Sarbanes doggedly pursues changes in policy at Fed He wants top banker to cut interest rates to create jobs for poor

December 25, 1997|By David Folkenflik | David Folkenflik,SUN NATIONAL STAFF

WASHINGTON -- There is something bracingly pure about Sen. Paul S. Sarbanes' continued and unfulfilled chase of Federal Reserve Board Chairman Alan Greenspan -- a bit like Wile E. Coyote's pursuit of the Road Runner on the old Warner Bros. cartoons.

For years, Sarbanes, an Awfully Serious Guy, has fenced with Greenspan, another Awfully Serious Guy, on detailed aspects of the Fed that tend to leave most members of Congress cold.

And yet, despite several years now of a remarkably serene economy -- low inflation, mild unemployment and robust growth -- that many observers hail as a vindication of Fed policy, Sarbanes is still at it. Almost alone in Congress, the Maryland Democrat is still publicly making the case for the nation's central bank to cut interest rates and pump more money into the economy, thus boosting growth even more quickly and helping to create more jobs.

As elusive as the Road Runner, Greenspan remains unconvinced. Many other economists, too, fear that Sarbanes' prescription could mean a return of 1970s-style runaway inflation and say that the senator should leave well enough alone.

"Most people have learned that printing more money does not create more prosperity, except, at best, temporarily," says Allan H. Meltzer, a professor at Carnegie Mellon University who leads a group of inflation-phobic economists that gathers twice a year to dissect Fed policy.

"There's something wrong with a person in a responsible position who can't see that," Meltzer growls. "You've had the longest period of sustained growth in decades -- 15 years with a single modest recession."

Says Robert D. Reischauer, former director of the Congressional Budget Office: "There is a consensus now that the Fed has been following a very enlightened policy and those who are anxious to havemonetary policy loosened are few and far between. There's not much to complain about."

But armed with a deeply held conviction that a job confers a priceless sense of dignity, Sarbanes argues that the nation has missed the chance in this period of economic strength to create an economy where every person who wants to work can do so.

'Pushing the envelope'

"I'm in favor in pushing the envelope," Sarbanes says. "It's a terrible thing for someone not to be able to have a job and support their family. It destroys their self-respect. It's not a way to build a decent and just society."

As for the Fed chairman, Sarbanes says: "Mr. Greenspan and I get along all right. I do not think Mr. Greenspan is an irresponsible office holder."

Greenspan does not respond to press queries for comment. But Joseph R. Coyne, the assistant to the Fed, says Greenspan looks forward to his periodic exchanges with Sarbanes whenever the Fed chairman testifies before Congress.

"He asks probing questions which the chairman really enjoys answering," Coyne says of Sarbanes. "He has stuck with it. He, I think, understands us more than the average member of Congress would."

Indeed, Sarbanes has identified a key contradiction in the conventional model of thinking about economic policy:

For years, most economists accepted a given rate of unemployment as "natural" for a healthy economy -- roughly 6 percent to 7 percent. According to this theory, once the jobless rate fell below roughly 6 percent, demand for labor would grow so strong that employers would be compelled to offer workers more money. Production costs would then rise, and companies would have to charge higher prices for goods.

If such inflation were unchecked, the Fed would eventually raise interest rates. The resulting slowdown could lead to layoffs and a recession.

Defying theory

But that "natural" rate of unemployment no longer appears to hold true -- or, at least, not lately.

Defying conventional economic theory, unemployment, now 4.8 percent, has remained below 6 percent since late 1994, and yet inflation has fallen so low -- around 2 percent -- that some analysts are even talking about widespread price cuts for consumers.

So Sarbanes has demanded that Greenspan acknowledge that the old rules may no longer apply. The senator wants the Fed chairman to force short-term interest rates even lower on the theory that there is a lower "natural" rate of unemployment that can be achieved before inflation flares up. Whatever that rate is, Sarbanes says, we're not there yet.

"If you see an inflation problem, if you actually see it developing, why, then you need to address it," Sarbanes says. "But don't kind of anticipate it and needlessly cut off economic growth and job creation."

Sarbanes' quest coincides with a coherent political ideology, wedded to the concerns of unions and the working class, that has animated the third-term senator since his first days in public life.

"Sarbanes is a throwback to an older generation of Democrats," says Benjamin Ginsberg, a political scientist at the Johns Hopkins University. "If you're a traditional New Deal, liberal Democrat, then it comes naturally to favor easing of monetary policy."

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