WASHINGTON -- With the official unemployment rate at 5.1 percent, its lowest level in more than seven years, an increase in interest rates by the Federal Reserve now seems all but inevitable. The only questions are when and how much?
If a number of influential policy makers have their way, the Fed's next move will be the first of a series. A conference of central bankers two weeks ago, sponsored by the Federal Reserve Bank of Kansas City, gave an ominous glimpse of just how far they would like to go. With their allies in the economics profession and among financial analysts, they met under the broad Western skies at Jackson Hole, Wyoming, to argue about how to worsen the already insecure situation of working people.
Martin Feldstein, former chief economist under President Reagan and an economic adviser to the Dole campaign, argued that the Fed could reduce inflation by another two percentage points, by causing a recession that would cut output by 5 percent. Never mind the millions of people who would lose their jobs in such a move. His only lament is that "There is no political support for that now."
That comment, however, refers only to the general public, whose input in this matter is quite limited. A bill introduced by Sen. Connie Mack, R-Fla., and co-sponsored by Bob Dole, would make "price stability" the only legal objective of the Federal Reserve's monetary policy. All previous legal mandates to consider employment as an important policy goal would be out the window.
Something everyone should know about monetary policy in the United States is that the Federal Reserve actually sets a minimum level of unemployment and uses its control over interest rates to slow down the economy when unemployment falls below that level. Currently, this amounts to a guarantee that at least 7 million people will not find jobs, no matter what they do.
Plus the others
(It's actually a lot more than that if we were to count all the people involuntarily working part-time, and those who have given up looking for work altogether).
This in itself ought to be a scandal. An ordinary person might ask, why not let the economy grow and allow the unemployment rate to fall as far as it may? The authorities ought to have a good answer, backed by solid evidence, to this question. After all, they are choosing -- in the best of times -- to condemn more than 7
million people who want to work to the pain and hardship of unemployment instead. And in bad times, such a policy actually brings on recessions that throw millions more onto the street.
But the Fed's defense is shaky. The claim is that "too low" a level of joblessness will push wages up, which doesn't sound so awful to most people. But this will increase inflation, the Fed argues, which will cause workers to demand even higher wages. The whole process will then spin out of control.
But there is no evidence that we have ever experienced this kind of "wage-price spiral" of inflation. Most of our bouts with inflation have been associated with external events such as wars or the oil-price increases in the 1970s.
Furthermore, it has not been demonstrated that lower levels of inflation are better for the economy -- or for the people who participate in it -- than the higher levels we have experienced.
The bankers and economists who met in Wyoming congratulated themselves on "bringing inflation to heel over the last 15 years or so," as Fed Chair Alan Greenspan put it. But the last 15 years compare quite miserably to the previous 35, when judged from the standpoint of anyone who has to work for a living.
The very low real interest rates of the 1950s and '60s, which today's Fed would never permit, allowed for the rapid income growth and relatively low unemployment that created the "golden age" of American capitalism. Even the central bankers' worst nightmare, the double-digit inflation decade of the 1970s, provided real gains for the overwhelming majority of the work force -- as compared to the real losses workers have suffered since then. We also had a higher rate of investment and growth.
Yet now the talk turns to eliminating inflation entirely -- the labor force be damed. In some sense it is redundant, since the Fed has long ago dismissed the idea that full or even high levels of employment should be its concern.
This tendency continually to up the ante on monetary policy is dangerous, and also very revealing of the real basis of the Fed's policy: the insatiable appetite of the bondholders. For the bondholders and bankers, inflation can never be too low. Unemployment is not a problem. There you have it; the Fed's policy explained in two sentences.
The rest of us have more complex needs. If we ever intend to return to a society in which prisons are no longer the fastest-growing industry, and the majority of the work force sees its income rise with productivity, then the goal of full employment will have to be back on the political agenda.
Mark Weisbrot is an analyst with the Economic Policy Institute.
Pub Date: 9/18/96