Saving us from Fed, Greenspan

What blessed news. The unemployment rate jumped and job creation slowed. The business press trumpeted this cheery news earlier this month. Ordinary citizens may be excused for wondering why the business press and the market cheers as more of us lose our jobs.

The business press shares Alan Greenspan’s worry that more job growth inevitably leads to runaway inflation and thus they take comfort when the labor market weakens. But it isn’t just fear of inflation that motivates these leaders. Their unacknowledged concern is an economy where there are so many jobs that workers would have real choices. Workers with real choices could demand equal power and fair treatment.

In an era when distrust of government has reached an all time high, the Federal Reserve, perhaps as insulated a bureaucracy as one could find, has gained substantial control over our economic development. With leaders of all parties determined to cut government spending, the responsibility to keep this economy moving falls increasingly to the Fed.

Most of us should take little comfort in the Fed’s role. The central bank has been described as a body whose job it is to remove the punch bowl just as the party gets going. Federal Reserve governors argue that their primary job is fighting inflation. The Fed maintained for many years that if unemployment dropped below 6%, runaway inflation was sure to follow.

As the economic boom of the nineties has proceeded, financial crises in Asia and Russia restrained the Fed from tightening as quickly as it might have liked. Alan Greenspan also deserves some credit for being less dogmatic about the magic six percent figure. Yet Greenspan still assumes that there is a tradeoff between unemployment and inflation and that with four percent unemployment, inflation will soon rage out of control.

Most economists accept some notion of a tradeoff. Nonetheless, just where unacceptable levels of inflation would commence and whether unemployment is the only way to combat inflation are points of dispute. The late Nobel Prize economist Steven Vickery put the doomsday fugure at 2 percent. Greenspan now seems as dogmatically confident about his 4 percent figure as his precdecessors once were 6 percent.

One must question both his logic and his priorities. There is still no sign that wages, having trailed productivity gains most of this decade, are doing anything more than barely matching those gains now. If Greenspan had cared as much about wages as corporate profits, he would have eased credit even more for most of this decade.

The same business leaders who now fear full employment once cut welfare benefits and proclaimed that jobs are the answer to welfare dependency. Federal policy therefore must continue to deliver on its promise to the unemployed. Even lower levels of unemployment are unlikely to trigger dramatic wage and price increases. Far fewer workers are unionized than during the sixties and business flight is far too easy.

Even the double digit inflation of the seventies was ignited as much by the massive Vietnam War buildup and the oil crisis as by union pressures. Too much government spending went into economically unproductive military technologies while massive federal tax cuts fueled a runaway private economy.

In today’s economic circumstances, tight labor markets — even with modest rates of inflation — would help most of us. In those parts of the nation where unemployment is very low, in the two to three percent range, even fast food franchises are finding they must offer benefits to part time workers. And down the road, horor of horors, unions or other forms of independent work organization might gain a foothold in a truly full employment economy. Nonetheless, even then jobs for all need not result in endlessly escalating wage demands pushing inflation to dangerous levels. Through profit sharing or other joint labor management arrangements, workers and businesses can agree to limit wage and profit increases and to pour a percentage of cash flow into expansionary investments from which both share long run gains. But such agreements work only when management recognizes workers as an equal, independent voice in corporate affairs.

A more democratic Federal Reserve could encourage such changes. Gradually increasing margin requirements for stock purchases would curb the stock market bubble. By establishing lower reserve requirements for member banks that make loans for local business and housing expansion, the Fed could also encourage the flow of more capital to productive forms of investment. In addition, the Fed could itself buy bonds targeted for specific social capital investment, such as worker training, new transit systems, and public health centers, which would foster a more productive, full employment economy.

I don’t expect the Fed to move in these directions soon. But with our economic future increasingly dependent on central bankers, more of us outside the realms of high finance must start paying some attention to the whims of this mysterious group.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail comments to buell@acadia.net.