Thu, 18 Nov 1999, 10:21pm EST
Greenspan and Marx, United in Proletariat Views
By Caroline Baum
New York, Nov. 17 (Bloomberg) -- After declaring war on the army of the employed yesterday, raising interest rates because of the diminishing pool of available labor, Fed Chairman Alan Greenspan should clarify for the markets -- not to mention the American public -- exactly what his strategy is. ``Where does the end-game in interest rates end?'' asks John Ryding, senior economist at Bear, Stearns & Co. ``The Phillips Curve end-game strategy is not just to prevent the unemployment rate from falling. It's to engineer an increase in the unemployment rate. How much will they have to slow growth to accomplish that?''
Searching for an historical model for the Fed's rate rationalization, Ryding dusted off his copy of Karl Marx's ``Das Kapital'' last night. ``There is not much difference between Marx's `reserve army of unemployed' and Greenspan's `unavailable pool of labor,''' he says.
Marx wrote in his famous 19th century treatise that in order to be profitable, capitalists needed a pool of unemployed workers to exploit. Only by paying labor less than their marginal revenue product -- the additional revenue earned from the sale of the product produced by that worker -- could capitalists extract a profit, Marx wrote.
In most respects, Alan Greenspan, a devotee of the free- market philosophy of Ayn Rand -- at least until he became a public servant -- is about as far away from Karl Marx as it gets. So what was he thinking about when he crafted the statement following the Fed's announcement yesterday, justifying the rate increase in terms of the dwindling available pool of workers?
``Greenspan is searching for a mandate,'' says Neal Soss, chief economist at Credit Suisse First Boston. ``Perhaps he's spitting in the eye of the people on the committee who forced him to tighten. He may be testing what is the nature of the Fed's mandate.''
In the 1980s, that mandate was crystal clear. ``It was to whip inflation even if it was at some cost,'' Soss says.
The 1990s has been a decade of prosperity. Minorities, individuals with only a high school diploma, and handicapped workers have benefited from the economic boom and strong demand for labor, which has pushed the unemployment rate to a 30-year low of 4.1 percent.
The public approved of economic prosperity, and Greenspan, reading the mandate correctly, had the prescience to allow strong growth to persist longer than a Fed chairman with a more rigid ideology, according to Soss. ``Now he's testing the limits,'' he adds. ``Is the Fed's public mandate to tell Americans they can't have jobs when they have no problem getting them?''
It seems something of a stretch to assume that Greenspan is knowingly provoking Congress, which has oversight responsibility for the Fed, to come down on him for his action; at least for the stated rationale. On the surface, it seems that Greenspan is relying on a Phillips-Curve model, which he is known to disavow and which has significant implications for monetary policy.
The pool of available workers is not going to get noticeably deeper after yesterday's 25 basis-point increase. Enough quarter- point increases, and it will. That may be why the bond market, expecting an all-clear from either a third rate increase or a pass from the Fed, can't muster any enthusiasm.
Of course, many of Greenspan's comments about the overvaluation in the stock market -- initiated against the better judgement of his staff -- have been criticized. Any money manager who heeded his warnings, first uttered at Dow 6400 in December 1996, would be out of business by now.
While it may have been an institutional mistake for the chairman of the Federal Reserve to comment on the level of stock prices, it was clearly a political mistake for Greenspan to link the Fed's rate increase to the shrinking supply of available workers. Curiously, there has been little hue and cry from Congress just yet. ``I'm afraid Greenspan's walk-on-water reputation will prompt them to assume that if he raises rates, it must be necessary,'' Soss says.
Congress is preoccupied with trying to wrap up the budget negotiations and get out of town. The media mostly ignored the implications of the Fed's statement.
I'll bet that if and when the economy starts to look less perky, our elected representatives will find it in themselves to take to the soap box to protest the harm to the ordinary working man, who just happen to be going to the polls next November.
At that time, Greenspan is going to take some heat for being too much like Karl and not enough like Groucho.