Opinion pieces and speeches by EPI staff and associates.
THIS PIECE ORIGINALLY APPEARED IN THE OLD CITY DERRICK ON JANUARY 11, 2000.
Greenspan’s appointment means higher interest rates
by Rob Scott
In October, it appeared that the Democrats had an outside chance of establishing real momentum going into the new millennium.
Reclaiming control of the House was well within the grasp of Mr. Gephardt and his colleagues, while the Republican ‘minority’ that has dominated the Senate since 1994 seemed to be losing their grasp. And as for Clinton’s successor, an economy humming along at a 4 percent growth clip indicated that the White House was the Democrats to lose.
President Clinton’s reappointment of Alan Greenspan as chairman of the Federal Reserve would appear to guarantee Al Gore the stable economy he needs to hang onto the White House. This ignores massive amounts of evidence on the state of the economy, and Mr. Greenspan’s own penchants and predilections.
Mr. Greenspan was appointed by Ronald Reagan in 1987, the year before Mr. Bush was first elected. At that time, the economy was gliding along at a 2.9 percent clip with 6.2 percent unemployment. This was good performance at the time, though weak by recent standards.
However, inflation stood at a ‘horrific’ 3.1 percent and Mr. Greenspan was worried. He mercilessly cranked interest rates up from 6.7 percent in 1987 to 9.2 percent in 1989. The economy continued to grow for a while, but by 1991 unemployment began to rise, and reached a peak of 7.5 percent of the labor force in 1992.
The rest of the story is history, and thanks to the recession so was George Bush in the 1992 election. Past experience suggests it takes about two years for Mr. Greenspan’s policy maneuvers to slow our economic ship of state. However, it’s not too late for him to do damage this time.
Mr. Greenspan and his colleagues have already raised interest rates three times in 1999 and the financial markets know that Greenspan has an irresistible urge to tighten monetary policy too soon, before wages and prices even begin to rise – think of the 1987-89 period.
The Dow dropped over 400 points on the day Greenspan was reappointed, secure in the knowledge that he will raise interest rates several times in the coming year. Wave goodbye to the punch bowl, Mr. Gore. If Mr. Greenspan has his way, unemployment is headed up, and fast.
But, wait, there is a way out of this mess. It’s a time-honored Washington solution. There’s a vacancy available at the much-maligned IMF.
It’s time for Mr. Gore to awaken his pals in the Senate and organize a fond goodbye party and coronation for the Fed chairman. How could Greenspan resist the possibility of presiding over the next world economic crisis, and saving financial markets once again from their own worst instincts?
And whom should Mr. Gore nominate to replace Greenspan at the Fed? Who better than a future Nobel Laureate? Who knows more about how monetary policy drives investors, long-term interest rates and the real economy as Joe Stiglitz?
Fresh from a stint at the World Bank, and before that the White House, Stiglitz would offer a refreshing perspective better suited to the current economy than Mr. Greenspan and his stubborn contractionary anxieties.
Mr. Gore, its time to nominate a real Democrat to head the Federal Reserve.
[ POSTED TO VIEWPOINTS ON SEPTEMBER 8, 2000 ]
Rob Scott is an international economist with EPI. He specializes in global finance, trade, and NAFTA issues.