ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Saturday, October 19, 1996 TAG: 9610210005
SECTION: EDITORIAL PAGE: A-7 EDITION: METRO
SOURCE: ROBERT STAUFFER, DARRYL LOWRY AND GARRY FLEMING
SINCE OUR profession is teaching economics, we have a very strong interest in promoting economic literacy. Unfortunately, the media in general, and The Roanoke Times specifically, are sometimes indiscriminate concerning the economic analyses they choose to publish.
In a Sept. 23 Newsweek article titled ``A Confederacy of Dunces,'' Robert Samuelson discusses the general media problem. We would like to discuss a specific example from the Sept. 24 issue of The Roanoke Times: Mark Weisbrot's commentary, ``Fed's interests aren't those of workers.''
Weisbrot claims to be ``research director'' for the Preamble Center of Public Policy. However, his analysis of unemployment, inflation and Federal Reserve policy demonstrates a glaring lack of knowledge of the topics. For instance:
* In respect to unemployment, he argues that an overly restrictive Fed policy has condemned us to a 5.1 percent unemployment rate and ``this amounts to a guarantee that at least 7 million people will not find jobs, no matter what they do.'' In fact, the current unemployment rate is the lowest since 1989, and many of those 7 million people are only temporarily unemployed due to job changes, layoffs and recent entry into the labor force. Most of those now unemployed will find jobs within a year, only to be replaced by newly unemployed workers who fall victim to ever-changing economic conditions.
The minimum attainable level of unemployment is defined by the large amount of change going on in the U.S. economy at any given time. As a result, approximately 5 percent of the labor force will be classified as unemployed, no matter what the Federal Reserve does. Perhaps Weisbrot should do a little research on why a certain level of unemployment is unavoidable.
* In respect to inflation, Weisbrot pays no attention to the problems it causes (harm to savers, those on fixed incomes, etc.). His assertion that OPEC was the main cause of the inflationary problems of the 1970s and that ``there is no evidence we have ever experienced this kind of wage-price spiral'' demonstrates a lack of knowledge of U.S. economic history. Perhaps he should research the fact that inflationary problems started in the latter half of the 1960s, as strong demand pushed unemployment below 4 percent and pulled the inflation rate from 1 percent in 1964 to 6.2 percent for 1969. The OPEC price hikes of 1973 and 1979 just added to existing inflationary pressures.
* In respect to Fed policy, Weisbrot states that ``today's Fed would never permit'' the very low real interest rates of the 1950s and 1960s. Apparently, he is unaware that:
(a) The Fed can only directly influence short-term market rates.
(b) The level of real rates (market rates minus inflation rates) is largely determined by bond-market participants. They usually demand rates of return of 2 percent to 3.5 percent above expected inflation to help with financing our $5 trillion-plus national debt. Therefore, the only way to keep interest rates low is to also keep inflation rates low.
(c) One major reason both market rates and real rates were low in the 1950s and early 1960s is that inflationary expectations were subdued by fiscal responsibility (small deficits and budget surpluses in 1951, 1956, 1957 and 1960) and an equally responsible monetary policy by the Federal Reserve (the same type of policy Weisbrot now wants the Fed to abandon).
(d) If the Fed were to try to push the unemployment rate below 5 percent at this time by pursuing a more expansionary policy, the result would be accelerating inflation. Short-term interest rates would initially fall somewhat, but longer-term rates would immediately rise due to inflationary expectations.
A strong argument can be made that the Fed has done an excellent job of balancing the goals of high employment and low inflation (i.e., the interests of workers and the bond market). The misery index (the rates of inflation and unemployment) is at its lowest level (about 8 percent) since 1967. The only way to argue that our current growth problems are the result of an overly restrictive Fed policy is to do what Weisbrot has done - distort the economic realities concerning unemployment, inflation and Fed policy.
We urge The Roanoke Times to be more selective in what it chooses to publish. Your in-house editorials often contain excellent economic analysis. It would be helpful to the interests of economic literacy if the person or persons responsible for those editorials took on a more active role in evaluating articles offered for publication.
Robert Stauffer, Darryl Lowry and Garry Fleming are faculty members in the Department of Business Administration and Economics at Roanoke College.
LENGTH: Medium: 81 linesby CNB