Greenspan Testimony/GOP Optimism
Jude Wanniski
May 27, 1994


The Senate Banking Committee waited until Congress went home for Memorial Day to invite Alan Greenspan to discuss monetary policy, and not a single GOP Senator was on hand this morning when Greenspan showed up. Thus, there was no chance for us to propose questions for him, although we did try to get one through to Chairman Don Riegle. Greenspan's prepared testimony was pure bureaucratic boilerplate, absolutely dreadful Phillips Curve nonsense that must have been written for him. In the Q&A, happily, he was much better. Of critical importance, he acknowledged "an anomaly" in his "tightening" of monetary policy, in that the raising of interest rates has been accompanied by an increase in bank lending, as banks loosen their lending standards. This tells us that Greenspan is hot on the trail we discovered here two weeks ago, when our David Gitlitz recalled a technical paper he'd read in 1984, by the late Fed Governor Henry Wallich, which suggested the reason why the raising of interest rates would be self-defeating, if the purpose was to lower inflation expectations. Expecting short term rates to rise again, and again, banks increase their demand for funds as the market increases its demand for funds, wanting to add to inventory before prices rise. As the Fed supplies those reserves to hit an interest-rate target, it ratifies the inflationary impulse. Having noted this "anomaly," Greenspan is almost certain to find a fix that will cure the problem, one that the Fed bureaucracy can live with. In other words, it is highly unlikely the Fed will notch up fed funds again, knowing it will merely increase bank lending that is inherently inflationary. We only wish some Republican Senators were on hand to nail this down. 


Paul Gigot's political column in today's Wall Street Journal is an accurate reflection of the euphoria sweeping the Republican Party as a result of this week's special congressional election in Kentucky, won easily by the GOP candidate, who captured a seat held by Democrats for 127 years. Party analysts are now talking confidently of winning control of the Senate in November, which would require winning seven seats, or six, on the assumption that Alabama's Richard Shelby, a Democrat in name only, would switch parties to permit the GOP to organize the Senate. There is dizzy talk we hear from usually sober sources mulling the possibility of winning ten seats or more. In the House, where the GOP has 178 seats and requires a pick-up of 40 for control, Gigot cites the latest forecast of John Morgan, a respected grass-roots analyst, who now sees the likelihood of a 25-to-31 seat pick-up, which would give Republicans more seats than they have had since the Eisenhower years. In the Kentucky district, a poll indicated that only 30% of the voters would now vote to re-elect President Clinton. The Democrat who lost this week tried to distance himself from Clinton on most issues, but was nailed by the Republican for refusing to pledge that he would not support employer mandates for health care. In one TV spot, the GOP candidate declared: "I've got two opponents, Joe Prather and Bill Clinton...Bill Clinton doesn't want me in Congress because I won't rubber stamp his tax increases for socialized medicine." 

Publicly, the Clinton team continues to believe its fortunes are tied to getting a health care plan passed in this Congress. The President and Hillary still think the people will respond to their promises once they spend several million dollars on a TV blitz, to counter opposition from the business community. Those Clintonites who are in closest contact with Democratic backbenchers, though, realize something has gone very wrong. Indeed, the more time, money, and energy the President puts into "getting his message out," the more support he loses. The fact is, the American people do not want socialized medicine, and if the President insists on a national referendum this November in the mid-term elections, the Democratic Party will be slaughtered. As I argued last week in "Health Care Update," the Republicans will only hurt themselves by helping the President pass a compromise plan of any kind. The GOP need only promise a conceptual approach to the health care issue, of the kind developed by the conservative think tanks, one that increases the power of the individual, not the state.

How can the President have gotten it so wrong? We have always believed he misread the special Senate election in Pennsylvania in 1991, when Harris Wofford, a wooly-headed professor, defeated Richard Thornburg, the former governor and attorney general in the Bush Administration. The Wofford campaign was run by Jim Carville, who had Wofford promise a national answer to the "health care crisis." When Wofford won, the liberal intelligentsia insisted the people of Pennsylvania were on the leading edge of a coast-to-coast yearning for national health insurance. Those of you with us at the time may recall we ridiculed that idea. We pointed instead to Thornburg's campaign, which rested on his friendship with President Bush, who had recently broken his "read my lips, no new taxes" pledge to the American people, Pennsylvanians included. The people of Pennsylvania voted against Bush, not Thornburg, and certainly not for socialized medicine. The Republican establishment, which of course could not attribute the Thornburg loss to Bush, allowed the Democratic reading of the election to pass into conventional wisdom without a murmur of protest.

Thus the impressionable governor of Arkansas, Bill Clinton, came to swallow the conventional wisdom, leading him to hire Jim Carville to run his campaign, leading him to promise the American people what Wofford had promised the people of Pennsylvania. When Clinton won, with 43% of the vote, he believed he had a mandate to produce universal health coverage via government mandate. The defeated Republican Party also believed he did, at least at first, which is why so many GOP plans were developed to compete with Hillary's. Yet it should have been clear from the start that the voters threw out George Bush as they had rejected Thornburg, and that Clinton was elected only because he happened to be available. In their wisdom, the voters drafted Ross Perot as a third-party candidate, which denied Clinton a majority. Otherwise, he might have already gotten a destructive health care scheme through Congress. For this reason alone, Perot deserves the nation's eternal gratitude.

Clinton's more fundamental problem is his reliance on the public opinion polling of Stan Greenberg, who spends a reported $2.8 million a year of Democratic funds trying to find the national pulse. His polling continues to find a national concern with health care issues that leads the Clintons to confirm their earliest impressions from the 1991 Pennsylvania race. The voters, of course, are concerned, but we have never believed they think the problems can be solved by increasing the role of government at the expense of the individual. As a party, the GOP only needs to make the case that the federal government permit individuals, as well as employers, to deduct their health insurance premiums from taxable income. There would be no negative revenue effects, only economic efficiencies that would instantly begin to resolve the concerns of the American people. It's a free lunch, increasing the power of individuals, impregnable to Democratic attack. 

Public opinion polls are worse than useless in assessing the collective wisdom of the electorate on specific issues. A political leader who relies on them will invariably fail his party and his country. As long ago as 1944, Charles Beard, the American historian, pointed this out near the end of his distinguished career in The Republic, a book we recommend to anyone who would like to be a political leader. For decades, I have observed political zealots of the right or left in countries, like Switzerland, or states, like California or Massachusetts, put their destructive ideas on ballots, as referenda, after polls showed the ideas were favored by huge majorities. The ideas always lose by enormous majorities, when the voters, instead of tossing off an opinion over the telephone, look these gift horses in the teeth and cast their ballots behind curtains. 

The current Republican euphoria does not guarantee the kind of sweep this November now in their dreams. The GOP is just as vulnerable to misreading elections as are Democrats, just as prone to ascribe a GOP victory in one place or another to their pet hobby horse at home. The current litany of GOP effluvia -- term limits, school "choice," line-item vetoes, budget-balancing amendments, capital punishment, "three strikes and out" -- we can practically guarantee are of little interest to ordinary voters, once they get behind the curtains. The electorate wants a return to normalcy, now that the Cold War is over, with a peacetime transfer of power, to the individual from the state. And they want it for all Americans, not only for white folks, which is something the GOP leadership should not forget if it wants an electoral sweep.