The Economic President

The ‘90s description of Federal Reserve Chairman Alan Greenspan as the second most powerful man in Washington is out of date. Next month, when George W. Bush is sworn in as president, Greenspan may just edge up to No. 1.

We’ll get a closer look at the new pecking order during the Federal Reserve meeting on Dec. 19, when the financial world will wait with baited breath for Greenspan’s decision on interest rates. Will the Fed lower them or simply abandon its anti-inflation bias? It’ll be Greenspan’s call. As the French used to say: Le Roi le veult, or “The King wishes it.” Trillions of dollars ride on his decisions, hundreds of billions on the parsing of his sentences.

Greenspan’s emerging primacy could be critical, a side benefit of an otherwise depressing presidential election. That’s because Greenspan is a force for global reassurance on a broad range of issues, from the fate of the dollar to the peril of a major tax cut, to the scope of the “wealth effect” and the timing of the next recession. Bush, by contrast, represents a pairing of half-baked ideas and dubious political legitimacy.

Not that any government chart will ever put Greenspan at the top. But the Fed chief, together with Bill Clinton and former Treasury Secretary Robert E. Rubin, has presided over the longest peacetime economic recovery cycle in U.S. history. Along the way, Greenspan made himself the principal economic voice in Washington even when he had tough competition. Now he doesn’t. For better or worse, central-bank heads everywhere are gaining stature and clout. It’s a global phenomenon.

Bush, by contrast, is inexperienced, having spent six years in a largely ceremonial role as governor of Texas, capped by the last five weeks of becoming the first U.S. president in U.S. history to lose the popular vote and take office as the appointee of a highly partisan 5-4 decision of the U.S. Supreme Court.

The best place to begin is with the high-stakes fate of the dollar. If the greenback, now strong, begins to slide in world markets, U.S. stock indexes could be dragged down with it. The cost of America’s huge monthly import bill would rise; inflation would climb. If this were to persist, Greenspan and the Fed might have to raise interest rates next year (or keep them steady) instead of being able to bring them down.

What the world thinks of Greenspan and Bush will play a huge role. Over the last 40 years, when U.S. presidents have weakened or lost substantial ground in the polls, the strength of the dollar has frequently eased along with them. It swooned in 1973-74 as President Richard M. Nixon’s job approval collapsed under the weight of Watergate, the Organization of Petroleum Exporting Countries and recession. The U.S. currency sank again in the late 1970s, as Jimmy Carter seemed unable to cope with foreign policy, inflation and his job. The Iran-Contra scandal was at least a peripheral factor in the dollar’s softness late in Ronald Reagan’s second term, and currency problems struck again in 1992, as President George Bush lost his moorings and his reelection race.

Clinton had dollar-decline pressures in 1994, when his job numbers tumbled and Congress was about to fall to the GOP. Revealingly, the dollar did not cause serious trouble during Clinton’s impeachment and trial in 1998-99 because his job ratings remained high even as the public’s respect for his morals collapsed.

Arguably, Greenspan also buttressed the dollar’s strength over the past five years, assuming some of the currency-backstopping role hitherto attached to the presidency. The more prominent he is in future U.S. economic policy, the more likely he’ll continue to play that role.

What could be dangerous, conversely, would be a growing focus by foreign and domestic markets on the minimal experience, reduced legitimacy and questionable future strength of the president-elect. Here, it is by no means necessary to focus on his tarnished selection by the Supreme Court.

More to the point, Bush is now the fourth man to become president after a messy election in which he failed to win at least a plurality of the popular vote, and it is instructive to ponder the fates of the previous three. Rutherford B. Hayes, elected in 1876, became known as “his Fraudulency” and was not even renominated in 1880. John Quincy Adams, elected in 1824, and Benjamin Harrison, elected in 1888, were defeated four years later by the men who actually won the popular vote in 1824 and 1888: Andrew Jackson and Grover Cleveland. This history, at least, suggests that Bush will be a weak, one-term president in trouble from the start. Thus, the utility of Greenspan emerging as a de facto economic president and dollar backstopper.

Bush’s proposed $1.3-trillion tax cut over 10 years, of which the top 1% get some 30%, is another threat that Greenspan seems to want to head off. He certainly has good reason. The last time Republicans had a new president and a strong position in Congress, back in 1981, they also went nuts on tax cuts, with the result that the federal budget lost its balance, upward pressure was put on interest rates and the economy, already teetering, sank into a deep recession, in which joblessness hit double digits for the first time since World War II.

Would another grossly overinflated tax cut, paying off lobbyists and big contributors, do the same thing in the summer of 2001 that it did in the summer of 1981? Maybe. Maybe not. But Bush, who wasn’t even savvy enough to discuss his tax program in the first presidential debate in October, is not the man to trust with the decision. Far better to dump the $1.3-trillion big payoff and let Greenspan make interest rate cuts, which seems to be exactly the bargain the Fed chief is holding out for.

Greenspan’s own record in dealing with the wealth effect is less than auspicious. Before 2000, he and the Fed pumped up the money supply, which fed the stock-market bubble, in general, and the technology-heavy Nasdaq exchange, in particular. But by comparison with Bush, Greenspan is the second coming of Aristotle.

Still another important, if covert, role for Greenspan will be to overshadow and diminish the importance of the new Treasury secretary. Early speculation has Bush picking from among the ranks of current or former Wall Street chief executives: Donald Marron of PaineWebber, Jack Hennessey of Credit Suisse First Boston and others. Unfortunately, bringing in investment-firm CEOs who turn the Treasury into Wall Street South is an emerging tradition: witness Rubin of Goldman, Sachs and, before him, Nicholas Brady of Dillon, Read & Co. (under Bush’s father) and Donald T. Regan of Merrill Lynch & Co. (under Reagan). But it is especially dangerous now that Wall Street and the new administration share the goal of partly privatizing Social Security. A Treasury secretary lost in Greenspan’s shadow can be more easily ignored on Capitol Hill.

The last of Greenspan’s big challenges--perhaps the biggest of all--is to keep Republicans from doing what every GOP administration in the last 70 years has managed to do: have a recession or a major regional slump in time for midterm elections. Greenspan has seen this pattern firsthand. He must be mindful that the biggest threat would follow if he has to keep interest rates high or raise them even higher. A major dollar decline could increase the chance of that. So would Bush mobilizing lobbyists and red-hots in Congress, ringing the greed bell, and somehow pushing through an excessive tax cut in the guise of needed economic stimulus.

If Greenspan can rise to all these challenges, he probably would be seen, especially in the media and overseas, as the most powerful man in Washington--and he would deserve it.

Ironically, some historians trace the last period in which the presidency was overshadowed by another part of government to the Hayes administration. The U.S. Senate, members of which were then elected by state legislatures, emerged as the linchpin of U.S. government during the last quarter of the 19th century, using its confirmation and patronage powers to overshadow most of the presidents (especially little-remembered men like Hayes, James A. Garfield, Chester A. Arthur and Harrison.)

That, too, could happen in 2001. But with the extended (maybe overextended) business cycle being at the hub of unfolding U.S. and world fortunes, that would suggest, for better or worse, that if the United States is not entering a new Bush era, it may be about to enter a Greenspan era. *