Monetary Policy Conflict Resembles Moralityplay

Article excerpt

The conflict between the Federal Reserve and the Reagan administration over what monetary policy should be and whose monetary policy is it, anyway, can easily be turned into a morality play.

Cast in the role of hero would be Alan Greenspan, named by President Reagan in August to succeed Paul A. Volcker as Fed chairman. In this role, Greenspan is upholding the independence of the central bank against the administration's efforts to push the Fed into what might be too stimulative a monetary policy.

The administration wants a vigorous economy, which would help the Republican presidential nominee in November.

Cast in the role of villains would be Beryl W. Sprinkel, chairman of the President's Council of Economic Advisers; Michael R. Darby, chief economist of the Treasury, and various unnamed administration heavy hitters.

All worry that the Greenspan policy may do to their candidate's chances in 1988 what the restrictive Volcker policy did to Jimmy Carter's re-election effort in 1980.

Where is President Reagan in all this? On his own testimony, he is just an uninformed and innocent bystander. Asked whether the criticism of Greenspan by administration officials meant that the president was dissatisfied with his own appointee, Reagan said:

``I'm going to have to find out what this is all about, because nothing of that kind has been directed to me.''

Apparently no one had told Reagan that his Council of Economic Advisers, in its annual economic report, criticized the Fed for monetary policies that sent interest rates up and the stock market into the October crash.

The report did praise the Fed for supplying ``ample liquidity'' to the financial system right after the Dow's 508-point drop, but it also said that, once the immediate danger was past, the Fed ``underestimated the risks to adequate economic growth.'' More recently, however, the Fed, according to the president's economic advisers, ``has been more supportive of economic growth.''

Greenspan is not grateful for all this coaching from the White House and the Treasury. He telephoned Treasury Secretary James A. Baker III to complain about a letter that Darby, an assistant secretary, sent to Fed officials on Jan. 21, shortly before the last meeting of the Fed's policy-making Federal Open Market Committee.

Greenspan told Congress last week that he ``objected quite strongly'' to administration interference and would resist any election-year pressure on the Fed's monetary policy.

Only the most politically naive could be shocked by news of pressure for economic expansion in an election year.

Scholarly studies have found that, since World War II, the growth of real income after taxes accelerated in 83 percent of the election years (both four-year presidential and two-year congressional elections), compared with 40 percent in the off years. …