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Is There Too Much Money?

Economic Trends


M2 and M3 worry some experts

In retrospect, it's easy to understand the Federal Reserve's latest decision to forgo a rate hike. Despite low joblessness and a buoyant first quarter, inflation is still dormant. Consumption and industrial output have slowed. Fiscal policy promises to stay restrictive for the foreseeable future. And low-wage workers are seeing real pay increases for the first time in recent memory.

Still, some economists say Greenspan & Co. may be missing the boat by not heeding an old familiar leading indicator: the money supply. Although the Fed has tended to downplay the money supply in its policy decisions for some years, Greenspan noted recently that the links between money and economic activity appear to be stabilizing again.

That's noteworthy, says William V. Sullivan Jr. of Dean Witter Reynolds Inc., because monetary growth could provide an answer to a puzzle plaguing economists: why the economy's growth rate eclipsed expectations by such a wide margin in three of the last four quarters. "It may be no coincidence," he says, "that growth of the M2 and M3 monetary aggregates have been trending higher since mid-1995."

Indeed, economist Paul L. Kasriel of Chicago-based Northern Trust Co. notes that M3 has been growing faster than nominal gross domestic product for nearly two years (chart) after lagging nominal economic growth for eight years. "The last time that happened was in 1986 and 1987," he observes, "and inflation accelerated in 1988 and 1989."

Recent monetary growth remains strong. M2 has climbed at better than a 5% annual pace so far this year, while M3 is currently posting its largest year-over-year advance since 1987. Significantly, growth of both M2 and M3 has been exceeding the target ranges set by the Fed at the start of the year.

Both Sullivan and Kasriel think such vigorous monetary gains foreshadow a pickup in economic activity in coming months--a pickup that could well exceed the Fed's speed limit for noninflationary growth. It's something Alan Greenspan may also be worrying about. In his early May speech in New York, he repeatedly referred to the dangers of "excessive credit creation, spurred by overly accommodative monetary policy."BY GENE KORETZReturn to top

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Sometimes, it can boost job growth

In recent years, a hot controversy has raged around the impact of the minimum wage on employment. While economic theory suggests that an increase in the minimum wage should retard hiring of low-wage workers, some economists have found that such effects are often negligible. Others question these findings, and the debate goes on.

In a new study, however, Walter J. Wessels of North Carolina State University points to one area where a higher minimum has often tended to actually increase employment: the labor market for waiters and waitresses.

The reasons relate to the nature of restaurant compensation. Unlike other workers, waiters derive most of their earnings from tips. Because of this, federal law allows restaurants to pay waiters and other tipped workers a special low minimum wage pegged to the regular minimum (it is currently set at 50% of the regular minimum).

Tip income, of course, depends on sales. However, as Wessels notes, businesses seeking to expand usually find that average sales per employee will decline as they add new employees--at least, until sales pick up. This means that restaurants that hire more waiters will cause tip income per waiter to fall, since there will be more customers, but fewer customers per waiter. To offset falling tip income and retain their workforces, expanding restaurants will typically boost their basic hourly wage rates for all such workers.

As Wessels notes, a hike in the minimum wage--and thus in the lower "tipped" minimum--changes the equation. Since wage rates have already been raised, many growing restaurants find they can add waiters without adjusting pay for their current serving staff.

The upshot is that hiring should pick up steam, which is exactly what Wessels found. His analysis indicates that, in most states, job gains among waiters and waitresses accelerated significantly in the wake of minimum wage hikes. (The exceptions were states which mandate a higher "tipped" minimum wage than the low federal minimum.)

"Raising the minimum wage may usually hamper job growth" says Wessels, "but in the restaurant industry it has often stimulated hiring."BY GENE KORETZReturn to top

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