Please, Mr. Greenspan, let the recovery proceed

April 12, 1994|By Robert Kuttner

You have sat too long here for any good you have been doing lately. . . In the name of God, go!

-- Oliver Cromwell, to the Rump Parliament, 1653.

SINCE President Clinton is too polite to call for the resignation of Federal Reserve Chairman Alan Greenspan, let me be among the first to do so. The man should take a well-deserved retirement before he does further damage to the economy.

The April 2 headline in the Boston Globe, my hometown paper, could be the epitaph for the economic recovery of 1993-94. The headline read: "Job Growth Soars in U.S.; Interest Rate Hike Forecast." Similar headlines have appeared across the country.

Rising interest rates, of course, will abort the fledgling recovery --with unemployment still above 6 percent, part-time work exploding and real wages stagnant.

At this writing, the two recent rate hikes by the Fed have pushed long-term interest rates well above 7 percent. Home mortgages are now back to nearly 8 percent. And the stock market has lost approximately 10 percent of its value.

All of this will quickly take money out of consumers' pockets, raise businesses' borrowing costs, depress housing construction, reduce the rates of economic growth and of job creation.

These mysterious movements of interest rates are neither the unseen hand of some perverse natural equilibrium, nor the markets' response to inflation.

They are the work of a foolish Federal Reserve and of a wrongheaded economics that underlies the Fed's actions.

When the Fed raised short-term rates a quarter point on Feb. 4, and then another quarter-point March 22, Chairman Alan Greenspan insisted that the idea was to reassure money markets of the Fed's anti-inflation zeal, and to lower long-term rates. Long-term rates went through the roof. So much for that theory.

Either Mr. Greenspan is dissembling and he really wants higher long-term rates -- or he doesn't understand economics. Either way, he belongs in another job.

The Fed's broader assumption that we can't have decent growth rates without kindling inflation is wrongheaded, too. Supposedly when times are good, workers gain power to bid for higher wages and factories begin having difficulty meeting orders. Both factors are said to lead to inflationary pressures.

But that describes the world of a generation ago, when there were stable basic industries, strong unions and little foreign trade. Today, the economy is globalized, services are as important as manufactured goods, and unions are weakened.

There are plenty of global sources of supply, and a worldwide labor market. The proof is that despite higher recent growth rates, inflationary pressures have not risen.

Given the changed economic context, the Federal Reserve should allow the recovery to continue. Beyond that immediate policy shift, we need a wholly different strategy to allow the economy to return to fuller employment.

Without such a strategy, an entire generation of recent graduates faces a world in which jobs are hard to come by, and good jobs with career ladders, security and fringe benefits are held mainly by their parents' generation.

Although the Fed jumped the gun when it raised interest rates, at some point -- say 5 percent unemployment -- high growth would lead to some inflationary pressures, in the absence of offsetting strategies. But the government is not without tools to allow growth and job creation to continue and to fight inflation at the same time.

For one thing, government could broker a social compact between industry and labor, to make sure that labor did not take advantage of worker shortages to push wages ahead of productivity growth. For another, government and industry could create more training slots, so that isolated scarcity of workers in high demand would not allow the bidding up of wages.

Economists have also argued that if workers took more of their compensation in the form of profit sharing and less in straight salary and wages, we could get closer to full employment without courting inflation. And a recent book by economist Edward Phelps, "Structural Slumps," argues convincingly that lower payroll taxes would make it cheaper for industry to take on new workers and hence would improve the "trade-off" between inflation and unemployment.

All of this is well worth doing as a long-term strategy of restoring full employment. But in the short run the most important need is for the Fed to stop being a wrecking crew.

Last August, when Congress and the president at last agreed to a $500 billion deficit-reduction package, the Fed rewarded this action by letting interest rates subside. The result was a long-deferred burst of economic growth.

With inflation having been wrung out of the economy during the 1980s and the deficit finally on a downward path, the stage is finally set for a return to steady, non-inflationary growth, and reliable job creation. If Mr. Greenspan finds this picture too happy to bear, he should get out of the way and allow a more benign presence to let the recovery proceed.

Robert Kuttner writes on economic matters.

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