Politics & Policy

Letting Alan Off The Hook

Senators just can't help but go weak in front of Greenspan.

Milton Friedman thinks the Fed is too loose. Supply-siders believe the Central Bank is too tight. And Alan Greenspan said virtually nothing on the subject in a three-hour Senate testimony on Tuesday. Does anybody know how to play this game?

That the economy is languishing is no big surprise. Overburdened by excess tax payments and a shortage of Fed-induced cash, along with a Y2K hangover and a couple of nasty energy-price shocks, current economic growth is just about zero right now. But the question is: What to do about it? The longer the debate goes on, the longer the economy will stall.

Greenspan told the country Tuesday that the Fed is satisfied with about 2% economic growth. But this is less than half our potential to grow. Yet it appears that the Central Bank has no clear gameplan to replenish the deflation of liquidity that it itself undertook last year. In fact, the Central Bank is still unwilling to acknowledge its primary roll in the economic downturn. Bureaucrats never do. It’s called covering your kiester.

But senators sitting around the horseshoe refused to grill the Fed chairman on his role in the downturn. Consequently, Sir Alan got off scot-free from specifying Fed-funds rate or money-supply targets — let alone any discussions about the weak gold price or the still-inverted treasury-market-yield curve.

Both gold and bond-market rates are signalling that monetary policy is still too tight, even after a dramatic 1-percentage-point policy-rate reduction in January. And given the Fed’s willingness to accept a paltry 2% economic growth rate this year, financial markets are fretting that the Central Bank will be less aggressive in easing future credit policies. As a result, market prices fell on news of the content-free hearing, sending a Bronx cheer to Washington.

Remarkably, Nobel Prize winner and free-market icon Milton Friedman gave a USA Today interview where he said the recent upturn in money-supply growth during the past two months foreshadows a 5% inflation spike next year. Huh? Commodity prices are falling almost everywhere. Gold has tumbled nearly 20% over the past twelve months. Ditto for most interest rates. These are deflationary signals, not inflation threats.

But regrettably, none of the senators in the Banking Committee hearing had the prescience or preparedness to press Greenspan on the monetary meaning of market-based price indicators. Markets are smarter than monetarist targets, or GDP-based Phillips Curves. But on this subject Republicans are just as ignorant as Democrats. And, of course, Greenspan loves this. Congressional ignorance breeds Fed bliss. Why discuss the true role of the Central Bank, which is setting interest-rate targets and monetary strategies, when no one is asking them to do so?

When it comes to monetary policy, members of Congress never earn their keep, and this allows the Fed to continue its eccentric, ad hoc, fine-tuning approach that permits them to gather as much bureaucratic policy making power as they wish.

Ironically, in a world swept by free-market policies launched by Ronald Reagan and Margaret Thatcher 20 years ago, the U.S. Fed and central banks the world over remain the last practitioners of Soviet-style central planning. Money is really the most important economic issue since everyone owns at least some of it. Yet the public never gets any clear answers because of Washington’s collective failure to do its job. If this process continues, then Sen. Daschle and other liberal opponents of across-the-board tax cuts will have their way. No more Lexuses or mufflers will be sold to anyone.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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