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Jewish World Review May 26, 2000 / 21 Iyar, 5760

Jack Kemp

Jack Kemp
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Is the economy being
saved or destroyed? --
LAST WEEK'S half-point interest rate hike to 6.5 percent is clear and convincing evidence that the Federal Reserve Board has completely lost touch with reality. The central bank has become obsessed with fighting a phantom inflation it fears might result sometime in the future because the Fed lacks faith in the free market's ability to balance demand with the supply of goods and workers during a booming economy.

The Fed's announcement of its sixth interest rate hike in a year was a demand-side caricature of Keynesian thinking so convoluted that it would make Lord Keynes himself blush. It assaults the common sense and sparks the skepticism of the American people by using jargon to justify the Fed's otherwise unjustifiable action: " ... the (Federal Open Market) Committee believes the risks weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

With all due respect to members of the FOMC, that sentence has absolutely no economic meaning.

It's not the single act of raising the overnight lending rate last week to its highest point in nine years that makes me suspect the Fed has gone over the edge; it is the fact that in almost maniacal fashion, the Fed has persisted in its Quixotic tilting at markets, raising interest rates by 175 basis points since last June, in total disregard of the fact that throughout the period of Fed tightening there has been a complete absence of any financial indicators of inflation.

The fact is, the Fed is stuck inside an outmoded, discredited, abstract model of the economy called the Phillips Curve, in which it believes that too much economic growth produces inflation. With each hike in interest rates we have been subjected to some new crazy explanation to legitimize this theory for which there is absolutely no empirical substantiation.

First, it was too many people working creates inflation; then it was too many people investing in the stock market; then it was too many people building too much wealth; then, most bizarre of all, it was too few people producing too many goods.

Government economic statistics due out this week on overall growth, housing and consumer spending are expected to show that the Federal Reserve's campaign to raise interest rates has yet to cool the economy significantly.

If the Fed is to be taken at its word, this means last week may have been just the beginning of Operation Rolling Thunder at the Fed to obliterate "excessive" economic growth with more interest rate hikes in the future. I can't wait to see the next new explanation to be propounded by the whiz kids at the Fed for why it must "destroy economic growth in order to save it."

Yet, if there are no statistical red lights flashing, if the Fed seems in a quagmire in its war against economic growth, if its strategy of escalating interest rates has yet to slow down the economy, and if the Fed suffers from a widening "credibility gap" with ordinary Americans, its propaganda campaign does seem to have won the hearts and minds of the financial press. Evidence of this success can be seen in the Washington Post in Sunday's business page. One financial writer opined that "the signs of creeping inflation are now unmistakable ... consumer spending, labor shortages ... and the first cousin of labor shortage, 'pressure for increased wages.' That's deadly. That is the essence of the inflationary scenario."

With productivity growth running at a 30-year high, increased wages are justified and desirable. Never in the history of mankind has a nation experienced rising inflation when the price of gold was falling and the foreign exchange value of its currency was rising, as has been the case here during the past year. The only significant price increases anywhere in evidence since 1996 are relative price increases that were the result of cartel-manipulated oil prices and reports out just this month indicate that even these prices are falling.

What makes this whole saga so personally disappointing to me is that the very able Fed Chairman Alan Greenspan, a close personal friend who has been guided over the years by the price of gold and the exchange value of the dollar as inflation indicators, now appears to have become a neo-Keynesian and succumbed completely to the notion that the Fed's job is to fine-tune markets and ration economic prosperity in doses it thinks appropriate. Give growth a chance, Mr. Chairman.

Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute. Comment by clicking here.


05/22/00: Immigration and the promise that is America
05/12/00: Stock market roulette or snobbery?
05/04/00: Is Rule of Law whatever we say it is?
05/01/00: Myths happen

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