Dropping the Pilot

The best news for the economic world would have been an announcement that, at President Reagan’s urging, Paul A. Volcker would stay on as chairman of the board of governors of the Federal Reserve System. The second, perhaps close second, best news was that Volcker will be succeeded by economist Alan Greenspan.

Change of any kind is hard for anyone, particularly central bankers, to swallow at any time. Change becomes almost unbearable if it comes a time when the dollar is falling in value, consumer debt is climbing as fast as the national debt, rising energy prices haunt those who worry about inflation’s comeback, and the world market for American products is soft. The Fed influences these and other economic problems by deciding how much money should be in circulation and generally what interest rates should be, and by monitoring banks that are members of the Federal Reserve System.

Greenspan’s track record as a hugely successful New York economist is no worse than any in his business, so it was not concern about his competence that made the dollar fall still further when the White House announced the switch. It was that Greenspan is not Volcker, who has spent nearly eight years trying to keep the American, and in turn the world, economy on track while a new breed of economists was settling into Washington to see what would happen if they applied this new theory or that.

Volcker’s record is not perfect. He was instrumental in pushing the United States into its worst recession since World War II as the only way at hand to crush inflation. But he was driven to tight money as a last resort by two Administrations that passed up sound economic policies for actions that made good politics. And his years of experience in government, in international negotiations, most recently in efforts to take some of the pressure off Third World countries struggling with their debt, had made him a 6’7” symbol of stability that will be hard for anyone to match.

Much was made at the White House on Tuesday of how few policy differences exist between Volcker and Greenspan, but there are differences. Philosophically, Greenspan thinks that society functions best when government functions least. Volcker has been reluctant to loosen regulatory controls on banks too much. Greenspan is more comfortable with the new economic theorists than Volcker is, but is not a blind devotee of supply-side economics. He spent long hours at the Republican Party convention in 1980, for example, trying to tone down some of the promises that candidate Reagan was inclined to make about the bright future that would come with major tax reductions.

In one area the two economists apparently do see the economic world in the same way. Volcker has tried consistently, and has largely failed, to get Washington to focus on the more than $1 trillion in national debt that is perhaps the most important consequence of the major tax reductions, and to stop borrowing money to keep operating. Greenspan shares that view. Whether he will find ways to persuade Congress and the White House to actually do something about it remains to be seen.

As an economist, Greenspan will have a good theoretical grasp of the powers that he is likely to inherit as chairman of the Fed. But he is in the position of an aeronautical engineer who can describe the theories of lift that make airplanes fly, who knows where the controls are and how much weight is too much for safety, but who has never actually been in the pilot’s seat.

Come August, assuming his confirmation by the Senate, he will not only be at the controls but will also have to learn to fly in very rough weather.