Congress Seeks Fed Chief’s Guidance

As members of Congress line up to begin work on a plan to boost the economy, Federal Reserve Chairman Alan Greenspan has the starting gun firmly in hand.

They’re just waiting for him to pull the trigger.

To a greater extent than perhaps any central banker before him, Greenspan has become a key player in the messy process of formulating tax and spending policy.

Just this week, he persuaded Congress to wait a few more days before drafting a stimulus plan. He told lawmakers how big it should be to have the desired effect. He even coached them on what kind of tax cuts would provide the quickest relief.

So far, they’ve listened.

“Chairman Greenspan, in his infinite wisdom, holds the combination to the lock on this,” said Senate Finance Committee staffer Michael Siegel shortly after Greenspan consulted with committee members behind closed doors. Lawmakers say Greenspan will be invited back for more talks.

Observers say the collaboration is unusual because it bridges the traditional divide between cautious, market-sensitive central bankers and impetuous, poll-driven politicians.

It also blurs the usual jurisdictional lines between the Fed and Congress. The Fed’s domain is monetary policy, the tweaking of the money supply and interest rates to nudge the economy one way or the other. Congress, along with the White House, has the franchise on fiscal policy, which wallops the economy with tax and spending broadsides.

But these are unusual times. The economy already was on the ropes when the Sept. 11 terrorist attacks delivered a staggering blow. The Fed, which cut interest rates seven times this year before Sept. 11 and once since, is running out of room to cut, and the economy is still headed south.

So the government’s only remaining weapons may be tax cuts and spending increases. It has rolled out these big guns recently: Washington mailed $38 billion in tax rebates this summer, and Congress approved $40 billion in emergency outlays to deal with the effects of the Sept. 11 attacks.

Many in Congress believe it will take another big round of tax cuts or spending hikes to prevent a painful contraction, and they are seeking Greenspan’s guidance. The package assembled by Congress will bear his imprint, even if lawmakers don’t follow his advice to the letter.

One Republican perennial--a capital gains tax reduction--is headed for the cutting-room floor, largely because Greenspan and former Treasury Secretary Robert Rubin said its effectiveness as a recession remedy is questionable.

Greenspan and Rubin, who presided over a period of uninterrupted economic growth, are warning lawmakers to be wary of the long-term consequences of short-term stimulus.

The best-intended plan could go awry if it permanently curtails the government’s ability to pay down its debt, they say. The prospect of less debt reduction in the future would cause long-term interest rates to rise today. The housing market could collapse, consumer spending could fall off and the economic slump could deepen.

“If the bond market says, ‘Oh my God, there’s going to be a trillion dollars less debt reduction because of this,’ then interest rates will go up,” said Gene Sperling, chief economic advisor to former President Clinton.

Although lawmakers are heeding Greenspan’s admonition to wait a week or two before acting, insiders say passage of some kind of stimulus plan is a done deal. All they need to decide is what, how much and how soon.

Sperling said Congress will wind up approving a stimulus package combining a year-end tax rebate for working Americans with targeted tax breaks for businesses.

Greenspan told Senate Finance Committee members that to be effective, the tax and spending provisions in a stimulus package ought to add up to about 1% of the economy’s output, or roughly $100 billion a year. Greenspan may have intended that as a ceiling, but some lawmakers may regard it as a floor.

“There seems to be in the Congress today this sort of heady atmosphere that all the rules are off, and we can now do pretty much anything we want,” former Rep. Bill Frenzel (R-Minn.), now a Brookings Institution scholar, said at a conference last week.

Greenspan’s involvement in the policy process is notable because it seems to be a departure from the traditional arm’s-length relationship between the central bank and the executive and legislative branches of government.

The appointed members of the Federal Reserve Board are usually noted economists. Their job is to ensure the soundness of the nation’s banking system and monitor the health of the economy. By adjusting interest rates and regulating the money supply, they can slow down an overheated, inflationary economy, or help revive a nation mired in recession.

Fiscal policy, which involves adjusting the levels of taxing and spending, is the province of the White House and Congress. The Fed rarely involves itself in that debate.

“The Fed values its independence, and the flip side of that is it tries to stay out of fiscal policy as much as possible,” said former Fed Vice Chairman Alice Rivlin. “Right now there’s a crisis. Everybody knows we’ve got to do whatever is necessary to get the economy going again. I think there’s a good deal of desire to accommodate.”

Greenspan, a conservative Republican, has been careful to maintain the Fed’s official neutrality since his first appointment to the chairmanship in 1987.

At the same time, Fed watchers say Greenspan has been more willing than his predecessors to engage with politicians. A private discussion between Greenspan and President-elect Bill Clinton in December 1992 is credited with contributing to the reversal of years of deficit spending.

“It is unusual for a Fed chairman to advise the government in such detail as to what to do on fiscal policy,” said David M. Jones, chairman of Aubrey G. Lanston & Co., a New York securities firm, and author of several books about the Fed.

Economists generally regard fiscal policy as an unwieldy tool. By the time tax cuts or spending increases take effect, a recovery may well be underway--just the wrong time to give the economy an extra jolt.

In this case, however, Congress and the White House appear poised to move quickly. A big cash infusion could work its way into the economy soon enough to fight recession. Although members of Congress might normally resent a central banker’s involvement in the decision-making process, many seem determined to rise above politics in the aftermath of the terrorist attacks.

“It’s a degree of detail and involvement [by Greenspan] that we usually do not have,” said one participant in last week’s Finance Committee session.

“I think the reason for that is that the task is an unusual one. It’s not about long-term tax policy, it’s about jump-starting this economy. When you get to that, he’s the guy who’s got the data and the credibility.”