Quick Trip to Washington/The Greenspan Watch
Jude Wanniski
August 11, 1994



It isn't really possible to get a feel for Washington, D.C., unless you spend at least 24 hours inside the Beltway, breathe the air, plug into the chatter, and most importantly, wake up to read The Washington Post. On Wednesday morning, I had to rub my eyes to make sure it was the Post delivered to the door of my hotel room on my one-day swing through Our Nation's Capital. The front page lead story was about Attorney General Janet Reno seeking an independent prosecutor to investigate possible fowl play by her fellow cabinet member, Agriculture Secretary Mike Espy. Espy appears to have been getting presents from Arkansas poultry king Donald Tyson, the First Family's good buddy. A man who has never seen a chicken he would not like to pluck. Next up, the Post advises us that the President is giving the boot to David Wilhelm, another good buddy, who has been presiding over the Decline and Fall of the Democratic National Committee. Then we have an absolutely amazing story under a photo of Senate Majority Leader George Mitchell, which says: "Businesses Desert Key Health Care Bills; Factions Coalesce in Opposition to Democratic Leadership Plans," a report on how the First Family expected the business community to be divided in health care, but now find it wall-to-wall in opposition. Next to this story, we get a report on the First Lady taking issue with the First Man's endorsement of the Mitchell Bill, calling it "an untested approach."

On the op-ed page of the Post, the lead essay by Robert J. Samuelson runs under a headline: "Health Care: Start Over Next Year; They Don't Know What They're Doing Up There." On the inside news pages, a brief story on A6 caught my eye: "CBO Is Lukewarm on Senate Health Plan," which in so many words told me the Congressional Budget Office thinks the Mitchell Bill stinks. This wasn't the message in yesterday's Wall Street Journal, which had "CBO Sees Democrats' Health Bill In Senate Expanding Coverage," with a few quibbles about the associated costs. I looked in The New York Times, but found the newspaper of record had decided the CBO report wasn't newsworthy. There's nothing in the Times today, either. The Wall Street Journal's editorial page today, on the other hand, runs out excerpts from the CBO's 17-page report, under a headline that says, "Particularly Hard to Administer," which advises that the Mitchell Bill stinks to high heaven. An accompanying editorial asks the question: "If an atomic bomb was dropped on Washington, would anyone notice?" (Does this mean the Journal's Washington Bureau?). The MacNeil-Lehrer News Hour, probably having read the Journal's news account, reported last night that the CBO report was one of the few pieces of "good news" the President got, in that the CBO does say the Mitchell Bill expands coverage to 95% of the people.

In my meetings and discussions around town, with politicians and journalists, there remains a sense of high drama surrounding the health-care debate, but it no longer turns on the question of whether the President and Hillary will win or lose. They've lost and everyone in town seems to know it but the White House. The dramatic question remaining is how long the game has to be played out before the Clintons will acknowledge defeat. How much embarrassment is the Democratic congressional leadership willing to endure before it tells its frightened members they do not have to vote for a dead horse? There remains fiction that somehow Rhode Island Republican John Chafee will be able to single-handedly talk other moderates into salvaging something the President could sign with a straight face. But when I heard on the grapevine that even Christie Ferguson, who is Chafee's health-care expert, says it is dead, well, it is dead. The President is playing out the Maxwell Smart routine: "If I don't get 100% and employer mandates, with this pen I will veto!!! Uh, Would you believe 95% and a hard trigger? Would you believe 93% and a soft trigger? Would you believe two aspirin and see me in the morning?" 

The Democrats are beside themselves with fury at the Republicans for having betrayed them on health care. Betrayed? How? The Republicans are supposed to fall into traps that are set for them by Democratic strategists, and they haven't. Republicans are supposed to be easily divided, and conquered, and they have stuck together. Republicans are supposed to be suckers for bargains, the old compromise strategy, where you double the ticket price of a cheap suit, then announce a 50%-off sale. Senate Minority Leader Bob Dole has seen all the tricks and has fallen for most of them in his long, legislative career. Not this time. It was Dole who, from Day One, was assumed to be the pushover, the guy who would crack at the last minute and buy the cheap suit at a deep discount. Dole's floor statement Tuesday evening, at the opening of the Senate debate, was not about bargains and compromises and legislative deals. It was about philosophy, which is why Hillary has thrown a fit and why Dole is now being denounced. He betrayed them!

The likeliest remaining scenario, I think, is for Senator Mitchell to try to salvage something out of this mess, trying to limit the political damage to congressional Democrats this fall. What remains are the political modalities of health care leading up to the midterm elections. How will the debate be framed in October? How will the Democrats play their obstructionist card and how will the GOP respond? This, after all, is only Round One. The health care issue will be back in January, with a lot more Republicans in Congress, but with Bill and Hillary still in charge down the street, older and presumably wiser.


Will the Federal Reserve Open Market Committee decide to raise the fed funds rate next week by another 25 basis points, to 4.5%? There's no reason for it to do so, and we hope it doesn't. Our advice to Alan Greenspan has been to remove the threat of an increase from the markets and to allow the increase in the demand for dollars to gradually chip away at the price of gold, by not expanding the monetary base. The gold price has come down and the dollar has thereby strengthened against the yen, and we continue to note that the Fed has gotten a bit stingier in printing fresh money, slowing the growth of the monetary base. In testimony before the House Government Operations Committee yesterday, Greenspan was instructive in arguing against computer models, monetary aggregates, or price indices as policy guides in setting short-term interest rates. Market expectations of inflation are better observed in commodities and the behavior of the bond market itself. Greenspan threw out the provocative suggestion that the Treasury should begin issuing bonds with interest rates that would vary with the level of inflation. The prices people were willing to pay for inflation-indexed bonds would show how fearful they are of inflation, he says. In a note to Greenspan this morning, I sympathized with the proposal, but disagreed with it:

Your provocative idea of Treasury bonds which carry obligations in real interest rates rather than nominal, with a principal that is nominal, not real, has it backwards. I suppose you know that, and at the very least you are inching toward the right answer, which is to guarantee the principal and let the interest rate float. As it is, the government issues floating promises on both principal and interest. A "floating dollar" is a floating promise to redeem the bond at whatever the market deems it to be worth at the moment of maturity. The government takes no responsibility for managing the value of its debt. Under your proposal, if the government allows a $1000 bond to decline in purchasing power to $500 as it matures, the interest rate will climb to offset this loss and the government will be stuck. It is an unusual way of putting the government in a position where it is unable to cheat its creditors. It is a variation on the Brazilian mode, an accommodation to the fact that the private market remains on a gold standard, and you would have us back into it. It avoids the necessity of using the word "gold" in the management of government debt. Unhappily, it still leaves the markets without a fixed unit of account for private transactions. When Greenspan borrows from Wanniski, he has to emulate the government, by promising to pay floating interest rates as well, a variation on the Brazilian mode. Instead of fixing the value of the unit of account in gold, which simplifies the drafting of all debt instruments, public and private, your proposal requires great complexity.

The error parallels your current approach to raising interest rates on government debt, short and long, to offset the fact that gold has climbed to $380, which indicates a loss of principal. In this frame of mind, you will urge another fed funds rise next week. Instead, you should allow the demand for dollars to rise faster than the supply of dollars. This allows the market to reestablish the value of the principal on dollar debt, gold drifting back to $350 over weeks and months. Both short and long rates will recede as expectations change for the better and the velocity of money declines.