I rise in defense of my erstwhile fellow BUSINESS WEEK columnist, Alan S. Blinder, now vice-chairman of the Federal Reserve. Blinder recently had the temerity to suggest that unemployment as well as inflation was of concern, at some times, in some places. From the ensuing uproar, you might have thought he had advocated nationalizing the means of production.
The New York Times interpreted Blinder's carefully qualified speech as an "intellectual split" in the Fed's Board of Governors. Newsweek columnist Robert J. Samuelson (no relation to the distinguished economist Paul A. Samuelson) pronounced him dangerously "soft on inflation," hence lacking "the moral or intellectual qualities needed to lead the Fed."
But Blinder's actual remarks at the Kansas City Fed's annual colloquium at Jackson Hole, Wyo., reveal no such thing. Blinder did say that "central banks, or more generally macroeconomic policies, do have a role in reducing unemployment as well as...reducing inflation." The Federal Reserve Act itself calls on the Fed to pursue both "maximum employment and stable prices." But this view, sadly, has become controversial.
What Blinder did not say was that he thought the Fed should ease money to fight unemployment in present economic conditions. On the contrary, he declared the economy "extremely close" to its sustainable noninflationary rate of unemployment. As if to underscore the point, Blinder's first vote as vice-chairman last July was to raise rates.
HEARING VOICES? The subject of the Jackson Hole meeting was reduction of unemployment. What Blinder did say was that unemployment is too high elsewhere in the industrial world, notably in Europe. And he observed, correctly, that unemployment has risen most in countries whose central banks were single-mindedly devoted to cutting inflation. He also said that looser monetary policy does have a role at points in the business cycle when unemployment is high.
That thought is hardly controversial. After all, it was Alan Greenspan's Fed that steadily relaxed monetary policy during 1989-1993 to stimulate recovery. Does this make Greenspan dangerously soft on inflation or morally unfit to lead the Federal Reserve? Does it suggest an intellectual split between Greenspan and Greenspan?
I have gently chided Alan Blinder in this space, from the opposite quarter. In my view, there is nothing "natural" about a 6% rate of unemployment, which translates to 8 million unemployed. On this point, Blinder concurs. "That doesn't mean you can't reduce the unemployment rate below its so-called natural rate," Blinder says. "It only means you can't do it with monetary policy. You have to use micro-economic interventions in labor markets."
Blinder is surely right that we need structural policies to make fuller employment less inflationary. At the high end of the job market, there are spot shortages in some professions and some regions, producing a smidgen of wage pressure even with an overall jobless rate above 6%. At the low end, millions of unqualified people are effectively out of the labor market. Using monetary policy alone to tighten job markets to the point where unqualified people began looking attractive would bid up wages across the board.
TICKLISH POSITION. The solution at both ends of the job market is education and training, as well as a less austere Fed. The Clinton Administration grasps that. But given the absence of support in Congress for new training outlays, we are stuck by default with the premise that 6% unemployment is somehow natural and that monetary policy dare not lower it.
Training outlays are indeed indicated, but the Fed should also take its foot off the monetary brake. Blinder, when he was a member of the President's Council of Economic Advisors, seemed to agree. According to the 1994 Economic Report of the President, which Blinder helped draft, long-term interest rates, then about 6% (and now close to 8% thanks to the Fed) were already too high. "Clearly, if inflation remains under control, bond yields have some way to fall to come into line with their historical averages."
Inflation remains low. Wages, the most significant source of inflationary pressures, are nearly flat. Some commodity indices are rising slightly, but the core rate of inflation remains minimal. Blinder replies that today, as opposed to last winter, the economy is closer to effective full employment; thus labor-market policy, not looser money, is indicated.
As a recent Clinton appointee to the Fed and a Keynesian, Blinder is, of course, in a delicate position. He is a bit more dovish on fighting unemployment than his colleagues and somewhat less inclined to panic when he sees a rising commodities index. But his overall view, if anything, is a shade too close to the Greenspan consensus.
Blinder's remarks neither contradicted his earlier views nor provoked a fight with his chairman. "The vice-chairman of the Federal Reserve Board created an incredible controversy by endorsing the Federal Reserve Act," Blinder says. "I'll stand by that endorsement."