Give Growth a Chance

The nominations of Alan Greenspan to serve another four years as Federal Reserve chairman and of vice chair-designee Alice M. Rivlin and Laurence H. Meyer will be approved later this week by the full Senate. But the delay caused for several weeks by Democratic Sens. Tom Harkin (Iowa), Paul Wellstone (Minn.), Byron Dorgan (N.D.) and Harry Reid (Nevada) was a significant if overlooked milestone in the evolution of economic policy in the 1990s.

The Populist Four were acting in the long tradition of prairie and Western predecessors, stressing growth and easier money as distinct from more conservative policies favored by Wall Street and central bankers. But with little notice, they increasingly are being joined by voices from all over the political spectrum: Steve Forbes, Jack Kemp, the AFL-CIO, the National Assn. of Manufacturers, small business leaders and Keynesian economists who see no reason that the U.S. economy should not be producing greater growth, more new jobs, more tax revenues and new private investment.

The next president, be he Bill Clinton or Bob Dole, almost certainly will propose a budget and deliver an economic message next January that will sound more like John F. Kennedy in 1961 than that of any recent president. Later this year, if they have their wits about them, both Clinton and Dole will discover growth as a campaign issue and propose to “get America moving again.”

Fact: The U.S. gross domestic product has grown in this decade at rates less than half those during previous post-World War recoveries and well behind the average overall growth rate of the American economy since the Civil War. The 2.2% growth rate of the 1990s, which we can expect again in 1996, also lags well behind the 3.8% worldwide growth predicted this year by the International Monetary Fund.

Fact: Inflation remains tame. Once again, it will be below 3% this year. Both wages and prices have been well contained by global competitive pressures. Even the Federal Reserve concedes that “price increases remain generally subdued and there are only scattered reports of wage pressures.” Additionally, as we’ve recently discovered, the consumer price index may be overstated by as much as .5% to 1.5%--meaning that inflation is even tamer than we think.

Fact: The so-called Phillips Curve, which maintains that there is a direct trade-off between domestic employment and domestic inflation, may be irrelevant. Domestic unemployment is at 5.6%--well below the presumed “natural rate” of unemployment of 6%, below which inflation is thought to be triggered. Yet inflation remains subdued. If the Phillips Curve ever had relevance, it no longer does because of the globalization of economics and finance. An 11% unemployment rate in the European Union, for example, creates elbow room for growth in our own economy, which no longer can be seen as an isolated or even predominant entity. Treasury Secretary Bob Rubin, a Goldman Sachs alumnus, has lent too sympathetic an ear to bond traders’ recurring inflation phobias. If whoever is president exerts just a bit more fiscal discipline next year and inflation remains as moderate as currently foreseen, there will be no reason at all why the Fed should not reciprocate and knock interest rates down by two or more points.

We are long overdue in giving growth a chance. There are big private and public needs that are going unaddressed because growth is lacking. Harkin and his colleagues have started a debate that ought to continue long after Greenspan, Rivlin and Meyer have been safely ensconced within the Fed’s marble palace.