Everett Dirkson's memory

Why is it that Alan Greenspan has been continuing to push short-term interest rates upward? Last June, the Federal Funds rate was 1.00%. In the intervening fourteen months the Fed has increased rates ten times to the current level of 3.50% on the way to an apparent target of 4.00%.

Why, faced with little evidence of inflation on the horizon, modest economic growth and anemic job creation, has the Fed Chairman and the most powerful central banker in the world felt the need to apply the monetary screws.

The reason is quite simple, and quite instructive. Monetary policy––the manipulation of interest rates and the money supply in order to balance the rate of economic growth and inflation––requires that the Fed have the latitude to raise interest rates when the economy is overheating and inflation is increasing, and to lower rates when recession threatens.

Over the course of 2001, with a recession looming, the Fed reduced the Fed Funds rate from 6.50% to 1.75%. Three years later, with the economy stable but shaky, Greenspan feared that if the economy were to head south, the Fed would have no tools at its disposal if it did not raise rates. That is to say, the Fed embarked on a steady program of rate increases not to head off inflation, not to cool the economy, but to have the ability to lower rates again if need be.

Discipline matters, Greenspan is telling us, because you need to plan for the worst.

Why is this instructive? Well, today, President Bush asked Congress for $51.8 billion for hurricane recovery, on top of $10.5 billion requested last week. Estimates of the ultimate federal cost range as high as $150 billion.

Back in the day, an appropriation of $50 billion would have required that some choices be made. Taxes would be raised. Spending would be cut elsewhere. Bonds would be issued for the specified purpose. There would be explicit choices and explicit tradeoffs.

And there would be political repercussions. Republicans would rail against deficit spending or borrowing. Democrats would appeal to the public weal and the justification of tax increases for an urgent need, for shared sacrifice.

Where is the Katrina money going to come from? No one asks anymore because we know where it is going to come from. We have no reserves. We have no flexibility. We are going to borrow it. Like the money to pay for our war in Iraq, it is going to come from the Chinese central bank, and when my children, and their children, are in their peak earning years, perhaps they will pay the Chinese back with their hard earned dollars.

Hurricane Katrina is a reminder of why fiscal discipline matters. Today, our combined federal deficit and trade deficits are massive. These deficits are pushing down the value of the dollar, and ultimately will depress the standard of living of Americans in the future as funds are siphoned out of the US economy to repay that borrowing. Our lack of discipline, our unwillingness to make choices simply puts the burden on our children.

There was a time, just a few years ago, when the budget was balanced and the national debt was stable. Everett Dirksen––the Republican Senator from Illinois who coined the famous aphorism “a billion here, a billion there, pretty soon it adds up to real money”––would have been pleased. But in five short years, a federal government in the firm control of the GOP has thrown away the rulebook and dispensed with any pretense of fiscal discipline. Wars have been declared and no funds raised to pay for them. Taxes have been cut with no offsetting cuts in expenditures. The unholy marriage of tax-cutting suppy-siders and big spenders within the Republican party that Pete Peterson decried in Running on Empty has been revealed in its full glory.

Now, in the face of a national disaster that demands funding outside of the normal budget process, we have no latitude. We have no savings. We have no contingency funds.

But thank God we still have the Chinese.