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The Only Salvation From Slump: Easier Monetary Policy

IT is all but official: America is now in a recession. Production is dropping. Unemployment is growing. Profits are hurting. Even President Bush has used the ``R'' word publicly. But, he reassured the people: any recession will be a weak and short one. On that I must reserve judgment.

Already American imports are dropping. They are seen to be falling even faster after we correct for the higher prices paid for oil. A recession-induced drop in our imports translates into lower sales here for Japanese and Korean goods. Italy, Spain, and Britain run a similar danger of disappointing US sales.

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What about the American military buildup in the Persian Gulf? Will that infuse money into the global economy in the way that our 1950s involvement in the Korean peninsula did?

The answer depends on whether a shooting war begins early next year. If Iraq can for a period hold off the combined United Nations forces attacking her, the acceleration of military activity will begin to heat up the global economy.

On the other hand, were a prolonged and inert standoff to prevail, as Saddam Hussein successfully shrugs off the embargo's sanctions, most of the costs of trying to contain him will involve using up of our military inventories and conscripting away from civilian pursuits some hundreds of thousands of our potential labor force. Not much extra production need be required.

First, let me make clear that Federal Reserve monetary policy is the only possible weapon for macro stabilization today. The Reaganomics of the 1980s has bequeathed us the evil legacy of a chronic structural fiscal deficit. It has thrown away any hope to use fiscal policy as a program for economic stimulus.

Second, it needs to be understood that there is no inherent tendency for our market system to spontaneously end and reverse a ``slugflation'' like the present one.

In the long run there are indeed some market forces that will work toward some restoration of job opportunity.

Agreed then that it is the Federal Reserve we must pin our hopes on to ameliorate the instability of capitalism. Why am I not optimistic that Fed chairman Alan Greenspan can pull off in 1990-91 the hat trick that Fed chairman Paul Volcker executed so brilliantly when he used discretionary easy-money measures in late 1982 to ignite the long global recovery of the 1980s?

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Dr. Greenspan must work with the colleagues appointed by President Reagan and with the 12 regional Federal Reserve Bank presidents whom Greenspan himself helped to appoint.

At least three of the 12 voting members of the Fed Open Market Committee are obsessed with a crusade to contrive price-level stability by 1995. If the cost of that is one or more recessions, or even a global slowdown, they are prepared to put that price on the backs of Main Street folk everywhere.

A majority of the Federal Reserve authorities are more reasonable, are less dogmatic than the monetarist diehards. Why then so little action thus far to soften the recession? Of course, we have seen a recent drop in reserve requirements and that is a welcome move in the right direction.

I fear Dr. Greenspan earns some of the blame. He has become Hamlet-like, fearful to be decisive and has been confusing the Congress and the money market by empty sermonizing. It is a sad sight to see a general or a central banker who seems to have lost his nerve. (It is a far worse sight when a general or central banker is hellbent on a collision course with disaster!)

Yes, the Federal Reserve must work its antirecession stimulus within the real constraint of high and rising interest rates in Germany and Japan. Yes, Iraq has dealt the world a supply shock that worsens the short-run inflation.

But no, these do not entail an impotent Federal Reserve that will be only pushing on a string if it tries to bid down short-term and longer-term interest rates.

No, Wall Street and the Gnomes of Zurich will not be stampeded by inflation fears if they see the Fed leaning against the winds of recession. They know how to distinguish between core rates of inflation and supply-shock, one-time upward blips.

The Central Bank cannot be ``independent'' for long in a democracy. The Federal Reserve will either wise up on its own, or any rise in the unemployment rate to above 7 percent will set into motion public-opinion forces that will teach them reason.

The evidence does not yet justify fears of a world collapse. It does, however, alert people everywhere that the long American boom of the 1980s is now part of history.

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