ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, October 5, 1996 TAG: 9610070011
SECTION: EDITORIAL PAGE: A-7 EDITION: METRO
SOURCE: RICHARD COTHREN
REGARDING Mark Weisbrot's Sept. 24 commentary, ``Fed's interests aren't those of workers'':
For some reason, the issue of what monetary policy ought to be pursued by government always has attracted no small number of crackpots and charlatans. One could fill a book with the policy recommendations of such. (In fact, someone has. See ``Monetary Mischief'' by Nobel laureate Milton Friedman.)
In our history, we need only consider William Jennings Bryan, a three-time presidential nominee. In his famous ``cross of gold'' speech, Bryan advocated a bimetallic, gold-silver monetary standard to replace the then-reigning gold standards. The speech exhibited little knowledge and no sense of proportion, featuring in its peroration the lines ``You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.'' This statement, if you can believe it, is about monetary policy! Bryan and monetary ``reformers'' through the ages share the belief that between us and bountiful plenty stands a tight-fisted central banker, a belief that easy and free flowing money will solve our economic ills. To this infamous cast of characters, we can now add one Mark Weisbrot, research director of something called The Preamble Center for Public Policy.
In the United States, monetary policy is the responsibility of the Federal Reserve Board (the Fed), currently headed by Alan Greenspan. Weisbrot tells us that the ``Federal Reserve actually sets a minimum level of unemployment and uses its control over interest rates to slow down the economy when unemployment falls below that level,'' and ``this amounts to a guarantee that at least 7 million people will not find jobs, no matter what they do.'' This is nonsense. The Federal Reserve does no such thing; its actions guarantee no such thing.
Weisbrot's grasp of historical events is equally tenuous. He is absolutely wrong when he tells us: ``Most of our bouts of inflation have been associated with external events, such as wars or the oil-price increases in the 1970s.'' Shocks of this nature can cause a general increase in prices, but will not sustain inflation over an entire decade, such as the United States experienced in the 1970s. Persistent, long-run inflation can only arise as a result of the Fed's allowing excessive money growth. This policy the Fed pursued in the 1970s.
Moreover, no economist who has studied the problem believes, as apparently does Weisbrot, that our comparatively poor growth in the past 20 years can be attributed to poor monetary policy.
The Fed does not set or determine the unemployment rate. The Fed does not set or determine the economy's growth rate. It could do neither of these things, even if it desired to do so. Ultimately, unemployment and growth are determined by the productive capacity of the economy - technology, plants and equipment, resources and the like - and by growth in same.
Some governmental policies (tax policies, for example) can affect unemployment and growth. Monetary policy, however, does not fall into this category, not in the long run at any rate. The historical record shows that the Fed cannot sustain an unemployment rate below that rate consistent with the full utilization of the economy's productive capacity. The failure to recognize this fact in the past invariably has led to high inflation with no less unemployment and no more growth. The failure of past attempts to evade this fact explains the current consensus among macroeconomists that the Fed ought to focus its efforts on that which it can accomplish, a reasonably predictable price level with low inflation. This was recognized 30 years ago by Friedman. (It is difficult, if not impossible, to avoid quoting him on these issues.)
With respect to stable money growth, a prerequisite for economic stability, Friedman wrote that it ``would provide a monetary climate favorable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs of economic growth.'' No amount of monetary quackery can substitute for these.
Richard Cothren is an associate professor of economics at Virginia Tech.
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