Green-eyeshade Greenspan - Federal Reserve Board Chairman Alan Greenspan's role in Bill Clinton's economic policies - Editorial

National Review, June 27, 1994

It never seemed to make sense when Fed Chairman Alan Greenspan, allegedly a free-market conservative, kept praising President Clinton's high-tax policies in various congressional hearings last year. Nor did anyone understand why he compromised Fed independence by sitting next to Hillary Clinton at the President's first State of the Union speech. Now light dawns. Mr. Greenspan was the chief architect of Clintonomics - or so says Washington Post reporter Bob Woodward in his latest book, The Agenda. It was Mr. Greenspan who persuaded President Clinton to renege on the middle-class tax cut, probably the most important economic promise made during the 1992 campaign. He also talked Mr. Clinton into a steep energy tax, paid largely by middle-class families and small businesses. This created a credibility gap from which the President still hasn't recovered.

And Mr. Greenspan somehow convinced President Clinton to tie his economic fortunes to the bond market, even though candidate Clinton had repeatedly trashed Wall Street "greed" during the campaign. He also argued that a $140-billion deficit reduction by 1997 was essential to reducing long-term interest rates, and thus to stimulating housing and business investment. This was not only bad politics, but bad economics. There is no clear link between deficits and interest rates: in the three years to 1993, a $271-billion average deficit didn't prevent interest rates from dropping to thirty-year lows; and even a blue-smoke-and-mirrors $170-billion deficit estimate for FY1995 couldn't prevent this year's explosive rise in rates.

While the Greenspan formula seemed to work in practice in 1993, as bond yields dropped briefly to 5 3/4 per cent, Mr. Clinton must be feeling betrayed in 1994 as prices collapsed and yields shot up as high as 7 1/2 per cent. For if last year's low interest rates boosted growth this year, then this year's high rates may well foreshadow a 1995 slump.

The last austerity-minded bond-market President who broke a no-tax pledge was George Bush. Nick Brady and Richard Darman put through their high-tax budget deal to assuage bond traders, but they forgot there are more Main Street voters than Wall Street traders. The latter love austerity, but the former want growth and jobs. And so Mr. Bush lost his job, and Mr. Clinton may follow suit in due course. But he will not be the only victim. Before this latest cycle runs it course, Main Street will again suffer. Bond traders have already done so.

POLITICAL NOTEBOOK

* Rhode Island: In the effort to defeat liberals in Congress, we have usually found Democrats in our cross-hairs. However, we now examine John Chafee, a three-term senator with perhaps the most liberal voting record on the Republican side of the aisle.

He voted with Clinton on three of the first eight budget votes; came out for repealing the ban on gays in the military; advocates abortion rights and federal funding for abortion. He opposed President Bush's efforts to defeat family-and medical-leave bills, and supported Mr. Bush in passing the Clean Air and Water Acts. Most recently, he has been a leading supporter of his own managed-competition health plan, and if the Democrats were to bring a plan to the floor he would probably be among the handful of Republican senators to support it.

Mr. Chafee was the governor of Rhode Island in the Sixties and entered the United States Senate in 1976. A well-liked Republican in a heavily Democratic state, he has never faced a primary challenge - until this year.

Thomas Post was Rhode Island state chairman for Pat Buchanan's 1992 presidential campaign. He plans to demonstrate that Senator Chafee's high-tax, expansive-regulation policies have cost this state thousands of jobs over the last few years. He will offer instead to vote for lower taxes and for any health-care reform that relies on the free market and not on government intervention and mandates.

Mr. Post, president of an underwater diving and maintenance company, hopes that a combination of his conservative message, the anti-incumbent mood, and the fact that he has signed up close to six thousand new voters (including some Democrats) for the Republican primary will be enough to defeat Mr. Chafee on September 13. Nearly as important, however, Mr. Post's candidacy will signal to Senator Chafee that if he plans to remain a Republican he will have to start acting like one.

If Senator Chafee wins renomination, he is likely to glide to victory in November - unless an independent or third-party candidate enters the field before the June 27 filing date. Calling Rhode Island conservatives: You must be a U.S. citizen, thirty years old, and able to paint Mr. Chafee as a liberal. What's the problem?

* Missouri: Six-term left-wing Representative Alan Wheat has decided to leave the House and run for the open Senate seat created by Republican John Danforth's retirement. There are in turn a dozen Democrats registered for the August primary to fill Wheat's now-open seat.

There are also three Republicans on the ballot. John Osgood, a former prosecutor, wants no new taxes, but thinks a rollback would be irresponsible. He says, "all Americans are entitled to health care," but opposes the Clinton plan. Larry Fournier is on the ballot, but shows no sign of actively campaigning. Which leaves Ron Freeman, a Kansas City community-service worker and professional football player, who ran second in the 1992 primary. Since then, he has been gathering grassroots support, including from distraught Democrats.