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Published October 23, 2000
Copley News Service
Headline: Prosperity in the Balance
The US economy is teetering on the verge of a hard landing, not the proverbial soft landing Alan Greenspan had tried to engineer. The Federal Reserve Board should be lowering interest rates at its November meeting since several sectors of the economy already appear to be in recession, and the blame has to be laid squarely at the doorstep of the Fed and US economic policymakers.
Tax rates, especially on capital and investment, are too high, monetary policy is too tight, our foreign policy too uncertain, and federal regulations are particularly damaging to the domestic oil, gas, and electricity industries. We need lower interest rates now, coupled with dramatic tax-rate reductions beyond the Bush proposals: an expansion of individual retirement accounts, a cut in the capital gains tax rate and lower rates across the board on corporate and individual income.
Congress and the Clinton-Gore administration, encourage by the Fed’s Alan Greenspan, are keeping tax rates higher than they need to be in an ill-considered effort to retire the national debt when the burden of debt as a share of our domestic economy declines automatically as the economy grows. All bets for the “new economy” are off if no one calls a halt to this fixation with debt.
Since the Fed began targeting the stock market and raising interest rates in May 1999, the “old-economy” Dow Jones industrial average has fallen around 10 percent. Nor is it surprising that the so-called “new economy” NASDAQ began its 40 percent sell-off when markets figured out the Fed had them in its cross hairs. So much for Greenspan’s “irrational exuberance” in the marketplace! While high-tech stocks were due for a correction, the broader market nosedive was driven by fundamental policy errors.
NASDAQ is more than a snapshot of economic prospects, it represents investors’ collective expectations about the future. When the Fed chairman implies that too many people working causes inflation, markets expect interest rates to go up, which not only raises the costs of capital and of production, but lowers productivity, driving up unemployment and shrinking revenues. No wonder investors head for the woods.
Brian Wesbury, former economist on the Joint Economic Committee under Florida Sen. Connie Mack, notes how the Fed’s deflationary monetary policy is jeopardizing today’s prosperity: Excluding the high-tech sector, overall industrial production has fallen at an annual rate of 1 full percentage point in the past six months and a whopping 2.3 percent in the past quarter. Output in many specific industries, such as lumber, motor vehicles, textiles and paper products, among others, has fallen anywhere from 4 percent to 13 percent in the past several months.
Greenspan’s great success at subduing inflation has not been matched by his stewardship during the high-growth/low-inflation years since 1996. He abandoned the market-price-rule rudder that the Fed used so effectively to quash inflation. Now, instead of calibrating liquidity by using market prices as a barometer, Greenspan has allowed the Fed to revert to the discredited Phillips Curve approach to monetary policy: targeting economic growth, the unemployment rate and the stock market rather than true indicators of stability like the value of the dollar.
Surging oil prices, partly due to Middle East unrest tied to American foreign policy mistakes, drive up production costs and consumer prices. The oil-driven consumer price index has risen at a 3.5 percent annual rate, which will inevitably slow consumption and employment. But this is not, repeat not, a monetary inflation. It is the law of supply and demand, with markets finding equilibrium after a supply shock. But because Greenspan has abandoned a price rule, the Fed cannot distinguish between today’s situation and the 1970s, when tightening was called for in the wake of an inflationary monetary policy of which rising oil prices were just one manifestation. This has led the Fed, wrongly, to maintain a bias toward further interest rate increases, even when markets need more liquidity.
At this time eight years ago, the economy was rebounding at an annual rate of 5.7 percent from a mild recession that interrupted the unprecedented Reagan-Bush expansion. Back then the Clinton-Gore team flat-out lied in blaming the Bush administration for the “worst economy in 50 years.” This year, Vice President Gore makes happy talk about an economy that is sliding one sector at a time toward recession, while he says nothing about the Fed’s deflationary monetary policy, pledges to squeeze Americans even more with energy taxes and no significant tax rate reductions, and proposes to further restrict our ability to increase the supply of oil. Americans have a choice to make on Nov. 7, and prosperity and jobs are in the balance.
Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute.
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