Opinion pieces and speeches by EPI staff and associates.
THIS PIECE ORIGINALLY APPEARED IN NEWSDAY ON APRIL 18, 2000.
Greenspan is bad for our economic health
by Jeff Faux
Fear that the up-tick in the consumer price index for March would lead to higher interest rates triggered last week’s plunge in the stock market. But the market bubble -overinflated by unrealistic prices for dot-com shares-would have lost altitude sooner or later.
Given that rising stock portfolios have encouraged high levels of consumer spending, the task for Washington policymakers is to make sure that a sinking stock market does not take the real economy of jobs and production down with it. At the very least, this requires the Federal Reserve to back off from its policy that has raised interest rates a full 1.25 percentage points since last June.
Unfortunately, the Fed seems to have fallen into its old tight money habits, and the damage will soon be apparent. It can take up to 12 months for the effect of higher interest rates to bite. So in a little while we will see reduced business investment, higher mortgage and credit-card costs and, as a result, rising unemployment. Wages for low- and moderate-income workers, which recently have been rising for the first time in two decades, will also be undercut.
One would think that engineering an economic slowdown in an election year would make incumbent politicians nervous. Yet Fed Chairman Alan Greenspan’s deity-like status on Wall Street puts him above reproach in Washington. In the last few months he has lectured an intimidated and fawning Congress that he is administering the pain for our own good-taking away the punch bowl before America’s booming consumer spending party expands beyond the capacity of the economy to produce, and sets off a wage-price spiral that can only be stopped with a recession.
When Greenspan warns of inflationary risks, it brings to mind the double-digit nightmare that destroyed Jimmy Carter’s presidency. Yet the inflation of the 1970s was not caused by an overheated domestic economy, but by the rise in global energy prices that-as is the case today-originated outside the United States. Nor was the previous bout of politically troublesome inflation due to overheated domestic demand; it was the result of Lyndon Johnson’s refusal to raise taxes to pay for the Vietnam War. The inflation before that was ignited by the Korean War, and the one before that by the lifting of price controls after World War II. In fact, going back to 1914, every serious inflationary episode has been either war-related or driven by global energy prices.
Currently, despite the stock market reaction, the latest consumer price numbers are no cause for alarm. Most of March’s increase was driven by energy and food prices, neither of which reflect an overheated U.S. economy. OPEC, the global oil cartel, is the source of higher oil and gas prices, and food costs rose because of weather-related changes in supplies. All other items in the consumer market basket rose a modest 2.4 percent over the year. Moreover, utilization of production capacity remains well below the peak of the last business cycle, and worker productivity continues to outpace employment costs.
In the tradition of the opaque institution he heads, Greenspan is a master at obscuring his motivations. But the simplest explanation for his recent attempt to suppress economic growth is not so much a fear of inflation, but a determination to protect corporate profits by keeping wages down.
Regardless of what Greenspan might be thinking, both Wall Street and Washington should remember that he is not infallible. To his credit, he halted the stock market crash of 1987 by encouraging New York banks to keep lending to stock buyers. But he also was slow to ease rates when growth leveled off in the early 1990s, a failure that plunged us into a recession and cost the senior George Bush his presidency.
It would be tragic to repeat that mistake. Tight labor markets and rising wages are good for America. They encourage companies to make labor-saving capital investments and improve efficiency. They make work pay for the poor whose welfare safety nets are being dismantled. And, of course, they increase working family incomes, restraining the widening income and wealth gaps that threaten social stability.
Our current business expansion is in its eighth year-a modern record. Like all mature expansions, it is increasingly vulnerable to shocks, such as a deflating stock market. Congress should not be running monetary policy, but neither should it stand by and let Alan Greenspan decide the country’s economic priorities. The message to maintain economic growth should be loud and clear.
Otherwise, the congressional chorus who chanted Greenspan’s praises this spring may be singing a different tune come November.
[ POSTED TO VIEWPOINTS ON APRIL 18, 2000 ]
Jeff Faux is president of the Economic Policy Institute in Washington, D.C.