Notes on the Revolution III Jude Wanniski January 17, 1995

COLAS: Fed Chairman Alan Greenspan last week revealed a potential saving of $150 billion a year via an adjustment of the formula by which federal cost-of-living adjustments are made. He dragged out a moth-eaten study made several years ago by UCLA economist Mike Darby, when Darby was chief economist at the Commerce Department. Darby undertook the study with an intellectual bias favoring management over labor. The study purports to prove a bias in the colas that overstates CPI inflation by the Bureau of Labor Statistics, which jacks up Social Security benefits and various federal retirement benefits. The real intent of the Commerce study was to shave points off the colas negotiated by organized labor with the Fortune 500. Malcolm Forbes, Jr., chairman of Empower America, last week blasted Greenspan for unveiling the study, accusing him of a diversion from his own misconduct of monetary policy. My own guess is that the colas understate inflation and that all Social Security and pension benefits should be adjusted upward. Darby made his case by arguing that the BLS underestimated the declining costs of computer chips and other high-tech advances of the last twenty years. In calling Steve Forbes to congratulate him, I observed that there are very few little old ladies I know who are thrilled that the cost of laptop computers has declined since they retired 25 years ago. In fact, the cost of gold is up 1100% since 1969 and the CPI is up only 300%. Greenspan would have us believe that the CPI overstates inflation! The GOP leadership in Congress should be extremely wary of endorsing Greenspan’s suggestion. On This Week with David Brinkley this Sunday, Dick Armey was asked about this and agreed that policy should always be based on the correct numbers. As Armey is the most scrupulous fellow I know when it comes to getting his numbers right, if he does look into this matter, he will, I think, be forced to recommend an upward adjustment in the CPI. Nobody who retired comfortably in 1968, when the serious inflation began with the closing of the London gold pool, can now make ends meet on their CPI-adjusted pensions. 

Indeed, Armey or Gingrich should have checked with their fiscal friends Gary & Aldonna Robbins before they swallowed Greenspan’s latest foray on behalf of the Forces of Darkness. They have studied this topic to death and point out that if Greenspan could actually prove his argument, which he can not, the effects on the economy would be disastrous. Why? Not because of all the old folks who can’t scrape by on inflation-devastated pensions that Greenspan says are too generous, and will reduce aggregate demand; but because, as Robbins reminds us, the income-tax schedules will all have to be recalibrated to correct the excessive tax cuts the nation has been getting via indexing! What Gingrich & Armey are being led into, like lambs to a slaughter, is a giant tax increase for everyone who is working and a giant reduction in pension benefits for everyone who is not! Welcome back, Democratic Congress. How should this be handled? Well, now that Armey has insisted we use true and correct numbers, we should proceed, and Gingrich & Armey will discover that the CPI in fact underestimates inflation. We will then have to increase retirement benefits to the old folks. And we will have to give all working Americans a big tax cut, in perpetuity! Greenspan will go berserk! The devilish Greenspan, that is, the fellow who has committed himself to balancing the budget by slashing benefits to widows and orphans and by raising interest rates in order to prevent the unemployment rate from falling; not the real Greenspan, the angelic Greenspan who wants to zero out the capgains tax and put the Fed on a gold standard, which would prevent evil Fed governors from raising interest rates when the angels were not looking. 

MINIMUM WAGE: If you watched Face the Nation Sunday, you saw Labor Secretary Robert Reich display a chart that shows that the $4.25 federal minimum wage has lost fifty cents of its purchasing power since Bob Dole voted for it in 1989. President Clinton is surely going to propose at least a fifty cent increase, even though economists of all stripes genuinely believe it costs jobs. Reich will trot out a New Jersey study showing that an increase to $5.00 per hour was followed by an increase in the number of jobs available to teenagers in the late 1980s. The survey, made by an economist named Card who is now a bigshot bureaucrat in the Clinton Commerce Department, is intellectually flawed. At the time it was conducted, New Jersey was booming on the heels of the Reagan tax cuts and the benign administration in Trenton of Gov. Tom Kean. Shopping malls in northern New Jersey were busing in workers from the South Bronx, paying the $5, plus bus fare, plus training. When the Bush-Florio tax increases hit and New Jersey went into a tailspin, the $5 minimum wage sent the unemployment rate from 3% to 8%, but the Card study ended before the recession. Card knows it and so does the White House and Robert Reich, but no matter. In 1989, I advised OMB Director Dick Darman that we should swallow an increase in the minimum wage in exchange for a cut in capgains. Alas, Darman dealt it away for nothing. The AFL-CIO is behind this move, trying to get something in exchange for the GOP capital gains tax cut. House Majority Leader Dick Armey, who says we should get rid of the minimum wage, wants to get capgains without it. I would gladly give up another 50 cents on the minimum to get retroactive indexation. A capgains cut and across-the-board indexation would swamp all of Armey’s economic concerns. That is, there would be so much profit opportunity and job creation that employers would not be able to find anyone willing to work for as little as $4.75 per hour. My first real job in the summer of 1950, as a Wall Street office boy, was at the 75-cent minimum wage, which would have to be $10 an hour today to produce the same after-tax income. To go to $4.75 or $5 today without capgains would of course have horrendous effects on employment for low-income workers.

MEXICAN BAILOUT: If you have noticed a deathly silence in the news media about the congressional authorization for a $40 billion Mexican loan guarantee, you are not alone. It’s all hush, hush while the GOP leaders and the Treasury folks try to figure out what they can and can’t do. The Treasury/Fed conspirators have of course heard all about the plan to revalue the peso at 3.5 and are running around Capitol Hill trying to stamp out the idea. The only possible compromise available to them is a phasing- in of the 3.5 rate, over a period of months. Otherwise, they really can’t put the issue to a vote, because they don’t have the votes. On Larry King Live last night, Senate Majority Leader Bob Dole, engaging in a lovefest with Ross Perot, signaled a willingness to shoot for 3.5 or 4, as he correctly indicated the number was arbitrary in that range. Treasury Undersecretary Larry Summers is spreading the nonsense that fixed exchange rates won’t work because you can’t give Mexican citizens the right to turn in unlimited amounts of pesos for dollars when Mexico’s central bank has only a limited number of dollars in reserve. He told House and Senate Republicans last Friday that this is the same reason you can’t have a gold standard, because you will run out of gold. This is single-entry bookkeeping at its silliest. If Mexicans had turned in all their pesos for dollars a year ago, Mexico would still have had dollars left over and Mexico would not have had a money supply. They would have had to sell goods and/or paper assets to us for dollars, to buy back their money supply. Instead, as the Bank took in pesos for dollars, they printed new pesos. Aren’t Ph.D. economists at Harvard required to take accounting courses? It is hard for me to see how Summers can survive this fiasco even if the team he has led down the garden path, including Rubin and Greenspan, come to terms with the political reality of a supply-side Republican Congress.