Comments of Dr. Kathryn Shaw
The Progress & Freedom Foundation
Aspen Summit Conference
Aspen, Colorado
August 20, 2001

ÖWell, if we have a new economy, what went wrong?  What caused the current growth slump?

 Well, I hate to tell you this but as of the fall - early fall of last year - we in the White House, and the Federal Reserve really, very much saw it coming.  So what do I mean by that?  Economic growth had started to fade in the fall of 2000 and in my morning briefings in the White House, I developed a reputation for this phrase weíve heard today, the gloom and doom economist, because the manufacturing sector was fading and so as I gave my morning briefings to Podesta and others they were beginning to turn to me with that bored look that one gets when talking with an economist and, in addition now, that depressed look, and I developed this line that we better get out while the going is good, because in fact in the fall, during the election, the numbers were still good but they were fading, so it was time to get the election past because things werenít looking rosy. 

 Well, if we saw it coming, why didnít we do something to prevent it?  You know its easy for me to say this in retrospect, so what really caused the slump?  Well, you know, I would agree with whatís been said earlier about what caused the slump, but let me just say a few things about how we should consider this. 

 When the Fed, when monetary policy is attempting to guide the economy, the Fed has a gun, and they have one shot, thatís interest rates.  But they have many targets, and in this case they had two targets in particular of course economic growth and inflation, Iím not going to even talk about the stock market target.  So what should they have been aiming for in the fall of 2000 to try and prevent this recession?  Well, some of the data suggested that they should raise interest rates at that time and particularly the energy increase.  With energy prices soaring from 11 dollars a barrel to about 30 dollars a barrel, it suggested a possible inflation around the corner and that we should be raising interest rates in the fall of 2000, in addition, there was some other evidence that inflation might be creeping up because of the growth of the growth of the economy.  On the other hand, other data suggested that the Fed should lower interest rates, and that was the manufacturing slump and it was the concern that some of the other sectors were feeling the impact as well.  And finally, the new economy data, the high trend in productivity, suggested we should do nothing, the economy was growing beautifully, no sight of really, core inflation, do nothing. 

 So this is the situation that Greenspan was in, in the fall of 2000, and with that in mind, he waited, he didnít move, he didnít act, and also he understood the risks but he decided it was time to wait and see what happened.  Well, recessions are usually caused by shocks to the economy and thatís of course what happened.  This recession was caused by several shocks, the exchange rate had been rising and that caused manufacturing to slump, then we had the energy price increase, which will result in a recession if it is severe enough and did contribute to the last three recessions in the U.S., and then finally, the decline in the stock market and therefore when we look to monetary policy, we have to figure out how to balance these actions. 

And finally, in early January 2000, with the stock market declining, manufacturing slumping, Greenspan and his committee decided to err on the side of movement towards lower rates, and at that time, he lowered ratesÖ