James McIntyre, Bert Lance's relatively unknown successor as budget chief, was in New York recently to get acquainted with the Wall Street fraternity. If one were to judge by the harsh reaction of Barton Biggs, the highly regarded research chief of Morgan Stanley & Co., one of the classiest investment banking firms around, McIntyre might just as well have stayed at home.
The new director of the Office of Management and Budget - hand-picked by fellow Georgian Jimmy Carter as the best man in the nation to fill Lance's shoes - came off as a country bumpkin.
"All my worst fears were confirmed. A nice, naive, not terribly bright lawyer from Georgia . . . without a questioning bone in his body," is how the outspoken Biggs characterized McIntyre in a biting commentary he dashed off to institutional clients. It was the financial community's first public slap in the face to the new budget boss, whose personal views on the economy are pretty much of a mystery.
What especially disturbed Biggs was McIntyre's lack of concern about the recent sharp increase in the budget deficit from $40 billion to $60 billion and its ominous implications. Nor did Biggs like McIntyre's views on inflation.
Belittling a brief speech given by McIntyre at a private luncheon, Biggs said, "It was not even country-slick. He (McIntyre) started out with some unusually corny platitudes about New York like, 'I'm always stimulated by the vitality of this city and its financial district.'" The guests, recalled Biggs, sneaked sidewise glances at each other for signs of this vitality (McIntyre's talk was given shortly before the market's recent surge).
McIntyre, Georgia's budget director when Carter was governor of the state, told the gathering the administration's economic advisers felt the economy would slow in the second half of this year if it were not stimulated. And so, he explained, a tax cut to keep the economy going was vital. And the fact the deficit was increased from $40 billion to $60 billion was perfectly responsible and healthy.
McIntyre even argued that the budget deficit was a "better quality" deficit because it was a "tax-cut deficit" rather than a "spending deficit." He also stressed his anxiousness to fight inflation . . . but not if it meant sacrificing programs to stimulate the economy.
One listener asked the budget chief whether he wasn't worried about a budget deficit of $50 billion in the fourth year of an economic recovery, when the budget should really be close to balanced or generating surpluses. Biggs also tossed in his two cents. He asked McIntyre about the risks of such a deficit increase - namely, that it would cause congestion in the capital markets and thus raise inflationary expectations and interest rates, lower stock prices, increase the cost of capital, weaken businessmen's confidence, diminish capital spending, and eventually affect consumer confidence. In other words, Biggs asked, wouldn't a bigger budget deficit be counterproductive, by restraining economic growth and increasing inflation?
McIntyre responded that administration advisers such as Charles Schultze, chairman of the President's Council of Economic Advisers, had told him that a bigger budget deficit would make stock and bond prices go up - not down.
"But clearly that's wrong," said Biggs. "Both markets have gone down since early January."
McIntyre expressed surprise at this revelation, observing that he knew the stock market had gone down, but he had thought that bonds had gone up.
"I must confess," Biggs said, "there was a fleeting and unkind suspicion in my mind that perhaps he thought bond prices went up when interest rates rose."
Biggs interest McIntyre's lack of comprehension of the significance of the budget deficit is largely a matter of Schultze's influence. He believes McIntyre is swallowing Schultze's earnest conviction that the old Keynesian techniques (largely the use of monetary policy to stimulate the economy) still work like they used to, even though they were never designed for an economy with a big deficit, high interest rates and persistent inflation.
It's worth noting that Biggs, who has been bullish on the market for about a year now - and, until recently, wrongly so - has blamed his miscalculations on the inept porformance of Jimmy Carter. (In fact, he thinks Carter's recent inflation-fighting plan was "somewhat vapid and nebulous.") And now, poor McIntyre is incurring Bigg's wrath.
Regardless of Bigg's motivation, his putdown of McIntyre is another example of Wall Street's widespread disenchantment with top Carter appointees. Even more disturbing, however, are Bigg's parting remarks: "If McIntyre is typical, the Carter people . . . still think they can talk away inflation without making any real political sacrifices in terms of reduced economic activity, higher unemployment, and some pain for almost everybody. The longer it takes them to understand this and the longer they wait, the more pain we will all have to endure."
Intrigued by McIntyre's views? Wants to know more? He'll be addressing a New York Financial Writers' Association meeting May 17. But based on Wall Street's reaction, could be he'll quietly slip away before the question period.