Questions for Greenspan
Jude Wanniski
July 29, 1999


After his Humphrey-Hawkins testimony before House Banking last week, we decided in our Fed Watch analysis (7-23) that "Greenspan Is Hopeless." On every topic he addressed, he was in a conservative Keynesian mode -- using the budget surplus to pay down debt, worried that inflation might reappear because too many people were going to work, and that he has no responsibility for the damage done to global commodity producers because of Fed policy. The Wall Street Journal, which always tries to say nice things about Greenspan, this morning decides the Fed Chairman is a hero after all because he did say that if it were necessary, in a Keynesian moment of economic weakness, he preferred tax cuts to spending increases. Big whoop.

Greenspan is back tomorrow for the second leg of his mid-year report, at Senate Banking. We are strapped into our seats, never knowing what new utterance to expect. Here are two questions we have circulated to Senate Banking staffers, hoping to pry some useful information out of the oracle. We actually prepared them last week at the request of a Republican staffer at House Banking, but they were discarded, as they almost always are, in favor of genuflections.

Q. Jack Kemp early in June wrote a letter to the President, expressing concern that the Y2K computer glitch could cause serious problems to the GLOBAL financial system -- because most of the world's money is now electronic. That is, even if our financial system is clean, breakdowns around the world could travel into our system. Kemp urged the President to fix the dollar to the gold price at a level above $300, by executive order, and invite the other nations of the world to do the same. The link would provide a single unit of account, which means the world's computers would be able to handle a fraction of the traffic that they do now with dozens of major currencies and a hundred minor ones. Kemp points out that even though there may be no problem when we hit Y2K, this is a reasonable precaution without costs. Mr. Chairman, how do you feel about Kemp's concerns and his proposal? Could it be done?

Q. Over the years, you repeatedly have advised committees of Congress that you regard gold as the best signal of a prospective inflation. Is it still not the best market signal -- if the Fed had only one -- indicating the changes in demand for dollar liquidity? That is, the gold price is the first commodity to rise in dollar terms when there is more liquidity than is being demanded, and the first to fall in price when there is less liquidity than is being demanded. And if so, how do you account for the fact that the price of gold has fallen by 33% percent in the last 33 months, and so has the price of corn? Soybeans are down more than 40%. So is wheat. Is the Fed making a grievous error in starving the economy of liquidity being demanded, thus crushing the farm sector? If I were you, Mr. Chairman, I could not sleep at night worrying about this issue.

If we had a third question, we would raise the point mentioned in the WSJ today, that Greenspan in the past has favored a zero capital gains tax, believing it would raise more revenue with economic growth going through other tax gates than the amount it actually collects directly. If Greenspan had his supply-side hat on, he would say he would always accept a zero capgains tax, even if the unemployment rate were approaching zero, because it would shift the entire work force to higher levels of productivity, with no increase in the general price level. If he had his conservative Keynesian hat on, he would say we should wait until the unemployment line lengthens into a recession, because a zero capgains rate would cause irrational exuberance on Wall Street and an over-heated economy. There was a time when I thought he automatically would go for the zero rate. His intellectual behavior in recent years has gotten so mushy, though, that by now I expect he either would urge postponement or spout gobbledegook.

What Senate Republicans should be hitting him with is the report last week of the Institute for Policy Innovation, by our two favorite supply-side tax experts, the husband-and-wife team of Gary and Aldona Robbins. In one of the most fascinating exercises I've seen in decades, they used their growth model to calculate the feedback effects of each element of the $792 billion tax cut that narrowly passed the House last week. They reckoned the entire package would yield $1.47 extra in Gross Domestic Product over the ten-year phase-in period for every dollar of imputed reduction in the surplus. The capgains tax cut to 10% from 20% would give the biggest bang for the buck, at $16.87 per dollar. Relief on the marriage tax penalty, the favorite of the cultural conservatives, would yield a miserable 12 cents per dollar. All the other changes are calculated as well. In a demand model, of course, every dollar of tax cuts is the same as every other dollar, because production is assumed. In a supply model, the level of production can only be surmised after a careful examination of the tax structure. All taxes have different behavior effects on risk-taking in the exchange economy. We shall hear more of this report in September, when Congress returns from its August recess, to wrestle President Clinton over the size and shape of the tax cuts.

We certainly hope someone asks our Y2K question. Kemp wrote his letter to the President on June 11, but there has been no response. Greenspan should be put on the spot, forced to offer an opinion in this context. He is, after all, the most powerful central banker in the history of mankind, and the state of the world's finances as we pass into the unknown on January 1 will have an impact on financial markets everywhere. He should not be permitted to dodge responsibility as he did in the deflation that wrecked Asia. It also is becoming obvious now to the nation's farmers that Greenspan's policies do have something to do with their plight. The Farm Journal now is blazing away at the Fed's monetary deflation and in Iowa, both Dan Quayle and Steve Forbes are making hay of this issue. It is one issue where George W. Bush is immobilized by his economic team's support of Greenspan.

As Labor Day approaches, we really need lots of questions cleared up by Greenspan, the President and the GOP Congress. As our Y2K subscribers learned yesterday, Wall Street very definitely is beginning to factor the bug along with monetary policy and tax and budget policy. It is hard enough juggling variables when Greenspan is let off the hook. We will be watching tomorrow to see if he can at least be made to squirm.