Political Business Cycle
September 1992 And Federal Reserve chairman Alan Greenspan announces
a big increase in the discount rate and bank reserve requirements.
Interest rates and unemployment increases, the economy goes into
a deeper recession, and Bush is defeated. But Greenspan has no apologies:
as a nonpartisan servant of the public, his policies must "focus
only on what's good for the economic health of America. The boom
was hurting our country; we had to purge the malinvestments to make
way for long-lasting growth."
scenario is about as likely, of course, as Madonna joining Mother
Theresa. Greenspan will do what Fed chairmen always do: the White
House's bidding. Thus he has artificially lowered interest rates
for most of 1991, leading to more economic troubles after the election.
first economists to examine thoroughly the political business cycle,
Stephen Haynes and Joe Stone, found "strong four-year cycles in
unemployment and inflation, with peaks and troughs consistent with
the four-year electoral cycle" from 1951 through 1980, the last
year they looked at.
isn't this as big a scandal as the October Surprise? It almost was,
in the early 1970s, when Richard Nixon appointed Arthur F. Burns,
beloved economist and party hack the Greenspan of his time as chairman of the Fed's board of governors. In making the announcement,
Nixon said, "I respect his independence. However, I hope that independently
he will conclude that my views are the ones that should be followed."
The audience applauded, and Nixon turned to his old friend. "You
see, Dr. Burns, that is a standing vote for lower interest rates
and more money." It was the only vote needed.
August 1971, with price inflation running at 4%, Nixon severed the
dollar's final tie to gold and imposed price and wage controls.
Under that stunningly opportunistic cover, Burns hiked money growth
from 3.2% in the last quarter of 1971 to 11% in the first quarter
of 1972, the election year. The economy boomed, prices were artificially
restrained, and Nixon was reelected in a landslide. After the election,
he removed some of the controls, price inflation soared to 12%,
and Burns stepped on the monetary brakes, bringing on a recession.
economic offenses are more difficult to prove these days, since
Burns abolished the practice of taking detailed minutes of the meetings
of the Federal Open Market Committee.
or not, however, Greenspan also does the president's bidding. After
all, as Arthur Burns once explained to a German reporter, "If the
chairman didn't do what the president wanted, the Federal Reserve
would lose its independence." Steve Axilrod, former staff head of
the Open Market Committee now making his fortune on Wall Street,
told me that was "the most damaging statement ever made by anyone
connected with the central bank." Damaging, of course, because true.
Fed serves two masters, the government and the big banks. In matters
of the government's core interests, i.e., elections, it calls
the tunes not that it gets any opposition from the big banks
its inception, the Federal Reserve's proponents said it would be
above politics. Thus its "independence." But this has always been
disinformation. The Fed is the quintessentially political agency
that Fed policy is the only way Washington, D.C., gets its way.
For example, politicians also have fiscal policy at their disposal,
which is to say they can spend more of our money on public works,
welfare, etc. And trade regulators can wipe out whole classes of
imports to create boomlets for select domestic manufacturers.
these strategies seem to improve the economy, only later turning
out to be deadly. By then, the politicians are safely reelected.
cost in human suffering of the political business cycle and related
political manipulations is incalculable but we can know that
most Americans are poorer, and most businesses shakier, than they
would be without government central banking, high spending, and