Those Bad News Bears

Two key Wall Street sages raise concern over the supply-side program

Wall Street had more topsy-turvy times last week. On Monday the major banks raised the benchmark prune interest rate they charge many business clients a half point to 19.5%. Immediately the Dow Jones industrial stock average fell 13 points to 963, continuing its drop of 61 points in less than a month. But later in the week the Dow rallied 23 points to close at 986. Bond prices, which had plunged some 7.5% since the end of March, also slumped on Monday but came back to finish up about 2% for the week.

The spark for the late-week recovery came from Washington as the White House, increasingly alarmed about the disarray in financial markets, tried to restore confidence among moneymen. President Reagan abruptly abandoned his pledge to spare Social Security retirement payments from the budget ax; he proposed reductions in old-age and other benefits that will trim Social Security payouts by 10% and shave $46 billion in the next five years. Lawrence Kudlow, chief economist at the Office of Management and Budget, promised that more spending cuts and deferrals were on the way and hinted that the Administration might scale back slightly its request for outsized increases in military spending. Said he: "Nothing is untouchable, including defense." Perhaps most important, White House spokesmen said that the President might be willing to make a compromise with Democrats in Congress who want to reduce the size of the threeyear, 30% tax rate cut plan that is the heart of the Administration's supply-side economic strategy.

These actions may have been a tentative—and no doubt reluctant—tip of the hat in the direction of a group of vocal Wall Street critics who have been arguing all spring that inflationary pressures were still strong and were likely to intensify as a result of Reagan's combination of large tax cuts and hefty boosts in defense spending. The most prominent of these skeptics are a pair of bad news bears: Henry Kaufman, 53, chief economist for the investment banking house of Salomon Bros., and Albert M. Wojnilower (pronounced Wodge-nee-lauer), 51, who holds the same post at the rival First Boston. They are two of the most respected oracles in the financial community; their ability to analyze and forecast money market trends with unusual accuracy has attracted legions of loyal followers.

While other forecasters were predicting earlier this year that weakness in the economy would drive interest rates steadily down, Kaufman and Wojnilower strongly dissented. In March Wojnilower warned: "An embedded inflation rate of 10% now has little chance of receding, and it's only a matter of several weeks or months until economic strength translates into greater monetary growth and higher interest rates to restrain it." On April 22, Kaufman criticized parts of Reagan's economic strategy in a speech to the National Press Club. Said he: "The Administration's fiscal policy is exceedingly expansionary and does not pursue a course that fights inflation vigorously." As a result, he contended, the prime rate would start rising. As Kaufman spoke, the prime stood at 17½%.