- The Washington Times - Tuesday, January 25, 2000

The Federal Reserve is watching Congress as it decides whether to raise interest rates to squelch an inflation threat that is being fueled in no small part by recent government actions.
Moves by Congress, state and local legislatures and various government agencies to regulate managed care, raise the minimum wage, force up cigarette prices and spend burgeoning surpluses are being cited by the Fed and private analysts as catalysts to inflation.
While higher oil prices have been the most visible cause of inflation, members of the Fed's rate-setting committee in November noted "the possibility of a higher minimum wage" and rising health care costs and said such labor-cost pressures eventually could drive up consumer prices, according to minutes of the meeting.
The committee raised rates by a quarter-point at that meeting and is widely expected to do so again at a meeting on Feb. 2 for similar reasons.
Fed officials said they view a recent uptick in health care costs, which last year rose by 3.6 percent while overall inflation was up 2.7 percent, as a troubling reversal of the trend toward lower costs ushered in by the shift to managed care in the early 1990s.
David A. Wyss, chief economist with Standard & Poor's DRI in Boston, said medical costs are rising because the demand for health care services is swamping efforts by employers and health maintenance organizations to hold down costs, he said.
"The trend could worsen sharply if the government gets involved, which now seems likely," Mr. Wyss said. "Passage of a patient's bill of rights or similar measures seems inevitable from the political standpoint. Depending on how stringent the measures are, the impact on costs could be significant."
Bills in Congress and state legislatures to allow patients to sue HMOs and to force payment for various services reflect the seemingly insatiable demand for more health care despite rising costs a key driver of inflation during the 1980s, according to DRI.
The federal government also recently joined a drive by state attorneys general to make tobacco companies pay for the costs of treating smoking-related diseases. In 1998, that resulted in an unprecedented 33.7 percent leap in cigarette prices. Last year, the 11.5 percent jump in cigarette prices was one of the fastest-growing components of the Consumer Price Index, which measures the cost of goods and services.
A Senate vote last fall to raise the minimum wage by $1 in stages to $6.15 an hour also got the attention of the Fed and inflation-watchers. Minimum wage increases are being debated by some local legislatures as well. Economists believe such wage increases can feed through to overall labor costs and inflation.
The Senate bill would boost the average earnings of American workers by about 0.5 percent or $35 billion, said Elizabeth H. Peters, economist with Goldman Sachs & Co.
Most of this "modest" increase would go to the 11.8 million workers who now earn the minimum wage, though the increase in the wage floor also would cause a ripple effect of higher wages for as many as 10 million others earning near the minimum wage, she said.
Governments also are fueling wage growth through direct raises, leading private employers for the first time since the 1980s in a round of generous wage settlements. Federal workers this month are getting pay gains averaging 4.8 percent a full percentage point above the national average.
In New York City, a rare budget surplus enabled the government to grant transit workers an estimated 18 percent increase in wages over the next three years, while the city's public school principals got a whopping 33 percent salary boost.
"Rising government budget surpluses are weakening politicians' resistance to labor demands," and the nation's powerful public employees unions are taking advantage of the occasion to "flex their muscle," said Maury Harris, chief economist of PaineWebber Inc. in New York.
More spending also is on the docket in Congress as legislators eye growing surpluses as a way to finance new government programs ranging from education and farm aid to prescription drug benefits for the elderly.
Fed Chairman Alan Greenspan warned strongly against using the growing federal surplus to go on a spending spree in a speech last week to the Economic Club of New York. He is expected to reinforce that point in testimony before the Senate Budget Committee today.
Surpluses, by draining off some of the nation's income and reserving it for future use, stimulate investment in new technologies and can be just as important as higher interest rates in restraining what the Fed views as excess consumer demand and spending, he said.
"I trust that the recent flurry of increased federal government outlays, seemingly made easier by the emerging surpluses, is an aberration," he said in New York, noting that until recently, "both the administration and the Congress have chosen wisely to allow unified budget surpluses to build."

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