The Sarbanes-Greenspan Debate

February 02, 1994

It is one of Washington's longest-running battles, a battle of polite pejoratives and economic esoterica, and no one expects Maryland's Sen. Paul S. Sarbanes and Federal Reserve Board chairman Alan Greenspan will ever agree. In the latest skirmish, Mr. Greenspan is accusing Senator Sarbanes of advocating the "forced feeding" of the economy while the Marylander rejoins by charging that the Fed chairman is plotting a "preemptive strike" against the recovery.

What set off the latest fireworks was Mr. Greenspan warning the Fed may "at some point" raise short-term interest rates to head off a return of inflation even before outward signs become visible.

In an indirect dig at Mr. Sarbanes, ever the proponent of priming the pump, Mr. Greenspan declared: "Attempts to force-feed the economy beyond its potential have led in the past to higher inflation and, ultimately, not to lower unemployment but to higher unemployment as destabilizing forces and uncertainties associated with inflation induced economic contraction." He said an increase in short-term rates "would not be taken in order to cut off or limit the economic expansion, but rather to sustain and enhance it. . ."

To which the senator replied: "I'm concerned about this talk about a 'preemptive strike.' [It] would be done without any rational basis, without any figures to work off of. . . You conjure up a hypothetical scenario. . . and then you do your preemptive strike." He said he was not at all sanguine that the recovery is bound to continue.

The Greenspan-Sarbanes debate is more than a constant tussle over monetary policy. As incoming chairman of the Senate Banking Committee, Mr. Sarbanes will be poised next year (if he wins re-election) to intensify congressional oversight of the historically independent Federal Reserve. Fortunately, President Clinton has declared his opposition to any change in what is widely considered to be one of the most effective central banking systems in the world. But the pressure goes on.

Actually, Fed interest rates have been kept low enough to spur the current recovery despite a Clinton budget bill that imposed some much-needed fiscal austerity. The president has indicated he will accept some nudging upward in short-term interest rates -- if long-term rates affecting mortgages and business investment remain low. So we see no real need for Mr. Sarbanes to be more hostile to Mr. Greenspan's plans than Mr. Clinton himself.

So long as the debate remains philosophical and the economy remains subject to the professional judgment of the Fed board of governors, Mr. Sarbanes' crusade will not do much harm and may keep Mr. Greenspan on his toes. The danger would come only if Mr. Sarbanes' brand of liberalism were ever to become government policy.

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