There is an old saying that “man proposes but God disposes.” It means that while humans can plan and attempt to carry out grand schemes, the actual outcome and eventual course of history depend on forces beyond their control.
It is similar to Robert Burns’ observation that “the best laid plans o’ mice and men gang oft awry,” but goes somewhat further by attributing the cause of plans going awry to the action of a higher power.
Let me suggest a corollary for U.S. economic policy: “Politicians propose, but the Federal Reserve disposes.” In this season of presidential and congressional election campaigns and party conventions, the public cannot help hearing politicians’ plans. Few of the plans can be described as well laid; politicians find safety in generalities. But like other proposals by humans, campaign proposals by candidates will collide with the forces of a more powerful entity.
At the risk of committing minor blasphemy, I suggest that higher power consists of Alan Greenspan and his colleagues on the Federal Open Market Committee, which sets U.S. monetary policy. The last 21 years show clearly that despite whatever prudent or imprudent actions the president and Congress choose to take, our monetary authorities ultimately hold a more powerful hand.
Governor George W. Bush calls for greater military spending and a substantial tax cut. Vice President Al Gore is trying to seize the high ground of fiscal responsibility but is clearly offering higher spending for social programs that Democrats want.
Either set of actions would throw additional fuel on the fire of an economy that is already overheated and that the Federal Reserve has been trying to cool for most of the last year. An economic “soft landing” is like the “surgical airstrike,” a phenomenon that is frequently discussed but rarely occurs.
Nevertheless, one may be taking place right now. There are some signs of slowing in an extremely fast-paced economy but few omens of a real recession. Economists may differ on whether further tightening of the money supply is needed, but hardly any would call for fiscal stimulus at this point.
Bush has chosen his advisors carefully; they are conservative but respected. His economic advisor is Lawrence Lindsey, a Harvard economist who served as an economic advisor to President George Bush and who was appointed by that president to the Fed’s Board of Governors.
Lindsey answers criticism of Bush’s call for large tax cuts by noting that they could not be implemented before January 1, 2002. By that time, he implies, the economy may be performing at a much slower pace. All well and good. While I would prefer to keep federal tax revenues at current levels and use any budget surpluses to reduce the national debt, this is a democracy and political candidates should be attuned to the preferences of citizens.
But citizens need to understand that in a democracy with an independent central bank, what one branch of government may hand out in the form of tax cuts may be taken away by another one in the form of higher interest rates.
Conflicting monetary and fiscal policies are not new. Indeed, we experienced them for several years in the early 1980s when the Reagan administration and a Democratic Congress cut tax rates and increased spending.
As a result, we doubled the national debt in a few years. All the while, Fed Chair Paul Volcker had his heavy foot firmly planted on the monetary brake pedal. Record interest rates were the result. While the high nominal rates of 18 percent or more experienced in 1980-1981 fell as inflation was squeezed out of the system, high “real,” that is adjusted for inflation, interest rates continued for most of the decade.
Business owners and workers in credit-dependent sectors such as construction and farming have those years etched in their memories. So do the steel and auto industries that had to contend with sharp import competition caused by a high-valued dollar, which was caused by high interest rates in turn caused by simultaneous loose fiscal and tight monetary policies. Do we want to return to those days?
The American people would be much better served by candidates who were more realistic about the choices we face. I’d like to hear any presidential candidate say something like the following:
“It would be foolish to significantly cut taxes or to increase government spending without also increasing taxes at a time when the U.S. economy is already operating at the limits of its capacity. I want to improve our tax system to make it both fairer and more efficient, and I seek moderate increases in spending on necessary programs. But I will not seek any overall changes in either taxes or spending that quickly will be offset by the Federal Reserve, as it complies with its legal mandate.”
OK, Al, George, Ralph, Pat: Are any of you willing to treat U.S. voters like responsible adults and say something like that? I’ll be listening.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.