PROFILE : New Fed Vice Chairman Seeks Balance After Long Summer

For Alan Blinder, it has been a disorienting summer.

When it began, he was a member of a White House economic team characterized in a best-selling book as overly conservative. Blinder and his colleagues, journalist-author Bob Woodward wrote in “The Agenda,” had coerced President Clinton to abandon his liberal campaign pledges and to focus instead on deficit reduction.

By Labor Day, Blinder was being characterized as a closet liberal, a Democratic outrider in his new institutional home, the Federal Reserve Board. Press accounts portrayed the Fed’s new vice chairman as indifferent to the risks of inflation, and overly preoccupied with the impact of interest rate increases on jobs and employment.

A magazine columnist, reacting to a recent speech by Blinder about unemployment, proclaimed him unfit to succeed Alan Greenspan as Fed chairman. Inside the clubby central bank, some conservatives clucked that Blinder, the first Democrat appointed to the Fed in 14 years, might hurt their credibility where they believe it matters most--on Wall Street.

To be attacked from both ends of the political spectrum within the space of a few months is a rare feat for an economics professor from Princeton with little avowed interest in politics.

“I was seen as being a moderate or slightly to the right of center in the White House, but here I’m seen as being left of center,” Blinder sighed in an interview last week. “I can understand it, because at the White House everyone is a Democrat, and I was slightly to the right of center there. The Fed is a conservative institution, and the center is different here than it is at the White House.”

It was an important revelation for Blinder, one that helped him recognize the need to pay more attention to how he is portrayed publicly at the Fed. Somewhat naively, Blinder thought he had left such spin-control concerns behind when he escaped the hothouse environment at the White House.

“The difference between the White House and the Fed is like night and day,” Blinder observed in his quiet office along the marbled corridors of the Fed’s headquarters here.

“Here you have time to think; there, everything was frenetic, and we worried all the time about message. Here, message has very little to do with what we do . . . but this episode shows that maybe I should be paying a little more attention to it.” It is a fact of life in official Washington: Perception--even within the cloistered walls of the Fed--has a nasty habit of becoming reality. And relearning that harsh lesson might help Blinder survive the recent flap and live up to initial expectations that he would succeed Greenspan as Fed chairman when his term expires in 1996.

The controversy surrounding the 48-year-old economist reflects the nuances and subtleties buried deep in U.S. monetary policy. It flared up following press reports about Blinder’s remarks at a Federal Reserve conference on unemployment in Jackson Hole, Wyo., in late August. In a speech, Blinder said that over the short term, Fed policies designed to fight inflation can indeed cost jobs, but over long periods of time he believes there is no real impact on employment.

“In my view, central banks, or more generally macroeconomic policies, do indeed have a role in reducing unemployment as well as in reducing inflation (in the short run),” Blinder said in Wyoming. But efforts to fine-tune monetary policy appear to have no long-lasting effects on unemployment, he added, and lax money policies eventually lead to higher inflation.

“Where employment is concerned, macroeconomics is everything in the short run, but nothing in the long run,” Blinder warned.

To many economists and Clinton Administration officials, Blinder’s remarks were not that startling. Laura D’Andrea Tyson, chairwoman of the White House Council of Economic Advisers, described them as coming straight out of the economic textbooks.

Still, his speech created quite a stir among some Fed officials. It particularly rankled those who hold the conservative view that even talking about the possibility of trade-off between inflation and employment threatens to undermine the Fed’s inflation-fighting credibility.

The controversy was fanned by a New York Times article suggesting that the Jackson Hole address reflected a rift between Blinder and Greenspan over monetary policy. It noted that Greenspan has suggested publicly that the Fed’s only objective should be fighting inflation.

That story, in turn, prompted Newsweek economic columnist Robert J. Samuelson to charge that Blinder is “soft on inflation.” Then the Wall Street Journal’s conservative editorial page chided that “we’ve all enjoyed the spectacle of Alan Blinder’s education as a central banker.”

Not all economic experts found Blinder’s comments objectionable. Some were surprised that the press had portrayed the issue as a Greenspan-Blinder battle. After all, they noted, Blinder’s first major decision since joining the Fed was to vote with Greenspan in mid-August to raise interest rates.

“The consensus in the profession is that there is a short-run trade-off between inflation and unemployment,” noted Allen Sinai, chief global economist at Lehman Brothers. “There is an argument over how long that will last, whether it is one or two or three years.

“But I thought it was OK for Blinder to remind people (of that trade-off.) That doesn’t mean he is soft on inflation. And I don’t think there is any rift between Blinder and Greenspan now. There might be some intellectual nuances or differences between them, but there is no reason Blinder and Greenspan have to talk and think exactly alike.”

Blinder dismisses the whole controversy as a “tempest in a teapot.” Nonetheless, he felt compelled to talk to Greenspan about the alleged rift. Both agreed there is no fundamental difference between them on monetary policy, Blinder said.

Greenspan declined to comment on the matter, and a Fed spokesman said the central bank had no official comment either.

Despite his initial hazing, Blinder said he doesn’t regret making the move from the White House to the Fed. What he gave up in access to the President, he has more than made up in increased independence and authority.

After a long career at Princeton, Blinder served intermittently as an economic adviser to the Clinton campaign in 1992, then joined the new Administration as Tyson’s deputy at the Council of Economic Advisers.

Blinder played a pivotal role in a wide range of policy fronts: He helped shape Clinton’s 1993 economic plan, and served as a member of the negotiating team sent to Japan to hammer out an agreement on a new framework for bilateral trade talks.

Blinder also brought to the White House a skeptical eye on the subject of health care reform. Early on, he privately raised many of the concerns that helped sink the Administration plan when it finally reached Capitol Hill.

When a vacancy on the Fed’s seven-member board of governors appeared early this year, the White House offered the post to Blinder, but he rejected it. When the Fed vice chairmanship opened up a few weeks later, Blinder was more interested. The position offered greater status and increased power--and the possibility of succeeding Greenspan when his second term as chairman expires in March, 1996.

By the time he assumed his new post in June, Blinder was already being assailed by Fed watchers who had read his past columns in Business Week. The critics characterized him as a liberal who might upset the delicate conservative balance within the Fed. His comments in Wyoming fanned those flames.

Whether the Jackson Hole flap has any lasting impact on Blinder’s credibility as a Fed member or his standing as Greenspan’s heir apparent is still unclear. Even critics say it all will be forgotten if Blinder recognizes it was a learning experience, and realizes that his words now carry more weight than they did when he was a Princeton professor.

For now, Blinder just wants to forget the whole thing. He said the controversy has had no serious impact on his work, and he is sticking to his guns about what he thinks should be done with Fed monetary policy.

Although Blinder’s policy preferences appear to be closer to his colleagues than some critics believe, he clearly does not intend to launch a crusade for zero inflation.

“If we could get economic growth of about 2.5% per year and inflation of 3%, and we could keep that for several years,” he said, “I would be ecstatic.”