Economic Outlook: Still Anemic/President Bush, Spinning His Wheels
Jude Wanniski and David Goldman
September 22, 1992



The economy is definitely not "poised for a dramatic recovery," as President Bush said on Rush Limbaugh's radio show yesterday. In our reading of the markets, the best we can say is that if the Federal Reserve continues to keep the gold price within a narrow trading range around $350, as we anticipate, the U.S. economy will avoid a double-dip recession. Our market-based indicators of growth expectations do show marginal improvement during the past month, which we attribute to the Fed's success in reducing inflation expectations by targeting gold. With the economy pulled in opposite directions by adverse fiscal policy and sound monetary policy, there is no recovery in the usual sense, i.e., a return to the economy's long-term growth trajectory . We continue to expect 1.9% economic growth this year, as we forecast last April, on the strength of market measures of growth expectations. We note that the consensus forecast, e.g., the National Association of Business Economists' 1.8% prognosis, has shifted towards our April forecast, which then stood on the extreme fringe of pessimism. Falling inflation expectations should keep this extremely slow growth continuing into the first quarter of 1993.

The relative movement of high-cap vs. low-cap stocks , such as the ratio between changes in the NASDAQ composite index vs. the DJIA, has provided a good leading indicator of economic growth during the past decade. This is because low-cap stocks better reflect the new industries and products at the economy's margin of growth. Economic activity appears to lag this indicator by approximately three quarters. The poor economic numbers reported to date for August appear to reflect decisions made during February and March, when the NASDAQ/DJIA ratio fell by nearly 20%. As we warned in April, the effects of these decisions would begin to appear during the third quarter.

Our model of the factors which have moved the NASDAQ/DJIA ratio since the recession began two years ago shows that the single most influential factor is the volatility of the gold price. We surmise the market reads into this factor the burden of the unindexed capital gains tax, which increases with inflation expectations. After falling to only 110% of its August 1990 level from its February peak of 130%, the NASDAQ/DJIA ratio inched back up to 117% during September. With no change in fiscal policy, a $350 gold price with zero volatility would correspond to a NASDAQ/DJIA ratio of 130% of its August 1990 level. This theoretical exercise suggests that the best monetary policy might do is to generate growth of 2.5-3.0% during 1993 , still miserable by the standard of past recoveries. Even 3% growth, though, seems too much to hope for. Gold price fluctuations are not likely to disappear any time soon, with the Fed's price-level targeting approach still in an experimental stage, and with liquidity shocks still coming from overseas markets. It would surely help if President Bush commended Fed Chairman Alan Greenspan for stabilizing the dollar's value against gold and commodity prices, as he recommended Sunday as a general rule to the G-7 finance ministers.

David Goldman


Whatever mileage the President could possibly have gotten out of Governor Clinton's maneuverings to avoid military service during the Vietnam War has passed a point of diminishing returns. That is, we think the President is being hurt by continuing to focus attention on the issue, as this tells the American people that he gives great weight to an issue of relative unimportance, one that Clinton points out the President said should not be an issue last winter when he, Bush, was ahead in the polls. Combined with his statement that the economy is in better shape than people believe, due to media distortions, the draft issue conveys a presidential disconnect from reality. Unless Governor Clinton can be shown to have acted illegally in his efforts to avoid the draft, the American people can only conclude that he simply used every legal means open to him, which is certainly his right. On "Crossfire" last night, Vice President Quayle's press secretary, David Beckwith, said Quayle himself opposed the war in 1969. He reminded us that by 1969 the number of people who still supported the war could fit into a telephone booth. Voters will rarely punish a candidate for something the law permits. They will punish tax evaders, not tax avoiders, draft evaders, not draft avoiders. Jim Baker would be advised to yank the expensive, negative TV spots that the political "pros" have put together on the draft issue. Every time voters see the spots they will be irritated at the President for wasting his time and theirs. Clinton and his strategists act as if they are troubled by the draft issue, which only encourages the President's "handlers" to waste more of everyone's time on the issue. My guess is that Clinton's strategists are delighted the Bush campaign is chasing its tail and getting nowhere. There's no question Clinton has been slick and slippery in the way he's handled the issue, but the horse has been beaten to death. One recent poll shows 82% of those questioned are tired of hearing about it.

The only way the President can come back is to devote all his energies to the economy, as Clinton has. Even then, the hand of Treasury Secretary Nick Brady is deadening every positive initiative the Baker-Zoellick team comes up with. The President's written speeches and statements are now under Baker's control and are better than any we've heard from Bush in years. The President still talks to his friend Brady and reflects his views, however. His extemporaneous remark on the Rush Limbaugh show that the economy is "poised for a dramatic recovery" was a pathetic reminder of Hoover's "prosperity is just around the corner."

Brady's crew at Treasury has been throwing ice water over the Baker-Zoellick gold initiative. Except for The Wall Street Journal's excellent editorial on the subject this morning, "An American Opportunity," the rest of the press corps is taking its cues from Brady and the Beltway Establishment, with predictable results. Since nobody at Treasury is smart enough to know what the initiative is all about, they are essentially saying: "We don't know what it's about or how it's supposed to work, but we don't think it can, whatever it is."

Even more outrageous is Brady's tolerance of the International Monetary Fund, which last week announced that the United States should raise taxes and this week announced that the Fed should raise interest rates as soon as the economy begins to expand! It's not surprising the IMF would give such stupid advice. It's the kind of stupid advice it gives all around the world, which helps explain why the world economy is in such a mess. The IMF is, though, for all practical purposes an extension of the U.S. Treasury Department. It wouldn't exist without the U.S. government's support. Whenever the IMF says anything about the United States economy, the Treasury Secretary knows about it ahead of time. Nick Brady knew in advance that the IMF staff was about to announce its considered judgment that the United States had to raise taxes to balance its budget. The best Brady might say is that someone may have told him but he wasn't paying attention. If he had paid attention, he could have simply called Michael Camdessus, who heads the IMF, and told him to send the report back for review . In truth, Nick Brady really believes that the United States should raise taxes to balance the budget and lower interest rates to get the economy going again, and then when it does, to raise interest rates. He can't say so himself, but the bureaucrats at the IMF will gladly say it for him.

Baker surely knows what a disaster Brady has been. Most people I know in the White House and in the campaign HQ say a prayer every day that Brady will up and resign. It won't happen, though, because Brady would insist that Darman be made to walk the plank with him, a solution Baker would have trouble with. The perfect solution would be for them to join hands, like Butch Cassidy and the Sundance Kid, and jump together.

Jude Wanniski