January 25, 2005
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OP-ED COLUMNIST
The Greenspan Succession
By PAUL KRUGMAN
lan Greenspan is expected to retire next year. The Bush administration, because of its nature, will have a hard time finding a successor.
One Fed chairman famously described his job as being to “take away the punch bowl just when the party gets going.” Bond and currency markets want monetary policy in the hands of someone who will say no to politicians. When a country’s central banker is suspected of having insufficient spine, the result is higher interest rates and a weaker currency.
Today it’s even more crucial than usual that the Fed chairman have the markets’ trust. The United States is running record budget and trade deficits, and the foreigners we depend on to cover those deficits are losing faith. According to yesterday’s Financial Times, central banks around the world have already started shifting into euros. If Mr. Greenspan is replaced with someone who looks like a partisan hack, capital will rush to the exits, the dollar will plunge, and interest rates will soar.
Yet President Bush, as you may have noticed, only appoints yes-men (or yes-women). This is most obvious on the national security front, but it’s equally true with regard to economic policy. The current Treasury secretary has no obvious qualifications other than loyalty. The new head of the National Economic Council apparently got the job because he is a Bush classmate and fund-raiser.
Of course, Mr. Greenspan himself has become a Bush yes-man. The chairman acted as a stern father figure, demanding fiscal rectitude, when Democrats held the White House. But he turned into an indulgent uncle when Mr. Bush took office. First, he urged Congress to cut taxes in order, he said, to prevent an excessively large budget surplus. Then, when surpluses were replaced by huge deficits, he supported a highly irresponsible second round of tax cuts.
Nonetheless, Mr. Greenspan retains considerable credibility with the markets. Who else can satisfy both Mr. Bush and foreign investors?
For a while, the presumed front-runner to succeed Mr. Greenspan was Martin Feldstein of Harvard. Mr. Feldstein, like Mr. Greenspan, has a reputation built over a long, distinguished career. Also like Mr. Greenspan, he is a former crusader for fiscal responsibility who became an apologist for budget deficits once Mr. Bush took office.
I’ve known Mr. Feldstein a long time, and worked for him at Ronald Reagan’s Council of Economic Advisers. He used to be a deficit hawk; now, out of what may be sincere conviction but looks from the outside like an effort to demonstrate political loyalty, he endorses tax cuts in the face of large budget gaps and gigantic borrowing to privatize Social Security.
But it’s reportedly not enough, because right-wingers have never forgiven Mr. Feldstein for his finest hour – the time when, as a member of the Reagan administration, he spoke out against deficits. It’s not just vindictiveness on their part: a man who once took a stand on principle while holding office might do so again once ensconced at the Fed.
Glenn Hubbard of Columbia, who served in the administrations of both Bushes, is also frequently mentioned. He’s a smart economist, but everything in his policy career suggests that when the party really got going, he would say: “More punch? Yes, sir, whatever you want.”
The last name one often hears is Ben Bernanke, currently a member of the Fed’s Board of Governors. (Before going to the Fed, Mr. Bernanke was chairman of the Princeton economics department, where I’m on the faculty.) If Mr. Bernanke were appointed directly from his current Fed position to the chairmanship, there would be general acclaim. But he may soon move to the Council of Economic Advisers. Why?
Surely it’s not because this administration, with its disdain for technical expertise in all fields, wants his advice. I hope I’m wrong, but my guess is that what’s intended for Mr. Bernanke is a form of hazing: he will be expected to prove his loyalty by defending the indefensible and saying things he knows aren’t true.
That might seem a tolerable price to pay for the Fed chairmanship – but a year of it might well make Mr. Bernanke damaged goods from the point of view of the markets.
It’s a dilemma. I don’t have any sympathy for the administration’s perplexity. But I do wish Mr. Bernanke the best of luck, and hope he knows what he’s doing.
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Backers of Gay Marriage Ban Use Social Security as Cudgel
By DAVID D. KIRKPATRICK and SHERYL GAY STOLBERG
ASHINGTON, Jan. 24 – A coalition of major conservative Christian groups is threatening to withhold support for President Bush’s plans to remake Social Security unless Mr. Bush vigorously champions a constitutional amendment banning same-sex marriage.
The move came as Senate Republicans vowed on Monday to reintroduce the proposed amendment, which failed in the Senate last year by a substantial margin. Party leaders, who left it off their list of priorities for the legislative year, said they had no immediate plans to bring it to the floor because they still lacked the votes for passage.
But the coalition that wrote the letter, known as the Arlington Group, is increasingly impatient.
In a confidential letter to Karl Rove, Mr. Bush’s top political adviser, the group said it was disappointed with the White House’s decision to put Social Security and other economic issues ahead of its paramount interest: opposition to same-sex marriage.
The letter, dated Jan. 18, pointed out that many social conservatives who voted for Mr. Bush because of his stance on social issues lack equivalent enthusiasm for changing the retirement system or other tax issues. And to pass to pass any sweeping changes, members of the group argue, Mr. Bush will need the support of every element of his coalition.
“We couldn’t help but notice the contrast between how the president is approaching the difficult issue of Social Security privatization where the public is deeply divided and the marriage issue where public opinion is overwhelmingly on his side,” the letter said. “Is he prepared to spend significant political capital on privatization but reluctant to devote the same energy to preserving traditional marriage? If so it would create outrage with countless voters who stood with him just a few weeks ago, including an unprecedented number of African-Americans, Latinos and Catholics who broke with tradition and supported the president solely because of this issue.”
The letter continued, “When the administration adopts a defeatist attitude on an issue that is at the top of our agenda, it becomes impossible for us to unite our movement on an issue such as Social Security privatization where there are already deep misgivings.”
The letter also expressed alarm at recent comments President Bush made to The Washington Post, including his statement that “nothing will happen” on the marriage amendment for now because many senators did not see the need for it.
“We trust that you can imagine our deep disappointment at the defeatist position President Bush demonstrated” in the interview, the group wrote. “He even declined to answer a simple question about whether he would use his bully pulpit to overcome this Senate foot-dragging.”
The letter also noted that in an interview before the election Mr. Bush “appeared to endorse civil unions” for same-sex couples.
The group asked Mr. Rove to designate “a top level” official to coordinate opposition to same-sex marriage, as a show of commitment.
Trent Duffy, a spokesman for the White House, said on Monday that “the president was simply talking about a situation that exists in the Senate, not about his personal commitment or his willingness to continue to push this issue.” Mr. Duffy said the “president remains very committed to a marriage amendment” and added, “We always welcome suggestions from our friends.”
Some Senate Republican leaders were not optimistic on Monday about the amendment’s prospects this year.
“I think if we had the vote right now we’d come up short,” said Senator Rick Santorum, the Pennsylvania Republican who is a member of the leadership and one of the amendment’s most vocal backers in Congress. “We’d like to bring it up when we have the best possible chance of getting it passed.”
The members of the coalition that wrote the letter are some of Mr. Bush’s most influential conservative Christian supporters, and include Dr. James C. Dobson of Focus on the Family, the Family Research Council, the Southern Baptist Convention, the American Family Association, Jerry Falwell and Paul Weyrich.
Several members of the group said that not long ago, many of their supporters were working or middle class, members of families that felt more allegiance to the Democratic Party because of programs like Social Security before gravitating to the Republican Party as it took up more cultural conservative issues over the last 20 years.
Tony Perkins, president of the Family Research Council, declined to talk about the letter, but said, “The enthusiasm to get behind his proposals is going to require that he get behind the issues that really motivated social conservative voters.”
Asked to estimate the level of discontent with the White House among the group on a scale from one to 10, Mr. Perkins put it at 8.
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U.S. Faces More Tensions Abroad as Dollar Slides
By DAVID E. SANGER
his article was reported by David E. Sanger, Mark Landler and Keith Bradsher and written by Mr. Sanger.
WASHINGTON, Jan. 24 – After a first term in which terrorism and war dominated President Bush’s foreign policy agenda, his allies in Europe and Asia suspect that his next confrontation with the world could take on a very different cast: a potential currency crisis, in which a steep plunge in the value of the dollar touches off economic waves around the world.
Already, the tensions over the dollar are becoming a recurring source of friction, a conflict that does not reverberate as loudly as the differences over Iraq but may be as deeply felt. At a meeting in Paris on Monday, the finance ministers of Germany and France complained that Europe had unjustly borne the brunt of the dollar’s decline, and called for coordinated action to stop it.
“Europe has until now paid too big a share in this readjustment,” Hervé Gaymard, the French finance minister, said. His German counterpart, Hans Eichel, said the United States needed to reduce its deficits, adding “each one has to play its role.”
Two months ago, similar sentiments came from China’s prime minister, Wen Jiabao, whose nation is at the center of a struggle with Washington over currency policy. He complained about the fall of the dollar, asking, “Shouldn’t the relevant authorities be doing something about this?”
In an interview just before President Bush’s inauguration, Treasury Secretary John W. Snow played down the tensions. “We understand that deficits matter,” he said, insisting that the tight budget Mr. Bush is expected to send to Congress next month should give foreigners and the financial markets the solace they seek.
But should the dollar continue to fall – if, for example, global investors determined that Mr. Bush did not have the will to hold spending down – it would not only add to tensions, analysts said. It might also force up interest rates at home to keep foreigners interested in financing America’s need to borrow more than $600 billion a year to cover its gap in the current account. The current account is the broadest measure of the trade and financial flows into and out of the country.
To be sure, the dollar’s fall may never reach crisis levels, and in the last few weeks, after a more or less steady fall of almost 35 percent against the euro and 24 percent against the Japanese yen over the last three years, the dollar has stabilized a bit. Many experts argue that a further decline, if relatively modest and gradual, is entirely manageable.
Administration officials, along with a number of like-minded economists, contend that the nation’s record trade and current account deficits are not particularly worrisome, a reflection more of strong foreign interest in investing in the American economy than any sign of global weakness.
But across Asia and Europe, a wide range of officials and analysts worry that Mr. Bush’s economic team may not be up to the challenge of grappling with the issue. They contend that Washington has retreated from efforts to marshal the biggest economies of the world into a mutual effort at more robust and balanced growth.
Many European politicians and exporters cannot shake the suspicion that the Bush administration, despite its statements supporting a strong currency, has been perfectly happy to watch from the sidelines while the dollar heads down.
At a moment of surging American trade deficits that have reached a record share of economic output, a falling dollar makes American exports more competitive and puts imports from Europe at a particular disadvantage.
“It’s hard to tell an entrepreneur to wait two years for a policy to change when he says, ‘I’ve got to deliver my goods tomorrow,’ ” said Anton Boerner, the president of BGA, the Berlin-based association of wholesalers and exporters.
Mr. Snow, for his part, paints a vastly different picture of the international economic landscape. He described the current situation as one of America’s remaining the economic envy of the world, where yawning deficits are being addressed and where there is little risk that foreigners will rethink the wisdom of lending the United States hundreds of billions of dollars a year to finance the trade gap and to cover the vast borrowing needs of the federal government.
Mr. Snow suggested some in Europe are seeking a convenient scapegoat, particularly after the tensions over Iraq, to blame for the Continent’s own inability to generate stronger growth.
“The current deficit levels are too large,” Mr. Snow said, describing himself as a deficit hawk who sees a chance to cut spending because the American economy is growing again. “They have to come down, and they will come down.”
But deficits aside, he argued, “overwhelmingly the United States is looked at as the model for success.” After years of stagnation in money flowing into the government, “revenues look good,” and the turning point will come in a couple of weeks, he said, when Mr. Bush sends a budget to Congress in which “you will see a number of programs that not only don’t grow at the rate of inflation, but that decline.”
While the budget is a domestic document, assessments of whether it will realistically grapple with the underlying problems and whether Mr. Bush has the political will to push tough measures through Congress may determine whether investors around the world stick with the American economy or head for the exits.
‘At a Critical Juncture’
No one knows for sure if the doubts that have already contributed to the dollar’s decline will intensify. Some worry that the markets may conclude that Mr. Bush will put the financing of the Iraq war, military transformation and the costs of revamping Social Security ahead of deficit reduction.
Others fret about the risk that a large, highly leveraged hedge fund or a big bank could be caught betting the wrong way in the markets, touching off a sudden currency sell-off that could have implications for the rest of Mr. Bush’s term.
“We’re at a critical juncture,” said C. Fred Bergsten, director of the Institute for International Economics, and a persistent critic of how Mr. Bush’s team has handled its global economic role. “The imbalances get worse and worse,” he said, rivaling Japan’s in the mid-1990′s.
“The projection is that they keep rising,” he added, noting that the current account deficit is running over 6 percent of the country’s gross domestic product. “And it is a trajectory that is bound to crack: people will stop buying dollars, and domestic politics will make the soaring trade deficit with China just unsustainable.”
For all those fears, foreign investors are still buying American. While much of that lending last year came from central banks abroad, private investors have shown renewed confidence lately. In November, the last month for which there are reliable numbers, foreigners made net purchases of $81 billion, enough to easily pay for the amount by which American imports exceeded exports.
“Our growth rates are still higher, over the long term, than Europe’s and Japan’s,” said Daniel J. Ikenson, a trade policy analyst at the Cato Institute. Given that, for foreign investors, “there is no reason to think they will sell.”
But the argument around the world is as much about leadership as about the long-term strength of the economy. Unlike the debate over war in Iraq, in this case the complaint is not about American unilateralism, but American retreat.
To America’s allies, the era in which the world’s largest economy also seeks to be the world’s economic leader has simply halted. Under both James A. Baker III, a Republican, and Robert E. Rubin, a Democrat, the Treasury Department was viewed as one of Washington’s most powerful institutions. It flexed its muscles to trim the market’s extremes and stem crises, from an excessively strong dollar in the 1980′s to the currency collapses of the 1990′s that stretched from Latin America to Asia to Russia.
There has not been an economic crisis of significant magnitude since Mr. Bush came to office. John B. Taylor, the Treasury under secretary for international affairs, said that was partly a result of preventive maintenance. “My first days on the job we had a crisis in Turkey and one coming in Argentina and Brazil,” he said. “Both were contained.”
Today the Treasury is regarded as a vastly diminished institution, with comparatively little influence in the White House. Mr. Bush is seen, rightly or wrongly, as far less comfortable dealing with global economic management than he is sitting in the Situation Room, buried in the details of the Iraqi insurgency or Iran’s nuclear threat.
As a result, the weakening dollar, to the minds of many from Hong Kong to Berlin, is a metaphor for a presidency so distracted by national security issues that American economic influence has ebbed.
China Stands Its Ground
Washington’s lack of success so far in pressuring China to finally allow its currency to float, or at least appreciate significantly to reflect its vastly stronger economy, is cited as the most striking evidence of Washington’s diminished economic influence. Beijing has used other issues, chiefly the Bush administration’s dependence on China to help prevent North Korea’s development of nuclear weapons from touching off a wider conflagration, to keep currency demands on the back burner.
That has contributed to a Chinese export surge that has soared to levels almost no one predicted when the United States, Europe and China reached agreement on the accord that brought Beijing into the World Trade Organization at the end of the Clinton administration.
The Chinese, like the Japanese in their heyday, have begun to question American economic policy. American officials say that the Chinese could solve a lot of problems by not linking their currency to the dollar, a step toward solving a trade surplus that looks set to hit a record of nearly $200 billion for 2004. It is a subject of enormous political sensitivity in Beijing, because of its effect on the breakneck pace of China’s economic growth.
But Mr. Taylor, the Treasury official, notes that teams of officials have visited China to offer advice about how to manage a floating currency and the Chinese last year hired the Chicago Mercantile Exchange to help it develop a market in currency futures.
“You don’t do that,” Mr. Snow said, “if you are planning to keep the currency pegged to the dollar.”
Seeking U.S. Leadership
China is only one piece of the global economic puzzle. The lack of interest by Mr. Bush and Mr. Snow to put together a global accord on currency, akin to the Plaza Accord that Mr. Baker organized in 1985, is viewed as evidence that Washington is content with a downward drift of the dollar. And there is no one to replace the American role.
“It will be a world of chaos without a center,” said Hideo Kumano, a senior economist at the Dai-Ichi Life Research Institute in Tokyo. Japan itself, after a decade of downward spiral that only now seems to be ending, has lost all pretense of assuming the mantle of leadership. Bush administration officials have a deep skepticism bordering on an outright ideological objection to intervening in the markets.
Certainly China, while growing in leaps and bounds, has neither the capacity nor the interest. “China has a big population and big economic growth, but it is not a mature economic system yet,” Mr. Kumano noted. “I cannot imagine it replacing Europe or Japan in terms of influence in the world economy. In such a condition, everyone must cope with a world economy where you cannot rely on America.”
For all the worries abroad, the Bush administration sees few signs of stress. “You don’t have any major economy now in recession, and volatility is low,” Mr. Taylor said. “Even inflation is contained in the emerging markets.”
But the lesson of the 1990′s is that currency crises, like the terror strikes of more recent years, are nearly impossible to predict.
“Financing of the U.S. current account deficit has gone more smoothly than many economists were predicting just a few years ago,” wrote Roger M. Kubarych, a former chief economist at the New York Stock Exchange who is now a scholar at the Council on Foreign Relations, a nonpartisan research group.
“But that does not mean that market stability can be taken for granted forever.”
David E. Sanger reportedfrom Washington for this article, Mark Landler from Frankfurt and Keith Bradsher from Hong Kong.
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