Memo to Greenspan Jude Wanniski January 16, 1997

Memo To: Alan Greenspan
From: Jude Wanniski
Re: Fed Governor Laurence Meyer and "wage inflation."

Gov. Meyer was on "Nightly Business Report" last night, talking about how the economy was so good that it is hard to see how it could get any better. It was an absolutely awful performance, which led me to wonder how he could be such a poor economist and have such a good reputation as a forecaster. The low point was when he said the economy is growing as fast as it can without causing the unemployment rate to fall even further and "thus cause inflation." This guy believes in wage inflation, Alan. This makes him dangerous. I think I know why he can be a bad economist and have a good reputation as a forecaster. It is because his productive years did not include any time when the dollar was as good as gold and the unemployment rate really reflected transient mobility in a fully employed economy. By that, I mean he has lived in an inflationary era in which labor successfully demands higher wages when it is being paid in devalued dollars. The worker is blamed when the problem is caused by the economist. The Phillips Curve, after all, did not get a foothold in the U.S. until the late '60s, after LBJ closed the London gold pool. It was already received wisdom in London, which had been experiencing monetary inflation via the sterling devaluations of the '50s and '60s. Laurence Meyer's total experience has been in this Phillips Curve world.

You, on the other hand, understand that if the economy has been driven below its potential by bad fiscal, monetary and regulatory policy, it can grow faster than the long term trend line of 2 1/2% until efficiencies are recaptured. You have seen rapid economic growth in the 1960s, when Meyer was a teenager and unaware of the dramatic increases in productivity that followed the Kennedy tax cuts. The question is, should the American people have to suffer while Larry Meyer goes to kindergarten on these economic phenomena? Shouldn't you sit down with the fellow and tell him the way the world works? President Clinton seems to have learned a lot from your discussions with him. Isn't it part of your responsibility to enlighten the other members of the Fed when you discover them saying things that are simply baloney? The people who are hurt the worst by his ability to influence monetary policy are the people at the bottom of the pile. Remember Margaret Bush Wilson, president of the NAACP back in the late 1970s? It was her view, and it is mine, that Inflation is not caused by too many people working.