Greenspan's Budget Committee Testimony
Jude Wanniski
October 9, 1997


Memo To: Alan Greenspan
From: Jude Wanniski
Re: Market Reaction to Your Budget Speech

Does it bother you at all that the financial markets clearly gave you the raspberries for your Budget Committee testimony? I often tell people that while you and I think alike on most issues involving the world economy, we differ slightly on the efficiency of markets. I think they are perfectly efficient in assessing accurate news that comes to it, while you think they are very efficient in doing that task. In this case, if you were happy that the markets razzed your testimony, you must believe that your views are superior to the market's view. If you really do think in this case the market is more efficient in assessing your testimony than you were in thinking it up, you of course should be wondering where you went wrong.

In reading through it carefully, I find a lot of very careful on-the-one-hand this, but on-the-other-hand thats, which is what the markets expect of a Fed chairman. David Gitlitz is working on an assessment of the variables you discuss which we will send to our clients later in the day. My chief concern is that you spend too much time wringing your hands over the potential of "wage inflation," as the economy runs out of labor. There is plenty of testimony from you on how productivity increases can offset inflationary pressures, even without additions to the work force. I'd wish you would hold out the concept that the entire work force is underutilized, underemployed at practically every level. If we had such a statistic, we could say the unemployment rate, including half of everyone, is 50% plus the official rate of 4.8%, or 54.8%. We can get that rate down by adding capital, which can be accomplished by reducing the risks of capital formation and increasing the rewards to capital formation. We surely do not want to increase the risks to capital formation, or the unemployment rate will rise above 54.8%. See what I mean? I actually think the market gave you the Bronx Cheer because they think you may make an error sometime soon in worrying about wage inflation when you should be worrying more about reducing monetary risks to capital formation.