Over the next six months, two extraordinary things will happen. Legislation to balance the federal budget will pass, and three slots will be open at the Federal Reserve, including Alan Greenspan's spot as Fed chairman. Who will guide the nation's monetary policy over the next few years will be even more important than usual. That is why Clinton should reappoint Greenspan, who has done a good job in a difficult period. At the same time, he should fill the other two slots with governors who understand how the economy is changing.
A budget that moves toward balance over a period of years will dramatically shift the mix of fiscal and monetary policies needed to assure the continued prosperity of the nation. A shrinking deficit means a drag on the economy, at least in the short run, as government jobs are eliminated and funds for Medicare and other programs are cut. Some of this will presumably be cushioned by a drop in long-term interest rates, which will stimulate investment. But the Fed must stand ready to be an active player as well, if it is necessary to cut short-term rates to compensate for the falling stimulus from government spending.
Such talk is anathema to Senate Republicans. With one seat already open, and Vice-Chairman Alan S. Blinder apparently ready to return to Princeton University, there are signs that the Republicans will reject any nominee who is not hawkish enough on inflation. An economic litmus test for the Federal Reserve Board may be good politics, but it won't serve the best interests of U.S. workers and businesses.