The Markets Vote

By MICHAEL DUFFY AND DAN GOODGAME

George Bush did not expect a honeymoon, but he did not get even the quiet Florida fishing weekend he had hoped for. Just after American voters overwhelmingly chose him over Michael Dukakis, the world's financial markets sent Bush a message of their own: the Dow Jones industrial average plunged 75 points, followed by the dollar's drop to near postwar lows against the yen. Investors who had sat quietly through candidate Bush's repeated taunts to Congress to "Read my lips -- no new taxes" decided that President-elect Bush had no convincing plan to cut the nation's towering trade and budget deficits. As the slide started, Bush hastily convened a seaside press conference to reassure nervous markets. With Atlantic waves crashing behind him, he allowed that his new burdens made him feel a bit "shell shocked," adding, "The problems are tremendous."

This dose of reality comes with Ronald Reagan still President and the Inauguration two months away. Yet Bush and his nascent team are already being held responsible for the direction of a debt-ridden economy. Bush moved + quickly, while stressing continuity: after announcing on the day after his election that his close friend James Baker would be Secretary of State, he tapped Nicholas Brady to remain as Treasury Secretary. Bush promised to name the rest of his economic team promptly and hold budget talks with congressional leaders before his Inauguration; he started Friday by having lunch with House Speaker Jim Wright. But all the while, Bush clung to his conviction, shared by Brady, that the economy could grow its way out of the deficit without new taxes or serious spending cuts. "Our most important priority is to keep our economy growing with low inflation," he said. "We must resist the policies that will impede that effort, such as raising taxes."

That repeat version of Reagan's 1981 rosy scenario came under fire from Federal Reserve chairman Alan Greenspan, who told the National Economic Commission on Wednesday that the supply-side approach was "fanciful" and implied that Bush's "flexible freeze" plan for reducing the budget would not work. "If we do not act promptly," said Greenspan, "the imbalances in the economy are such that the effects of the deficit will be increasingly felt and with some immediacy."

Within hours, the markets echoed that skepticism, accelerating the dollar's fall to a low rate of 121.52 yen. Improved trade figures did not stanch the bleeding; the damage was halted only by the purchase of $5 billion by foreign central banks, led by the Bank of Japan. Noted John Williamson, a senior fellow at Washington's Institute of International Economics: "Foreign investors are not happy. They read Bush's lips too."

In other ways as well, the world showed that it will not wait for Bush's Inauguration. British Prime Minister Margaret Thatcher and West German Chancellor Helmut Kohl, in Washington for valedictory visits to Reagan, took Bush aside to voice their concerns about the U.S. economy. (Thatcher, interestingly, spent as much time with Greenspan as with Bush.) Meanwhile, Soviet leader Mikhail Gorbachev, in yet another deft diplomatic thrust, announced that he would make a surprise visit to the United Nations next month. The President and President-elect ruled out any impromptu superpower bargaining. Still, complained a senior Bush foreign policy adviser, "we're already being expected to govern. It isn't fair, but we aren't able to ignore those expectations."

Bush generated further friction as he assembled his governing team. Just as the capital anointed James Baker as de facto deputy President, Bush broke away from his old friend and campaign manager. Against Baker's advice, he passed over his current lieutenant, Craig Fuller, 37, for the job of White House chief of staff and turned to an outsider, New Hampshire Governor John Sununu, 49. Fuller, who had served Bush for four years, responded by quitting.

Baker had preferred that Bush appoint a troika consisting of Fuller, Sununu and campaign pollster Bob Teeter, who together would bring the necessary Washington experience, negotiating ability and personal clout to the job -- much like Reagan's first-term team of Baker, Michael Deaver and Ed Meese. But Bush was determined to show his independence. While some members of the transition team seemed thrilled to see the President-elect make a bold decision, others recalled that Bush was not always at his best on his own. Said a skeptical adviser: "There was a lot about this week that was reminiscent of the Dan Quayle episode."

But Sununu is no Dan Quayle. A seasoned and quick-witted political street fighter, he is respected as crafty, tough and stubborn. An M.I.T.-trained engineer and nuclear-power enthusiast who is completing his third term as Governor, he holds a deep conservatism that is both economic and social. Sununu helped turn around Bush's flagging campaign during the New Hampshire primary, when he urged the Vice President to emphasize his "no new taxes" pledge. The Governor then served as the campaign's top Dukakis basher, shadowing his Massachusetts counterpart and ridiculing him. Some Bush aides are concerned that the combative Sununu may run roughshod over Washington's more swollen and tender egos. Sununu, however, pledged to work warmly with Congress, purring with a Cheshire smile, "I'm a pussycat."

From the moment Sununu's appointment leaked last week, it drew fire from supporters of Israel who were troubled by his refusal in 1986 to join the 49 other Governors in signing a proclamation condemning a 1975 U.N. resolution that equated Zionism with racism. Sununu, whose father is Lebanese, mollified critics with the explanation that he later recognized his mistake and supported the strongly pro-Israel plank in the 1988 Republican platform. "One learns from what goes on," he acknowledged. The flak aimed at Sununu spurred Bush to accelerate by 24 hours his tapping of the chief of staff, after which the criticism subsided.

* Sununu's reputation as a fierce opponent of new taxes will not reassure the financial markets about Bush's ability to cure the deficit. Nor will the appointment, expected this week, of the author of Bush's flexible-freeze plan, Stanford economist Michael Boskin, to head the Council of Economic Advisers. If the next Administration will not support new taxes, even for the rich, it must slash into defense (where Bush has vowed to pursue plans for new carrier battle groups and nuclear missiles) and into middle-class entitlement programs like Social Security and farm subsidies (which Bush has promised to protect). As President, Bush will also face urgent new multibillion-dollar spending requirements to salvage the bankrupt savings and loan industry and rebuild the nation's defective nuclear-fuels plants. As a practical matter, his "kinder, gentler" promises for better funding of child care, national parks and college-tuition programs may have to wait.

For the moment, Bush must at least signal that he recognizes his budget dilemma. He will probably name the rest of his economic team before departing for his vacation home in Kennebunkport, Me., for Thanksgiving weekend. The biggest question is whether former Reagan Treasury official and Baker protege Richard Darman will be named to head the Office of Management and Budget. A respected investment banker, Darman at OMB would please the markets, but he might seem too independent to meet Bush's exacting standards of loyalty.

Bush is also scheduled to name two members to the bipartisan National Economic Commission, which is seeking ways to balance the budget. Although he scorned the committee during the campaign as a stalking horse for a tax increase, he could encourage its work by appointing pragmatists rather than supply-side theorists. Another signal to the markets might come from Bush's choice of a Defense Secretary, since he must decide whether he wants a skilled politician or a disciplined manager. Among the finalists: former Texas Senator John Tower, who has strong ties to defense contractors, and Paul O'Neill, chief executive of Alcoa and a former OMB deputy.

With these choices and others, Bush is quickly discovering, as John F. Kennedy put it, that it is "much easier to give the speeches than to make the judgments." Bush won the White House by promising no new taxes, no significant spending cuts -- no pain. Now he has moved into the world of knuckle-biting trade-offs and compromise. Having spent much of his adult life striving to be President, George Bush finally is getting his chance to act like one -- and sooner than he expected.

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With reporting by Richard Hornik/Washington