Economists Urge Fed To Expand Money
`PURE and simple, the Fed is not getting the job done.'' So says Lacy Hunt, chief United States economist of the Hongkong Bank group, the 26th largest bank in the world. His complaint is that in the heart of a recession in the US economy, the Federal Reserve System has not yet managed to expand the nation's money supply - the fuel for economic activity. Indeed, the money supply, by whatever measure, has actually shrunk since mid-October.
That failure, Mr. Hunt says, will prolong and worsen the recession: ``In a highly overleveraged economy like that we have today, it is a terribly misguided policy to let the money supply shrink.'' During the bustling 1980s, many consumers and businesses piled up more debt than they can comfortably service. With layoffs multiplying and sales diminishing, many of these ``over-leveraged'' individuals or businesses stand in greater risk of financial difficulty.
In testimony before Congress earlier this week, Fed Chairman Alan Greenspan strongly hinted that the central bank will continue to ease monetary policy if the money supply doesn't resume steady growth. ``The downward pressures on activity may be lessening,'' he said, forecasting that the slump will end around midyear.
But in the eyes of Hunt and Anna Schwartz, an economist with the National Bureau of Economic Research in New York, that's not likely unless the Fed suddenly manages to boost money growth. Dr. Schwartz is coauthor with Nobel prize-winning economist Milton Friedman of a 1963 book, A Monetary History of the United States. This significant book revived the concern of economists and central bankers in most industrial countries with money supply trends as an important influence on the business cycle.
During the 1980s, ``monetarism'' lost some favor in economic and financial circles and probably in the Fed.
Despite this falloff in popularity, Schwartz says, ``I can't see that a single thing has changed in the 1980s. Monetarism is alive and well.'' By that, she means trends in the money supply still precede trends in business activity ``with a long and variable lead.'' She suspects Mr. Greenspan has been following money supply numbers all along, although downplaying them publicly.
Hunt offers a chart showing a dip in real M2 (a measure of money that includes currency, checking deposits, and some savings deposits, with the impact of inflation removed from the numbers) well before each of the four recessions since 1960 and an upturn in advance of each recovery. Real M2 flattened out toward the end of 1986 and declined last year.
In the last recession, the real money stock turned up in September 1981, and the economy began expanding in November 1982 - 14 months later. The average lag between positive money growth and a revival in national output was eight months.
The Schwartz-Friedman study, which covers a century of business cycles, found that the average lag was nine months. But the lag has been as short as six months and as long as 28 months. This would suggest that even if the Fed gets the money supply growing again in February, it will be at least summer before economic activity would pick up. It could be longer.
Greenspan ``should be paying attention to growth in the money supply,'' Schwartz says. Of course, she adds, the money supply is not the only factor that affects the economy.
The Middle East war has depressed consumer and business spending. Congress last October passed the largest tax increase in US history, with many of its provisions taking effect at the start of the new year. Thirty-three states have raised taxes in the last year.
Greenspan advised Congress that it should not further boost taxes to pay for the war or cut them to stimulate the economy.
Hunt says monetary policy already needs to offset the contractionary tax measures in place. Another economist, Paul Boltz of T. Rowe Price Associates, says the Fed's present inclination to ease should be strengthened by the Middle East war.
Hunt's look at the latest recessions finds that housing starts on average turn up eight months before the economy as a whole picks up. Car sales turn around six months before an expansion starts. In this recession, housing and car sales have yet to revive.
Hunt does not find such facts encouraging for quick recovery.