The Woodward Effect
Jude Wanniski
June 10, 1994


As soon as you finish reading this report, have someone run to the nearest bookstore to buy ($24) Bob Woodward's sensational new book, The Agenda, which you should read ASAP. The book is of great importance because it provides an accurate window onto the decision-making mechanism on economic policy in the first year of the Clinton administration. As a result, everyone involved in attempting to influence the shaping of economic policy in this administration now has a much clearer guide on how to proceed. This will absolutely change the way economic policy is made, which can only be in a positive direction. I bought the book Tuesday and ripped through it after seeing how carefully Woodward had assembled his material. His assessment of President Clinton's evolving relationship with Fed Chairman Alan Greenspan is remarkably accurate, very close to the analysis we have been providing over this stretch of time, but with detail suggesting that the Fed Chairman's "teaching" of the President has been woefully inadequate -- with not a trace of the supply-side arguments on fiscal and monetary policy that Greenspan has mastered. 

Greenspan, who took a copy on his flight to London this week, should be surprised and chagrined to learn how much his austerity streak came to dominate the internal White House debate. It's sad to see the President operating in a milieu of what can only be described as Kindergarten Keynesianism, the framework that dominated the Nixon, Ford and Carter administrations. There is hardly anyone here that comes out looking good, in the sense of having learned anything from the experience of the Reagan-Bush years. It is as if the '92 campaign theme of "12 years of greed" required everyone around the President to deny that anything could be learned from those 12 years. This might have been avoided had Clinton given any White House post to Rob Shapiro, the Harvard Ph.D. at the Progressive Policy Institute who at one point believed he would be named OMB Director. Shapiro was shut out, I think, precisely because he had written that there were actually some things about the supply-side theory that were not too bad. Labor Secretary Robert Reich is pitiful in his appearances, and so is Alan Blinder, now headed to the Fed vice chairmanship. It is Blinder who makes the hoary Keynesian argument that it doesn't hurt the economy to tax the rich because they don't spend as fast as the poor. Of all the players, the only one who pokes her nose in now and then with sensible arguments is Laura Tyson, chairman of the CEA. It is most interesting that she won the job in her interview when Clinton asked her what she thought of the monetary aggregates as a guide to Fed policy, and she pleased the President by saying they had too many technical drawbacks to be useful -- a lesson I believe he learned from Shapiro. When Woodward began the book project in 1992, it was originally planned as a window on the Bush Administration's economic policymaking -- perhaps in the belief Bush would be re-elected. Woodward, who had never before seriously delved into economic policy, spent several hours interviewing me back in '92, but all that was scrapped when he realized the Clinton project was much more important. Hurry up! Be the first on your block to read how The Most Important Man in the World (and his wife) make up their minds!

FED WATCH: Greenspan's London speech -- talking down inflation -- is clearly an attempt to jawbone the bond market back into a rally. It worked for an hour or two, but jawboning will not work as long as the Fed continues to add reserves to the banking system. As the markets no longer expect the Fed to raise the funds rate again, demand for reserves has fallen, as we said it would on the phenomenon described in 1984 by the late Fed Gov. Henry Wallich. The open market desk in New York should have been draining reserves this week, with funds below the 4.25% target! This would ignite a bond rally. But the desk stayed out yesterday and today, for some reason Greenspan has not told us about. The bond market cannot resume its rally until the price of gold falls back toward $350 -- information nobody is telling the President. For bonds to trade against a gold market of $385 is now clear evidence Greenspan is willing to permit a 10% devaluation of all dollar assets, public and private. The Woodward book makes it clear that many of the President's advisors believe "the bond market" is a bunch of rich Wall Street traders. Is there nobody around the President who understands that the bond market consists of all the people who own some of the U.S. national debt of almost $5 trillion and all of the people who are thinking of buying some of that debt? Unless the Fed corrects this error soon, the S&P 500 and NASDAQ will continue to forecast a weakening of the economy going into the November elections. Psst! Mr. President! Hillary! We've got a secret!

HEALTH CARE: We are getting very close to the point where the GOP leadership in House and Senate can make the case that it is now too late to fashion health care legislation this year -- that the two political parties should go back to the voters for a fresh mandate on this issue. Rep. Dick Armey [R-TX] and Sen. Bob Bennett [R-Utah] are now making this argument. The Democrats are trying to cobble together something in a few weeks, so they will have something to take to the voters in November. Republicans need only argue that the President has had a year and a half to produce a plan, but has not. He cannot expect the country to permit the restructuring of one-seventh of the economy in the weeks remaining before the summer recess and fall elections. Democrats are frantically scaling back the plans in the Moynihan and Kennedy committees, hoping to find some bare minimum that can pass with a fig leaf of bipartisan support. A GOP "haste makes waste" argument might even persuade the President to call time out, as it would resonate in the country, which I believe is now scared to death that Clinton and the Democrats will do something stupid on health care at the 11th hour -- which is why they are electing Republicans in every special election.

HAITI: The White House is gearing up for an intervention in Haiti sometime between July 1 and August 1, but my guess is that it will not happen. The President is being pushed by the Congressional Black Caucus, but there are several drawbacks that should prevent him from using military action. Not the least is the problem that President Aristide has created for himself by privately supporting the idea of U.S. intervention, news of which has made it into The New York Times. Aristide had been careful to point out that he cannot call for military intervention because this would be in violation of the Haitian constitution. His most radical supporters on the left, in Haiti and Florida, are fiercely opposed to a U.S. invasion, which implies a colonial occupation reminiscent of the U.S. occupation of Haiti early this century. According to the best estimates I can get, there are at least one thousand infants per week dying for lack of sanitary water or food, as the U.S. embargo tightens again. There are 45,000 tons of medicine and food that have been sitting on the docks of Miami for a month, I'm told, waiting for permission of the United Nations bureaucrats to allow them to be shipped to Haiti by the charitable groups allowed to distribute relief. Rep. Rangel is pleading for invasion to end the suffering the embargo is causing. GOP leaders, who oppose invasion, should be insisting that unless the President proceeds by a certain date, perhaps in 30 days, he should ask Congress to lift the embargo and go ahead with the diplomatic fact-finding mission which Senator Dole has recommended as a policy alternative -- and which the Haitian military has said it would welcome.

JACK KEMP endorsed Ollie North's GOP Senate bid in Virginia, but only after asking him to pledge that he will campaign statewide for the black vote, ending the GOP's 30-year-old "Southern Strategy." Kemp has announced that he will only campaign for Republicans who make this pledge. The rest of the GOP will have little choice but to follow Kemp's lead, which can only increase its chances of making major gains in the House and Senate midterm elections. It may not seem like much on the surface, but believe me, this is an historic event. Kemp told the LA Times today that he hopes Colin Powell "runs for the Republican presidential nomination and picks me as his vice president. It would be good for the party." I still see a potential Dole-Kemp ticket in '96, with Colin Powell as Secretary of State in the GOP landslide that would follow.

COMING ATTRACTIONS: You will be receiving next week an essay-length treatment on the real state of the U.S. economy, "Economic Prosperity: It Ain't What it Used to Be," by David Gitlitz. It's a fascinating follow-on to the short piece we sent you last December 3, "The Economy Stinks." David tears apart the GNP statistics in a way that should persuade you that our government has to scrap its national income accounting method -- which was originally built to satisfy the Kindergarten Keynesians of the 1930s -- if it is ever to be able to make sensible economic policy under any President, of either party. You will also soon receive an essay-length report on my trip to Havana last week, where I found a Cuban government trying desperately to convert to a market economy, but still making all the mistakes the Russians have made -- except more gradually. Kind of a "Slow Shock Therapy."