Greenspan Cool to Appeals to Spur Economy

Federal Reserve Board Chairman Alan Greenspan, signaling the central bank’s resolve to continue its traditional campaign against inflation, Wednesday brushed aside congressional appeals to spur the economy with a more accommodating monetary policy.

A “non-inflationary environment” is an essential requirement for long-term growth, Greenspan told the Joint Economic Committee of Congress, whose Democratic members repeatedly pressed him to move more aggressively to stimulate economic activity.

“The country had a watershed election and we are entitled to see a change of policy by elected and non-elected officials alike,” complained Rep. David R. Obey (D-Wis.), the committee chairman.

Although President Clinton and Greenspan have proclaimed their shared commitment to economic growth, the new Administration and its congressional allies could be headed for a serious clash with the Federal Reserve because of its overriding emphasis on price stability.

“It would be a sad irony for the country to have voted to end the gridlock in economic policy between the Congress and the President, only to find it replaced with a new gridlock between an Administration and a Congress committed to stronger growth and a Federal Reserve determined to restrain growth by keeping its foot on the monetary brakes,” said Sen. Paul S. Sarbanes (D-Md.).

Sarbanes and other Democratic lawmakers are upset because growth of the nation’s money supply has fallen below the Fed’s own targets, yet the central bank has refrained from changing its policies to stimulate more growth. Critics argue that the Federal Reserve’s restraint has slowed the pace of recovery, but Greenspan and other bank officials have insisted that further easing is unwarranted.

At the White House, Communications Director George Stephanopoulos dismissed suggestions of disagreements between the President and Greenspan. “They share the goals of getting growth in this economy, increasing jobs,” Stephanopoulos said. “I think the President shares Chairman Greenspan’s judgment that we’ve had some sluggish job growth over the past several months and years, and it’s something we have to address--and that’s what he intends to do.”

Clinton and several of his economic aides will meet with Greenspan this morning, the White House said.

The central bank influences the economy by raising or lowering the discount rate, the rate it charges on loans to member banks and by expanding or shrinking its huge portfolio of government securities. When it buys securities, money is pumped into the nation’s commercial banking system. When it sells securities it absorbs money, reducing the funds available for banks to lend to business and consumers.

Because inflation has fallen to historically low levels, Democratic critics maintain that the Federal Reserve should be much more aggressive in expanding the money supply. The cost of living rose 2.9% last year, the smallest annual increase in seven years.

Greenspan, however, told the congressional panel that the way to achieve maximum growth is to promote a “stable, non-inflationary, financial environment.” His formal predictions on economic growth and inflation and his monetary policy priorities will be presented to Congress next month.

In his testimony, Greenspan was modestly optimistic about the prospects for continued recovery, noting that businesses and households have managed to reduce the massive levels of debt accumulated during the 1980s. Last year, Greenspan likened the challenge of recovering from recession while burdened with so much debt to the difficulty of sailing into head-winds of 50 m.p.h. “Those head-winds have now slackened somewhat,” he told the committee. “But they have not disappeared.”

Republicans on the committee rushed to Greenspan’s defense against Democratic critics. “Why all the recent Fed-bashing?” Rep. Dick Armey (R-Tex.) asked Greenspan rhetorically. “The Fed is scapegoated far too much. I fear, Mr. Chairman, that somebody is preparing a whipping post in your honor.”

But Obey, who subjected Greenspan to several rounds of pointed questions, appeared determined to keep the pressure on Greenspan for faster monetary growth.

“The public expects us to produce and believes we are in full charge of the levers of power,” Obey said. “But that is not quite so. I believe in the principle of Fed independence. . . . But I also believe the Fed has a concurrent responsibility to respond. Elections are not just to replace people but to send messages.”

Greenspan and other experts have acknowledged that they have been baffled by the nature of the current recovery, which has proceeded for more than a year without any significant creation of new jobs. “This is the first time in my experience I have seen anything like it,” Greenspan said. “This is a different animal.”

Only 20% of the jobs lost during the recession have been restored since the recession technically ended some 21 months ago, Greenspan said. That represents the worst job-creation record of any recovery during the entire post-World War II period.

The slow-growth, high-unemployment recovery is attributable in part to the dramatic restructuring of corporate America. Just this week, Sears Roebuck and Co., Boeing Co. and Pratt & Whitney announced massive layoffs, joining a long list of companies that are responding to competitive pressures by permanently cutting their work forces.

The intensive use of computers “may finally be showing through in a significant increase in labor productivity,” Greenspan said, speculating on why corporations continue to slash their payrolls in the midst of the recovery.

“These far-reaching changes in the production processes in manufacturing and in the means by which services are produced and distributed have apparently yet to run their course, though one must assume that the pace of restructuring will surely slow,” he said.

Meanwhile, Labor Secretary Robert B. Reich said Wednesday that the Clinton Administration probably will seek an extension of unemployment insurance benefits as part of an economic stimulus program that it expects to unveil next month.

Reich, one of President Clinton’s key economic advisers, said that the impact of a 7.3% unemployment rate “is still very, very bad.” Although the economy appears to be growing, “we’re not out of the woods,” Reich said.

Since the recession began in mid-1990, Congress has enacted several emergency extensions of the jobless benefits available to newly unemployed workers. The current emergency extension expires in June.