George W. Bush jokes with his new economic adviser, Larry Lindsey
The easing itself — reinforced by a quarter-point cut in the discount rate (the rate at which banks lend to each other) — was not a surprise. With the markets in the dumps and the economy slowing fast, analysts had long expected Greenspan to make such a move to increase liquidity, spur business investment and head off a recession. Short-term bond markets had already priced in a full point of cuts over the next six months. But the magnitude of the cut and, more especially, the timing — four weeks before the next Fed meeting — was hardly expected.
So why now? One explanation is that Father Greenback has gone bearish along with everybody else, and wants everybody to know it; in fact, some believe he could be leaving room for another easing when the FOMC meets at month's end. Another is that he knows something about Friday's unemployment report that the rest of us don't — namely, that unemployment is up, maybe way up.
Politics in play?
But Greenspan could have headed off the unemployment report as easily on Thursday with a nice transparent speech about cutting rates ahead of the Jan. 31 FOMC meeting. And he could have reassured the bond markets with a quarter point next week, or last week. Picking Wednesday to make a cut, and such a dramatic one at that, points to one overarching factor: politics.
George W. Bush has been flogging the slowdown all winter to promote a front-loaded, supposedly slowdown-curing version of his $1.3 trillion tax cut. Dick Cheney has been using the r-word almost every time there's a TV camera around. And on the very day Greenspan made his move, Bush was hosting a get-together of bearish (and Bush-backing) economists and business leaders in Austin, the culmination of which was to announce that ex-Fed man and dedicated supply-sider Larry Lindsey would be his top economic adviser.
In other words, Greenspan may well be reminding Bush who the economic paramedic is in this town.
Here's the way the message translates, from Alan to George W. (and Larry): Tax cuts don't prevent recessions, rate cuts do. Presidents don't save economies anymore, Fed chairmen do. And there's no way I'm going to sign off on a half-cocked, trillion-dollar budget-buster just because you need the specter of a recession to scare congressional Democrats into playing along.
Tussle over a tax cut
Not that the tax cut is dead, nor is Greenspan's endorsement of it. Bush has had only the most preliminary of discussions with the Fed chairman about it, and presumptive treasury secretary Paul O'Neill, who, along with Lindsey, will be Bush's Fed water carrier, hasn't even moved into his office yet. And the negotiations with Congress are at least a month away.
What Greenspan may be trying to tell Bush is that the $1.3 trillion tax cut will have to survive on its own merits. As a surplus giveback, an ideologically preferred alternative to government spending (a preference which Greenspan shares), that's fine. But as a recession cure? No dice. Greenspan will likely OK the idea of a big across-the-board tax cut as long as it's fiscally responsible. But he can't be crazy about the fact that Bush has been bragging that he and his tax cut can do Greenspan's job for him.
Wednesday, emerging from his parley to the sound of fireworks, Bush did his best not to sound upstaged. "I think the cut was needed," Bush said. "It was a strong statement that measures must be taken to make sure that our economy does not go into a tailspin."
Danger for Bush?
Then Bush was back on the sell — and maybe taking his first unwise steps toward renewing his father's rivalry with the man Clinton was smart enough to kowtow to. A half-point reduction, Bush said, "is not enough to serve as a stimulus to encourage capital formation, economic growth, job creation."
The danger for Bush is that he misses the point entirely — that though Greenspan seems willing to work with Bush on a tax cut, the Fed chairman will do the short-term economic worrying around here. One of the blessings of this market-led, wealth-effect-sensitized New Economy is that modulating its ups and downs is well within the power of the Federal Reserve, and that if there's more stimulatin' to be done, Greenspan will be more than willing to take care of it himself.
Just ask Larry Lindsey. Over the next few months, he'll be selling the economic benefits (and the fiscal sense) of Bush's tax cut as hard as anybody, but for now he knows who the the captain of the boom is. When reporters told him of the Fed's move, the first words out of Lindesy's mouth were:
"Great! The Fed is always right."