- The Washington Times - Monday, April 23, 2001

Alan Greenspan and the Federal Reserve Board, trying to repair the damage they did to the U.S. economy with six straight interest-rate boosts, seem to have learned a valuable lesson at our expense.
Remember when Mr. Greenspan said interest-rate increases were needed in 1999 and early 2000 to cool the economy in order to keep an inflationary Godzilla (which only Mr. Greenspan could see) from terrorizing us? In fact, there never was any inflation to speak of. What little there was, according to most economists, was overestimated by 1 percent to 2 percent. (The Labor Department reported last week that the Consumer Price Index rose a bare 0.1 percent in March.)
Then, throughout the summer, fall and winter of last year, when business economists were warning that the economy was getting dangerously weak and capital investment was drying up especially in the high-technology sector the Fed still didnt get it. Or they did, but were too afraid to do anything that would anger the inflationary boogeyman that continued to haunt Alan Greenspans dreams.
With recession-leaning numbers tumbling out of the economy with disturbing frequency, the Fed grudgingly conceded it had gone too far in its tight money policy; that the economy was in deep trouble; that the lack of capital liquidity was the problem, not inflation; and that instead of tightening, they should have been easing.
Last week was the latest affirmation by the Fed that it has fully come to grips with the reality that the economy has been edging close to a recession (defined as two consecutive quarters of negative growth), and that it could get a lot worse.
The Fed had cut interest rates three times this year, but the economy was still showing too many signs of weakness especially in business earnings; declining consumer spending; and a critical pullback in capital investment, the lifeblood of a healthy economy.
A major sign of the economys weakness: Initial public stock offerings a key investment barometer of new business formation have fallen to their lowest level in a decade.
"Capital investment has continued to soften, and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward," the Fed said last Wednesday in announcing its fourth half-point rate cut.
"This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak," the Fed said in a statement explaining its action.
It is rare for the Fed to make interest-rate changes outside its regularly scheduled meetings, so it is reasonable to assume it was acting on data that suggest the economys troubles are worse than they thought.
Economic analysts were increasing their forecasts of a recession. The Great American Jobs Machine was slowing to a crawl, and the unemployment rate was creeping upward. The sharp yearlong plunge in the stock market had evaporated the wealth effect (despite the turnaround on Wall Street that followed the Feds action), consumer confidence was in the doldrums, and retail sales remained anemic.
Perhaps worst of all, there was a sense of fear about the economy that fed on itself. The market was starving for some good news to kick it out of its lethargy, and the unexpected Fed cut had that effect.
Certain events on the horizon make me even more bullish about the prospect of an economic recovery later this year. One of them is Congress expected action next month to cut taxes by between $1.3 trillion and $1.4 trillion over the coming decade. This will give the economy a very powerful boost over the long term. A retroactive income-tax cut this year will inject further liquidity into household wealth.
With the Fed sending signals of more interest-rate cuts to come, possibly lowering the federal funds rate to 4 percent, and with Congress and the Bush administration preparing to cut taxes beginning this year, the economy is ready to soar again.
But it is important that both monetary and fiscal policy work in tandem to get the economy running at the 4 percent to 5 percent growth rate that we had in the last half of the 90s.
House Speaker Dennis Hastert and Senate Majority Leader Trent Lott can help by accelerating a deal on the budget, which will set the total amount by which taxes will be cut; and by putting President Bushs tax bill on a fast-track schedule in early May. That would strengthen the confidence of the financial markets, the investment community and among consumers that income-tax cuts will become a reality.
With Congress on the brink of cutting taxes which would be implemented quickly through lower withholding rates on peoples paychecks this summer and with the Fed planning another rate cut when it meets again in three weeks, May is shaping up to be a blockbuster month for the U.S. economys long-awaited revival.

Donald Lambro, chief political correspondent for The Washington Times, is a nationally syndicated columnist.

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