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Back to the Cross of Gold BY JAMES K. GALBRAITH ONE THING MY OLD Yale classmate Jaime Serra Puche and I have in common, besides our names, is that we’re both entitled to be sore at Alan Greenspan. Financially, I’m a simple case. I have an Adjustable Rate Mortgage, tied to a shortterm interest rate, which now costs me about $2,000 per year more than it did a year ago. I have some savings in a pension fund, partly in stocks and bonds, that have lost value this year. I have an income, too, but that hasn’t changed. You get the picture. Jaime’s case is also simple. He has a country, called Mexico, that has been borrowing, at an adjustable rate, to finance roads, schools, water and power systems. He has an investment, called the peso, now worth 30 percent less than it was just last month. Oh, and Jaime doesn’t have an income. Until a few weeks ago he was Finance Minister. Now he’s unemployed. There are lots more like us not to be hurt when interest rates rise you have to be very rich, quite poor, or a hermit. Even being rich doesn’t always do it. Orange County, California, one of the richest places on earth, borrowed short to invest long, got caught in the squeeze and went bankrupt. Or consider Uncle Sam himself, who cut $500 billion from his five-year deficit in 1993, only to have $150 billion or more added back in new five-year interest costs when rates rose. \(In 1993, Uncle Sam also cut back on his long-term borrowing in favor of short-term bills, to take advantage of those low short-term interest rates that then didn’t stay low. Tough luck, Speaking of bankrupts, the chief political victims of all this are President Clinton and the Democratic Party. They were the ones who promised, back in 1992, that we would be better off by now. Some of us are: Employment is up, thank you, and profits are up by over a third. But most of us aren’t better off: Average wages haven’t risen one bit in two years and wages are what most of us earn. Low interest rates were supposed to make up for this, to be the great benefit of deficit reduction, or so we were told. Re teaches economics at the LBJ School of Public Affairs of the University of Texas at Austin, and is co-author of Macroeconomics, a textbook member? It might have worked too, if inter est rates had stayed down. But they didn’t. It would be nice to think that in raising rates, Alan Greenspan and the Federal Reserve Board were serving some higher public purposesuch as fighting inflation. But no. Greenspan and company haven’t offered any serious argument that raising rates was necessary to fight off inflation. Inflation was low before rates started rising, remains low today, was and is forecast to remain low in the future. Except for the fact that deficit reduction passed, circumstances did not change between 1993 and 1994. And that should have brought stable rates, not increases. It was a bait-andswitch, pure and simple. Greenspan and company wanted, among other things, to scare middle-income folks out of stock and bond mutual funds and back into liquid assets \(like money market funds and, you guessed it, bank decommercial bankers. Greenspan actually said this, more or less, to the Senate Banking Committee last May \(I was there and watchdog press woke up. The New York Times had a piece in December, charting the rise in rates and the fall in the stock market. Guess what? Week by week, they trackpretty well. Why then aren’t interest rates a political issue? One reason is that we seem to lack a political leader with the nerve to make them one. The President won’t do it. Newt Gingrich, for his part, actually did say that he thought high interest rates were a problem. But someone got to him quickly, and he retracted. As H.L. Mencken once cracked about some surgery on Randolph Churchill: “The doctors found the one part of his body that was not malignant, and removed it.” CUTTING MIDDLE-CLASS taxes is now the agendato be paid for, in Clinton’s proposal, by cuts in public housing for the poor and in transportation spending. \(Thanks, but at that price I’ll pass worse but more authentic: they’ll cut capital gains taxes for the rich, add another $12 billion or so to the military, and take it all out of welfare. Virginia, the Federal Reserve really does the point of deficit reduction in 1993 and now of “paying” for tax cuts by screwing the poor was supposedly to raise \(or mainthereby stimulating investment and produchas spoiled that game, by driving up the short-term rate until the effects spill over into long-term markets and the benefits of So why bother with holding the deficit down? The true Democrats might begin their comeback by proposing to cut workingclass taxes big-time, say by knocking two full points off the Social Security payroll tax and thereby eliminating the surplus in those funds, which presently is not used for Social Security but is rather lent back to the rest of the government and spent on everything else the government does. If doing this means breaking the budget rules, well then, break ’em. It’s a better deal for the middle class than the Republican plan of cutting capital gains taxes \(also deal and say so. But if the budget rules hold and can’t be broken, the other tack would be to go after the Federal Reserve. I notice that my friend Jaime Serra’s successor, a Stanford economist of similar vintage, has turned the NAFTA card into $18 billion of new loans to stabilize Mexico in this moment of crisis \(something I predicted, by the way, back in cessor do this to create jobs in, say, California, New York, New Jersey, even Texas? For that matter, why not do it for the whole American middle class, by the simple device of reversing the course of the past year and bringing interest rates back down? Congress wrote the Federal Reserve Act, and it can change itif and as it chooses. Let the Democrats propose, say, a rollback order on interest rates and a full sunset review of the Federal Reserve System. And let the Republicans oppose it. The Federal Reserve Act of 1913 had one great success. It removed the subjects of interest rates and banking from politics for over eight decades. But if we can’t have a real fiscal politics anymore, a politics of working-class tax cuts and jobs programs and universal health care, then by all means let’s go back to the 1890s, and have a politics of money and interest rates once again. Anyone care for a crown of thorns? THE TEXAS OBSERVER 7