Talking Back to Greenspan

New York Times

I do not believe that it is politically feasible to insulate such huge funds from a
governmental direction," Alan Greenspan told the House Ways and Means
Committee last week, one day after President Clinton proposed investing a
portion of Social Security funds in the stock market.

Mr. Greenspan was equally forthright in criticizing the President's proposal to
raise the minimum wage to $6.15 an hour from $5.15. "My own preference
would be to lower it and, in fact, eliminate [the minimum wage] because I
think that it does more damage than good," he told the committee.

Pundits are now declaring Mr. Clinton's stock plan to be in deep trouble, in
large part because Mr. Greenspan opposes it. And a new cloud also hangs
over the possibility of raising the minimum wage.

Rarely has the chairman of the Federal Reserve Board been so outspokenly
critical of the White House. Rarely, in fact, has Mr. Greenspan been
outspoken about much of anything.

The forcefulness of Mr. Greenspan's criticisms is especially peculiar in light of
the unwritten -- yet inviolable -- rule that the President and his
Administration must never criticize the policies of Mr. Greenspan. (As
Secretary of Labor, I once had the temerity to suggest to a reporter that the
Fed "might" pay a "bit" more attention to the unemployment rate when
setting short-term interest rates -- and within an hour received a call from
the then-Treasury Secretary strongly suggesting that I should be more

The Administration's rule of silence about the Fed is not a result of Mr.
Greenspan's popularity with the public. Most Americans have no clear idea
what he and his colleagues do. Nor is the rule invoked because Mr.
Greenspan and the Fed have been perceptive enough or lucky enough in
recent years to have kept the economy from overheating or overcooling. No
one knows exactly why the economy is enjoying its longest peacetime
recovery, but the Fed deserves credit for not messing it up.

In fact, the rule of silence was in place before the current recovery gained
strength. It was there right from the start of the Clinton Administration. It
was probably in place in 1987, when President Ronald Reagan first
appointed Mr. Greenspan.

The truth is that the White House cannot criticize Mr. Greenspan because
Wall Street would take any such criticism as a sign that the executive branch
was not as serious as the Fed about preventing inflation. The Street's
resulting "lack of confidence" would send interest rates up and stock and
bond prices down.

I am not aware of any study that has verified this assumption, but that's
beside the point. Like so much other lore surrounding the mysterious ways
of our capital markets, it has its own prophetic power, simply because so
many traders believe it, and, presumably, they are prepared to act upon it.

The result has been the muzzling of any discussion by the executive branch
about monetary policy. This is doubly paradoxical because monetary policy is
the only major remaining policy lever over jobs and wages -- of larger
consequence than any Presidential proposal on Social Security or the
minimum wage.

Decades ago, the economy could be nudged either by reducing short-term
interest rates or by increasing net Federal spending, or both. But now the
car has only one pedal. Fiscal policy is dead. Budgets have to be balanced.
The President even wants to reduce the national debt.

So what might the President say, were he allowed to comment on Mr.
Greenspan's policies with the same forthrightness that Mr. Greenspan has
commented on the President's? I have no direct knowledge. (Wall Street can
relax.) But here's one possibility: The President might say that Mr.
Greenspan could do a great deal of good by reducing interest rates once
again when he and his colleagues meet next week.

Even though short-term interest rates are three-quarters of a point lower
than they were in September, there's room to lower them further. After all,
inflation has now utterly vanished. It has gone largely because much of the
rest of the world is in recession, but also because new information
technologies have caused domestic competition to intensify so much that
producers dare not raise prices. And most workers -- knowing how easily
they can be replaced by technology or by global "outsourcing" were their
wages to rise -- dare not demand raises.

On the other hand, consider the benefits of lower interest rates. A tighter
labor market would induce employers around America to do what they have
begun to do in places where unemployment has dropped below 3 percent.
They are recruiting workers from central cities and from rural backwaters
where joblessness continues to be relatively high, then training them and
even paying them wages above the minimum.

Mr. Greenspan's forthrightness about the President's proposals also
deserves a candid response.

If Mr. Greenspan does not believe the Government should try to extend the
life of the Social Security trust fund by putting part of the proceeds into the
stock market, he has another option. Were he and his colleagues to cut
interest rates and thus reduce unemployment still further, more workers and
their employers would pay into the trust fund. As a result, Social Security's
day of reckoning would be delayed for years, or perhaps forever.

Likewise, if Mr. Greenspan opposes the minimum wage, let alone the
prospect of raising it, he could cut interest rates and thus tighten the labor
market further. That way, employers would be induced to pay people at the
bottom a bit more. Presto. No need for a mandatory rise in the minimum

The President's proposals are now open to public debate. Mr. Greenspan is
free to criticize them, as is everyone else. Congress can ditch them, and may
very well do so. That's the way democracy works. But the proposal that Mr.
Greenspan makes to the Fed's Open Market Committee next week about
what should happen to interest rates is not open to public debate. Not only
is the President in effect barred from commenting, but Congress has no role
to play. All Mr. Greenspan must do is convince a majority of the Fed that he's

Mr. Greenspan may be wise, but he's not always right. He, and the rest of
us, need to keep that in mind.

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