Politics & Policy

Greenspan Vs. The Economy

Casualties mount in the Fed Chairman's war on growth.

Alan Greenspan must be thrilled. Last month, 116,000 Americans lost their jobs in the private sector while the unemployment rate climbed from a 30-year low of 3.9 to 4.1 percent. This was the first employment report since January 1996 in which private-sector payrolls shrank. The Fed’s War on Growth finally has produced its intended casualties.

The Fed has ordered six consecutive short-term interest rate hikes since June 1999 — from 4.75 percent to 6.5 percent — supposedly to slow America’s nine-year-long expansion lest inflation ignite and burn the U.S. economy like a barn. Ironically, the Fed itself has begun singeing some Americans.

Minorities — surprise, surprise — are among the first to get scorched. The record-low jobless rate for Hispanics increased from 5.4 to 5.8 percent, while black unemployment soared from 7.2 percent to 8.

Beyond the troublesome jobs picture, mounting evidence suggests that an overall slowdown has commenced.

Factory orders were off 4.3 percent in April, their biggest monthly decline since the depths of the last recession in November 1990. April durable goods orders fell 6.4 percent while electronic equipment orders tanked 20.2 percent. Interest-sensitive new- home sales fell 5.8 percent in April. All this bad news occurred before the Fed’s half-point boost on May 16.

Of course, behind these figures stand real people — American men and women whose lives and aspirations have been disrupted as Greenspan and his fellow central planners willingly sacrifice them to the imaginary gods of inflation. Perhaps the Fed’s governors will be so kind as to fill out the unemployment-insurance applications for those whose jobs they’ve vaporized.

This situation may grow worse. Economists point to a nine-to-twelve-month lag between rate increases and their effects. Thus, May’s unemployment uptick could be the bitter fruit of the Fed’s initial hike one year ago. If so, joblessness could continue ascending in response to the Fed’s five subsequent rate boosts.

While salaries remain tame — average hourly earnings inched up 0.1 percent last month and have advanced only 3.5 percent since May 1999 — there’s nothing wrong with pay raises. Politicians often decry the supposed stagnation of wages since the 1970s. As possibly the world’s hardest-working labor force, Americans deserve to be rewarded for their efforts.

Indeed, it is emblematic of Washington’s perverse ways that the Fed is trying to freeze paychecks while the Senate considers raising the minimum wage. In the Beltway, the buckle has no idea what the strap is doing.

For now, only high oil prices seriously threaten price stability. Tapping the Strategic Petroleum Reserve would grease the skids on gas prices. And even if non-energy-related inflation loomed, there are preventive measures far superior to Dr. Greenspan’s sledgehammer therapy.

The best vaccine against inflation is higher productivity. Eliminating the capital-gains tax will give companies an incentive to finance research and development, capital expenditures, technology purchases, and other investments that will accelerate productivity or output-per-employee. This will tame the inflationary beast. While such a tax cut will reduce short-term revenues, this fiscal year’s federal budget surplus is expected to hit $179 billion. As President Reagan used to ask: “If not now, when?”

If rising wages outpace productivity growth, high inflation could indeed return. One way to forestall this is to expand the labor supply. A new law allowing seniors to work without losing Social Security benefits should encourage many of them to do so, at least part-time. Congress also could help by dramatically increasing the number of work visas for energetic foreigners who wish to prosper here. This immediately would help companies that are having trouble filling job openings.

Federal regulations cost the U.S. economy $880 billion annually. That’s $8,550 per average family, Americans for Tax Reform estimates. Rescuing entrepreneurs from foolish red tape will free them to rededicate time and money to enhancing productivity.

Finally, free trade curbs inflation by allowing the importation of low-cost goods and raw materials and opening markets to U.S. products. Inviting more Latin American countries into NAFTA and signing an Anglo-American trade pact among the U.S., Canada, Britain, and Ireland would advance these ends.

Liberals often attack “cruel, cold-hearted” corporations when economic conditions prompt them to dismiss employees. And yet the Fed, a unit of the “caring, compassionate” federal government, deliberately targets American workers.

Alan Greenspan obsessively leads this immoral fight against illusory inflation, like Captain Queeg in the movie The Caine Mutiny. Queeg turned his battleship upside down to find the sailor who stole some strawberries from the galley. The human toll of Commander Greenspan’s equally unnecessary quest has only just begun to mount.

Deroy Murdock is a Manhattan-based Fox News contributor and a contributing editor of National Review Online, and a senior fellow with the London Center for Policy Research.


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