MARKET
FALTERS, GREENSPAN DOESN'T
BY
JULIANNE MALVEAUX
|
It doesn’t take much more than a column
on taxes than to stir the ire of a bunch of my readers. At least, that’s
what I learned last week when I got more than two dozen pieces of
e-mail disagreeing with my take on the Bush-whacked economy. Some took
me to task for using the term, which they viewed as biased and unfair.
Others cared less about the terminology than about what they could
gain from the Bush $1.3 trillion tax cut. What a difference a week
makes! While the President-elect is still talking tax cuts, I’m not
the only one looking askance at his plan. And Mr. Bush has given us a
preview of what he means by "bipartisanship", joking (I
think) that he’d like to be a dictator.
George W. Bush will learn, as many Presidents before him have, that the act of passing legislation is a process that has all kinds of participants, few who take orders well. He will also learn that while he can dictate to his staff, he can’t dictate to financial markets, nor can he dictate to the fed. Thus, while he talked about economic "warning signs", openly hoped for interest rate cuts from the Fed’s Open Market Committee, and met with Federal Reserve Board Chairman Alan Greenspan, he didn’t get much of what he asked for, and he watched markets tumble this week while some expected a "Bush bounce". Bush isn’t responsible for the market’s lackluster performance. Indeed, with dozens of companies revising their fourth-quarter earnings projections, their projected dividend, or their early-year performance, it’s a wonder the market isn’t performing worse than it is now. When poor projections are combined with the very necessary set of corrections in the technology and communications sectors, corrections that had been foreseen for at least two months, few should be alarmed by the downturn in the market. Furthermore, the fourth quarter is typically flat, although the NASDAQ shot up at the end of last year, and early this year, partly because of wonton and ill-advised speculation in the technology sector. Still, a market stumble doesn’t mean recession, and Mr. Bush would be well advised to put a brake on his scare tactics. He isn’t scaring Alan Greenspan, who prefers to pay down the deficit than to cut taxes. Wall Street may have hoped that Greenspan would have initiated an interest rate drop, but Greenspan has always marched to the beat of a different drummer. I suspect that Greenspan is shrugging drop in stock prices off. He has spent much of this year warning about a coming correction, in any case. It will be interesting to see how Greenspan and Bush develop their relationship. Greenspan’s term as chairman of the Fed runs until 2004, and he isn’t likely to resign to accommodate Mr. Bush. Three of the remaining Federal Reserve Board members are also Clinton appointees, with terms that run through 2002, in the case of Edward W. Meyer, through 2008, in the case of Edward Gramlich. Laurence Kelley, appointed by Ronald Reagan, will sit on the Federal Reserve Board until 2004. When the Federal Reserve Board is fully constituted, there are seven members of the Board, which means that Mr. Bush can fill the two vacant seats that exist as soon as he wants to. Such an action may change the texture of Fed conversation, but it isn’t especially likely to change its actions, since most members follow the leadership of the Chairman. Indeed, Alan Greenspan has so successfully dominated his fellow Fed members, that Mr. Bush may find it difficult to work around him. So far, it seems that the two aren’t singing from the same hymnal. Bush wants his tax cut, which he thinks will stimulate an economy he has characterized as "in trouble", while Greenspan is concerned both about recession and the deficit. When Mr. Bush met with President Clinton, Mr. Clinton made it clear that our economy is not in a recession (which is technically defined as negative growth, not slower growth), and it isn’t likely to be so unless Mr. Bush mismanages it. It wasn’t said, but it should have been, that fiscal policy is often too slow and unreliable to stimulate the economy on time, and that federal programs and spending (or cuts) should be fashioned around the public needs and not solely around countercyclical concerns. Too, it should be noted that while Mr. Bush is talking of tax cuts and spending cuts, he is also talking about beefing up military spending in the multi-billion dollar range. One might ask how that spending, in conjunction with the desired tax cut, would impact the economy. The two years between now and the 2002 mid-term elections can fly
by or drone on in economic terms, depending on how well George W. Bush
picks his economic team. So far, he has done well by picking Alcoa
Chairman Paul O’Neill as Treasury Secretary. Most see O’Neill as a
pragmatist who understands the concerns of working people, and is less
focused on the elite than Mr. Bush is. But other selections may
determine how the economic course is steered. And Bush’s willingness
to back down on his tax cut, reader sentiment notwithstanding, may
make a difference in the way the economy performs. |