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May 18, 1990
All of the week's economic data were weaker than expected, and the economy is clearly weaker and less inflationary than it looked in the April scare.
The Consumer Price Index rose only .2% in April. Housing Starts fell 5.8% to a level not seen since the 1982 recession. Industrial Production fell .4% against expectations of an increase, and Industrial Capacity Utilization fell to 83%. The bond market spent the spring worried first about inflation, and then shifted to concern about how to absorb the major debt spill in May from ruptured tanks at the Treasury.
The worry of the month has moved to the budget deficit and the outcome of last ditch negotiations between the Congress and the White House.
Though the Reagan administration tended to make up projections to suit the needs of its spokesmen, the Bush people have tried hard to stay in the real world. Through 1989, a credible case could be built that the economy really was growing its way out of deficit trouble.
The sudden allhands dealdoing meetings in Washington have been triggered by some painful surprises. Tax revenues have slowed with the economy. Interest rates have risen, driving up the cost of servicing the national debt. The 1991 budget, projected to come in well below $100 billion, now projects at $140190 billion.
The fear of every sensible player in deficit chicken has been: what happens when the economy weakens, and revenues fall? Do we raise taxes and cut spending while the economy is weakening and cause a depression? Or do we just let the deficit go to $350 billion and look like Brazil?
The preauction jitters at the end of April turned out to be overdone, and the debt was sold easily. However, a good case of the frights was introduced at the White House. Budget Director Darman, no fool, said "There is a limit to the amount of Treasury paper that the markets can buy."
If a deal is going to be cut, now is the time. The defense budget is indefensible, and provides the key giveaway chip for the Republicans. If Rostenkowski and Bush fail, it will be a sad day for mortgage rates.
However, never underestimate the resilience of the American economy: even if the bigwigs fail it won't be the end of life on earth which will be predicted by every newspaper in the land.
Bush will take fierce heat for reversing himself on taxes, but as another American politician said: "When I discover I am wrong, I change my mind. What do you do?"
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