Rate hike reservations

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One of us is the First Supply Sider. The other is the Last Keynesian. One is Republican; the other Democrat. One helped invent Reaganomics; the other spent four years trying to stop it.

Yet we agree on one thing. Alan Greenspan should not raise interest rates now or in the near future.

To begin, there is no evidence of a monetary inflation. If that were happening, gold prices would go up. But the price of gold has fallen $35 since it touched $430 earlier this year.

And while growth has returned, the economy remains far from full employment. We have enjoyed just a few decent months of job creation. A million jobs in three months is good news. But we remain about 1.3 million jobs below the actual level of payroll employment four years ago. We're still about 5 million jobs short of what we should have, given population and labor force growth since then.

Economists once argued inflation would not only rise, but also accelerate in a destructive spiral leading to hyperinflation -- if the unemployment rate fell below a threshold level called the Non-Accelerating Inflation Rate of Unemployment, or NAIRU.

But where was that threshold? Six percent, as many argued 10 years ago? Five and a half? Five? We ran the experiment in the late 1990s, with unemployment below 41/2 percent for 21/2 years. Inflation numbers didn't budge. If the NAIRU exists -- which we doubt -- it isn't anywhere close to today's 5.6 percent unemployment rate.

Price pressures exist. Chairman Greenspan was rightly concerned when gold, oil and commodities were all heading higher together. Yet the Fed took the path of patience at that time. Now with real recovery and rapidly rising business profits, liquidity may flow away from commodities toward investment. That would calm rather than roil commodity prices, while financing businesses at low interest rates. With a little more patience from the doctor, in other words, the patient might cure himself.

And oil prices may come down soon, if the Organization of Petroleum Exporting Countries acts as promised. But if they do not come down, that will be due to changing world energy markets and insecurity associated with the Iraq war -- not monetary inflation.

There also are large increases in health-care costs. They have nothing to do with monetary inflation, nor with tight labor markets or rising wages. A better security policy, a better energy policy, and a better health care system would help. High interest rates are not a good substitute for these measures.

What will happen when interest rates rise? We don't know. But there are several good reasons to worry.