George Perry at the Fed
Jude Wanniski
January 11, 1994


President Bill Clinton seems almost certain to nominate Brookings Institution economist George Perry, 59, to fill the vacancy at the Fed that will occur when Wayne Angell's term ends this month. It's hard to think of someone who would be less like Wayne Angell in background and economic outlook than Perry. He has an extremely pleasant personality, as does Angell. This is what may have won over Bob Rubin, chairman of the National Economic Council, who controls the selection process. And, like Angell, he has a Ph.D. in economics, but there the similarity ends. Where Angell has run a farm and a bank, Perry's entire adult life has been far removed from reality, almost all of it spent inside the Beltway as a textbook, Democratic Keynesian. He was on the staff of President Kennedy's Council of Economic Advisors when Walter Heller was chairman, followed Heller to the University of Minnesota where he taught for a few years, and has been at Brookings since 1969. 

Perry's biggest problem is his continued acceptance of the neo-Keynesian Phillips Curve, which posits a trade-off between employment and inflation. It is as deeply ingrained in Perry as it is an object of ridicule for Angell and Fed Governor Larry Lindsey. There is nothing worse for the bond market than the Phillips Curve, which provided the political rationale for President Nixon's abandonment of the gold link in 1971, and the devaluation and subsequent floating of the dollar -- all of which were supposed to cut deeply into the unemployment rate and the U.S. trade deficit with Japan. Perry was a cheerleader then and, as far as I can tell, he hasn't changed his thinking one iota. All inflations in the history of the world have been preceded by a rise in the price of gold. But because it doesn't say so in the textbook, it isn't true, which is why Perry could write last June that gold prices do not have "any noticeable effect on finished goods' prices [nor do] they predict inflation more broadly." When you are an academic economist, with only a political check and no reality check, you are permitted to say whatever you wish. Perry comes as close to being the economic embodiment of the 1970s as anyone in Washington. The Perry appointment is cause for celebration by James Tobin of Yale and Robert Solow and Paul Samuelson of MIT, the three leading Keynesian dinosaurs outside the Beltway. Currency floater Milton Friedman, a co-conspirator of the Keynesians and an arch-foe of Angell's price-level targeting, would also toast the Perry nomination.

What actually does it mean for bonds? It doesn't make it any easier for the long bond to hit 5.5% this year, which is our forecast here. But first we note Robert Novak reports today that the White House has assured Fed Chairman Alan Greenspan that President Clinton's jawboning will cease. Treasury Secretary Lloyd Bentsen has also reversed himself in his line of Fed kibitzing, now conceding that the Fed soon might have to raise short-term rates. The gold price is off $10 and the volatile long bond has steadied. Greenspan's political patience may be working again.

It may also be premature to believe that Perry will have more influence on Greenspan than vice versa. The two men have known each other forever and somehow manage to get along, probably because they are temperamentally alike. In the mid-1980s, I attended an annual winter conference in Colorado of a handful of institutional investors and political types, at which Greenspan and Perry were regulars. They chose to sit side by side, and when one would speak the other would carefully find something nice to say in response. It was because of this experience that I opposed Greenspan's nomination to the Fed in 1987, as he would cheerfully agree with Perry's Phillips Curve analysis of those brilliant Reagan years: Taxes would have to be raised to close the budget deficit to fight inflation. Recession was not only inevitable, it was to be welcomed as necessary medicine.

As Fed chairman, Greenspan for the most part managed to keep these tendencies under control. His worst boo-boo occurred in 1987, his first year, when he told Fortune the dollar would have to devalue gradually over several years. The comment burned like a drop of acid through the Louvre accord -- which assured America's creditors early in 1987 that there would be no more devaluations. Greenspan's comment appeared a few days before the stock market crash that October, which was triggered when Treasury Secretary James Baker tossed a jar of acid on the Louvre accord -- which he had negotiated. Bond markets hate devaluations. Greenspan has been good on that score ever since, with Angell an important influence in steering him away from the Phillips Curve back to gold as an early warning signal of inflation.

Will Perry be able to move Greenspan back to the Phillips Curve? We would be kidding you if we didn't admit we worry about this very point. By himself, Perry is no match for Greenspan. But the Tobin-Solow-Samuelson triumvirate will have a direct pipeline into the Federal Open Market Committee through Perry. We must assume that Perry, who at first turned down the Fed assignment, changed his mind after his academic confreres told him he had to take it in memory of John Maynard Keynes and for the good of western civilization. As soon as he takes his place, he will be making the arguments for this team, arguments that always lean in the direction of a little bit of inflation

If Greenspan had demonstrated more attentiveness to the rising gold price as a companion to rising bond yields these past three months, we would worry much less about Dr. Perry. The longer gold hangs out in this range, the more it embeds itself into the price structure, of goods and bonds. There can only be two reasons why Greenspan has hung back. One is that he thinks he must be extra careful in bringing along the Clinton Administration, which is what I prefer to think. The other is that he is having an attack of the Phillips Curve, and has it in his head that a tightening of short-term rates will cause economic problems instead of reviving the bond rally. At the pre-Christmas meeting of the FOMC, Greenspan obviously did not rally the troops as we would have liked, or we would see the fed funds rate off 3% dead center. Does he have limited authority to pounce, if he thinks the time is right to snug? We don't know, although we hear confident rumors on both sides of the question. 

Meanwhile, the Dow Jones Industrial Average continues to make new highs, while the broader NASDAQ has not climbed back to its October 15 peak. The big guys who comprise the Dow 30 have less to gain from a strong bond market. In the short run, they may even make out better with commodity prices climbing along with gold. The little guys, who have a lot of equity and a little debt, are those hurt by a little bit of inflation -- especially with capital gains not protected by indexation. Wayne Angell has been a voice for the little guy. George Perry has been, and always will be, an advocate for the bigs. Sorry about that.