Zero-Inflation Madness: Going for Broke
Minneapolis Star Tribune, July 24, 1997
There's something a little twisted about a gathering of central bankers over the Labor Day weekend, where they argue about how to worsen the already insecure situation of working people.
No smoked-filled rooms for these guys. With their allies in the economics profession and among financial analysts, they met under the broad expanse of Western skies at Jackson Hole, Wyoming to discuss their theories. And no conspiracies, either: they blab freely to the press. Sounds exaggerated? Take Martin Feldstein, former chief economist under President Reagan and an economic adviser to the Dole campaign. He argued at the conference that the Fed could reduce inflation by another two percentage points, by causing a recession that would cut output by five 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 matters is quite limited. A bill introduced by Senator Connie Mack of Florida, and co-sponsored by Bob Dole, would indeed 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.
To understand what's going on here, there are a few things that everyone should know about monetary policy in the United States. First, 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. At present this amounts to a guarantee that at least seven million people will not find jobs, no matter what they do. (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? One would think the authorities would have a good answer to this question, backed up by solid evidence. After all, they are in the best of times condemning more than seven million people who are actively seeing work to the pain and hardship of unemployment. At their worst, they have actually brought on recessions that throw millions more out on the street.
But the Fed's defense of its harsh intervention in the economy is actually very shaky. Their first 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, they argue, which will cause workers to demand even higher wages. The whole process will then spin out of control.
However, 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 the oil price increases in the 1970s, or wars.
Furthermore, it has not been demonstrated that lower levels of inflation are better for the economy-- or the people who participate in it, for that matter-- than the higher levels we have experienced. The bankers and economists who met in Wyoming last week 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 they 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 damned. 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.
But this tendency to continually up the ante on monetary policy is very dangerous. It is 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.