Growth without pain Dogma: A "natural" jobless rate of 6 percent to avoid inflation is being questioned even by economists.

June 30, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

The June sun is already scalding the damp sidewalk that leads to the unemployment office on Eutaw Street, and already the jobless fill out forms in the cramped plastic seats inside.

It's 10: 15 a.m. on a Friday. Each applicant's tale is as particular as his Social Security number. His plant closed for the summer. Her restaurant went out of business.

But the scene is timeless, built into the government, programmed into economists' equations.

In Maryland alone, unemployment employs more than 600 people, perpetually, to process benefits applications, issue checks and such. Economists speak of a "natural" rate of joblessness of about 6 percent. When the number of adult Americans who want to work but can't is about 7 million, prevailing economic theory implies, all is right with the world.

But the prevailing theory is under siege. Nobody is saying unemployment can be abolished, but long-held ideas about how fast the economy can grow and how low the jobless rate should sink are being challenged as they have not been in years.

Specifically, critics of the Federal Reserve say that the nation's central bank has been too strict, that it can lower interest rates to stimulate the economy and reduce unemployment without making inflation worse.

That notion, in most economic circles, is heresy.

Accepted wisdom holds that whenever more than 94 percent of the work force holds a job, the resulting labor scarcity forces companies to boost wages. Higher wages get passed along as higher prices for goods and services, and inflation bites deeper into money's value.

The 94 percent rule, contends Paul S. Sarbanes, Democratic senator from Maryland, is "dogma that really doesn't work. We need some fresh and broader thinking. I think we can have faster growth and not have an inflation problem."

The liberal Sarbanes has been saying such things for a long time. But the ideas are gaining a wider hearing, thanks to the economy's continued torpor, presidential campaign debate, recent congressional hearings on Fed appointments and a growing suspicion that the global marketplace truly has nullified the 94 percent rule.

"You have had a series of structural changes in the last decade that have basically increased the potential of the economy to grow without inflation," said Jerry Jasinowski, president of the National Association of Manufacturers, a Washington trade group. He wants the Fed, whose rate-setters meet this week, to cut short-term interest rates by a quarter percent this year and another quarter percent later.

Jasinowski warns that rates should be cut cautiously and that faster growth also requires tax reform, better education and other remedies. But he's an important poster boy for the forces for lower rates: He represents big business, which is nothing if not economically conservative. And he is trained as an economist, the profession that has sanctified the 94 percent rule.

But business people aren't the only ones lured by the concept of pain-free economic stimulation. Amid flat personal incomes, shrinking corporations and one of the slowest economic recoveries on record, the idea promises payoffs for workers and policy-makers as well.

"We can't solve any of our basic economic and social problems and balance the budget and make the investments we have to make without higher growth," said Felix G. Rohatyn, a managing director of investment bank Lazard Freres & Co. and another in a minority of big-business inflation "doves." "We shouldn't be afraid of growth."

Even small changes in economic growth rates make huge differences in Americans' lives. The Fed's perceived "speed limit" for the gross domestic product now is 2.5 percent annual growth, about its current rate. Any faster, policymakers fear, and unemployment drops and inflation rises.

Suppose, though, that the Fed's critics are right, that the economy could grow steadily by, say, 3.5 percent annually. It's ,, not out of the question. Between 1945 and 1988, the economy grew at an average yearly pace of well over 3 percent. Since then, growth has been more like 2 percent.

"It makes a whopping difference," said Gary Robbins, a research fellow with the Institute for Policy Innovation. A percentage-point increase in GDP growth now could wipe out the federal budget deficit in five years, he said. It would cut the long-run Social

Security deficit by half.

"That's why people should be concerned," Robbins said. "It's the difference between whether some people are going to get their benefits or not."

Growth advocates claim that the Fed is fighting the last war, that policy-makers and Wall Street learned the lessons of the 1970s a little too well. Thanks to oil shocks, stronger unions, a hesitant Fed and a consumer psychology that accepted higher prices, inflation hit double-digits four times between 1974 and 1981.

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