SPECIAL REPORT ON THE FED:
Harkin was right about Greenspan
by James K. Galbraith
Senator Tom Harkin took to the floor of the Senate last month in a lonely
battle to oppose Alan Greenspan's reconfirmation as chairman of the Federal
Harkin's crusade didn't get a lot of respect. He had to hold up Greenspan's
confirmation, and those of Alice Rivlin and Lawrence Meyer, in order to
win time for the debate. For this, he was called an extremist by the Washington
Times and "annoying" by the New York Times. The Washington Post
called him obstructionist. But once the debate started he sure looked and
sounded reasonable to me.
Harkin spoke for more than five hours in all - carefully, methodically and
clearly. He based his case on the simple fact that the American economy
is not performing well. Growth is slower, employment creation and wage gains
are less than at similar points in past expansions. We hear a lot - as we
always do from the White House, no matter who controls it - about how strong
the economy is. But every American knows we could do better, and Harkin
argued that we are right.
What made this expansion so slow? Harkin pointed to the policies of the
government. In particular, he pointed to the slow-growth, high-interest-rate
policies of Greenspan.
Why does the Federal Reserve's chairman believe that slow growth is good
for us? Apparently because it reduces inflation, or so Greenspan thinks.
But, in fact, as Harkin showed, Greenspan hasn't reduced inflation very
much. The world changed before Greenspan came in. With global labor markets,
global product markets and a new economy of intense wholesale and retail
competition, Harkin argued, inflation isn't the threat it was 20 years ago,
and Greenspan is stuck in the past.
There never was much of a link between slow growth and slow inflation. The
strong expansions under Kennedy-Johnson and Reagan were not very inflationary.
The inflationary expansions of the Nixon, Ford and Carter years were not
The theory Greenspan seems to be using, which links inflation to unemployment,
seems to be at least a dozen years out of date. We cannot know for sure
whether more rapid growth, cutting unemployment from the present 5.6 percent
to, say, 4.5 percent over two years, would cause rising inflation. There
is a small risk that it might. But it might not, and a million more Americans
would have decent jobs.
Greenspan is known for his fascination with statistical details. But as
Harkin said, he isn't very good at reading those details. In 1990, he failed
to see the evidence that the economy had entered a recession - even three
months after the recession had begun. In 1994, he launched a preemptive
strike against inflation, doubling interest rates in a year's time - even
though no evidence of inflationary risk existed or ever emerged.
But the real problem isn't with Greenspan's judgment. The problem is Greenspan's
ideology. His errors aren't random. They are systematic. During a long career
going back to the 1970s, he has repeatedly overestimated the risks of inflation.
He has consistently downplayed the costs of stagnation and unemployment.
Greenspan is a throwback. He is a man who admits that, if he had the choice
to himself, he would return to the gold standard - something we haven't
seen in this country since 1933. He's obsessively opposed to economic progress,
to more rapid growth or to rising wages. And the markets understand this
very well. This is why almost every uptick in the growth rate or drop in
unemployment is met by a tumble of stocks and bonds. The markets read ahead
from the news, to the next meeting of the Federal Open Market Committee.
They expect the good news to be countered by a rising interest rate. As
Harkin said, they're like the naughty child who goes to sit in the corner
- even before he's been punished.
Greenspan's friends and supporters didn't want this debate. The White House
didn't want it, because it knows that Harkin is right. They know that Greenspan
is going to be nothing but trouble if President Clinton wins a second term.
The Senate Republicans didn't want it, because they don't want to defend
Greenspan's slow-growth policies in public. Harkin's arguments were hard
to answer. And, in the event, no senator tried seriously to rebut him.
For this reason, even though he lost, Harkin's stubbornness had lasting
value. For the first time in years, the Senate held a real debate over jobs,
growth and interest rates. Harkin is forcing these vital questions back
onto the public agenda, where they belong. That makes it harder (not impossible,
but harder) for the Federal Reserve to jack up interest rates, launching
another misguided strike against the mirage of inflation this year.
It's too bad that Clinton renominated Greenspan to serve another term as
chairman of the Federal Reserve. And it's too bad that the Senate confirmed
But it's a very good thing that we have Harkin, who was willing to stand
in the well of the Senate and state the plain truth.
James K. Galbraith is professor at the Lyndon B. Johnson School of Public
Affairs and in the Department of Government at the University of Texas at
by James McCarty Yeager
Of all the unslaughtered sacred cows emanating from Washington, the Federal
Reserve Board (a.k.a. the Fed) is the most likely to be found wandering
the streets of American peasant villages everywhere, destroying crops, homes
and shops. And being worshipped for our pains.
But there are a few agnostics. Former House Banking Committee Chairman Henry
B. Gonzales of Texas has long been one of the brave. He took on the Federal
Reserve Board's murky ideology of higher interest rates and secret practices
during the last Democratic Congress. And was ridiculed for his pains.
The central bank has functioned secure in its respectfully silent official
adulation ever since. Until this summer.
For three days on the floor of the Senate came the Democratic Senators Tom
Harkin of Iowa, Harry Reid of Nevada, Paul Wellstone of Minnesota, and the
smartest single-state Senatorial pair, Kent Conrad and Byron Dorgan of North
Dakota. By dint of pounding on Senate Republican leadership - and of ignoring
the coat-plucking of timid Democratic colleagues - Harkin had forced an
actual Senate debate, ably seconded by the others, on the powers, policies
and practices of the American central banking system.
Immediate effect? Nil. Alan Greenspan was confirmed to a third and final
four-year term as Chairman of the Federal Reserve. By an overwhelming vote.
But statisticians might note that Greenspan's disapproval jumped 250%, from
2 Nay votes four years ago (Conrad was one) to 7 Nays this time, the above
5 debating stalwarts being joined by Bob Kerrey of Nebraska and Russ Feingold
Long-term results of the debate, however, may be less favorable to the anti-inflation
romantics to whom Greenspan is chief idol and we are the sacrifices. For
one thing, the General Accounting Office, Congress's chief watchdog agency,
was finally permitted - not to audit, oh no, that's much too sacred a function,
NOBODY audits the Fed - to report on the its operations.
This was the first time the Fed had ever undergone outside scrutiny. And
it did not like it one little tiny bit. All GAO's recommendations were rejected
by the Fed with that patrician scorn with which bankers have always treated
their suppliants, er, customers.
But the precedent has been set. And a few anomalies discovered. Like the
Fed's $3.7 billion slush fund, which has doubled in size since 1988, allegedly
held against losses although the Fed has never had a loss in 79 years, and
cannot by law ever have one.
Like the massive increases in Fed staff and executive salaries, travel,
and administrative expenses at a time when every other non-weapons-bearing
government agency has been forced to slash programs and personnel.
All of which the Fed mulishly defends, as it defends high joblessness and
artificially high interest rates, as necessary to fighting inflation.
In the Senate debate itself, the litany of excuses recited by Greenspan's
defenders ranged from despicable to dumb. Senate Banking Chairman Al (Still
Inexplicably Unindicted) D'Amato touched both poles simultaneously when
he solemnly argued that fighting inflation was so important that the non-banking
classes must cheerfully continue to bear however much unemployment was thereby
Domenici of New Mexico, Bennett of Utah, Hutchison of Texas, Mack of Florida:
These likewise peddled snake-oil. Domenici and Bennett seemed to find it
frightful that the interests of ordinary checking-account users, rather
than of bondholders, might be considered in fiscal policy. Meanwhile Mack
recalled in horrified tones the oil-shock inflation of 20 years ago, which
he professed to believe lurks under the national bed afresh, given life
with every quarter-point drop in the discount rate. Hutchison, as always,
provided comic relief with a dose of that mindlessly energetic cheerleading
for which she was first, and most authentically, famous and which still
constitutes her whole stock in trade.
Even people who ought to know better, such as Moynihan of New York, Dodd
of Connecticut, and Simon of Illinois, sprang to Greenspan's aid. As if
those who own the money need further facilities than those their own wealth
It should come as no surprise that those inclined to sclerotic fiscal orthodoxy,
from the Bundesbank to the FRB, should prefer modest economic growth and
high unemployment to high economic growth and low unemployment. After all,
those who have so much money that they can't spend it all on necessities
like to put the money someplace where it makes a nice rate of interest.
And too much economic growth might, after a few years, lead to conditions
where actual working people begin to increase their take home pay just as
if they were entitled to it. Like others, less gainfully employed, are said
to be to profits, or dividends, or interest.
As Harkin remarked, "What we have operating now in America on middle
class families is what I call the Greenspan tax - yes, the Greenspan tax
on American families. Higher interest rates are nothing more than a tax
on hard-working middle-class families, farmers, and main street businesses."
He and his four midwestern Democratic colleagues debated from the position
that stopping inflation was only half the Fed's mandate: The other half
was to support full employment. Despite many risible attempts by the opposition,
nobody has yet succeeded in convincing the American people that 5% unemployment
is the same as 0% unemployment.
One telling quote during the debate was introduced from Jerry Jasinowski,
whose position as Exalted High Whim-Wham of the National Association of
Manufacturers hardly qualifies him as a bomb-throwing free-credit socialistic
society-destroyer. Said Jasinowski, "Monetary policy in this country
is controlled by bond traders who live in highrises and are completely out
of touch with reality."
This was echoed by Wellstone, who observed that "What we have is a
policy that works great for bondholders, great for Wall Street, but does
not work well for families in our country. Every time we are about to generate
more jobs that people can count on, we have this policy which helps some
folks at the top but puts a squeeze on the vast majority of people in this
Marshaling studies by wildly centrist investment banker Felix Rohatyn as
well as mildly progressive economist Lester Thurow, the Progressive Five
hammered away at the Fed's deliberate low-growth policies. Rohatyn's position
was that lower interest rates would bring in growth and that the Fed should
stop trying to prevent it. Rohatyn, ironically, was denied a Fed seat last
year by Republicans who failed to remember his signal service in making
sure the bondholders were the only people unhurt by the financial collapse
of New York City in the 1970s.
Meanwhile, Thurow noted that inflation is an extinct volcano nowadays because
of technological change as well as the global economy that keeps domestic
wages down; and that, in any case, inflation rates less than 10% have never
harmed an economy.
Harkin noted that Greenspan's Fed had raised its pet interest rate, the
fed funds rate that banks charge each other for overnight loans, by 100%,
from 3% to 6%, over the course of the year 1995. All the while admitting
that there was no inflation anywhere in the economy to be afraid of. There
just might be later.
From this central fact the rest of the Senate fled in horrid disbelief,
mumbling the liturgy of anti-inflation though the corpse of inflation was
long since interred. And so Greenspan was confirmed. But the lines are now
clear. Economic growth that benefits everyone is being deliberately stifled
so that a few investors can safely tenant their highrises. But now nobody
can say we weren't warned.
James McCarty Yeager witnesses the effluvia being dumped into the Potomac
from a position safely upstream in suburban Maryland.
Harkin, Dorgan intend to pursue the Fed
by ART CULLEN
Sen. Tom Harkin grabbed the nation's attention when he held up the confirmation
of Federal Resrve Board Chairman Alan Greenspan for 2 1/2 weeks. That's
all he set out to do - for now.
"I wanted to focus the nation's attention on monetary policy,"
Harkin told me.
Talk, more talk. That's all farmers and small businesspeople need these
days, I told him.
Harkin said that a lot of people called to say that his is "right on
course" even the CEO of General Electric phoned in.
When GE approves, Harkin should take pause to re-examine his route. But
Harkin's supporters run the gamut from workers to executives to farmers.
Everybody's wondering: Why is out so-called recovery so stagnant, and why
does Greenspan pull the alarm when the economy rises from the dead?
Real interest rates are nearing record levels again, as they were during
the farm crisis of the mid-1980s. Greenspan thinks he is keeping an inflation
tiger at bay, but it's truly a paper tiger roaring over an academic exercize.
Harkin knows he has nothing to lose. Greenspan would be appointed. Harkin
would look like he's fighting for the little guy - even if it does benefit
GE. He knows that populist themes are selling well these days, and always
have in Iowa.
"We need lower interest rates," Harkin said. "They're two
or three points higher than they need to be."
One percentage point lower would mean $1,000 less on the mortgage of a $115,000
house, the senator pointed out. (That's an attractive price range for independent
swing voters who consider him vs. the affable Congressman Jim Ross Lightfoot
of Shenandoah, Harkin's Republican challenger.)
"Mr. Greenspan and all his friends are living on Park Avenue, where
it doesn't bother you much. Well, we need more talk about how the policies
of the Fed affect families and farmers. I just fired a shot across the bow."
Harkin insists that this is more than just talk. He and Sen. Byron Dorgan,
a populist North Dakota Democrat, are pushing to open up the Fed from its
shroud of secrecy. The minutes of open market committee meetings, at which
interest rates are set, are sealed from the public for five years. "That's
ridiculous," said Harkin. "We hope to change that next year so
minutes are open after a year or a year and a half."
They also want a mechanism that introduces democracy to Fed appointments.
"We want some real people on there - the small businessmen, not just
bankers and economists," Harkin said.
By now he was on a roll.
But he had to run. No more time for talk. More later, rest assured.
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