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Greenspan Strikes Again
He bit Bush in '92. Now it's Gore's turn.


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Larry Kudlow

At least you can say one good thing about Alan Greenspan: He’s an equal-opportunity unemployer when it comes to presidential campaigns. Or so it seems to George Bush the elder and his top economic advisers, who have never ceased blaming Greenspan for their 1992 defeat.

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This thought came to me after running into former Bush Treasury secretary Nick Brady on the NY-Washington MetroLiner yesterday. Mr. Brady is an old friend and I was sharing with him some of the numbers that show just how tight current Federal Reserve policy is.

The Y-T-D monetary base (the only money supply measure directly controlled by the Fed) is shrinking at a 22% annual rate, after several interest-rate increases by the central bank. Actually, the Fed has removed $44 billion in high-powered liquidity from the economy, amounting to 7% of the $600 billion monetary-base total. As a result, Greenspan & Co. have stopped the bull market dead in its tracks. Their efforts to put downward pressure on economic growth will unfortunately reduce the prosperity rate from its current 5% pace to 3% or slightly less for the second half of this year.

So the Clinton-Gore “It’s-the-economy-stupid” argument for Al Gore’s election will suffer proportionately. Add to that assistant attorney general Joel Klein’s corporate break-up attack on Microsoft, and the 80-million-plus investor class is undoubtedly getting ready to vote against Gore.

I showed Nick Brady a chart of the shrinking monetary base, and the former U.S. senator and CEO of the old Dillon, Read investment bank, muttered, “Yeah, he double-crossed us, too.” I responded by saying, “Don’t tell me that (since the Fed is supposed to be independent).” Brady explained, “Well, in return for raising taxes to fight the deficit, he promised to cut interest rates.”

Whoa, I thought to myself. That tax hike was the single worst mistake ever made in recent political history. Not only did it depress the economy (and increase the budget deficit), it also broke Bush’s key 1988 campaign pledge not to raise taxes. When Bush Sr. moved his lips, he lost all credibility, and paid dearly for that in his moribund re-election campaign.

In the office today, I took a look at the Fed’s statistics for 1992, just to see if Greenspan did in fact tighten money that year. It turns out that such a tightening policy did not take place. Actually, the monetary-base increased about 10% that year — a rather loose policy. Also, the Fed’s policy-target interest rate (Federal funds rate) declined from 4% early in 1992 to 3% by October of that election year. Even the stock market increased 12%.

So, by these measures, monetary policy was loosened in ’92, and thus Greenspan upheld his part of the so-called bargain. Mr. Brady’s recollection — and it’s a point that Bush Sr. has made time and again since his defeat — is simply not true. My intent here is not to express any personal disrespect to Nick Brady, who is a fine person and who has given considerable service during his lifetime in both the public and private spheres. But there is an important difference between good and bad economic policy. For example, higher personal-tax rates that reduce the economy’s capacity to grow should be coupled with tighter money — in other words, less money chasing fewer goods would be necessary to hold down inflation and maintain the dollar’s value.

Greenspan took a risk in ’92 by printing more money after the tax hike legislated in late 1990. Today, however, the situation is completely different. The last major tax change was a 1997 reduction in the capital-gains tax, coupled with an expansion of super-saver IRAs. Those pro-growth tax cuts helped trigger a new-economy boom in technology investment, productivity, jobs, tax revenues, and the federal budget surplus. The production of more goods should be accommodated by an ample flow of money. Meanwhile, with King Dollar rising and gold languishing, there’s no real inflation in sight.

If Greenspan took an inflationary risk in ’92, he is taking a recessionary risk in 2000. Whether George Bush the younger’s economic advisers, especially Messrs. Larry Lindsey and Michael Boskin, who served under Bush Sr., understand this, remains to be seen. So far Mr. Lindsey, who believes the stock market “bubble” has generated an “overheated” economy, has applauded Greenspan’s overly-tight policy. This is not a good omen.



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