By ROBERT KUTTNER
The Federal Reserve Board’s decision to hike interest rates a quarter point, with more hikes anticipated later this spring, is perverse. The economy is finally growing at a decent clip, ordinary people are getting glimmerings of wage increases and Chairman Alan Greenspan feels compelled to slam on the brakes.
The Fed’s senior staff, even more inflation-phobic than Greenspan, has spent the past several months scouring the economic indicators for some small hint of escalating inflation, to justify a rate increase. But they couldn’t find any. Inflation actually declined in the first two months of 1997, to an annual rate of 2.3 percent from 3.3 percent in 1996.
Even Greenspan, in his Joint Economic Committee testimony, said recent slight wage gains had not affected underlying inflation, and that “faster productivity growth last year offset the pressure from rising compensation gains.”
That, if anything, was an understatement. During 1996, productivity increased by 1.2 percent, while real wages went up by only 0.5 percent. Greenspan himself has repeatedly said that the actual growth of productivity is understated by the statistics.
So why the rate hike?
Greenspan and his colleagues offer a startlingly new rationale a preemptive strike against price pressures that do not yet exist. Though there is no evidence of rising inflation, we have to act because inflation might be around the corner. Depressingly, this has become conventional wisdom.
A second explanation is that Greenspan acted out of his repeated concern that the stock market is overvalued. Higher interest rates cool the stock market by coaxing investors out of stocks and into money market funds. And by raising the cost of borrowing, slowing economic growth and industry’s profitability higher rates further dampen the stock boom.
But if that is the real goal, there are better ways to cool the stock market without damaging the real economy. Greenspan, who is never shy about making policy recommendations, might have thrown some useful cold water on the proposed capital gains tax cut. That would dampen market euphoria. Or he might have put in a kind word for the idea of a small tax on financial transactions, to discourage speculative stock trades.
But instead of acting to temper the speculation, the Fed moved to throttle the real economy. Unfortunately, Chairman Greenspan has taken on the role of infallible deity.
This is a pity, since there ought to be a real debate about how fast the economy can grow, and why the average working family is not sharing in the economy’s productivity gains. If the Fed slams on the brakes whenever growth hits 2.5 percent or so, that debate is moot. The economy grew at nearly twice that rate in the two decades after World War II, and could again.
There is far too much deference to Greenspan, and too few dissenting voices. During her brief service on the Federal Reserve Board, economist Janet Yellen was an eloquent voice for the proposition that the new competitive structure of the economy allowed higher growth and fuller employment without the risk of inflation.
But last year President Clinton asked Yellen to chair the Council of Economic Advisers, reportedly to put a woman in a senior economic policy post. Yellen’s move may have been the most ill-advised “promotion” since LBJ persuaded Arthur Goldberg to leave the Supreme Court for the United Nations. Yellen was doing far more important work at the Fed.
The current economic expansion is in its seventh year. With welfare reform, 1 million to 2 million welfare recipients, half of them minorities, will be thrown onto the job market. According to the Economic Policy Institute, the current unemployment rate among young black female high school graduates is 22 percent; among dropouts it’s even higher.
It is only well into an economic expansion that hard-to-employ people finally get a shot at jobs, and other workers finally get raises. The Fed’s concerns about lower unemployment triggering inflation have been repeatedly disproved in the 1990s. Yet the Fed is prematurely extinguishing the expansion just when ordinary people are beginning to benefit.
It is striking that Greenspan’s recent testimony cited wage inflation. For, if wages have finally risen a bit, it’s about time. Yet the Fed’s policy seems committed to the proposition that America doesn’t need a raise.
This, of course, is a profoundly political question. The owners of financial wealth are enjoying a stunning boom. Wage and salaried workers are not. There is more than one way to manage an economy, but this one is being managed in the interests of Wall Street rather than Main Street.
In January, Group Health Cooperative of Puget Sound, serving over 650,000 consumers, celebrated its 50th anniversary. But on March 15, with very mixed feelings, the membership voted to affiliate with a much larger HMO.
The lopsided vote to embrace the Kaiser Permanente health system, the national nonprofit behemoth based in Oakland, reflects the radically changing nature of health insurance. The Puget Sound co-op reluctantly concluded that they had to find a much bigger partner or very likely go under.
The co-op was founded in 1947 by citizen activists, small farmers, trade unionists and radically dissident doctors. At the time, prepaid group health insurance was considered almost subversive.
The American Medical Association fought the idea tooth and claw. Prepaid group plans, with salaried doctors, flat fees and comprehensive family coverage, were not quite socialized medicine, but close. The local medical society blacklisted Group Health doctors, until a state Supreme Court anti-monopoly ruling intervened in 1951.
Of all the early group health plans, the Puget Sound group was perhaps the most idealistic. It was organized as a true co-op, with a board elected by all members. Policy was debated at mass meetings. For its first 20 years, Group Health even refused group contracts with employers because it wanted its insurance subscribers to be active individual co-op members.
But with the emergence of large, commercial HMOs, which often lack a social mission, plans like Group Health Co-op of Puget Sound have become endangered species.
Robert Kuttner is a syndicated columnist for the Washington Post Writers Group and a writer for The New Republic and Business Week. Jane Bryant Quinn is off this week.