Working with a Democratic President - Essay Example

In Chapter 8 of the book, entitled "Working with a Democratic President," Beckner discussed Greenspan's reappointment as FED Chairman under the Democrat administration of Bill Clinton. Together with Greenspan, Alan Blinder, Lawrence Meyers, Alice Rivlin, Janet Yellen, and Ned Gramlich were also appointed to make up the Board of Governors - all of which are academic economists. One important point this book makes through this chapter, in light of the decision-making process under the FOMC, is the impact political factors have on the independence of the FED.

This highlights the importance of the FED Chairman's character, especially in Greenspan's case under the Clinton administration. The 1990s began with a recession caused by the FED's tightening of monetary policies during the late 80s. This recession, although mild compared to the earlier crises that the FED had to deal with, was the event, which set the course of monetary policy for the rest of the decade. As the book illustrated in previous chapters (Beckner, 1997), warding off the recession during this time was left to the hands of the FED because the government was powerless to render an effective fiscal policy.

On the one hand, the government was experiencing a high budget deficit; and on the other hand, the Bush administration, which was Republican, had to deal with a Democratic Congress, making it difficult to agree on an effective fiscal policy. Hence, the FED repeatedly cut off interest rates to ward off the recession. As a result, the recession ended in 1991 paving the way for continuous recovery.When the recession ended in 1991 and following his re-appointment under the Clinton administration, Greenspan, in 1993 announced that the FED would no longer depend its policies on monetary aggregates.

Instead, it focused more on ensuring that an increase in inflation is balanced out by a higher increase in interest rates. This has been the FED's response to the economic conditions of the 1990s. It was an illustration of Greenspan's discretionary policies. According to Gregory Mankiw (2001), monetary aggregates played no role in improving the macroeconomic performance of the 1990s. Instead, he argues that it was adjusting nominal interest rates more aggressively in response to inflation, which prevented spiraling inflation.

Such policies implemented by the FED through Greenspan's leadership have given the United States its most exceptional performance, to date. The economy was more stable in terms of inflation, unemployment, and real growth rates. In terms of inflation, inflation rates during the 1990s were a less volatile than that during the 80s. Unemployment was also declining. Furthermore, real growth rates were also less volatile than that in the 80s. In addition, demand and supply shocks were not as significant as it was in the earlier decades.

The worst shock that the country experienced was that caused by the Gulf Crisis, which sent oil prices to increase. Interestingly, as Beckner (1997) eagerly demonstrated, Alan Greenspan's leadership of the FED through his discretionary policies seem to have provided the United States an effective monetary policy to keep inflation at bay while at the same time keeping unemployment low and growth rates stable. Such leadership would not have been as