FEBRUARY 22, 1996
President Clinton announced his nominations for the governing board of the Federal Reserve. Elizabeth Farnsworth discusses the nominees and the direction of the Fed with two economists.
ELIZABETH FARNSWORTH: Besides Alan Greenspan, who was nominated to a third term, the President also nominated his budget director, Alice Rivlin, as the vice chair of the Board, and he nominated economist Laurence Meyer of Washington University at St. Louis to the Board. To discuss the nominations and what they mean for the economy, we have in Boston Allen Sinai, the chief global economist for Lehman Brothers. We are also joined from Austin, Texas, by James Galbraith, an economics professor at the University of Texas at Austin. Welcome to both of you. Mr. Sinai, do you think the renomination of Alan Greenspan was the right thing to do?
ALLEN SINAI, Lehman Brothers: Oh, absolutely. There's no doubt about that. Greenspan has done a terrific job, a very fine job, and he is respected worldwide, as well as domestically. There never was any question he'd be reappointed I think.
ELIZABETH FARNSWORTH: And, James. Galbraith, do you agree?
JAMES GALBRAITH, University of Texas at Austin: Well, the President made three appointments to the Federal Reserve Board today. I have a very, very high regard for Alice Rivlin, Laurence Meyer I know by reputation, but I think in the case of Alan Greenspan, he would have done better, the President would have done better to name someone who was more committed to a higher rate of economic growth, reduction of unemployment, and I think that it's unfortunate that he didn't take that opportunity.
ELIZABETH FARNSWORTH: The President is committed to those things. Why do you think he didn't take that opportunity?
PROF. GALBRAITH: Well, I can't speak for the President's reasoning, but I do think that if you look back at Chairman Greenspan's record, it is one of systematically overestimating the risk of inflation in this economy, raising interest rates when it was not necessary to do so, particularly in a period beginning in early 1994 and going on up to the middle of last year, doing a great deal of damage to the prospects for growth, and to the general welfare, particularly of middle class Americans. And I think that we're in a period now in which people really are looking to our national leadership to address those concerns, and I'm afraid with Alan Greenspan's reappointment, we're seeing that they will not be addressed as effectively as they might be.
ELIZABETH FARNSWORTH: Okay. I'll come back to that debate in a minute. We want to talk about that, but first, what about the other two appointments? You mentioned it, what you thought about them, Mr. Galbraith. What do you think, Mr. Sinai, of the appointment of Alice Rivlin and Laurence Meyer?
MR. SINAI: Well, they're--
ELIZABETH FARNSWORTH: What do you think they'll bring?
MR. SINAI: --excellent.
ELIZABETH FARNSWORTH: What might they change?
MR. SINAI: Well, first of all, they're excellent appointments. The professional qualifications and experience of both are impeccable. I do think they will be more on the pro-growth mode that President Clinton is looking for, and will tilt the Federal Reserve more in the direction of the higher propensity for more growth with lower interest rates, and, and perhaps address some of the criticisms that Mr. Galbraith is levying against Mr. Greenspan.
ELIZABETH FARNSWORTH: And before we get into the criticisms, Mr. Galbraith, do you have anything else to say about the two new appointments?
PROF. GALBRAITH: No. I think they're both--I know Alice Rivlin quite well, and I think she's a fine appointment. As I say, I know Mr. Meyer by reputation. I agree with Allen Sinai, that these appointments will move the Federal Reserve in the right direction. I just move--hoped it would be moved further and more quickly.
ELIZABETH FARNSWORTH: Now, you have begun to lay out the debate that has been in the papers and in lots of different places in recent weeks about what the Fed should be doing. Could you do this--you've started it--in a way that non-economists, which most of us, we're not mostly economists in the audience--can understand? The President has said he wants more of a debate inside the Fed about pro-growth policies. The idea is that the Fed has been too restrictive in its monetary policy, or at least that's one view. Could you describe that argument, and then we'll go to Mr. Sinai and talk to him about it too.
PROF. GALBRAITH: Well, Federal Reserve policy is the single most powerful force acting on our economy. It determines--it helps determine whether the stock market goes up or down; it helps determine whether growth and employment go up or down. And in recent years, I believe that the Federal Reserve has been much too worried about the threat of inflation when, in fact, no such threat really existed, and the Federal Reserve, itself, had no evidence that any such threat existed. So we would see a reaction against a phantom threat of inflation by raising interest rates and slowing the economy. At the same time, on the other side, we've seen very little response to the fact that we still have in the order of 7 million unemployed, 5 1/2, 5.8 percent unemployment, that we have a growth rate which is right now slowing down. I can't predict the future, but I think that the--we're in a situation which could become dangerous later on this year. And I think that the Federal Reserve should have been more worried about slow growth and unemployment, less worried about essentially non-existent threat of inflation. They have been conducting the policy which has been biased against growth, and that's--it seems to me--is a mistake.
ELIZABETH FARNSWORTH: Mr. Sinai, what do you think about that?
MR. SINAI: Well, I think Prof. Galbraith really misses the, the nub of the contribution of the Greenspan Fed, which is so revolutionary and why I give Chairman Greenspan some of the highest marks in history. It is the forward-looking and preemptive approach of a central bank in dealing what ultimately drives our economy into recession, too much inflation, and the lags in that process are such that the central bank, if it does it right, has to act in advance of the obvious presence of the problem in order to prevent the problem from occurring. It's like taking preventive medicine. And this was very different. This in 1994, a very, very tough period of rising interest rates, with a lot of trouble for all of us, including myself, firms all around the world, this was one of the reasons, this is one of the reasons, perhaps the primary one, why today we are entering the sixth year of this business expansion without a threat of accelerating inflation and why we now can legitimately debate the issue and move toward somewhat more pro-growth actions without worrying about accelerating inflation. Fighting and preventing inflation from picking up when the economy was getting close to full employment in 1994 and at an unsustainable growth rate had to be done to get where we are today so we can go ahead now and to fashion more pro-growth policies, which by the way I favor. We can grow faster without--we can grow faster in an inflation-safe way now because of these preemptive actions that Prof. Galbraith obviously doesn't understand.
ELIZABETH FARNSWORTH: Mr. Sinai, this--
PROF. GALBRAITH: Well, let me respond on that.
ELIZABETH FARNSWORTH: Go ahead. Yes, go ahead.
PROF. GALBRAITH: I'm a very close student of what the Federal Reserve says officially to Congress, and in 1994, when they raised interest rates, they did not say that they were facing a threat of higher inflation. In fact, Chairman Greenspan, himself, explicitly said the contrary. He said that inflation was under control, that inflation expectations were coming down as a result of the deficit reduction policies that had been put into effect in 1993. So when pressed in 1994 as to why he was raising interest rates, he did not make the anti-inflationary argument that Mr. Sinai attributes to him in retrospect.
ELIZABETH FARNSWORTH: Mr. Galbraith, let me interrupt you. I just want to bring this up--we have very few minutes left, and I want to bring this right up to the President--present. This relates very much to the current fears that people have about the economy, the Fed's policy. Can you explain that, please, I mean, what the debate is about right now, whether or not people's incomes are rising rapidly, people being laid off.
PROF. GALBRAITH: That's right. We have not seen rising wages in this country for well on 20 years. We have not seen an improvement in living standards. We have tremendous anti-inflationary forces that affect our economy now that did not affect it 10 and 15 years ago. They come from foreign trade; they come from the low cost of imports; they come from competition in the labor market. We are much less prone to inflation now than we used to be, so while Mr. Sinai says the Federal Reserve has looked to the future, I say it has missed the boat on the present. It has--is fighting the last war, and it is not giving the American public the opportunity to have a higher standard of life than many people want, and I think they deserve, and that the economy can safely produce. That's the problem with the current policy.
ELIZABETH FARNSWORTH: Mr. Sinai, what about that argument that current technological changes and other factors have made it possible to have growth without inflation and that the Fed hasn't recognized this?
MR. SINAI: I think the Fed is looking at that, has been looking at that. Any central bank anywhere has to worry very much about keeping inflation down--(audio trouble)--
ELIZABETH FARNSWORTH: We're having trouble with--I'm going to--oh, there you are. You're back.
MR. SINAI: I watch the Federal Reserve, read every comment. I do that for a living, in 1994, every day, every minute of the day, and I must say that he hasn't read the record correctly and if you read the statements of ex-vice chairman Blinder, as well as Chairman Greenspan, it's very clear that they were preemptively attacking inflation before it showed up in the hope of sustaining the business expansion; that is almost a universally-held opinion by students of what the Federal Reserve did at the time. He simply is wrong. He's not at all in touch with the record. And the second thing is his comment about wages, there's only one statistic, average all the earnings, that shows the kind of behavior that he has attributed. There's no doubt American workers are squeezed, it's been a tough time. We have grown slowly on average--inflation is lower as a result. The unemployment rate isn't that high actually, it's--many people think it is essentially at full employment--I don't, but many people do. But American workers are feeling squeezed because they're working very hard to make a living and that we do have to address as a nation and take care of over the next four years.
ELIZABETH FARNSWORTH: Well, Allen Sinai and James Galbraith, thank you very much.