National Savings Jude Wanniski July 25, 1996

Memo To: Alan Greenspan
From: Jude Wanniski
Re: National Savings

Yes, I thought your Humphrey-Hawkins testimony before Senate Banking July 18 was excellent, and so did the financial markets. (Although I see a "Washington-based" economic firm — you know who — is warning its financial clients that the markets misinterpreted your testimony and that you really do intend to raise interest rates as soon as you can, to slow this economy down from a snail pace to glacial.) You must admit that in this, your tenth year as chairman, you still have not gunned down the Phillips Curve. If you had a student under your tutelage for 10 years and had still not gotten it through his head that there is no simple inflation/unemployment tradeoff, we would have to assume that either the student was a fool, or the professor was deficient. Now I can listen to your testimony and tell that you make distinctions about increases in prices that are related to productivity increases and price increases that are monetary in origin. So can the broad market. But there are fools out there, Alan, who have told their clients that you are going to raise rates, and they have been left plenty of elbow room by your testimony.

I must take issue with you on another point of your testimony on which you were emphatically clear. That is, you said the quickest way to increase national savings would be to lower the budget deficit. You have been dragging this dead horse around for as long as I can remember. The idea that government investment crowds out private investment is one of the great fallacies of economics — dating back to the 1930s, when it contributed mightily to the depth of the Great Depression. A man in your position should not say something that is not true, even though you learned it in school. Just because a private producer sells goods to the government does not mean he will have a buyer if the government decides not to buy. You and I can agree that for the most part the government uses resources less efficiently that the private sector. But don't translate that idea into a plea for less government purchases of goods on the grounds that it will lower interest rates. (Please note that interest rates have climbed during the last 21A years of declining budget deficits.) Indeed, the quickest way to increase the "national savings rate," as we measure the thing, is to have a mind-bending recession. Even with gathering clouds of recession, people in aggregate pull in their spending horns and "save" for the bad times ahead. Next time you get an urge to spin the "crowding out" story, I suggest you go out for a beer instead.

Did you see Bob Dole on C-SPAN Sunday night? A nice interview with Brian Lamb, who asked him what they first thing he would do as President. Two years ago he said he would cut the capital gains tax. A year ago he said he would end affirmative action. Now he says he would send the Balanced Budget Amendment to the Congress — and follow it with a Balanced Budget. He allowed as how the American people were going to elect him and Newt in order to cut the hell out of spending. Where do you think he learns such silly stuff?