What Greenspan Has to Do Jude Wanniski September 5, 2001

Memo To: Fed Chairman Alan Greenspan
From: Jude Wanniski
Re: Acknowledging Error

It is getting time, Alan, for you to find a way to admit you have been making a long series of mistakes in your management of monetary policy. You can do it directly, in a speech, or indirectly, in a meeting with Treasury Secretary Paul O’Neill. But the only way to pull the economy out of its slide is to arrest the monetary deflation with a change in the Fed’s operating mechanism. And that can’t happen unless you shoulder the burden. Lowering interest rates will do nothing to stop the deflation, even if you get the funds rate to zero. If you find it impossible to acknowledge you have been on the wrong track, there’s no realistic way you can change the Fed’s policy in a way that will liquefy the economy and prevent further damage.

You may not remember, but several years ago you became exasperated with my friendly criticisms of your conduct of monetary policy, which I conveyed to you by fax, phone and in person. You asked: “Jude, have you ever been wrong, about anything?” I had to laugh, thinking you had picked up the line from George Will, who was once a friend of mine, that “Wanniski is more certain about everything than I am about any one thing.” I remember telling you that I have been wrong about so many things in my life that it would take more time than we had to enumerate my errors. Of the several examples I gave you, I do recall saying I once thought black people were intellectually inferior to white people at birth, and I was wrong about that. I also once believed the optimum rate of capital gains tax was 15%, but that you had persuaded me that it was zero. In fact, Alan, it was my mentor, the Nobel Prizewinning economist, Bob Mundell, who had first persuaded me that it was 15%, but you made better arguments, which Bob could not handle. He got mad at me when I insisted that zero was the correct rate and actually barked at me: “Why do you think you know everything?”

The only reason I could see problems heading toward us when nobody else did is that I’ve never stopped learning from my mistakes. In fact, I don’t remember Bob Mundell or Art Laffer ever saying publicly that they were wrong about anything. I don’t remember you ever ‘fessing up that you had blundered. You never did when you were President Ford’s chief economic advisor in 1974 and he decided to Fight Inflation by raising taxes and passing out WIN (“Whip Inflation Now”) lapel buttons. Yes, yes, you can say you were privately opposed to all that claptrap, but for goodness sakes, you were chairman of the Council of Economic Advisors, weren’t you? You could have, later on, after the body of the Ford Administration cooled, written a piece about how you wished you had been more ardent in arguing against the taxes and the buttons. You never did.

The reason I bring this up at this time, is that you know, practically better than anyone else in the world, that I was alone in December 1996 in warning about a monetary deflation. We talked about it at the time, as the price of gold began to fall from its $385 per ounce plateau, but the only record I have of my warning to you is a fax, when I heard you were going to get married. I sent congratulations and said I hoped the falling price of gold would not spoil your honeymoon. You wrote your thanks on that fax and sent it back to me. All this is important for folks to know that I did not think up the deflation argument seven months ago, but had seen it on the distant horizon way back then. It was kind of frightening, because I knew the deflation monster was tromping toward us and the whole world economy, because the Fed was still fighting an old monster, when the new one approaching was much more important.

In the next several weeks, it should be clearer than ever that we were not in a typical inventory correction that would lead to an economic rebound, once retailers of goods had to reorder and restock. The President and the Congress will be under great pressure to do something, and they will wrangle over what might work. I think you know by now there is nothing they can do with the fiscal tools they possess. They can increase spending or cut taxes and still not halt the deflation. Only you can do that, but you can’t unless you first admit to yourself that you got on the wrong track when you were warned where it would lead. History will reward you if you do.