Greenspan yea, Bush nay
By Thomas Oliphant, 1/6/2002
WASHINGTON
THIS WEEK'S MOSTLY ritual meeting between Alan Greenspan and George Bush is most noteworthy for what the Federal Reserve chairman is in a position to say that he was not in a position to say just a year ago: ''I've done my part, what about you?''
Forget the partisan positioning about ''stimulus'' legislation. For the moment, the most interesting divergence is not between the parties on tax cuts and aid to the growing legion of the unemployed. It's between the two halves of national economic policy, which are in danger of working at cross purposes.
For a year now, Greenspan's Fed has aggressively moved to stimulate a sagging economy, not only with aggressive moves to lower short-term interest rates but with steady action to expand the country's supply of money. It may be true that monetary policy was tightened too much and too quickly at the height of the '90s boom, but in an atmosphere that remains remarkably free of serious inflationary pressures there is no question that the Fed has acted to help bring the downturn to a close.
That means that the real question about the future should not be the nature of the recession but the nature of the recovery that is poised to begin in a few months. Right now, it looks at best like Recovery Lite, a function not of Greenspan's monetary policy but of President Bush's nonstewardship of the other half of the equation - fiscal policy.
As the recession bottoms out, the fact that the government has lost control of its finances is going to act as a brake on the expansion that might be expected to follow. The blame game participants can argue causation all they want; the fact is, the government's house is not in order, and Bush is the president.
Having frittered away a supposed $5.6 trillion surplus in this decade, the government is poised to begin borrowing money to cover deficits. That means that money generated in the economy that might be going into business investment to fuel recovery is going to be taken out of circulation by the government. And this textbook ''crowding out'' by Uncle Sam is going to have the secondary effect of making the capital markets tighter than they would be, which will make longer-term interest rates higher than they would be, further dampening the forces of recovery.
The issue is not so much what happens this year. The forces already at work - which will be affected only marginally by the politics of ''stimulus'' - are most likely to produce a gradual end to the recessions itself, most likely by the summer. The real issue is what happens after this summer - whether there will be a snappy rebound and a relatively brisk return to prosperity or whether the recovery will be so slow that the recession's impact lingers indefinitely. The prospects are mixed, and the key variable is probably just how bad the government's budget prospects turn out to be.
From Greenspan's monetary perspective, serious stimulation has probably gone as far as it should go. It's not just a function of 11 rate cuts since he began 2001 or a steadily expansionary stance on the money supply. Greenspan can also note the other stimulative factors still working their will on the economy - lower oil and electricity prices, not to mention tax cuts already enacted and due to take effect this year.
That's a lot of stimulus, and as a convincing guardian against inflation, he has also noted last week's job market reports showing an uptick in hourly wages and length of the average work week. This is at most an argument for no more than one more slight cut in short-term rates.
By contrast, Bush displays the politician's focus on the short-term economy, on this year's politics, and on his conservative ideology. When you combine the three ingredients, you get a preoccupation with tax cuts, invariably skewed toward the corporate and upper-income core of his constituency. If Democrats often err on the side of blind faith that government expenditures can produce prosperity out of recession, the conservative Republican yang to this yin is an equally blind faith that rates of taxation hold the key to the economic future.
While this shouting match continues to dominate the media, the underlying reality is that deficits loom, and they are going to do their looming at precisely the point (the end of a recession) when they are most likely to be hurtful to economic growth. Thanks to Greenspan, the country has sound monetary policy. The question now is whether a nutty fiscal policy will be allowed to ruin it.
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