Who Should Run the Federal Reserve?

EXECUTIVE-DECISION MEMORANDUM

To: The President of the United States
From: D. N. Forser, Chief of Staff
Re: Appointments to the Federal Reserve Board / The Growth Issue
Date: March 8, 1996

A. Appoint Chairman Greenspan for another four-year term and nominate two other like-minded inflation hawks to fill the two vacant positions.

B. Refuse to reappoint Greenspan and nominate outspokenly pro-growth advocates to fill the two vacant slots.

C. Reappoint Chairman Greenspan but balance his strong anti-inflation approach by nominating two pro-growth economists for the vacant slots.

This economy is growing! And it's your economy! If you open up a debate over growth you'll be shooting yourself in the foot. You had it right in your State of the Union Address: This is the best economy in years. Inflation is at a historic low, unemployment is the lowest it's been since the late 1970s, interest rates are in single digits. Yes, growth slowed last year, but for the first time since the mid-1970s we have all the fundamentals right. Sure, call for more growth, but keep to the course of steady growth.

Those who want to shake up Wall Street need to face facts. Growth depends on investment. Investment depends on confidence in the future. Confidence depends on the assurance that inflation will not return. Main Street needs Wall Street--more than ever in this new world economy. We need Greenspan and Greenspan-friendly people on the Fed. That will do more for investor confidence--the key to growth--than anything else you can do. And remember: Greenspan has hinted, and your appointees can remind him, that once a balanced-budget agreement is reached, interest rates can come down again.

Investor confidence, a balanced-budget--that's your path to more growth. Let's keep the debates over growth in-house.

This is the most consequential decision of your presidency. None of the promises you made in the election campaign can be fulfilled without more economic growth than the Chairman is willing to tolerate. Absent the growth that will create more (and better) jobs, your job-retraining programs will not raise wages and living standards. More investment in infrastructure and in research and development, more spending on education (even coupled with longer school days), higher academic standards--these steps are all for tomorrow's workforce. But 80 percent of today's workforce has seen no gains in real income since 1979. Mr./Ms. President, America needs a raise. Yet Alan Greenspan, the Abominable No Man, says no.

In 1975-1976, when he was President Ford's chief economic advisor, Greenspan talked Ford into fighting inflation (remember those "WIN" [Whip Inflation Now] buttons?) just as the economy was entering a recession. Ford lost the 1976 election. Greenspan's refusal to ease interest rates in the name of WIN cost George Bush the 1992 election. Will history repeat itself this year?

The inflation of the 1970s and early 1980s was, if not wage-led, then wage-propagated. But wages are flat or falling today, and we have new restraints on inflation--new pressures from the world economy, new efficiencies yielded by the computer revolution. Greenspan is fighting the last war. He's said that he'd like to see zero inflation. The last time we had zero inflation was in the Depression! Wedded to growth no higher than 2.5%--the average growth rate from 1870-1970 was 3.4%--Greenspan has again and again raised interest rates whenever growth threatened to bid up wages. He's pulled the punch bowl away from American workers every time the party was really getting started!

Mr./Ms. President, we'd have Wall Street brokers jumping out hotel windows if we didn't reappoint Greenspan. The bond market would collapse. It's unthinkable. He must stay.

But let's cocoon him with Board nominees who will vote for lower interest rates. Yes, Republican Senators, who must approve Fed appointments, would give any such Board nominees a hard time. Maybe even reject them. But at least, Mr./Ms. President, we could open the debate over growth you said you wanted. Even if we lost, we'd win. We'd educate the public about the importance of the Fed to their daily lives. We'd put the GOP in a spot. Why are you guys against growth? Why don't you want to GET AMERICA MOVING AGAIN? We'd take the growth issue away from them. Nothing would make it clearer that they are the party of Wall Street. The Street wants slow growth, stable prices, flat wages. You'd be able to speak for Main Street.

Mr./Ms. President, with both parties pledged to a balanced budget, fiscal policy is effectively off the table. No growth-igniting tax cuts, no growth-igniting spending. That leaves monetary policy as the only source of growth. Let's start a debate over keeping interest rates low long enough to get this economy growing by 3.5% to 4%.

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