A question for Alan Greenspan, chairman of the Federal Reserve:
If the unemployment rate is too low, forcing you to consider raising interest rates to slow the economy and head off inflation, what’s going to happen two years from now, when all those people on welfare are supposed to get jobs?
For that matter, what’s all this about a “natural rate of unemployment,” below which the economy dare not go? And if it is healthy to have 8 million people looking for work, what happens when another 4 or 5 million join the search?
Far be it from this writer, who struggles with long division, to question the demigods who oversee the country’s monetary policy. It’s just that I’m sensing a disconnect between conservatives who want everybody to get a job and conservatives who want 6 percent of the labor force not to have a job.
Or maybe I’m missing something.
It could be, for instance, that if we cut income taxes by 15 percent and halve the capital gains tax, as presidential candidate Bob Dole wants to do, we could juice the economy in such a way that the unemployed could be put to work without inflating the currency. It could be, except hardly anybody outside the Dole camp, and the economics quadrangle at the University of Chicago, thinks that’s a possibility.
Not even, Murray Weidenbaum, President Ronald Reagan’s economic guru, who doubts a Dole administration could cut spending enough to offset Dole’s promised $548 billion tax cut. (Too much of the federal budget consists of sacred cows such as Social Security, Medicare, national defense and interest payments on old debt. And you don’t hear Dole saying much about those items.) Even an economically challenged scrivener like myself knows if you cut taxes by more than you cut spending, the deficit will soar, and with it, inflation.
Weidenbaum likens Dole’s tax cuts to putting “air in a flat tire without patching up the holes.” Others have called it “Voodoo 2,” a reference to George Bush’s now-famous description of tax-cutting Reaganomics. That approach left the economy staggering under $4 trillion in debt.
All of which brings us back to Mr. Greenspan, who on Tuesday will call to order a meeting of the Federal Reserve’s rate-setting Open Markets Committee.
The chairman has good reason to be pleased with himself and the performance of the economy over the last three years. Recovery from the ’91-’92 recession, if not robust, has been steady. His main enemy, inflation, is nowhere to be seen. The August reading of the consumer price index came in at a near-deflationary annualized rate of one tenth of 1 percent.
And yet, there are those within the gilded corridors of the Federal Reserve who want Greenspan to raise interest rates. These are the anti-inflation “hawks,” and they say it’s worrisome that the economy grew at a 4.8 percent clip last quarter, when it was supposed to be gliding to a “soft landing.”
What has really got them screeching, though, is the low unemployment rate. Last month the segment of the labor force without a job fell to 5.1 percent, the lowest in seven years. And even more ominous, if you’re an inflation hawk, is the fact that wages have begun to rise faster than the rate of inflation. Most people cheer this development, inasmuch as inflation-adjusted incomes have stagnated over the last 20 years. But most people aren’t inflation hawks.
Not satisfied with a price escalation rate of 2 to 3 percent, they insist now is the time to push for zero inflation. And they want Greenspan to start pushing this Tuesday by raising the federal funds rate, a key determinant of short-term interest rates, to 5.75 percent from its current 5.25 percent.
It is purely a coincidence, one would hope, that the buttoned-down “hawks” would urge such a thing just six weeks before the presidential election. Nobody, leastwise nobody with any credibility, has accused them of wanting to tank the economy for political purposes. It’s too late for that anyway, since a rate increase now wouldn’t begin to slow the economy until early next year. It might, however, knock the stock market for a loop, which is something President Bill Clinton would like very much to avoid.
My guess is that Alan Greenspan will stay the course and leave interest rates alone, at least until after the election. Then they may have to be lowered, not raised, because there are signs–like slowing car sales and rising credit card defaults–that consumers are tightening their purse strings.
Besides, Chairman Greenspan is in no hurry to become a two-time loser.
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A lot of Republicans blame the then-neophyte Fed chairman for not lowering interest rates fast or far enough back in 1991, after Saddam Hussein grabbed Kuwait’s oil fields, sending the U.S. economy into a tailspin. George Bush may have won the campaign against Iraq, but a dead-fish economy surely helped Bill Clinton win his against Bush.
So don’t look for the Fed to raise rates this week.
Then, after the election, Greenspan needs to ask the hawks for their plan to create jobs for all those ex-welfare recipients. As if they had one.