Economists Agree: Bush Should Befriend Greenspan
By JACOB M. SCHLESINGER Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- George W. Bush often bashed the Clinton administration on the campaign trail, and he has spent much of the postelection period huddled with his father's old guard. But economists across the spectrum agree that in at least one area he would be better off following the lead of President Clinton than President Bush: cultivating Alan Greenspan.
The Texas governor's father was frequently at war with the Federal Reserve chairman, a tension that heightened financial and economic fragility during his term. Years later, reflecting on his humiliating loss to Mr. Clinton, the senior Bush flatly blamed Mr. Greenspan. "He disappointed me," he said.
Mr. Clinton, in contrast, made a point of wooing Mr. Greenspan within weeks of the 1992 election. The White House religiously avoided attacking the central bank, and the close ties that developed over the following eight years became crucial to economic policy making. Clinton aides coordinated well with Mr. Greenspan to deftly handle the Asia crisis. They also won his influential backing early in passing a deficit-reduction package and later in blocking Republican tax cuts.
Gov. Bush suggests he will follow the Clinton model. During an interview last week on CBS-TV's "60 Minutes II," Mr. Bush said he felt Mr. Clinton "made the right decision in embracing Alan Greenspan," adding, "I look forward to working with Alan Greenspan." And the Fed chief, one of Washington's ablest politicians, will undoubtedly employ his considerable influence, charm and connections.
The two have never had a lengthy conversation, though they have met several times over the years. Mr. Greenspan shared a table with the Texan at the ritzy Alfalfa Club's annual dinner in Washington this past January.
But there is no guarantee of good relations. With the economy softening, the new administration will be tempted to prod the Fed to lower interest rates swiftly -- the same conditions that helped sour relations a decade ago. In addition, Mr. Greenspan has strongly supported using budget surpluses to pay down the national debt. Mr. Bush, in contrast, advocates a big tax cut.
Another potential trouble sign: Mr. Bush's chief economic adviser, Lawrence Lindsey, irked the Fed chief over the summer by claiming Mr. Greenspan had privately given him an endorsement of the Bush economic plan. Mr. Lindsey -- who served as a Fed governor under Mr. Greenspan for five years -- quickly clarified his statement. But the indiscreet attempt to draw the Fed into the campaign injected an extra note of caution into early meetings between the two sides, likely to last until the untested Mr. Lindsey and colleagues can demonstrate the trustworthiness Mr. Greenspan found in the Clinton team.
An early sign of whether Mr. Bush will be cooperative or confrontational will come in his choices for the Fed's Board of Governors, who vote with the chairman on monetary policy. President Reagan used those appointments to undercut Mr. Greenspan's predecessor, Paul Volcker, by tapping people who would openly challenge the chairman's authority.
Mr. Bush could do the same quickly to Mr. Greenspan, if he wanted. Two of the seven board seats are vacant. A third is held by Vice Chairman Roger Ferguson, whose term has expired and who could be replaced immediately. An offer to reappoint Mr. Ferguson -- a Clinton appointee considered close to Mr. Greenspan -- would be a friendly overture.
Mr. Bush would also win points by inviting the Fed chairman to meet with him soon in Texas, just as Mr. Clinton brought Mr. Greenspan to Arkansas shortly after his victory. With the official election results in doubt, no such formal call had yet been placed.
The importance of winning Mr. Greenspan's support is probably even greater today than it was during the last Bush administration. He is now hailed as a chief architect of the record economic expansion, and is increasingly sought out by politicians on an ever-broader range of topics. Earlier this year, Mr. Clinton persuaded the Fed chairman to publicly endorse free-trade legislation with China, a position that pleasantly surprised White House aides and caused some discomfort inside the Fed.
Mr. Greenspan has been particularly influential on budget policy and he has made clear his preference for accumulating surpluses. Still, the Fed chairman has left himself wiggle room to embrace a Bush tax cut if he chooses. For one thing, he has said that if Congress can't maintain fiscal discipline, he considers tax cuts better than spending increases. Besides, one of Mr. Greenspan's justifications for building up surpluses -- to act as a damper against an overheating economy -- is fading.
Yet Mr. Greenspan's main reason for avoiding big tax cuts still stands. The government, he has argued, needs to hoard surpluses, a way of raising national savings, in order to give the economy enough resources to pay for the retirement of the baby-boom generation. That view could set Mr. Greenspan on a collision course with Mr. Bush over another one of the Texas governor's pet projects: overhauling Social Security.
It is a topic in which Mr. Greenspan has a great interest. He oversaw the last major Social Security reorganizational effort in 1983. And in 1999, in a rare split with the Clinton administration, the Fed chairman played a big role in killing Mr. Clinton's own Social Security plan by blasting as government meddling the proposal to invest the trust fund in the stock market.
In contrast to the Clinton plan, Mr. Bush wants to partially privatize the program, allowing individuals to invest some portion of their payroll taxes in the stock market. And he would divert money from Social Security surpluses to pay for those accounts, thus paring the debt reduction Mr. Greenspan prefers.
In public remarks, the Fed chairman has expressed skepticism about the economic value of investing Social Security funds in the stock market, a plan Messrs. Bush and Lindsey have touted. Such a change would "merely reshuffle claims to real resources," Mr. Greenspan told Congress last year. It "would not, in itself, have any effect on national saving," he added.
The usual point man between an administration and the Fed is the Treasury secretary. No clear choice has yet emerged for that slot, and the names most frequently circulated aren't on Mr. Greenspan's long list of prominent friends. That leaves Mr. Lindsey, who is expected to take a top White House job, as the person most likely to shape the Bush administration's Fed policy, at least in the early days. Mr. Lindsey, a midlevel aide in the last Bush administration, was a surprise choice for the Fed board in 1991.
A bit outspoken for a Fed governor, Mr. Lindsey wasn't shy about openly dissenting from Greenspan-led policies, decisions usually made by unanimous consent. He voted against Mr. Greenspan four times -- "a 10% dissent rate," Mr. Lindsey once estimated. Mr. Lindsey declined comment for this article. In an interview last year, he said, "I had an independent mind, though I generally agreed with Greenspan."
People who know the two say Mr. Greenspan regarded Mr. Lindsey with some affection, but didn't appear to treat him as one of his confidants inside the institution. For example, in the days before Mr. Greenspan's December 1996 speech warning about "irrational exuberance" in the stock market, several Fed governors said the chairman sought their comments on a draft of the speech. Mr. Lindsey said he first heard the famous phrase as Mr. Greenspan delivered it.
Even if Mr. Lindsey does bring good personal ties, that doesn't guarantee an easy time. The senior Bush's Treasury secretary, Nicholas Brady, started his term working well with Mr. Greenspan. But ties frayed as the Fed, nervous about oil-induced inflation from the Gulf War, refused to cut rates as swiftly as Messrs. Bush and Brady wanted to ensure a growing economy in time for the 1992 election.
Treasury officials regularly publicly questioned the Fed's stance. In early 1988, a senior Treasury official took the remarkable step of sending a letter to Fed officials around the country arguing that slow money growth was choking the economy. In congressional testimony a few weeks later, Mr. Greenspan took the rare action of rebuking the Treasury, saying he "objected quite strongly" to the missive. By the end of the Bush administration, Messrs. Greenspan and Brady had broken the tradition of weekly luncheon meetings between the Fed chairman and Treasury secretary, and were barely speaking at all.