Sacrificing Workers in War on Inflation

When President Bill Clinton mustered support for the China trade bill, one of the first people he turned to was Federal Reserve Chairman Alan Greenspan. With Clinton standing beside him during a rare Rose Garden appearance--Fed chairmen usually shun the spotlight to maintain impartiality--Greenspan declared that the bill would have “profound implications” for the world economy. It was another sign of the extent to which the Clinton administration has become hostage to Greenspan and his star power.

No previous Fed chairman has enjoyed the kind of immunity from criticism that Greenspan does. The Clinton administration has zealously pursued tight fiscal policies to please Greenspan, prompting former Labor Secretary Robert B. Reich to accuse it of practicing Calvin Coolidge economics. During the primaries, Sen. John McCain (R-Ariz.) declared, “If Mr. Greenspan should happen to die, God forbid, I would prop him up and put a pair of dark sunglasses on him and keep him as long as we could.” Sen. Phil Gramm (R-Texas) has called him simply “the greatest central banker in history.”

This is all hype. In recent months, Greenspan has shown why his record at the Fed is itself grossly overrated. Obsessed with battling the phantom of inflation, Greenspan and his colleagues have raised interest rates six times since last June, to 6.5%, a five-year high. More hikes are sure to follow as Greenspan attempts to slow down the economy. But interest-rate hikes are hurting middle- and lower-income Americans just as they have started to realize small benefits from the roaring economy. Perhaps no one has a more immediate stake in this than Vice President Al Gore, whose fate will, most likely, rise or fall with Greenspan’s handling of the economy.

Greenspan’s determination to fight inflation rather than unemployment is a moral as well as economic choice. It favors the haves over the have-nots. Greenspan would rather have higher unemployment figures than run the risk of inflation. His economic philosophy includes the idea that it’s dangerous if the unemployment rate sinks too low. In essence, he wants a certain proportion of Americans to be unemployed permanently. He knows that in a robust economy, like the current one, employers have to compete for workers. As a result, since demand rises for workers, they can insist on higher wages, thereby, the thinking goes, leading to inflation.

Again and again, Greenspan has come down on the side of the wealthy in order to prevent the labor market from shrinking too much--and leading to more jobs and higher wages. For example, in 1994 and 1995, he doubled interest rates because he felt the economy was in danger of going below the “natural rate of unemployment,” which he asserted is 6%. Similarly, Greenspan has been jacking up interest rates in the last year because he’s afraid of too low an unemployment rate, which is currently below 4%, its lowest level since 1969. The Federal Reserve’s latest Beige Book states that “employment costs remained under pressure and appeared to intensify in the last two months.”

No doubt the Fed has to be concerned if costs for employees start zooming and if consumer spending spins out of control. But they haven’t. On the contrary, wages have not been rising appreciably and, given how much they have sunk for less-educated workers, an increase is surely in order. Since 1970, average wages fell by 10% for workers with a high-school diploma and by 24% for those who did not complete high school. Black unemployment, historically far higher than white unemployment (around 17%), is just starting to decrease, especially among teenagers. To cut off the economy when it is finally beginning to affect the underclass seems perverse.

What’s more, for all the hoopla about the “new economy,” many Americans, as American Prospect editor Robert Kuttner has repeatedly warned, have not yet benefited. Indeed, as Joel Rogers and Ruy A. Teixeira note in the June issue of the Atlantic Monthly, “for many working Americans the new economy has until very recently been more new than good.” One reason is that wealth inequality has been rapidly rising over the past decades. The national income has increased, but it has been concentrated among the top 20% of families. Families at the low end of the economic ladder have actually seen their inflation-adjusted incomes decrease.

Greenspan seems determined to solidify these trends, but perhaps this shouldn’t come as a surprise. He is, after all, a former disciple of writer Ayn Rand, who glorified the self-made man and libertarian philosophy in her novels. Thus, in 1980, Greenspan hailed President Ronald Reagan’s supply-side economics, calling it “an exercise in reasonable economics.” Greenspan tried to protect Charles H. Keating Jr., the most notorious figure in the savings-and-loan mess, from federal regulation, just as he would arrange a bailout of the Long-Term Capital Management investment group in 1998, when he should have let it sink. If you’re a small investor, Greenspan seems to think, it’s OK for you to suffer the risks of capitalism, but if you’re a highflying trader, you get VIP treatment from the Federal Reserve.

To be sure, Greenspan has warned about “irrational exuberance” in the stock market and compared his handling of the economy to someone trying to land a speedboat at a dock without crashing it. But if Greenspan were truly concerned about the stock market, he could increase restrictions on margin trading. When tech stocks recently plunged, many investors got caught short because of margin calls, but they would never have been able to buy as many stocks in the first place if the margin rate were higher.

Still, one effect of the technology boom has been to increase productivity, holding out the hope of decreasing unemployment while avoiding an upsurge in inflation. In 1994-95, when he raised interest rates, Greenspan refused to accept that fundamental changes were taking place. Today, Greenspan is falling into the same trap. The stock market may be overheated, but the economy is not. Yet, Greenspan is using an elephant gun to kill the mouse of inflation.

As he wages war against a bogy of inflation, Greenspan resembles a general fighting the last war. So far, the Clinton administration has stood by silently. But if the economy crashes as a result of his hasty interest-rate hikes, the Fed chairman’s ultimate victim could be Gore. It might serve the Clinton administration right for getting in bed with Greenspan in the first place.