Executive Summary: The relative buoyancy of the stock market continues to forecast a Reagan victory on November 4. The chances of a Reagan "landslide" slip away as the Reagan tacticians are outmaneuvered by President Carter's strategists. Influenced by the Nixon-Ford economists and Richard Wirthlin, the pollster/strategist, the Reagan campaign has moved away from the economic growth issue and supply-side economics. Reagan remains personally committed, as evidenced by his exposition of the ideas in the debate with Anderson. But unless he debates Carter or recasts his media spots in the closing weeks, his agenda for change will not get through to the electorate in prime time. His decision not to debate Carter was a major error accompanied by a market selloff. Carter's negative attacks on Reagan, a la Truman's 1948 campaign, can succeed by keeping Reagan pinned down and defensive. A narrow Reagan win means narrow GOP congressional gains. A steady October market slide would anticipate a Reagan defeat. Either way, markets will be volatile in the homestretch.
The Campaign Homestretch
On the continuing assumption that the stock market is dominated by the approach of Election Day, its continued buoyancy even in the face of disturbing news from the Middle East forecasts a Reagan victory on November 4. Against our August 1 scenario ("The Reagan Bull Market") that suggested a Reagan landslide would be accompanied by a Dow Jones Industrial Average of 1100, Reagan is still a long way from a landslide or even a substantial win. And chances of a GOP sweep slip away as the campaign enters the October homestretch seemingly committed to a low-risk, coast-home, run-out-the-clock strategy. Indeed, such a strategy is vulnerable to Carter's high-risk, slambang attacks on Reagan that are reminiscent of Truman's savaging of Thomas E. Dewey in 1948. Just as in 1948, elite opinion is clucking over the low-road campaign of the incumbent (the elite can not publicly tolerate political maliciousness). But if the attacks successfully distract the Reagan campaign from selling its agenda for change against Carter's dismal record, as they have so far, the President's chances of re-election are enhanced considerably (and following a Carter victory, the liberal elites would hail his brilliant "give 'em hell" strategy).
At the top of the homestretch, the Reagan high command is breathing a little easier because the candidate's dizzy collapse in the public opinion polls following the Democratic Convention has been arrested, with even some signs of improvement. Even at Reagan's low point in the polls, on about Labor Day when most polls showed a dead heat, the expert handicappers in both parties conceded that Reagan would win via his edge in electoral votes. When he edged forward to a 2-to-5 point lead by mid-September, there was a natural tendency to feel the worst was over, the campaign under control, and by not making mistakes the electoral votes would be there. The stock market accompanied this rebound with a rebound of its own to new high ground.
There was, though, little reason for the Reagan high command to congratulate itself for this positive flurry. Carter himself, and campaign manager Robert Strauss, had deliberately handed Reagan a breather by refusing to participate in the September 21 debate. True, they had no choice, given their calculations about the threat to their base from John Anderson. But they still demonstrated a willingness to swallow a short run tactical setback to fit in with a strategic plan. The Reagan campaign was simply lucky and had no reason to believe its underlying problems had been resolved. In a sense, this breather handed them by Carter was paid for by smugness, a euphoria that enabled them to blink away the serious structural problems of the campaign. On September 1, in the midst of the slide, there was pressure to replace the hydra-headed campaign committee with a single strategist. By September 15, the pressure was gone, given the upward blip in the polls, and decisions were made to cement the committee of tacticians into place for the duration.
As I argued in the August 1 scenario, the most important problem in the campaign is that "Reagan's chief strategist, Richard Wirthlin, is also his pollster. This is a dangerous mix. Polling can only tell a candidate what the electorate believes today, not what it will believe given new information." In the absence of John Sears, nobody in the campaign is capable of challenging Wirthlin in his interpretation of his polls. In fact, the high command is mesmerized by them. The most serious casualty has been Reagan's chief issue of the campaign: economic growth through supply-side economic policies. Wirthlin1s polls, which indicate the public is dubious about tax cuts financing themselves through economic growth, have frightened the campaign's committee into "moderating" the commitment to the idea — which means backing away from it. What does this leave? Only subtle differences between Carternomics and Reaganomics, a serious dilution of Reagan's promise of change. It also means that in the larger debate over economic policy between Reagan and Carter, Carter has won. In the eyes of the electorate, he has forced Reagan to back down on what had been the central thrust of his winning primary campaign.
During the primaries, Wirthlin had been a supporter of the supply-side Kemp-Roth issue; his polls consistently showed that the various primary electorates responded favorably to Reagan's advocacy of economic growth via tax-rate reduction. As "strategist," he repeatedly ordered heavy play of the tax-cut TV spots made for the campaign. Reagan was attacked again and again by his GOP opponents on the idea (George Bush said it was "voodoo economics," John Anderson said Reagan was using "mirrors"). But in the New Hampshire, Illinois and Texas debates, Reagan masterfully defended the concept and always the electorate responded with smashing Reagan victories. In Michigan, Pennsylvania and Connecticut, where there were no debates and no TV spots, Bush defeated Reagan.
At the Republican Convention in July, Reagan soared to a 28-point lead over Carter in the Harris poll in the wake of his flawlessly upbeat, supply-side acceptance speech. But from July 17 to September 21 the mass electorate would hear not a word of advocacy by Reagan on the idea. What they did get was the blistering attack on the idea by Jimmy Carter and Walter Mondale at the Democratic Convention in August, watched by more people on prime time TV than had watched the GOP convention. The ridicule heaped on Reagan's economic program included assertions that it would cause a 30 percent inflation rate and a $1 trillion loss in revenues, and almost all social programs would be wiped out.
Reagan, vacationing in Southern California, did not reply to the assertions. Nor did the Nixon-Ford economists who had spilled into his campaign after the defeat of the GOP candidates they had supported in the primaries. Conservative Keynesians or monetarists, they had opposed the supply-side, classical theory underpinning the Kemp-Roth 30 percent tax cut at the center of Reagan's program and relentlessly sought to have Reagan dilute the plan. The primary TV spots and the people who had produced them were abandoned and William Casey, the nominal replacement of John Sears as campaign manager, hired the Peter Dailey firm of Los Angeles to produce new TV spots. Wirthlin, polling after the uncountered Carter-Mondale attacks, found weak support for the Kemp-Roth approach. In the new series of TV spots, the tax/economic growth idea was avoided entirely. Because Reagan refused to back away from Kemp-Roth, the campaign command turned its defense over to Alan Greenspan, a conservative Keynesian, who defended Kemp-Roth on traditional theory. Income-tax rates would not be cut because they are presently burdening the economy by being unnecessarily high, but because future inflation would produce so much revenue that a portion could be safely returned. The Greenspan approach would concede rampant future inflation. It would be a requirement.
In his New York Times column of September 10, Leonard Silk was quick to see the effect of this shift in the Reagan strategy:
Does it make any difference, from an economic standpoint, whether Jimmy Carter, Ronald Reagan or John Anderson is elected President in November? The economists who spoke in their behalf — Charles L. Schultze for Mr. Carter, Alan Greenspan for Mr. Reagan and Hendrik Houthakker for Mr. Anderson — at the Denver meeting of the American Economic Association last week made it sound as though it didn't matter very much.
Mr. Greenspan, the chairman of the Council of Economic Advisers under former President Ford, embraced Mr. Schultze, President Carter's chief economic adviser, in a bear hug that left Mr. Schultze blushing in discomfort. But under his own imposed rules for the nondebate, Mr. Schultze chose not to respond to Mr. Greenspan's declaration of qualified love for a man he hailed as a fellow conservative.
Indeed, Mr. Greenspan said: "Both President Carter and Governor Reagan argue from a generally similar philosophy. Both rail against inflation and advocate accelerated tax depreciation to offset its anti-investment consequences. Both deride the growth in regulation. Both oppose mandatory wage and price controls, although President Carter has tried a guidelines approach. Both advocate tax cuts to stem the rise in tax burdens derived from inflation. Both advocate budget balance."
On September 14, a Times editorial commented on "Mr. Reagan's Me-Too Economics":
When President Carter reached Washington nearly four years ago, his economic strategy was quickly revealed to be vintage Gerald Ford. Like his predecessor, Mr. Carter proved himself fiscally conservative, monetarily cautious and prepared to fight inflation by judiciously crossing his fingers. Now we learn that Ronald Reagan, too, stands for this stale brand of economics. The Republican candidate's new economic plan, minted by the same men who served President Ford, is sober, cautious and woefully inadequate.
When it comes to economics, it is admittedly safer to be dull than dazzling. At least Mr. Reagan's five-year plan abandons wild promises and envisions the difficulties of governing. He no longer wants to return to a gold standard. Nor does he cling to the elephantine tax bonanzas for business embodied in his 10-5-3 accelerated depreciation scheme. Mr. Reagan seems even to have emerged from Wonderland to recognize that cutting taxes will mean losses of Federal revenue, and some risk of still higher inflation.
Of course the Times was correct. The Nixon-Ford economists had diluted the Republican platform and Reagan's conceptual supply-side approach to the vanishing point. Greenspan, who had in 1974 presided over the Ford strategy of a 5 percent income-tax surcharge and the WIN buttons ("Whip Inflation Now") to combat inflation, and later, a $50 tax rebate to combat the recession that the earlier policies induced, was now engineering economic strategy with the support of Wirthlin's polls. And with no Presidential candidate now defending the tax-cut/economic growth idea, Wirthlin's polls of course reflected further doubts about it. Even Gerald R. Ford again publicly criticized Kemp-Roth. And President Carter predicted that before the end of the campaign, Reagan would abandon the plan altogether. At the beginning of October, there were no Reagan plans to debate Carter or advertise Reagan tax-cuts on TV. The Reagan media campaign would focus on Carter's record and a pledge to lower the level of government, information known to the electorate already. Missing or heavily diluted is the agenda for change embodied in the GOP platform and Reagan's own acceptance speech.
One might almost say that the campaign strategy has been to mask Reagan's own personal, intellectual commitment to the idea of economic expansion through supply-side policies. From the time he delivered his acceptance speech, he did not speak his mind to the national electorate on the economic issue until his debate with John Anderson on September 21. August was spent on foreign and defense policy and the "gaffes" over China, Darwinism and the Ku Klux Klan. His stump speech still reflected growth ideas, but network news programs did not focus on this "old news.1' In September, to avoid "gaffes," the campaign sanitized Reagan, eliminated personal interviews with the press, "moderated" the growth idea in his prepared texts, and excised the tax/growth idea from the TV spots.
In the September 21 debate, Reagan was masterful in his exposition of economic ideas within a supply-side framework, and polling indicated he dominated Anderson on the four economic-related questions:
I believe that inflation today is caused by government simply spending more than government takes in at the same time that government has imposed upon business and industry from the shopkeeper on the corner to the biggest industrial plant in America countless harassing regulations and punitive taxes that have reduced productivity at the same time they have increased the cost of production. And when you are reducing productivity at the same time you are turning out printing-press money in excessive amounts, you're causing inflation. And it really isn't high prices. It's just you are reducing the value of the money, you are robbing the American people of their savings.
With a month left in the campaign, though, there seems no avenue left for Reagan to communicate his natural instincts and commitment to the mass electorate. Had he accepted the September 25th offer of the League of Women Voters to debate Carter one-on-one, with a follow-on debate to include Anderson, he would have had the opportunity to draw the austerity/growth issue clearly and finish out the campaign with a bang, going away. But again, the absence of a dominant strategist hurt. In the committee of tacticians, counsel was divided on whether or not to accept a debate with Carter. According to published reports, Casey, Wirthlin and Ed Meese urged debate while Lyn Nofziger and others in the campaign argued that Reagan, having pulled ahead once again in the polls, should not chance a debate. Reagan, clinging to the idea that Carter was playing the debates to his advantage and would somehow back out of a second debate with Anderson, came down against the League offer. When it was announced on September 25 that Reagan had rejected the League offer, it appeared that chances of a confrontation between Carter and Reagan had dropped to near zero. So said the New York Times of September 26. This would be a major error by the Reagan campaign. The refusal of the challenger to debate the incumbent, who is thus excused from having to defend his record face-to-face, was bad enough. To also be seen as running from Carter would wipe out Reagan's advantage gained in September. The White House, through Jody Powell, quickly accused Reagan of being afraid to debate. The sickening stock-market slide of September 25-26, I believe to a large degree reflected the market's evaluation of what this would do to Reagan's chances. (There was a simultaneous barrage of bad news on the afternoon of September 25. The Fed raised the discount rate and the Senate tabled the Finance Committee's supply-side tax cut.)
There is thus only a month left to the campaign which, on its present track, would suggest a narrow Reagan victory, a narrow mandate, and narrow gains in the congressional races for the GOP. But October "breaks" favor the incumbent and could produce Carter's re-election. A month in a presidential race is a long time, however. And the electorate is so fundamentally unhappy with Carter that it would not take much at all to correct the Reagan effort and deliver the substantial win that seemed probable so recently. And there are pressures inside the campaign pushing for these corrections. He could reverse the debate decision and agree to a showdown with Carter. He would almost certainly help himself, especially if properly briefed. There are also pressures to recast the media campaign, and because Reagan is as adroit as he is with the medium, it would take almost no time at all to scrap the planned series of TV spots and cut new ones that revive the themes of the primaries.
It was this last-minute dash that brought Reagan his 27-point victory in New Hampshire last February: a faceoff with George Bush in Nashua three days before primary day; new TV spots that began running 10 days before primary day, when Reagan was actually trailing Bush in the polls. Whatever happens, though, October promises to be a wild-and-woolly month in the financial markets. A Reagan defeat would be anticipated in October unless corrections are made, and the stock-market slide would no doubt be appreciable. Hold on to your hats.