- The Washington Times - Monday, May 29, 2000

The biggest question facing businesses, consumers and workers this year is whether the Federal Reserve Board's interest-rate increase will slow the economy or even steer it toward a recession.

Right now, there is no recession on the horizon. But the U.S. economy is like a giant ocean liner that cannot turn around easily. Fed Chairman Alan Greenspan and his inflation hawks have set a dangerous course into the unknown, using outdated navigational charts based on the medieval, flat-Earth economic assumption that strong economic growth produces inflation.

It doesn't. When the Reagan economy was racing along in the '80s at the breathless pace of 4 percent growth or better, inflation was falling and so were interest rates. We picked up the pace in the '90s and, lo and behold, inflation and interest rates fell further.

A string of price measurements over the last few weeks shows that even though we are experiencing one of the most vibrant economic expansions in our history, the inflation rate remains tame at its core despite labor shortages.

The reason? First, worker productivity gains have been spectacular, driving down the per-unit cost of what we produce, thereby enabling us to produce more at a lower cost to consumers. Second, technology and other cost-cutting production, marketing and delivery innovations have dramatically cut prices for a whole range of things from computers and calculators to many aspects of health care. Third, intensified global competition, largely fed by expanding free markets and free trade, has kept the lid on prices.

But the economic statistics also show that the Fed's relentless interest-rate increases the economic equivalent of bleeding the economy to make it well have slowed the economy. Stock-market portfolios and pension funds have been battered by sell-offs because of Wall Street's unending fear that the Fed's interest-rate rampage will sandbag the economy. Retail sales are declining. Housing sales are down.

Apparently, the Fed cannot stand the thought that someone, somewhere is making an extra buck or two. The high priests of central banking say they are only concerned about rampant growth fueling inflation, and that their rate increases are not aimed at what Mr. Greenspan once called the "irrational exuberance" of the stock market.

The truth is that Greenspan & Co. (ruled by the Gang of Three: Clinton appointees Ed Gramlich, Roger Ferguson and Laurence Meyer) are intent on depressing the economy. They want to slow consumer spending. They want unemployment to creep up a bit to ease the tight labor markets.

This is root-canal economics. The Fed has failed to understand the cost-cutting dynamics of the Internet economy.

The Fed's course is "right out of a 1950s smokestack playbook," says Wall Street economist Larry Kudlow. "Too many people working. Too many people getting raises. Too much investment. Too much productivity. Too much … prosperity."

The result: Driving down stock prices denies the Internet economy the new start-up capital that has driven innovation, growth and job creation to historic levels.

With this month's rate increase of 50 basis points squeezing the markets, and the threat of another 50-point rise in June (and perhaps yet another increase in August), no wonder the markets are manic-depressive.

Meanwhile, most of Europe's financial markets have been sinking under the persistent weight of their welfare-state systems. Japan has slid back into recession. Most of South America remains in the grip of excessive regulation, taxation and corruption.

Add to all this the government's fanatical antitrust action against Microsoft (which has further unsettled the tech markets), and an administration that remains adrift on macroeconomic policy, and you have the potential for more economic upheaval this year.

A ray of light penetrated this gloom last week when the House easily approved the China trade deal, which will be a booster shot for the U.S. and global economies.

What is needed now is a major economic speech by George W. Bush to set forth the policies his administration will pursue to give the country some hope that further economic change is on the way.

Mr. Bush should state that faster economic growth does not cause inflation; that higher wages should not be feared, but instead should be encouraged as a reward for increased productivity; that it should not be Fed policy to micromanage the stock market; and that free markets are the best instrument for the most efficient allocation of the nation's financial resources.

But that kind of sweeping policy speech would be problematic for Mr. Bush's chief economic adviser, Larry Lindsey, a former Fed board member who has been notoriously bearish about the U.S. economy. Throughout the '90s, he predicted that America's "bubble is going to burst," and complained that the economy was growing much too fast for his taste. In fact,Mr. Lindsey says he likes the Fed's tightening.

Maybe Mr. Bush should be seeking out a broader range of economic advice. As John F. Kennedy once said, "Presidents cannot afford to hear just one point of view."



Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.

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