A Fortunate Experiment
BROCKWAY, GEORGE P.
The Dismal Science A FORTUNATE EXPERIMENT By George ? Brockway One of the mysteries of life in the United States today is why we are not in the midst of a raging inflation, a depressing...
...The first thing it does is cause a drop in investment...
...For the past 30 years, hard-nosed devotion to the theory of a natural rate of unemployment (a frequent target in this space) has been a prerequisite for appointment to the economics faculties of our major colleges and universities...
...If mainstream economic theory were sound, the world would not move in this way...
...it causes it...
...In short, its raising the interest rate reduced the investment rate, increased the bankruptcy rate of businesses, increased the poverty rate, increased the cost of living, raised taxes, made the rich richer, caused nine recessions—and thus slowed the rate of inflation...
...It is an IOU of the state, was issued by the government in payment for some goods or services, and will be accepted by the government in payment of some tax or fee...
...Still, as a general rule, people who lend money are richer than those who borrow...
...But every interest payment is a transfer to the haves from the have-nots...
...By investment I don't mean speculating in mutual stock funds and derivatives...
...Today the Federal funds rate is at 5.5 per cent, and investment is only 16 per cent of GDP in an economy that, according to Mr...
...Do we dare...
...Indeed, the percentage of American families living below the poverty line is higher in this economy that is one of the best Mr...
...It is accepted in private transactions because there are always, somewhere in the economy, citizens who need government IOUs to pay taxes or government fees...
...Their terror, though, is that if they raise the interest rate to stop the inflation no one else can see, they will be remembered for having precipitated one of the great economic crashes of all time...
...To be sure, not everyone who borrows is down and out...
...Fifth, raising the interest rate is a principal way for the rich to become richer...
...Now, I am not saying that the interest rate is solely responsible for the rich becoming richer and the poor poorer, and I am emphatically not against borrowing and lending and the charging of interest...
...By upping the interest rate, the Federal Reserve Board reduces everyone's purchasing power and thus increases the general price level...
...Greenspan says, and he could stop them by jumping the interest rate—as the Reserve did in 197 8 (not to mention 1929...
...Even without the experiment, the Reserve should have learned a few of the effects of raising the interest rate—at least five bad effects and one claimed to be good...
...I hasten to explain that I agree with Mr...
...Fourth, raising the interest rate raises Federal, state, local, and school taxes, as the recent hoo-ha over the deficit has taught us all...
...But the Federal Reserve Board does not dare to act...
...He has protested that it is a problem for Congress, not for him...
...The Dismal Science A FORTUNATE EXPERIMENT By George ? Brockway One of the mysteries of life in the United States today is why we are not in the midst of a raging inflation, a depressing recession, or both...
...Raising the interest rate does not cure inflation...
...According to conventional theory this cruel absurdity is a good thing and the way things are supposed to be...
...Greenspan has seen...
...This time the Federal Reserve Board has refrained from raising the interest rate, as its governors would normally be inclined to...
...In the early 1960s, when the Federal funds rate averaged about 2.7 per cent, annual investment ran over 21 per cent of the gross domestic product...
...The relation of money to the fee for its use is similar to the relation of the price of a government bond (also an IOU) to the rate of interest...
...That is the way all threats of inflation have been contained since World War II —with a single exception, the present one...
...Every three months the Reserve Board meets and the bankers anguish over their belief that inflation must be around the corner...
...that increasing the interest rate increases this effect...
...That's the bad news—or some of it—about raising the interest rate...
...Greenspan's unwillingness to specify conditions that would prompt him to raise the rates further...
...The third thing raising the interest rate does is raise the unemployment rate...
...No wonder the rate of home ownership has fallen in this economy that is one of the best Mr...
...The shift from 4 per cent (or lower) FHA and VA mortgages of 50 years ago to today's "low" rate of 7 or 7.5 per cent has been a gift of billions (if not trillions) of dollars to mortgagees and a corresponding drain on mortgagers...
...In the quarter century before 1969, though, there were no fewer than 12 years with a lower rate of unemployment than the 4.5 per cent of this economy that is one of the best Mr...
...Hence the doctrine has not only been taught at those institutions, it has been accepted respectfully in editorial rooms and enthusiastically in board rooms across the land...
...The good news—or what's supposed to be good—is that raising the interest rate stops inflation...
...Yet today unemployment is lower than it has been for decades, while inflation (especially if you figure it as the Boskin Commission did a couple of years ago) has been practically invisible for at least four years...
...But there have been 10 surges of the economy since World War II, and except for the present surge, every one of them was seen by economists as threatening to spiral into inflation and snubbed down by the Federal Reserve Board...
...Moreover, during the same period the interest rate has been relatively stable...
...I mean helping to finance the organization, continuation or expansion of companies that will produce goods and services to be sold in the marketplace and enjoyed by everyone...
...Greenspan that the market is overenthusiastic, overpriced and in danger of collapsing...
...Nevertheless, the world does move in this way and, I make bold to predict, will continue to do so until the Baby Boomers start retiring in substantial numbers, at which point the present stock market boom will come to an end...
...The current stock market boom has accidentally forced upon us an economic experiment of world-shaking possibilities...
...So the booming stock market that concerns Mr...
...The theory, of course, claims that if too few people are unemployed, inflation will accelerate rapidly, and the only way to slow it down is to raise and keep raising the interest rate...
...The piece of greenbacked paper you have in your pocket has no practical use as paper...
...Since the latter provide most of the new jobs, any impediment to new business is an additional handicap for the poor, as well as for middle-class would-be entrepreneurs...
...Greenspan has incidentally forced the Reserve into an unnoticed experiment that lays bare the fallacies of conventional interest rate policy...
...Greenspan has seen than it was 25 years ago...
...Greenspan has seen...
...Second, an increase in the interest rate favors established and big businesses over small and start-up businesses...
...The market is all the bad and dangerous things Mr...
...Greenspan's recent Congressional testimony, is one of the best he has seen...
...that therefore the rich are richer and the poor poorer...
...The answer, though, is staring us in the face...
...The situation is beautifully ironic...
...Money has no price (there is no point in paying a dollar for a dollar bill...
...Greenspan's predecessors gloried in...
...I am saying that interest always has the immediate effect of taking from the poor and giving to the rich...
...He keeps talking, however, about raising the interest rate on some unspecified occasion in the future...
...But I also think that as long as the Baby Boomers keep pouring their savings into it, and as long as the interest rate does not go up, the market will continue to rise in a classic example of the "law" of supply and demand...
...that the present rate does not improve matters (except in relation to the rates Mr...
...We are finding that holding the interest rate steady does not cause inflation, even when the unemployment rate steadily falls...
...and that an unnecessary uncertainty is introduced into the economy by Mr...
...In the capitalist system, almost all investment depends directly or indirectly on credit, that is to say, borrowing...
...When one speaks of low purchasing power, it is the same as speaking of a high general price level...
...Greenspan has more than once cited the widening gap between the rich and the poor as dangerous to our democracy...
...You may borrow the use of someone else's money by paying a fee (interest), which is a cost to you and has the effect of diminishing the amount you can borrow...
...Well, no one can say it quite does that, because since World War II the Consumer Price Index has gone up in every year except 1955 (and that year the prime interest rate was lower than in any subsequent year...
...They are inherent in the nature of money, something conventional economics has archaic ideas about...
...Also proved false is the immoral claim that a decent minimum wage causes unemployment...
...Raising the interest rate gives the appearance of stopping inflation because, on the supply side, it increases the costs of operating a business, discourages expansion and leads to downsizing, which, in turn, reduces wages and thereby contracts the demand side...
...This, you may remember, is Brockway's Law Number Two, first proclaimed here in the issue of January 9, 1989...
...Howsoever that may be, the unemployment rate today is 4.5 per cent, or lower than it has been since 1969...
...Those consequences were not unpredictable...
...All the dismal prophecies of a natural rate of unemployment have proved false...
...In other words, raising the interest rate tends to bring about a recession...
...In both cases, the higher the interest rate, the lower the purchasing power (the effect on borrowing power, essential for investment, is even more severe...
...What money has is power—purchasing power and borrowing power...
...With such empirical results in hand, we may be emboldened to take the next step and discover that lowering the interest rate can lower the price level, increase productive enterprise, and start the long task of healing the suppurating wound in our society that gapes between the rich and the poor...
...Let's look at the record...
...If the economics profession can bring itself to pay attention to what is happening in this accidental experiment, we may be spared further exposure to the barbarous theory of a natural rate of unemployment...
...Chairman Alan Greenspan of the Federal Reserve says he does not altogether agree with the theory...
Vol. 81 • August 1998 • No. 9
