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Rates key to debate on growth


An article in the Business section Sunday incorrectly attributed a response to Sen. Paul S. Sarbanes' use of cartoons to criticize Federal Reserve Board Chairman Alan Greenspan. The response -- "You've certainly elevated the intellectual level of this debate" -- was made by Sen. Phil Gramm, R-Texas.

The Sun regrets the errors.

WASHINGTON -- The man everyone expects to become chairman of the Senate Banking Committee next year had done plenty of what some say he does best, economics homework.

He had to, because he was about to do what he might have done for a living if he hadn't gone into politics -- teach economics. And he was out to give a lesson to no less a student than Federal Reserve Board Chairman Alan Greenspan.

Sen. Paul S. Sarbanes methodically worked through charts and graphs that he said proved there was no inflation and thus no need for still-higher interest rates, and quoted from a Nobel Prize-winning economist and a Pulitzer Prize-winning columnist.

The Maryland Democrat finally pulled out his surprise exhibits, huge blowups of editorial-page cartoons that skewered Mr. Greenspan as a killjoy stamping out the economic recovery.

"Greenspan's Car," one was entitled. It had an immense brake pedal and no accelerator. "Say, isn't that Greenspan's house?" another said. It showed a street where a fierce lightning storm was hitting only one house.

Mr. Greenspan rose acidly to the bait. "You've certainly elevated the intellectual level of this debate," he replied.

It was an exchange of ever-so-correct barbs that might have been expected at an economics faculty meeting, but it took place in a Senate committee room last week. It thus became part of a national debate over interest rates, which the Fed has bumped up four times since February and which are affecting virtually every American's pocketbook.

The debate may determine much about how far and how long the economic expansion, now in its fourth year, can go.

The issues at stake have driven up the payments on a new 30-year, $100,000 home mortgage by more than $100 a month since winter, have sliced 8 percent from the value of stocks in pension-savings plans (and nearly 2 percent from the bonds) since February and are determining the job prospects of millions new graduates and unemployed workers.

With seven Republicans vying for the right to challenge him in November, Mr. Sarbanes makes it a point to spend more time in Maryland this year. But even his own re-election campaign was not enough to keep him from a chance to confront Mr. Greenspan.

The debate's fulcrum is interest rates, and its vocabulary comes largely from economics textbooks, but the real issue is the nation's priorities. It is a debate that shows how much life still exists in the timeless tensions between conservatives and liberals.

"High unemployment has social as well as economic costs. The burden of a high-unemployment . . . government policy falls twice as hard on minorities," Mr. Sarbanes told the Fed chairman, chiding him for having said economic conditions are "ideal" when unemployment is still above 6 percent.

To Mr. Greenspan, who only six months ago was under fire from conservatives for keeping rates too low too long while the economy gathered momentum, the principal enemy today is not unemployment but inflation. A secondary enemy is a weak dollar.

Here is how he described the dangers:

"An increase of inflation would come at considerable cost. We would lose hard-won ground in the fight against inflation expectations -- ground that would be difficult to recapture later; our long-run economic performance would be impaired by the inefficiencies associated with higher inflation if it persisted; and harsher policy actions would eventually be necessary to reverse the upsurge in inflationary instabilities.

"We are determined to prevent such an outcome."

And the economy is already in the midst of a "rapid expansion," Mr. Greenspan said. He cited the 1.4 million net new jobs this year, annual economic growth rates of more than 7 percent in the fourth quarter of 1993, nearly 3.5 percent in the first quarter of this year -- and above the long-term average in the second quarter, though figures are not yet published.

The only way to keep that expansion going, Mr. Greenspan argued, is precisely the opposite of what Mr. Sarbanes advocated -- keep interest rates up, and watch closely for signs of inflation down the road, which would require that rates go still higher.

With new-car sales and new housing starts already dropping off, the 1.25 percent the Fed has increased rates this year is already "choking off the recovery" from recession, Senator Sarbanes asserted.

"If we are wrong when we take rates up, we can fairly easily correct the consequences of that mistake," Federal Reserve Chairman Greenspan replied, adding that recovering from a new round of inflation would be painful and costly and would take a long time.

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