The Fed Appointees/Bosnia Update
Jude Wanniski
April 28, 1994


We are not as alarmed about the appointment of Alan Blinder to the Fed vice chairmanship as the bond market grapevine seems to be. The Wall Street Journal op-ed Tuesday, "Fed Nominee, Inflation's Friend," correctly portrays Blinder as a Phillips Curve Keynesian throughout his academic career at Princeton and as a columnist for Business Week. We assume Janet Yellen of Berkeley has the same record, as scattered quotes from her past about her tolerance for inflation would indicate. The fact is, this is not the same Dr. Blinder as represented by his quotes of yore, which seem frightening in the here and now, nor is it the same Dr. Yellen. In recent years, they have watched the world go not according to their textbook theories, but in accordance with the logical behavior of markets, which punish inflation policies and reward sound money. We really have come a long way from the days when the Nixon presidency and U.S. economy could be destroyed by Herbert Stein and Arthur Burns. Stein at the Council of Economic Advisors, and Burns at the Fed, teamed up in 1971 to expand the economy by currency devaluation, countering the inevitable inflation with wage-and-price controls. (How sad it was yesterday to see The Wall Street Journal editorial page run Stein's hymn of praise to himself on the day of Nixon's funeral.)

The dinosaurs of the economics profession, like Robert Solow of MIT and James Tobin of Yale, are celebrating the appointments of Blinder and Yellen, whom they believe they can manipulate into inflationary postures. Yellen, a Yalie, is actually cited as a protege of Tobin, which leads one to conclude that Tobin practically has a seat on the Fed board of governors. The front page New York Times story Sunday, "Growth of Jobs May Be Casualty In Inflation Fight," by Louis Uchitelle, sounds a pop-gun from Professor Solow, peddling the idea that Alan Greenspan wants to keep the unemployment rate high to combat inflation. The dinosaurs essentially argue that the Fed target the unemployment rate, pumping reserves into the banking system until the number of unemployed is down to 7 million (5.5%) from 8.5 million (6.5%). 

We can imagine Greenspan laughing at this preposterous idea from Solow, a Nobel prize-winner. It would require that the nation's bankers invite every deadbeat they had turned away from their loan windows in the last year, thrusting tens of billions of bank reserves into their hands -- fresh from the Fed's printing press. When Chairman Greenspan carefully explains this to Dr. Blinder and Dr. Yellen, their native intelligence will automatically enable them to envision the banking crisis of 1996, as the nation's banks try to collect from the deadbeats. Those numbers might even include James MacDougal of Whitewater fame, who participated in the Solow/Tobin inflation of the Carter presidency. I don't know Dr. Yellen personally, so I can't vouch for her. But I have known Blinder for more than 15 years, and can attest to the fact that he is not a drooling ideologue who refuses to learn from the mistakes of his elders. He's always had an independent streak, but now he no longer has to write books and articles to win the praise of the dinosaurs, which is the surest path to advancement in academic life and in Democratic power circles. He has a real policymaking job at last, among the most powerful positions on earth, which carries with it present and future accountability. 

I'm not even so sure that Janet Yellen is going to be the pipeline for Tobin's inflationist dogma. It was after all Laura Tyson, chairman of the CEA, who picked her old tea-drinking buddy from Berkeley, not Tobin. If you will recall, Tobin and Solow threw a snit and a fit when Professor Tyson was named to the CEA, on the grounds that her academic credentials were inadequate (meaning she was insufficiently dogmatic for their tastes). Insofar as Tobin and Solow also threw a fit over Bob Rubin chairing the National Economic Council, alarmed that he doesn't even have a degree in economics, and that Rubin approved both Blinder and Yellen, we, therefore, have a more interesting story than that which appears in the papers. People remember stuff. In Washington two weeks ago, I chatted with Blinder in his office about monetary policy, and he did not yell or scream when I suggested he think about targeting gold -- as a way of putting himself on the winning side of history. Dr. Tyson even wrote me a nice note, including the line: "I trust that you will see me as you see Alan Blinder, as one who is willing to debate the evidence without rigid dogma."

Even the Financial Times of London, which was a leader of the inflationist schools spawned by the young dinosaurs, has joined the sound money wave of the future. A month ago, Samuel Brittan, the FT's senior financial correspondent, went so far as to suggest that Japan would do better to reduce its trade surplus by ending its U.S.-inspired deflation -- although he made it clear the Americans still do not understand this point of view. In Tuesday's FT, Michael Prowse weighed in with his column, written from the Washington bureau:

In spite of Mr Greenspan's attempts to re-educate Congress and the public, economic debate in the US is redolent of the 1960s. Policymakers from the President down still believe in a "Phillips Curve" trade-off between inflation and economic growth. Fed tightening -- even the mild 3/4 percentage point so far announced -- is widely seen as a heartless attack on the jobless. Such primitive fears, of course, are not remotely justified. Indeed, it is hard to grasp how this supposedly pragmatic view ever gained economic respectability. Why should a steady decline in money's purchasing power increase general prosperity? At best, the stupid process of raising prices and salaries every year for reasons entirely unrelated to economic efficiency would be neutral for growth. In practice, as Mr Greenspan has stressed, inflation nearly always destroys jobs and wealth.

Blinder will never be a supply-sider, which would require him to unlearn too much economics. But at the Fed he has a chance to learn commercial finance, which is almost as good. He's always been an advocate of indexing the capital gains tax and has even agreed that cutting the rate would be good for the efficiency of the economy -- while opposing such policy because it is politically incorrect at Harvard, Princeton and Yale. In their spare time, Greenspan and Gov. Larry Lindsey may win him over to their position of zero capgains, with arguments based on finance, not demand management. It is automatically assumed that by coming aboard, Blinder and Yellen will convert the Fed to their way of thinking. It's more likely, I think, to be the other way around.

Bosnia Update

Press reports that the Serbs are finally behaving themselves by observing the UN/NATO ultimatum, pulling back from Gorazde, are pure baloney. With the exception of Henry Kissinger and Colin Powell, the entire U.S. Establishment -- White House, Congress, and national press corps -- had been suckered by the Bosnian Muslims into a belief the Serbs were "bad guys" engaged in "aggression" at Gorazde. We have to read 10,000 words per day of press and wire clips to keep up with what's going on. Most reports would have us believe the Gorazde "safe zone" to be occupied by 65,000 cripples, women and children. In fact, after the Bosnian Muslims thought they'd suckered the UN/NATO onto their side of the civil war with the Sarajevo stratagem, they moved 6,500 troops (UN estimate) or 10,000 troops (Serb estimate) into Gorazde and began firing into Serb positions. Serbia protested to the UN, which ignored the protest, and only then, on April 1-2 did the Serbs fire into Gorazde. They pulled back last weekend only when UN forces interposed themselves between the two sides, to prevent Muslims from firing on them in retreat. Even so, The New York Times told us yesterday, buried in the 10th graph of its story, Muslim forces have been firing into UN positions! previously occupied by the Serbs. In the last graph of yesterday's Financial Times account, we find an unnamed "senior UN military officer" paraphrased: "He also accused Bosnian government forces of violating the cease-fire in Gorazde, by trying to trap a Serb unit within the enclave so it would become a target for NATO air strikes when the ultimatum expires today." 

The confusion in our esteemed Ruling Class was reflected in last weekend's Times, when R.W. Apple, the Washington bureau chief, at one point spoke of the "civil war" in Bosnia and, at another, of the Serb "aggression." President Clinton has referred to the "civil war" while Secretary of State Warren Christopher refers to the "aggression." Civil war it is, with the Serbs for the most part having won. We will publish next week a most illuminating exposition of the entire affair by our Criton Zoakos, complete with a recommendation inspired by Henry Kissinger, on how to solve this Balkan crisis, at least until the next one.