Memo To: George W. Bush
From: Jude Wanniski
Re: Your Friend Greenspan
I understand you are so eager to reappoint Alan Greenspan as chairman of the Federal Reserve that you would be happy if President Clinton decided now to offer Alan another four -- to take monetary policy out of the 2000 campaign. The fact that I disagree is of little importance against the weight of your opinion, but in the last few days two letters have been written to Greenspan by people you know, men whose combined weight may matter more than a hill of soybeans. In case they did not come to your attention, I append them here. One is from Jack Kemp, the other from Dan Quayle.
July 27, 1999
The Hon. Alan Greenspan
Chairman Board of Governors
The Federal Reserve System
20th and C Streets, NW Washington, DC 20551
I caught part of your appearance last week before the House Banking Committee and later read your prepared Humphrey-Hawkins testimony. I was really astounded, Alan, by what I heard and read. I can't understand why the performance of the stock market and the level of unemployment are serious indicators, much less the foremost indicators, of price stability and inflation. Whatever happened to the price of commodities, the price of gold and other financial indicators? I won't bore you with a full recitation of the statistics but please tell me, why are you dismissing the strong signals from key financial and commodity indicators? To mention but a few examples, the dollar is very strong; the CRB Commodity Index is down 33 percent since March 1997; the price of gold has fallen to $255 from $350 two years ago; the PPI is increasing annually at only 1.5 percent and actually is negative over the past six months. There is no inflation, at best, and at worst, which I believe closer to the truth, we actually are in the throes of a continuing deflation here and worldwide.
In the past, as a friend, I always gave you the benefit of the doubt when you talked about "tightening labor markets," and "irrational exuberance" in financial markets, assuming you had political constraints in the FOMC with which to contend. But after listening to you last week and reading your comments, I can come to no other conclusion than you actually do believe it all. You really sent me over the edge when you went on record urging Congress to retire the national debt instead of cutting tax rates as Bill Archer wants to do on capital gains and the estate tax and Bill Roth wants to do with IRAs. I guess you really do believe we are growing fast enough and do not need tax rate cuts, and by implication, I can only infer that you must also believe tax rate reductions would be inflationary. Why, I simply couldn't believe my ears. Mr. Chairman, if I may say so, you are starting to sound like Lester Thurow and Larry Summers. With all due respect, I believe your answer to Congressman Paul Ryan (R-WS), who asked a brilliant question, has done immeasurable damage to the growth wing within the Congress, which is trying to overcome the demagoguery of the White House and the soak-the-rich crowd. This damage will not be repaired easily.
I'm sorry you had to cancel our breakfast on the 15th. We really do need to get together as soon as mutually convenient to discuss these critical matters. Please, help me understand your reasoning, Alan. I really do want to understand it because these issues have ceased to be merely of academic interest, and it is not just about Kemp or Greenspan. What's at stake is your legacy and the conduct of monetary policy after you leave the scene. Let's get together again soon. I've attached an advanced copy of an op-ed that, as you can tell, delves into these matters in much greater detail.
Your old friend,
July 30, 1999
The Honorable Alan Greenspan
Board of Governors
The Federal Reserve System
20th and C Streets, N.W.
Washington, D.C. 20051
I write to express my strong objection to the recent policies of the Federal Reserve Board. In particular, it is my view that our economy -- particularly that which is dependent on commodities -- is now suffering from deflation, not inflation. The Federal Reserve Board's failure to recognize this reality is responsible in large part for the growing crisis on the family farm.
I am well aware that the "experts" describe the economy as "prosperous," and for some that is true. I also understand that you will be urged to raise interest rates because of a preoccupation with certain economic indicators, such as the increase in the wage index of 1.1% during the second quarter of 1999. But that is not the entire story, and it is time those in responsible positions of leadership started focusing as much on middle and rural America as they do to large corporations and Wall Street.
As you are surely aware, soybean prices in Iowa are lower than at anytime in the state's recorded history; hog prices have declined by more than 40% over the past two and a half years, and prices for corn have dropped 17% just since June. These declines in prices track similar declines in other commodities, and match the more than 30% drop in the price of gold since 1997. In the past, you have indicated that you would watch the price of old as an inflation signal. But now that it is dropping, it seems, you ignore this quite reasonable measure of the demand for liquidity in the economy.
Failing to inject more liquidity in the system to halt the deflation is a serious mistake. But this mistake is compounded by your apparent intention to actually raise interest rates. To do so at this time is potentially devastating to thousands of farmers and their families.
I am also concerned that in your recent appearances before the Congress you minimize the need for tax relief. Americans are overtaxed; returning excess taxation to the American people who earned the money is a moral imperative and an economic priority. Our economy need not fear more growth, and should not tolerate less. The announcement by the Commerce Department of mediocre growth in the second quarter of 1999 only underscores that we should be focused on greater economic growth.
Mr. Chairman, none of us wants a recurrence of inflation. But in chasing the phantom of inflation, you and the other members of the Federal Reserve Board are ignoring the real-world evidence right before your eyes. As you discharge your responsibilities, I urge you to give much greater consideration to the developing crisis on the family farm.