THE United States economy is in a free fall. Employment, income, consumer spending, production and profits are all dropping rapidly. As the recession deepens, a fragile US financial structure is at risk. Political backlash from the recession could be nasty. Both the ``battle of the budget'' and the Gulf Crisis were major influences on voter attitudes this fall. However, White House loyalists tend to blame the recession - and Republican losses - on Federal Reserve Board chairman Alan Greenspan, not on Iraqi strongman Saddam Hussein.
That view is generally correct; the recession started before Iraq invaded Kuwait. As a result, Mr. Greenspan may not be reappointed when his term expires next August. He could be replaced before then. The post of Fed vice chairman has been vacant for months. All President Bush has to do is appoint a new vice chairman and then indicate informally that he or she will take over next summer. Greenspan would have to resign.
The cornerstone of Greenspan's policy is a conviction that zero inflation should be the Fed's primary target. To this end, he has been aiming for an economic slowdown ever since he took office in August 1987. Total bank reserves - the basic monetary fuel that the Fed supplies to the economy - have increased an average annual rate of only six-tenths of 1 percent during Greenspan's tenure. By contrast, the average increase in total reserves under his predecessor, Paul Volcker, was 9.3 percent.
In theory, Greenspan is correct. The economy operates best in a stable price environment. However, this begs the key question: Is the country prepared to follow the Fed down the road to zero inflation? If the answer is ``no'' - which appears to be the case - then Greenspan's rigid stance is overkill. In turn, this could undercut the support he needs to fight inflation over the long haul.
Meanwhile, it is clear that the opportunity for the Fed to avoid a slump has long passed. Money is still tight. Recent cuts in short-term interest rates by the Fed have been insufficient to induce a sustained pickup in money growth. Greenspan is plainly unwilling to compromise on his goal of zero inflation so long as he remains in office.
The cut in bank reserve requirements, which the central bank announced on Dec. 4, will shore up bank profits. It will not flood the economy with money. But even if the Fed were to pump up the money supply, the recession would still continue for some time.
The administration and Congress have been cool to the idea of zero inflation. The White House view of Greenspan has ranged from lukewarm to hostile. In the 101st Congress, Rep. Stephen Neal (D) of North Carolina was unable to get his Subcommittee on Domestic Monetary Policy - let alone the full house - to vote for a resolution setting zero inflation as the Fed's target.
More recently, dissents have come from people who should be among Greenspan's strongest allies. The US Chamber of Commerce, whose reports often reflect the views of conservatives on the White House staff, says flatly that Greenspan is responsible for the recession. His policies, the Chamber said recently, have attacked ``the supply side of the economy directly by lowering profits and raising the cost of investment.'' Just the other day, the Minneapolis Fed bank published an analysis concluding that the costs of zero inflation exceed its benefits. That is a disturbing attitude for a Fed bank. If the central bank won't defend the value of the currency, who will? Yet, keep in mind that this view has long been popular among liberals. Many Fed watchers believe Gary Stern, president of the Minneapolis Fed, would like a senior job in Washington if and when the Democrats retake the White House.
In 1974, when Mr. Greenspan was chairman of President Ford's Council of Economic Advisers, the White House launched a campaign to Whip Inflation Now (WIN) at a time when the economy was falling off a cliff. This contributed to one of the sharpest postwar recessions. Jimmy Carter's election as President led to a more expansionary policy that set the stage for the rapid inflation.
Greenspan's commitment against inflation is sincere. But if his policies drive the economy into a really deep decline, the Fed would have to reflate. It has happened before. It could happen again. In that case, by the mid-1990s both actual and anticipated inflation rates would be more likely to rise than fall.