A Clear Win for Alan Greenspan

Financial Times

The big winner in this week's bizarre presidential election is Alan Greenspan, the venerable chairman of the US Federal Reserve Board. Mr Greenspan won because the next president - regardless of whether it is George W Bush or Al Gore - will go into office without authority to do much of anything.

To some, it may appear that the occupant of the White House has great authority simply by virtue of holding the office of president. But in fact, even under the best of circumstances, his authority is tightly circumscribed. He must share power with Congress and must depend on the public's continued support.

This time around, presidential authority is more constrained than ever. Given that about half of Americans bothered to vote, only about a quarter of eligible voters will have put the new president into office. If it is Mr Gore, he will be relying on a razor-thin majority of those voters; if Mr Bush, he will have no popular majority at all. Congress, meanwhile, will be delicately and precariously balanced between Republicans and Democrats, with neither party able to move legislation on its own. The next president, in short, will enter office with no mandate and almost no capacity to assert his will.

As a practical matter, this means that Mr Bush's Dollars 1,300bn tax cut proposal is a dead letter. So, equally, are the vice-president's ambitious ideas for a new prescription-drug benefit for retirees and an expensive new federally subsidised retirement programme on top of the current Social Security scheme. Indeed, forget all campaign pledges. Americans have voted in favour of keeping everything exactly as it is.

Mr Greenspan must be pleased. The chairman was never happy about the Republican tax cut or Democrats' spending plans. Either one would stimulate the US economy and Mr Greenspan does not want the economy stimulated. Nor does he want want investors to expect that it will be. On the contrary, he is trying his best to engineer a "soft landing" featuring slower (and, in his view, more sustainable) growth, slightly higher (and, again, more sustainable) levels of unemployment and therefore less chance of runaway inflation.

So far, Mr Greenspan is on course. There is ample evidence that the Fed's series of rate increases starting in June 1999, totalling 1.75 percentage points, has begun to take hold. Consider that the full effects of interest rate increases are not felt until a year after they occur and it seems likely that the US economy will slow further.

The American economy grew at an annual rate of 2.7 per cent in the third quarter of this year, which is less than half of its 5.6 per cent rate in the second quarter. Moreover, although October's unemployment level continued at a record-low 3.9 per cent, job growth slowed in October. America's payrolls grew by 137,000, compared with 195,000 in 1999. So far this year, private sector job growth has averaged 164,000 a month, compared with 202,000 a month in 1999.

Most importantly, Mr Greenspan has taken much of the wind out of America's soaring stock market. He had openly worried about the "wealth effect" of high stock prices on the spending patterns of American consumers. Personal consumption is now growing below the rates of 1998 and 1999. Investments in housing and construction have dropped. Mr Greenspan can stay on course toward a "soft landing" only if the president and Congress co-operate by doing nothing. Presumably, he would like nothing better than gridlock in Congress and paralysis in the White House, which is exactly what he is going to get.

The status quo helps Mr Greenspan in another way. Without a tax cut, tax revenues will continue to pour into the Treasury. Without ambitious new spending plans, those revenues will continue to be far in excess of what the government spends. The net result: continuing large budget surpluses.

Normally, those surpluses would be tempting targets to politicians bent on turning them into tax cuts or new spending. But with no alternative use for them that any set of politicians can agree upon, the surpluses will automatically be used to pay down the national debt.

Paying down the debt gives Mr Greenspan even more leeway to get his soft landing. Debt reduction eases the strain on capital markets, allowing companies to get money for new investment. In the short run, this is stimulative. In the slightly longer run, additional business investment leads to higher productivity, which improves the economy's capacity to grow quickly without risking inflation.

Americans may be confused about whom they have elected president but they should be clear about one important aspect of the outcome of this election. Alan Greenspan's power has been consolidated. He is now, indubitably, President of the United States Economy.

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