Waiting for Reaganomics

By Alexander Taylor

What investors and executives expect from the "businessman's populist"

The President-elect's swearing-in was still eleven weeks away, but on Wall Street, which has long been Ronald Reagan country, the bulls began a kind of Inaugural Ball right after the landslide. In the eight trading days following Nov. 4, investors grabbed up long-depressed shares with enough zeal to set new records for trading volume and push the widely watched Dow Jones industrial average of 30 blue-chip stocks up by 49 points, to 986.35; that was a half point below the previous high reached on Jan. 10, 1977--just ten days before Jimmy Carter moved into the White House. At week's end some brokers were speculating that the market had enough upward momentum to propel the Dow through the magic 1,000 level--which it last hit in 1973--by the time Reagan takes up residence at 1600 Pennsylvania Avenue.

Led by mutual funds and other institutions, which had mostly been sitting on, the sidelines in the waning weeks of the campaign, investors sent share prices soaring on the very day after the election. Although the Dow wound up that session with an impressive 16-point gain, at one time it stood 45 points above the pre-election close. Moreover, an unprecedented 84.1 million shares were traded on the New York Stock Exchange. Prices later slipped back as banks boosted the interest rates they charge their prime corporate customers by a full point, to 15 1/2%. But the chill of rising rates, which nearly always push stocks down, was short-lived, and the market resumed its climb last week. Almost all kinds of issues rose, but the big gainers were energy and defense companies, which stand to benefit from Reagan's plans to speed deregulation of domestic oil and natural gas prices and beef up the armed forces.

Whether the stock surge was the start of a long Reagan rally was problematical. If the buying spree continues, it will be in the face of not only signs of continued economic .slump and inflation but also some Wall Street history. In modern times, stocks have usually climbed through the first year of a new Democratic Administration.* But the last time the Dow rose in the Inaugural year of a Republican Administration was in 1925, after Calvin Coolidge was elected.

In part, the market's glow reflects a conviction in the business community that happy times will return with the incoming Administration. Says Felix Rohatyn, a partner in the influential Lazard Freres investment-banking firm: "Reagan is a businessman's populist. Under the Carter Administration, they considered themselves the whipping boys, overregulated and over-Naderized. Now they all see a better climate coming."

Among the cheeriest businessmen are energy company executives. They have hopes that an Administration with a pronounced free-market economic philosophy will bring into being many items on their wish list, including stepped-up leasing of federal lands for oil and gas exploration, the easing of burdensome environmental rules and perhaps even a cut in the windfall-profits tax on the rising revenues from "old" crude oil. But a good many oilmen look for relief in these areas not so much from a G.O.P. White House as from conservatives who will be replacing anti-oil company liberals on key committees on Capitol Hill. Says Alton Whitehouse Jr., chairman of Standard Oil Co. (Ohio): "What I am really pleased about is what happened in Congress. It has been the true disaster area."

More broadly, executives hope that the incoming Administration can temper the antibusiness hostility that they believe has prevailed in Washington for much of the 1970s and complicated efforts to deal with the nation's economic malaise. The Reagan White House, says Charles Bliss, chief executive officer of Chicago's Harris Bank, has an opportunity to "set the tone for the beginning of the decade toward solving our problems of inflation, slipping productivity and declining standard of living. We will have a whole new appraisal of the role of Government."

Perhaps, but Reagan's first priority will be to deal with some pressing economic problems. During the campaign, notes Chicago Economist Robert Genetski, "Reagan did not concentrate on the pain ahead. The necessary economic adjustment was underplayed, and 1981 is going to be rough." The new Administration, as Banker Rohatyn notes, will be "starting off with all the momentum going the wrong way." Instead of inheriting an economy that is expanding smartly, as he might have hoped, Reagan is faced with one that could plunge into recession again sometime this winter. At best, economists say, the prospect is for almost no real growth over the next twelve months.

Much of the problem lies with high interest rates. While many Wall Street bulls are betting that rates have just about peaked, others believe that the cost of money will go even higher. The Federal Reserve Board fueled those fears late last week when it boosted the discount rate, the interest it charges on loans to member banks, from 11% to 12%, and tacked on an additional 2% surcharge for especially big bank borrowers. A number of Fed watchers believe that the central bank plans to work hard at least through Jan. 20 to rein in the money supply, whose growth is still exceeding Fed Chairman Paul Volcker's targets. Says Investment Analyst Julian Snyder: "For Volcker, the next three months provide a great opportunity to clamp on the monetary brakes with minimum political interference. He can try to wring out in December what could not be wrung out in May."

Inflation is sure to rise above its present 12.7% annual rate over the next few months; some economists even foresee a rerun of the price explosion of last spring, when the rate briefly hit 18%. One of the villains will be food prices; they may rise by as much as 2% a month this winter because of a poor harvest and overseas demand. At the same time, the unemployment level, now 7.6%, will creep up as rising interest rates slow down homebuilding and other industries. As it is, the economy is very sluggish. New home sales in September dropped 14% from the previous month, and retail trade, depressed by continued weakness in the auto and building-material markets, slipped back in October after rising for four consecutive months.

Given the still parlous state of the economy, it is uncertain whether Reagan as President will press for the program espoused by Reagan the candidate. The former California Governor has by no means disavowed his campaign-trail proposals to cut personal and corporate taxes, increase defense spending and reduce the federal deficit--or his assertion that the economy can be returned to health without much cost to Americans in terms of lowered standards of living. Reagan endorses the views of so-called supply-siders like Congressman Jack Kemp and former Treasury Secretary William Simon, who want to spur growth by stimulating business investment rather than consumer spending. The President-elect maintains that the country can spend its way out of the slump without stoking inflation.

But is this realistic? Some Reagan advisers say that the answer is yes--if the new Administration can achieve a delicate balance in the timing of cuts in taxes and cuts in spending. They insist that they can quickly carve $13 billion, or 2% of the total, out of the current fiscal 1981 budget, even though it will have already been in effect for four months by the time the new Administration takes office. Simon says that there is "still plenty of fat" in that budget, including unspecified items of "fraud, abuse and waste" that, he says, amount to $100 billion. Once the fat is sliced away, goes the argument, Reagan can move to honor his pledge to cut personal income taxes by 10% a year for three years. This can scarcely be inflationary, Simon maintains, "because the economy is turning over at only 74% of its capacity."

Fiscal conservatives like Reagan Advisers Alan Greenspan, the Ford Administration's chief economic adviser, and George Shultz, who was Richard Nixon's Treasury Secretary, (986.35 dispute the Simon scenario. They note that the 1981 budget has a deficit of at least $50 billion already locked in. The addition of $10 billion to $20 billion in defense spending increases pledged by Reagan plus the planned tax cut would put the budget $100 billion in the red. Says Lora Collins, a Conference Board economist: "Reagan's growth policy runs a real risk of overstimulating, while no one knows how much new business activity would be unleashed, or how much tax revenue generated."

Simon concedes that the new Administration will not produce any miracles. "We are not going to see immediate results," he says. "Everyone is wondering how you are going to increase defense spending and balance the budget. It will not be done in one year. It will be done over the President's first term in office. We did not get into this mess overnight, and we are not going to get out of it overnight."

Businessmen seem willing to grant Reagan ample time to get his program in place. Says Crocker National Bank Economist Thomas Thomson: "The economic levers available to a President aren't that good any more, and the short lead times of the '60s just don't work. Things aren't going to be a helluva lot better in the first part of '81."

One Reagan pledge on which businessmen hope to see fast action is his vow to reduce Government regulation. He has already said he will scrap the failed Carter wage and price guidelines as soon as he takes office, and some expect him to proclaim a moratorium on the issuance of new rules by Washington's myriad regulatory agencies. Says W. Martin Dillon, chairman of Northwestern Steel and Wire Co. of Sterling, Ill.: "The biggest thing the Reagan Administration could do is just stay out of our hair."

Detroit, especially, is anticipating the early departure of Nader Disciple Joan Claybrook as head of the National Highway Traffic Safety Administration, where she pushed hard for the air bags and tighter fuel-efficiency standards for trucks and vans that caused auto-industry headaches. Yale Professor Merton Peck, a Johnson Administration adviser, expects to see increased deregulation of small businesses where, he says, enforcement of rules is erratic and costly, and benefits to employees and consumers are marginal.

Inevitably, there will be criticism of the new Administration's individual programs and appointments. But businessmen seem united in their view that it will bring a marked improvement over the stop-and-go economic policies of Jimmy Carter, which thwarted anti-inflation efforts and severely complicated corporate planning. Still, honeymoons have a way of ending abruptly. The burden will be on the new Republican in the White House to prove that he can deliver a robust economy.

-- By Alexander Taylor. Reported by William Blaylock Washington and other U.S. bureaus

* One exception: 1977, when Jimmy Carter went to Washington.

With reporting by William Blaylock

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