Good News from the Home Front

June 05, 1994

Traveling the battlefields of Europe, President Clinton got what he called "good news from the home front" as the unemployment rate dropped sharply from 6.4 percent to 6 percent in May, the lowest level since 1990. That wasn't the only good news. During the month 191,000 new jobs were created -- much less than the 285,000 feared on inflation-antsy Wall Street but well over the 170,000 monthly rate required for Mr. Clinton to achieve his goal of 8 million new jobs by election day, 1996. Financial markets remained calm.

The May numbers are likely to heat up debate among economists and within the administration about what constitutes "full employment" -- the optimum number of jobs that can be filled without triggering inflation. In the 1970s, Democrats and labor unionists aimed at getting unemployment below 4 percent. But with increased volatility in the work force, as more people move more rapidly to different kinds of jobs, there is a growing consensus that 6 percent is the more correct number.

If so, the May figure (which is subject to readjustment, probably higher) would indicate that the Federal Reserve Board had it about right by pushing up short term interest rates from 3 percent to 4.25 percent in the February-to-May period. The larger question now is whether further increases will be necessary to keep the economy from overheating.

On this, the various economic indicators are mixed. Laura Tyson, the president's chief economic adviser, offers as good a diagnosis as any when she says the "economic expansion continues right on track." By her definition, this would be 3 percent growth rate this year and 2.9 percent next -- a pattern that leads Treasury Secretary Lloyd Bentsen to say the economy appears stronger than at any time in the past 20 years.

Mr. Bentsen and Ms. Tyson have consistently refrained from criticism of the Fed's interest rate increases while softly suggesting enough is enough. If this is constructive caution, it is clearly attuned to the president's wishes. History shows that while former President Jimmy Carter succeeded in pushing down the unemployment rate from 7.7 percent to 5.8 percent during his first two years, he also ignited the double-digit inflation that led to his defeat in 1980. That is a pattern President Clinton must want to avoid. Politicians exult in job growth for the 8 million currently unemployed, but wise ones know that inflation is a curse that affects the entire voting public.

So while Fed chairman Alan Greenspan takes his licks from growth-minded Democrats, Mr. Clinton seems well and rightly content to let interest rates rise and unemployment rates drop to levels where they are in equilibrium. The economy seems to be in that pleasant state right now, which is indeed good news from the home front.

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