Fed and its critics now are jogging in same direction
Boston — The United States economy is in far better shape today than most anyone anticipated early this year. Consumer prices, which rose 13.3 percent in 1979 and 12.4 percent last year, are now climbing at only a 7 or 8 percent annual rate this year. Unemployment hasn't changed much from the start of the year, despite gloomy prognostications. A slightly larger percentage of the labor force is working now than eight months ago. Gains in hourly earnings of workers have declined from 1980, a good sign for future inflation rates. The dollar is strong on the foreign exchange markets. Economic growth, though probably negative at the moment, has not plunged drastically. Interest rates at last have started down.
Thus, concludes the so-called Shadow Open Market Committee, the Reagan administration and the Federal Reserve system should not back away from anti-inflationary economic policies that are working. "They should stick with their general program," says Prof. Karl Brunner, co-chairman of this small group of private-sector economists who meet twice a year to kibitz on federal economic policy, especially monetary policy. It is named after the Fed's monetary policymaking body, the Open Market Committee.
This shadow committee used to be something of a booing section, highly critical of Fed actions. But in October 1979 the Fed adopted a fundamentally "monetarist" position closer to that recommended by the shadow committee for some years previous. This means, in determining monetary policy, the Fed decided to pay more attention to growth in the money supply (cash in circulation plus bank deposits used for transactions) rather than to trends in interest rates. This policy at first was poorly implemented, and the committee remained critical.
This year, however, two shadow committee members took important policy positions with the Reagan administration and resigned from the committee.
Moreover, the Fed has better controlled the growth of money. So when the committee met in New York Sunday and Monday, it drafted what one member, H. Erich Heinemann, vice-president of Morgan Stanley & Co., an investment banking firm, described as "a letter from a friend to the President."
The statement sounds something like the "hold that line" cry of football fans. Keep up the budget cuts. Keep shrinking the size of government in relation to the private sector. Keep a tight anti-inflationary monetary policy. It's tough going now with astronomical interest rates, a slowing economy, and large numbers of jobless. Be patient, though, because such an economic program involves at least two years of economic suffering. Glory be, ahead lies the promised goal of a healthier economy with low inflation rates. And, the statement notes, the costs are transitory while the benefits are permanent.
Nonetheless, this committee of monetarist economists did offer some controversial advice to the government:
* It urged the Fed not to step up the supply of the money to the economy to meet its monetary targets.
By doing so, the government could bring down the rate of inflation faster. Dr. Brunner speaks of the possibility of prices, as measured by the broad so-called GNP deflator, increasing only some 5.5 to 6 percent next year if the Fed retains a firm monetary policy.
On the same day the shadow committee issued its statement, both Treasury Secretary Donald T. Reagan and chairman of the Council of Economic Advisers Murray Weidenbaum were calling on the Fed to push up the growth of the money supply to meet its own targets.
Such a dispute is almost hairsplitting. If the Fed does attempt to meet its own target for so-called M1B (one measure of the money supply) by adding more money more rapidly to the economy in the next few months, it will still be following a basically anti-inflationary policy.
However, administration officials are concerned that below-target monetary growth might produce more of an economic slowdown than they have counted on. One result would be even larger budget deficits. Another could be damage to Republican prospects in the midterm congressional elections next year.
The Shadow Open Market Committee members have different prime concerns. They suspect any sharp increase in the money supply growth, even if temporary, would have adverse psychological effects. It might keep interest rates higher than otherwise and stimulate labor to seek larger wage increases, prompting more inflation.
* The committee also held that too much is being made of the size of the federal deficit and that a balanced budget by 1984 should not be the goal of policy. "It is not even of secondary importance, but of third or fourth level of magnitude," said Dr. Brunner.
* The government, the committee held, could make "more efficient use of resources" by slowing the growth of defense spending from the 17 percent annual boost through 1981 planned in the Reagan budget.
Dr. Brunner concludes that it is crucial that the government stick to its anti-inflationary, stringent economic policy, not reversing directions like earlier administrations did with the first signs of economic slowdown. "We can get inflation down if we want to," he says."It's a matter of whether we want to."