A Dangerous Man Jude Wanniski April 29, 1997

Memo: To Alan Greenspan
From: Jude Wanniski
Re: Educating Laurence H. Meyer

On January 16, I sent you a memo on "Fed Governor Laurence Meyer and wage inflation," in which I argued that his monetary views were "dangerous" and pleaded with you to educate him. Now I see that he is as dangerous as ever, and that maybe, I shudder to think, he has converted you to his way of thinking. Did you see The Wall Street Journal's front page of last Friday, April 25? An article by David Wessel reported that even though Meyer tries to be careful when he makes public speeches or statements, his utterances still cause problems in the bond market. Wessel, who is not a very good reporter, thinks it is all a ha-ha, failing to note that Meyer's utterances always cause the 30-year Treasury bond to fall in value — which is what makes him dangerous. On April 24, Meyer spoke to the Forecasters Club of New York, and when his remarks hit the wire the price of the 30-year bond immediately fell a quarter point, dragging down with it the Dow Jones Industrials by 20 points. In his article, Wessel does not point out that the centerpiece of his speech that day was a celebration of the Phillips Curve. "I am a strong and unapologetic proponent of the Phillips Curve," Meyer proclaimed. Given the fact that he is one of the most powerful men in the world — courtesy of a U.S.Congress that permits you folks to manage the world's key currency, the dollar — it is no wonder whenever he burps, the bond market falls. Over the years I have known you, you have unapologetically ridiculed the Phillips Curve idea of a tradeoff between inflation and unemployment. Now, you have permitted this evil idea to become the consensus of the world's most important central bank.

If you would re-read my January 16 memo, which I append, you will find an argument from me on why Meyer has been led to what amounts to a Fool's Gold Standard. Even Meyer is beginning to scratch his head about why it has not been working lately. Note his April 24 speech: "Despite the sharpness and force of the Phillips Curve/NAIRU model, it can be difficult to implement in practice. Still, this relationship was about the most stable tool in the macroeconomists' tool kit for most of the past 20 years; those who were willing to depend on it were likely to be very successful forecasters of inflation, and the record speaks for itself on this score. Nevertheless, the combination of the 7-year low in the unemployment rate and 30-year low in inflation was a surprise to those using this framework. The challenge is to understand why we have been so fortunate."

Alan, I submit that the time is ripe for you to go to Meyer and explain to him why he was able to forecast with better than average results using the Phillips Curve, Fool's Gold, but why the Curve cannot compete with the real thing, a stable gold price.

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 of2l/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.