Greenspan Places Some Bets
STELZER, IRWIN M.
Greenspan Places Some Bets by Irwin M. Stelzer IF YOU THINK IT’S EASY TO UNDERSTAND breaking economic news, consider the following lead in the Wall Street Journal: “Sales of existing...
...The most common explanation is that he didn’t want to increase rates during the run-up to the presidential and congressional elections...
...Somehow Greenspan has managed to process the reams of information he receives, separate the wheat from the chaff, and come up with answers that have helped keep the economy growing steadily, unemployment at low levels, and inflation at bay...
...If reelected—and especially if the Democrats regain actual or de facto control of Congress—he will probably ease those constraints...
...It seems that the slippage from July still left home sales 2 percent higher than last year at the same time...
...THE FED CHAIRMAN’S RELUCTANCE TO RAISE INTEREST RATES MOST LIKELY MEANS HE THINKS THE ECONOMY IS COOLING...
...He has promised tax cuts to families, students, and other groups...
...Labor markets are tight, with employers offering sign-on bonuses to attract workers as various as computer programmers and supermarket checkers...
...Not very much, I would guess...
...Hey, let’s party...
...The reaction from the Republican camp was about as confused as the rest of the Dole campaign...
...Business Week said it best: “It really doesn’t get any better than this: first-half growth at 3.4 percent, the jobless rate close to a two-decade low, core inflation at a three-decade low, and the Dow headed toward 5900...
...I’m glad about that...
...Or so Greenspan thinks...
...Irwin M. Stelzer is a scholar at the American Enterprise Institute...
...With creditcard debt and delinquencies at record levels, consumers may be ready for a breather...
...Stocks on dealers’ shelves are low...
...For, although he’s no political naif, Greenspan is not given to subordinating his fight against inflation to the desires of Washington’s pols...
...Foreign buyers, beset by slow growth, are pulling back on their purchases of American-made goods: Exports fell 3.6 percent in July...
...Bill Clinton already shows signs of impatience with the constraints of balanced-budget targets...
...In short, confident consumers, with increasingly secure jobs and money in their pockets, may be about to descend on the nation’s malls and shops...
...Mix in the fact that idle capacity in many industries overseas is available to meet American needs, and you have a recipe for price stability...
...he wants to spend more on education...
...Indeed, there are signs that the demand for goods and services has tapered off...
...Well, yes...
...Eight of these bankers thought interest rates should go up—a fact leaked to Reuters and then to the public, causing Greenspan to request an FBI investigation to track down the source of that leak...
...Manufacturing plants are operating at only a bit more than 82 percent of capacity, which means that any increase in demand can be met with stepped-up output rather than price increases...
...Add the fact that inventories are at the lowest level ever recorded, and you have an outlook that is decidedly bright...
...Certainly Greenspan’s stand-pat-ism pleased Bill Clinton, who used it to bolster his contention that America is on the right track: “I think it shows we’ve got a strong economy with no inflation...
...The difficulty of interpreting the signals flashed by economic data explains why Federal Reserve Board chairman Alan Greenspan is held in such high regard...
...He even promised a New Mexico audience to keep the woefully wasteful Department of Energy intact—a gambit that pleased the crowd, eager to preserve the jobs that DOE’s labs generate in New Mexico, but that startled congressional Republicans who have been trying to eliminate a useless agency that costs the taxpayers $18 billion per year...
...Therefore, he should support the Fed’s decision not to slow the economy down by raising interest rates...
...Real incomes are rising...
...With few goods on hand, retailers will have to order from factories that are having trouble finding workers...
...and Daschle, Gephardt, and Hillary undoubtedly have plans of their own...
...Wages will go up, retailers will for the first time in a long time feel able to pass along any price increases, and inflation will again become a problem...
...Unfortunately, if Greenspan proves wrong, prices will be on the upswing just when it is likely that the budgetary discipline imposed in recent years on federal spending will be relaxed...
...It’s a very chancy bet...
...American consumers also reined back a bit during the summer, causing retail sales to drop 0.2 percent in August...
...More likely, his reading of the economic tea leaves is different from that of the presidents of the regional Federal Reserve banks...
...It is also true that the economy has some spare productive capacity to act as a buffer should demand increase...
...Robust and slipping both...
...Indeed, his ebullient running mate, Jack Kemp, threatened “to bang on the Fed” if it raised rates—a blatant political interference in monetary policy that treasury secretary Bob Rubin made sure the administration avoided...
...Dole, meanwhile, can’t seem to find any places to cut spending to prevent his across-the-board tax cut from becoming a budget-buster...
...Greenspan may have made a second bet—a bet that he can solve these problems if they occur by raising rates, perhaps at the next meeting of the Fed’s Open Market Committee on November 13...
...Greenspan is betting that the economy is already cooling, reducing any inflationary pressures that may have built up in the second quarter, when the economy moved ahead at a 4.7 percent annual rate...
...But his track record is so good that, at least for now, it would be foolish to bet against him...
...He writes frequently on economic matters for The Weekly Standard...
...Consumer confidence remains high...
...And yet the Dole camp (Kemp excepted) was actually rather hoping that the Fed would move interest rates up—thereby implicitly suggesting that the economy could not continue to grow at its present pace without triggering inflation unless Dole’s tax plan is adopted...
...The effect of interest-rate increases is not instantaneous...
...Allan Meltzer, a professor at Carnegie Mellon, estimates that it takes six to nine months for monetary tightening to affect output, and 18 to 24 months for it to begin to bring inflation down...
...If all of these inflationary pressures do bubble up, Greenspan will have lost his bets...
...Greenspan Places Some Bets by Irwin M. Stelzer IF YOU THINK IT’S EASY TO UNDERSTAND breaking economic news, consider the following lead in the Wall Street Journal: “Sales of existing homes remained robust in August, slipping just 0.5 percent from July...
...he has announced plans to undo parts of the welfare-reform package he recently signed...
...Business continues to invest in new equipment...
...It takes time for the higher cost of money to make itself felt—time during which inflation can get up a good head of steam...
...And that this increase from last August occurred despite the fact that mortgage rates have gone up a full percentage point, to 8 percent...
...How much all of this affects Greenspan no one can say with certainty...
...But in truth, he is betting against the odds...
...Which has many financial analysts wondering just why Greenspan went to such lengths to persuade his reluctant colleagues not to raise interest rates the other week...
...Bob Dole is trying to make the case that the economy is growing too slowly and needs the boost he says his proposed 15 percent tax cut will give it...
Vol. 2 • October 1996 • No. 4
