Needed: Lower Interest Rates

February 29, 1992

Puzzled voters might ask why such liberal Democratic senators as Maryland's Paul Sarbanes and Michigan's Donald Riegle seem intent on saving President Bush from Herbert Hoover's fate at the polls. Each time Federal Reserve Board chairman Alan Greenspan appears before their committees, they pressure him to lower interest rates in the hope of jolting the economy into recovery before the election. This also happens to be the White House formula for quick anti-recession action.

The patriotic answer is that these senators are interested in what's good for their country. Another explanation is that they may have their eye on the distressed situation a Democratic president might inherit if he is elected in November.

Even if the economy improves marginally during the next few months, as some analysts believe, it might not be enough to turn around consumer confidence, now at a 17-year low. And consumer confidence equals votes, which may be why the incumbent president lost one in three votes either to Pat Buchanan in New Hampshire or to "uncommitted" in the South Dakota primary.

In technical terms, Mr. Bush is caught between the leading indicators and the lagging indicators. At the moment, the lagging indicators are winning. Even if the blue-chip economists are correct in stating that a slow recovery has already begun in terms of higher corporate profits, more real estate activity and higher stock prices, these and similar improvements will filter through so slowly into the public's consciousness that a recessionary psychology might prevail until November.

Unemployment, for example, is a lagging indicator. Jobs usually start to materialize well after a recovery is under way because employers tend to be even more cautious than consumers. In addition, Mr. Bush has to worry about signs of a global downturn that could abort what has been an encouraging rise in U.S. manufacturing exports.

If Mr. Bush and Senators Sarbanes and Riegle can agree on anything, might they be right and Mr. Greenspan wrong? The answer, in our view, is yes. The Fed was correct in sharply lowering interest rates in December and, lately, in easing banking industry reserve requirements. But the danger of renewed inflation is so low and the danger of short-circuiting a recovery so high that we believe the Fed should again cut interest rates. This would be better medicine for the economy than a fiscal remedy -- specifically a middle-class tax cut -- that would merely drive up federal deficits.

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