Greenspan on the Firing Line Jude Wanniski January 27, 1993

Today and tomorrow, Fed Chairman Alan Greenspan is running the gauntlet on Capitol Hill, today before the Joint Economic Committee, tomorrow before the Senate Budget Committee. As we saw today, the Democratic members of these committees are practically demanding that Greenspan adopt an easy money policy to offset the fiscal austerity they are planning with their allies in the Clinton Administration, mainly Budget Director Leon Panetta. Senator Paul Sarbanes (D-Md.) this morning practically threatened to subpoena the entire Federal Open Market Committee to come before the committee, so he could tongue-lash them all. Senator James Sasser (D-Tenn.), chairman of the Senate Budget Committee, yesterday delivered a tirade against the Fed as a preview of what Greenspan can expect tomorrow. Sasser, who if possible knows even less about the financial markets than Sarbanes and Panetta, will attempt to extract from Greenspan a solemn pledge to "accommodate" their Hooverian fiscal schemes with an open monetary spigot.

What's going on here? We are seeing the last gasp of the Old Guard Democratic economists who were, along with Milton Friedman, chiefly responsible for the economic mess of the past quarter century. These include Yale's James Tobin and MIT's Paul Samuelson and Robert Solow. All Nobel Prize-winners, now in their 70s, they remain fanatical advocates of the Tobin policy mix of tight fiscal policy and easy money. They have been essentially ignored by the Clinton Administration, which as far as we can tell has not placed a single economist in a position of influence who favors easy money or currency devaluation, which is the same thing, as a spur to economic growth. The younger generation of economists who have landed jobs within the administration have observed the failures of their elders and decided to move on. Princeton's Alan Blinder, Harvard's Lawrence Summers and Robert Reich, and Berkeley's Laura Tyson, the important economists who occupy key posts, are uniformly opposed or profoundly skeptical of the concept that emerged in the 1960s -- "greasing the wheels of commerce with a little inflation." The concept greased the skids for the Democratic Party and paved the way for twelve years of Republican rule.

MIT's Paul Krugman, who has been anointed by the grey beards to carry on their tradition, is definitely a devaluationist. His intemperate denunciations of Laura Tyson in The New York Times, for not being on the established pecking order controlled by the Old Geezers, has solidified opposition to him and the Old Geezers in the White House and Treasury. Washington Post economics editor Hobart Rowan, in his Sunday column, ridiculed Krugman and announced that he had damaged the standing of all academic economists within the Beltway. The septuagenarians continue to have influence with the senior Democratic Senators, with whom they have been dining and dancing throughout the Reagan-Bush wilderness years. Hence, the savaging of Greenspan, whom MIT's Samuelson has now blamed for the defeat of George Bush. This pronouncement is being embraced by the Old Guard Democrats to warn President Clinton that unless he follows their policy mix, he will also go down the tubes. Of course, the policy mix is precisely that which the Old Geezers had sold to the Carter Administration, via the Treasury department. This morning, Senator Sarbanes cited Samuelson's Nobel Prize and warnings like a club, bashing Greenspan. Greenspan was marvelous, as cool as a cucumber, fending off Kenyesian and monetarist arguments with precise counter-measures far beyond the sophistication of the Senators or their staffs.

Greenspan is also supremely confident of his political standing. With the change in administrations, Greenspan no longer has to contend with Nick Brady, Dick Darman and Michael Boskin, who used him as a convenient scapegoat. In addition to the younger academic economists who eschew the devaluation tool, Greenspan now deals with Lloyd Bentsen at Treasury and with Bob Rubin, formerly of Goldman Sachs, at the White House. Both are opposed to cheapening the dollar as a route to economic growth. Indeed, Greenspan advised the committee that he had met with Bentsen this morning, before the hearing, as if to remind them he has Bentsen in his corner.

The political and financial press corps seem completely befuddled by what's transpiring. Reporters are falling over themselves in hustling the Old Guard line that: (a) the economy is struggling because the deficit is high; (b) a cut of $100 billion in the deficit will cause interest rates to plunge; (c) a cut of $200 billion will cause interest rates to plunge further; (d) a huge increase in taxes and deep cuts in spending will cause an economic boom! Monday's Wall Street Journal contains one of the silliest stories we can recall on this subject, "Big Deficit Cut Could Sharply Reduce Interest Rates," by Constance Mitchell, quoting expert sources at Data Resources, the WEFA Group, and The Boston Co., to that effect. These "economic giants" are running simple supply/demand models that assume constant market expectations. If Clinton were to follow this line of reasoning, the financial markets would collapse, correctly discounting an imploding economy.

When the bond market boomed on Monday, triggering a boom in stocks, it was uniformly attributed to Bentsen's appearance on "Meet the Press," where he confirmed that an energy tax is one of the options being considered for the Clinton Plan. This is of course the umpteenth time this "option" has been floated, and when the Monday headlines trumpeted Bentsen's statements as being definitive, President Clinton correctly noted, in tweaking the press corps, that Bentsen had not said anything definitive about energy taxes. It was all just so much baloney, fitting the thesis that Wall Street would be thrilled with a monster tax increase. What Bentsen did say on "Meet the Press" that surely excited the bond market was the following, interjected after a question from NBC's Tim Russert:
 

BENTSEN: Let me make another point that you fellows have not touched on, and that is cooperation with the Federal Reserve. And I'm looking forward to that, and I've already met with Alan Greenspan in his office, he's met with me in my office, and we're going to reinstate the weekly meeting between the two of us. As chairman of the Finance Committee, I worked with Alan over the years, and he testified before the committee, you know; he's a friend of mine, and I'm looking forward to a cooperative effort between the Treasury Department, the administration, and the Federal Reserve, in seeing that we keep inflation down, we get this economy moving again.

RUSSERT: And keep those interest rates down?

BENTSEN: And keep the interest rates down.

RUSSERT: Even lower than they are now?

BENTSEN: Oh no, no no, that will be one that we will work out in a cooperative way!

There is nothing in the recent public statements of either Greenspan or Bentsen that would lead me to alter my judgment that these two men, along with Senate Finance Committee chairman Pat Moynihan, are going to be the salvation of the Clinton Administration. The announcement that Clinton will not unveil his economic plan until February 17, in his State of the Union speech, is extremely encouraging news. If Clinton had kept his promise to unveil his Plan the day after the inaugural, it would have been worse than half-baked, a complete hash that would have set him on a destructive course from which he might not have recovered. As it is, the dynamic between Bentsen and Greenspan has steadily moved policy toward genuine, long-term solutions. I am absolutely positive that Greenspan and Bentsen have been trying to find a way toward a reduction in the cost of capital that does not simply produce a short term bubble -- indexing capital gains.

Greenspan was terrific again this morning in dumping on the idea that there is useful information to be obtained by observing the wiggles in the Ms or trying to pump them up now with lower interest rates. The Humphrey-Hawkins Act requires the Fed to report on the Ms, but here too, Greenspan has the advantage of a deep split in the ranks of the monetarists. Milton Friedman insists the Fed should be pumping up M2, but Friedman's most important student, Alan Meltzer, disagrees, siding with Greenspan. As with Samuelson, et al., there is a generational shift in the profession that is coinciding with the change in political administrations. We can hardly wait for Greenspan's appearance before the Senate Banking Committee on February 18, the morning after the State of the Union speech, at which he is required to discuss the state of monetary policy in accordance with Humphrey-Hawkins. More importantly, he will be asked to comment on what the nation has heard the previous evening. I'm still confident that, with the help of Lloyd Bentsen, he will like what he hears, and will be able to say so without adding too much length to his nose.