out, we talked to three other clients and an official at the Fed in Washington who also noted the connection between the President's comments and the bond selloff. As we know, the financial press, with rare exceptions, is incapable of making such connections on its own, I called an editor at The Wall Street Journal, and an item making the connection appears at the bottom of the editorial page today. There is a bit of a discrepancy on the exact times, with the broad tape carrying a headline, MBush Calls For Lower Interest Rates, Fitzwater Says," logged at 2:32. But there should be no doubt that Typhoon Bush was responsible for Friday's selloff. Two weeks ago I yelled at Boskin for his Fed bashing, pointing out that the 30-year Treasury takes a nosedive whenever he's quoted. He claims to be taken out of context. He is taken out of context at least twice a week. It of course does no good to explain to the Treasury Secretary as I did in his office early in 1989 that when you are trying to persuade your creditors to lend you lots of money, you should not be threatening to cheat them through an inflation. Ten days ago I wrote the President a three-page letter, urging him to make a personnel change at Treasury if he hopes to get the economy on track. I, of course, sent a copy to Secretary Brady as well.

The only thing holding together the economy, as much as it stinks, is the good sense at the Federal Reserve to continue resisting the pleas of the Administration to inflate. The fed funds rate continues to drift lower, but only coincident with a decline in the price of gold, now at $356. The Fed is clearly not adding liquidity faster than the market is demanding it. There is simply less demand for liquidity for transaction purposes because there are fewer transactions. The dollar is being hammered against the Deutschemark only because the Bundesbank is not taking seriously the sharply declining gold price in D-mark as a demand for more liquidity in that currency, due to the continuing, surprising expansion of the East German sector.

In his Texas speech Friday, President Bush did a lot of yelling and screaming about how the Democratic Congress has prevented the U.S. economy from expanding. Alas, I now agree with Senate Majority Leader George Mitchell: The Bush Administration is, at least in fiscal policy, looking more like the Hoover Administration. As much as the President favors economic growth in principle, he has for three years in a row made the budget his highest priority. It was possible to blame the Democrats in 1989. In 1990, it was possible to divide the blame, as the White House and Congress cut their budget deal. In 1991, the President has once again decided the preservation of his Budget Agreement is more important than negotiating a growth package with the Democrats. He has taken three called strikes, the bat never leaving his shoulder, and now he would like a fourth pitch in 1992. Maybe. In The Wall Street Journal this morning, we read that Budget Director Richard Darman believes there may be a capital gains tax cut next year, if the economy hasn't recovered on its own! 

Two weeks ago I called a Pennsylvania client who had introduced me to Richard Thornburgh in 1978 when Thornburgh was running for governor. I told him I didn't think Thornburgh could win his race for the Pennsylvania Senate seat as long as he was defending the economic policymaking of George Bush. As much as the people of Pennsylvania might prefer him to Harris Wofford, a traditional liberal Democrat, it would send the President the wrong signal if they elected Thornburgh. On the other hand, if Thornburgh, even in the closing days of his campaign, aligned himself with the growth faction in the Administration, publicly disagreeing with the Hooverian policies of Brady, Darman and Boskin, the voters would almost have to vote for him, to send that signal. David Duke would not have defeated Republican Governor Buddy Roemer in Louisiana this September if Roemer had given the voters the slightest opportunity to use him as a protest message to the Bush Administration. With 70% of the nation now responding to polls saying the country is on the wrong track, why would anyone line up behind candidates who are lined up behind George Bush?

The Journal carried an article last week indicating that Art Laffer and I have given up on President Bush and have now embraced former Gov. Jerry Brown as the supply-side "torchbearer." The article was the result of Brown telling the reporter that he has consulted us for advice. (The reporter, whom I've known for more than 25 years and have never, ever telephoned, described me in his article as a "self-promoter.") The same article points out that I've also been trying to persuade New York's Mario Cuomo to jump into the race, which suggests I'm awfully fickle or about to commit political bigamy. The fact is that at the moment, we have no choice but to look for an alternative to President Bush, to talk to any Democrat who looks to us for counsel, or to any Republican that might j^e thinking of jumping into the GOP primaries next year. I've not spoken to Art Laffer in several years, but I understand it is as imperative for him as it is for me [as it is for all of us] to find a political solution to the mess the country is in. If we can't find the solution on the GOP side, there is only one other party left.

In his front page column in Barron's this week, Editor Alan Abelson, who read the Journal article, finds all this very amusing. The column opens: "Jerry Brown and Jude Wanniski. Governor Moonbeam and Mr. Moonshine. Together at last. It was destined to happen: The conjunction of touchy-feely politics with feel-good economics. There hasn't been so perfect a union since Laurel met Hardy."
Actually, Jerry Brown and I have not even held hands yet, let alone committed strange bedfellowship or political union. We don't know each other well enough. But it might come to that. It's always possible President Bush will get back on track, with a little marriage counseling. Even if he doesn't change course, at the moment he's still more likely to be re-elected than any of the alternatives that have emerged among the Democrats. On matters foreign and domestic, he is still more likely to do the right thing more often, eventually, than the opposition we've seen to date. Foreign economics excepted, his foreign policy team is as good as it gets. He has been, and remains, excellent on trade issues. His appointments to the Supreme Court, especially that of Clarence Thomas, have been laudable. We also cannot forget that he reappointed Alan Greenspan to the Fed, over the objections of Nick Brady, and that it is Greenspan's resolve which is holding things together on the monetary side. Unfortunately, when you add up all his good points and throw in all his good intentions, the fact remains that the economy stinks, it's not getting any better, and he's to blame.