VIEWPOINTS : If Volcker Steps Down, Policies Will Linger On

Federal Reserve Board Chairman Paul A. Volcker soon will lose his majority on the board of governors of the Federal Reserve System, as the third and fourth Ronald Reagan appointees take their places on the board.

Moreover, Volcker can’t even be sure of his own reappointment as chairman in August, 1987, especially in view of the frequent White House criticisms of the Fed chief’s policies in recent years.

Two things that Volcker can be sure of: He has strong backing from another key part of the Federal Reserve organization, and if he is forced to leave, it will be in the face of strong support from central bankers around the world who believe his economics have been better than that of the man in the Oval Office.

Even if Volcker should resign following the loss of his board majority, he’ll leave behind a solid Volcker majority on the key monetary-policy group, the Federal Open Market Committee.

The presidents of the regional Federal Reserve Banks have a crucial role to play in this regard. The president of the New York Federal Reserve Bank, along with each of the seven governors, always has a vote on the open market committee.

The presidents of the other 11 regional Federal Reserve Banks share the other four committee votes on an annual-rotation basis. But all 12 presidents participate, sometimes vociferously, in every open market committee monetary discussion.

Reappointments Due

The presidents face an important date on March 1, when all 12 come up for reappointment for five-year terms. Reappointment normally is all but automatic, so the crucial question is: Who makes the original appointments? Openings occur whenever there are resignations or retirements (mandatory at 65).

By law, each president is appointed by Federal Reserve Bank directors, who are mostly regional bankers and business people. But the law also says that each appointment must be approved by the board of governors, which means that Volcker has the final say.

He can’t count on appointing his first choice in every case, since he must take into account the desires of the regional directors and his board colleagues. But he can ensure that each winning candidate shares most of his basic attitudes.

Volcker has now placed nine new presidents--four within the past year and a half alone (to fill out remaining terms of retirees), including the crucial positions in New York and San Francisco.

With that accomplished, he can retire with a light heart, especially since only one more presidency is scheduled to be filled within the next half-decade.

The record shows that Volcker has been choosing people like himself--economists or MBAs with plenty of financial-market experience. (Monetarists, supply-siders or other Reagan loyalists need not apply.)

Consequently, he can count on continued strong support on monetary-policy issues coming before the open market committee, whereas he can soon be outvoted by Reagan appointees on those issues (mostly regulatory matters) that are handled only by the board.

Institutional Bias

This raises the question of why a policy gap should exist between the White House and the Fed. Much of the problem can be traced to institutional bias--to the basic difference between those who spend the nation’s money and those who must find the means of payment.

Salesman types have almost always dominated the Oval Office, while steely-eyed credit managers have always predominated within the central bank’s marble halls.

The inevitable gulf has widened in the present case, however, because of the Administration’s choice of policies.

The Reagan Revolution has represented a variation rather than a reversal of the Roosevelt Revolution, with a formula of “borrow-borrow, spend-spend, elect-elect” replacing the earlier formula of “tax-tax, spend-spend, elect-elect.”

Herbert Stein describes the Reagan approach as “the economics of joy” in his book, “Presidential Economics.” “Reaganism was the rejection of traditional Republican policies of ‘austerity’--sometimes called castor-oil economics or deep-root-canal economics.”

The central bank, in contrast, has always favored “castor-oil economics,” or at least favored relatively moderate expansionary policies.

The Fed, and mainstream economists generally, could never support the Reagan attempt--the first in history--to finance a major military buildup without a substantial tax increase.

The Fed, of course, is far from blameless, especially when it occasionally compromises its vaunted independence by accommodating the Administration’s radical policies.

Still, Volcker’s performance has been positively sparkling in comparison with that of his White House opponent. Measured by practically every economic yardstick, Reagan’s performance has fallen far short of his coming attractions.

Growth Has Slowed

Real--or inflation adjusted--gross national product increased less than 2.4%, in annual-average terms, between 1980 and 1985, compared with the 3.4% average growth of the preceding half-decade.

About 8.2% of the labor force was on the dole during the 1981-85 period, compared with a 6.7% average jobless rate in the 1976-80 period.

Inflation admittedly has been curbed, at least temporarily, with the consumer price index rising 5% annually during the Reagan era, against a 6.7% average annual increase during the Ford-Carter era.

But here the kudos must go to Volcker, because inflation is primarily a monetary phenomenon; witness the consequences of his sharp restriction of money growth during the 1980-82 period.

As every school child knows, Reagan’s reliance on credit-card financing to pay for his spending programs has caused the federal debt to double to $2 trillion, after only a single term in office.

And as many family heads can attest, the heavy reliance on foreign funds to finance soaring deficits, by pushing up the dollar’s value, has made U.S. products uncompetitive and helped dismantle the production base of the national economy.

Almost 2 million manufacturing jobs have disappeared in the past half-decade, while the one-third decline in real farm income has been unmatched since the days of the Great Depression.

Policy Brought Despair

Reagan’s “economics of joy” thus has brought despair to many sectors of the American economy.

Against this, Volcker offers the prescription of mainstream economics--cyclically balanced budgets and moderate monetary growth--the prescription that created several decades of economic buoyance before Vietnam and OPEC pressures disrupted everything.

Volcker still believes in that formula, as do his close allies on the open market committee and, perhaps most of all, his thousands of supporters in the world’s central banks, finance ministries and financial markets.

If he should be invited to walk the plank, his supporters might well despair at this latest display of American fecklessness, and the resultant turmoil in Wall Street and in the exchange markets could be spectacular indeed.