Chairman Greenspan, Further Thoughts Jude Wanniski June 9, 1987

My first reaction to the Greenspan appointment was that it was "the worst decision to come out of the Reagan White House," as The Wall Street Journal quoted me June 3. "He's one of the ringleaders of the austerity gang," I said. Having cooled off for several days leaves me only marginally less anxious. Greenspan is one of the nicest, sweetest, gentlest public figures I've known (almost 15 years). But he has been systematically wrong about the economy on every central policy prescription that has been at issue in this era. The supply-siders have had no more dangerous enemy over the years than Greenspan, because of his quiet effectiveness in undermining growth policies. Although a "partisan Republican," he is loved by Democrats, The New York Times, Walter Heller, the economists at Brookings Institution, etc., because his advice has poisoned GOP Presidents.

As President Ford's chief economic adviser in August 1974, he was the coordinator of the easy money, high tax "consensus" arranged at the domestic economic summit, which pushed the DJIA to its low point of the decade. When the decision was made to switch to tax cuts in December '74, Greenspan produced a $50 rebate! The Ford decision to extend oil price controls came without complaint from Greenspan, the "political pragmatist," and cost Ford the presidency. In 1980 he got his foot in the Reagan camp after Bush and Dole collapsed, and in December '80/January '81 became the confidante to David Stockman — first helping him make the case for deferral of the Reagan tax cuts to 1983, then, in September '81 helping Stockman and his henchman, Larry Kudlow, lay the groundwork for the huge TEFRA tax hike of '82. (Now chief economist at Bear Stearns, Kudlow is cheering the Greenspan appointment.) In the spring and summer of '82, with the Fed squeezing the worst deflation in U.S. history, threatening the world banking system, Greenspan told the WSJ (5/17): "If the Fed were to ease, it would drive up money supply and put another upward notch in long-term inflation expectations ...from which I conclude the appropriate policy is no change." When the Fed did ease in July to avert a banking crisis over the Mexican debt, and the stock and bond markets soared, Greenspan said on "This Week With David Brinkley" (8/22) that the soaring stock market was due to passage of the $98 billion tax increase: "I think what the financial markets around the world read into that — passage of the tax increase — is that we're beginning to take this budget deficit very seriously, and that even though what we did was not as much as needs to be done ... I think the financial markets are now reading a very real seriousness of purpose on the part of the President and the Congress."

Rarely does the Fed seem relevant to monetary policy in Greenspan's budget-driven world. He told the WSJ (6/25/84): The outlook for rates over the next year or so "depends almost wholly on whether a major budget compromise is struck during the early months of 1985." During the midst of the second Volcker deflation that brought gold below $280 and the dollar to an eye-popping peak, Greenspan was happiest. "There isn't any evidence of a need to move policy," he told the WSJ (8/20/84). "The economy seems to be doing quite well." He predicts the dollar will weaken (6/28/84) because of the trade deficit, thereby reducing the trade deficit. Several months later, with the dollar stronger (11/6/84) he told the WSJ (11/8/84) that this was due to the perception of international investors of the currency as a "safe haven." He "likened the situation to a rapid rise in the value of gold after the Iranian revolution in 1979 when investors were seeking a safe haven for their wealth." This kind of foolishness is typical of Greenspan, Martin Feldstein and other "eclectic" Keynesians who reach for an all purpose non-economic reason to plug the holes in their models. In other words, the Fed had nothing to do with gold becoming a "safe haven" during the dollar's collapse and nothing to do with the dollar becoming a "safe haven" during gold's collapse.

How will this affect economic policymaking in the next two years? Unless we are extremely lucky, Greenspan is bound to exert a negative influence in the future as he has in the past, both because of his technical deficiencies and his "ideological pragmatism," which means he will say or do anything on the grounds that it is "politically necessary." (He put on a WIN button in '74.) It isn't correct to assume that Greenspan will always push for tighter monetary policies as Fed chairman, a la Henry Wallich. That would neutralize him as a negative force, as Vice Chairman Manley Johnson and Governor Angell would count on him when needed and line up against him when an easier stance is needed. As it is, Greenspan is quite capable of systematically taking the wrong stance, and drawing the support of the conventional forces to his side. At the moment, George Perry of Brookings, a liberal Keynesian and friend of Greenspan, says Greenspan might not look at a weaker dollar as something that should be arrested, as Volcker had, but that he might let the market take the dollar where it will. Greenspan could ignore the inflation signs with his "safe haven" arguments, switching to a tighter stance six months too late and then overcooking the dollar on the downside. Alan Reynolds still thinks Greenspan will more often than not take the correct positions, but I worry that he will be a pliable and active agent for the forces of austerity, in word and deed. My experience is that he will support free-market, free-trade, pro-growth policies when the discussion is at a theoretical level, and stand with the opposition when the debate is at the margin. When the key decisions are made on whether or not and what kind of tax hikes the President must swallow to achieve a budget compromise, he will be on the side of David Stockman. When the decision must be made on whether or not the President should sign the trade bill, Greenspan will find something good to say about it. This is the nature of the pragmatic ideologue. I hope Alan is right, that Greenspan will be okay. But I doubt it.