Let's Not Tighten Now

The inflation hawks are circling again. Third-quarter growth is likely to exceed 3%, and that would mean the U.S. economy has grown by almost 4% in the past year, well above the hawks' supposed speed limit of 2.5%. So Alan Greenspan is once again under pressure to raise rates to head off an inflationary surge. Indeed, the Fed chairman appeared to be preparing the financial markets for such action when he sounded an alarm about the possibility of rising wage costs in remarks before Congress on Oct. 8. The dour warning, coming just a few months after Greenspan's upbeat assessment of the economy, may have been merely a tactical concession. But it was a shocker.

Those who would confine the economic agenda to inflation-fighting should consider this: If growth had been held down to 2.5% over the last 18 months, the U.S. would have given up $150 billion in economic output. The unemployment rate would have been more than half a percentage point higher, putting 750,000 people out of work.

Allowing the economy to grow has had enormous benefits. Real incomes are rising for white- and blue-collar workers alike, after years of stagnation. Strong growth has made getting people off the welfare rolls far less painful than many expected. And for the first time in a generation, the federal government may report a budget surplus.

What's more, there is little reason to fear a resurgence of inflation soon. Third-quarter productivity growth should top 2%, and profits could rise by more than 15% this quarter. Corporations clearly can shoulder modest wage increases. Goods inflation, outside of food and energy, is rising at only 0.6%, half the rate of a year earlier. And despite a surge in consumer spending, the expansion is still investment-led.

No question, it may be necessary to raise rates and slow the economy down at some point. But let's not forget that carrying the fight against inflation to an extreme would prevent the U.S. from reaping the many benefits of globalization and the strong productivity growth manifest in the New Economy.

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