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Jewish World Review Feb. 1, 2001/ 9 Shevat 5761

Lawrence Kudlow

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Shifting Political Winds -- IN HIS recent book about the Greenspan Fed, "Maestro" author Bob Woodward makes clear that during the Clinton-Rubin days the Fed chairman believed they were all working for the same firm.

Well, the firm has changed. And so has Greenspan's policies.

In the past three weeks the veteran central banker has completely flip-flopped on two vital issues. First, on January 3 the Fed made a 360-degree about face from fighting inflation to fighting recession. Second, on January 25 the chairman testified before Congress that it is now okay to use budget surpluses for tax cuts.

In both cases Greenspan cited a rapidly deteriorating economy which he described as "very close to zero." But so far he has yet to tell the public exactly why the economy is faltering.

Could it possibly be that the Fed's prior policy mistakes have something to do with the "very close to zero" economy? The fact that last year they deflated liquidity and raised interest rates far beyond reasonable bounds has not yet entered into the discussion. But it should.

Last year Fed officials blamed stock market increases, low unemployment, rapid economic growth and even at one point fingered productivity advances as inflationary threats. Ordinary Americans were baffled at this logic, as main street folks believed prosperity to be a good thing, something to be desired, not squashed.

But the Fed stubbornly carried on its extreme tightening policies, even while the much ballyhooed inflation failed to materialize. Now those chickens are coming home to roost. When asked about the downturn, Greenspan blamed "an inventory liquidation process." While this is technically true, it avoids causality.

Recessions or downturns are not born of immaculate conception, but bad policy mistakes or major external shocks to the economic system. While the OPEC oil price hikes drained about $100 billion from U.S. GDP, and income tax bracket creep caused a roughly $100 billion transfer of resources from private hands to government coffers, the Fed's overly tight credit policy is the real culprit in the "very close to zero" scenario.

It is doubtful that Chairman Greenspan will ever acknowledge this before Congress or anywhere else. And it is equally doubtful that the central banker will ever appear before a news conference and submit to the kind of detailed questioning that other senior policymakers in the government routinely submit to.

No one will ever know whether political gamesmanship or economic analysis are responsible for the Fed's huge policy U-turns on taxes and money. One can only wonder if Al Gore had won the presidency would Mr. Greenspan be endorsing broad-based tax cuts.

While media commentators continue to cling to the fiction that Greenspan did not endorse George Bush's tax-cut plan, they have a hard time explaining the supply-side language used by the chairman that tax rates should be sufficient to meet spending commitments "while doing so in a manner that minimizes distortions, increases efficiency, and enhances incentives for saving, investment and work."

Clearly Greenspan is talking about lower personal tax-rates, not a Gore-like flood of inefficient and economically distorting tax credits that have no long-term impact on work or investment incentives. The mere Greenspanian mention of incentives links to the Bush tax-cutting approach.

In the course of his testimony Greenspan noted that new Congressional Budget Office projections of future surpluses are so huge that the federal government will be able to retire all the outstanding Treasury debt and still have so much unused cash that it would have to start buying up privately-owned corporate stocks and bonds.

Because he wants to avoid politicizing federal fiscal policy, he'd rather send the surpluses back to the taxpayers. Endorsing another Bush policy, Greenspan opened the door wide to shifting huge Social Security surpluses into privately-owned investment accounts.

But in fact Greenspan and everyone else knew about these massive budget surplus estimates six months ago. And most everyone outside the Federal Reserve and its circle of acolytes knew that excessively tight monetary policy would bring the economy to its knees.

Why didn't the Fed and its chairman move six months ago? Well, the political winds hadn't yet shifted. Now they have. At least the chairman is reading the right tea leaves. It's never too late to implement good policies. Let's hope he stays the course.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


01/27/01: Inflation tax-cut
01/25/01: The Philadelphia Story
01/17/01: New Bull?
12/19/00: Help is on the way
12/04/00: Slumbering spirits
09/19/00: Euroland Tax Revolt is Good for the Europe
08/24/00: Tax Cut Issue in Campaign
07/31/00: Mr.G., you’re gaining on it
07/26/00: Investor Class Rising
07/17/00: The rising tide of national prosperity is lifting all boats
07/11/00: On Soft landings
06/29/00: Is the sky falling?
06/21/00: Internet-more-important-than-Fed update
06/14/00: The judicial hacker
05/16/00: Front-View Windshield
05/09/00: Don't Overreact
05/05/00: Give it Back
05/01/00: Wealth and Capital
04/18/00: Growth, Freedom and the New Investor Class--Stay the course
04/13/00: Correct Value
03/28/00: Governments roil the Markets
03/28/00: Fed should keep its powder dry
03/14/00: Reduce Debt, Derail Economy
02/17/00: Unsettled
02/10/00: Bush's Footprints
01/25/00: To preserve its standing as the world's number one economic power
01/06/00: It's not the '70s
12/28/99: They missed it
12/23/99: Bonditos
12/20/99: Dracula's Curve
12/16/99: When Alan Greenspan sneezes, Wall Street economists catch cold
12/10/99: Y2K-Related Cash
11/23/99: Y2K Money: Inflationary or Not?
11/16/99: Investor Retaliation
11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow