Monday, April 12, 2010

Alan Greenspan’s Thoughts Circa 1980

In 1980 the Hoover Institution published its longest and most influential policy book, The United States in the 1980s, whose contributors included many members and advisors of the Reagan administration. I edited the fourteen domestic issues papers, which included a paper that can be read on Google books by Alan Greenspan entitled “Economic Policy.”

The context of his paper, the high and rising inflation of President Carter’s years, led Greenspan to warn of the risk inflation posed to investment and the efficiency of the economy. Reducing high-risk premiums, which were “blind-siding” the market system, should be the primary focus of Western economic policy. This, in turn, required a significant and credible reduction in the rate of inflation.

The policy question was how to lower inflation and contain it. He stated that the Federal Reserve Board alone would find it difficult to take the heat to reduce and contain inflation. It was also necessary to curb the growth in federal spending and deficits to restore balance to the financial system. Curbing spending and deficits necessitated reining in the growing number of fiscal constituencies that clamored for ever-more government programs.

The most effective constraint in his view was a constitutional amendment to restrain expenditure and tie it to a balanced budget requirement. Recognizing the political difficulty of achieving an amendment, second best was requiring 60 percent super majorities for Congress to pass money bills. Although a super majority provision could be readily overturned by simple majority passage of another law, he believed that the politics of appearing spendthrift could keep a super majority provision in place for some time.

Fed Chairman Paul Volcker succeeded in lowering inflation in the early 1980s, which threw the economy into recession. Its subsequent recovery and steady expansion over the next several decades in a non-inflationary environment suggests that presidential and Fed chairman will were the crucial ingredients. But Greenspan was prescient in warning that government spending and deficits would grow without some effective constraint. Sadly, no effective constraint exists.

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