MOST Wall Street economists are cheering the Federal Reserve's third boost of short-term interest rates this week. It was necessary, they say, to slow the economy and to prevent more inflation. Some financial economists are even saying the Fed was too slow to reverse monetary policy.
But not Northwestern University economist Robert Eisner. He says the Fed's move was based on ``mistaken dogma'' that goes back to Karl Marx, the patron saint of Communism. Marx said capitalism depended on a ``reserve army'' of the unemployed to keep wages down. As that army shrank, labor could demand higher wages. So capitalists invested in labor-saving machinery that put employees out of work and restrained wages again. This had the merits of boosting productivity.
Today, the somewhat comparable popular economic thesis is that the economy has a ``natural rate'' of unemployment of about 6.2 to 6.5 percent. Below this, workers can bargain more easily for better wages, pushing up costs and accelerating inflation.
Professor Eisner, however, says the Fed should not have hiked interest rates at all. ``It is disgraceful,'' he says. Unemployment is substantial, the economic recovery has a way to go, and there is no sign of more inflation.
Moreover, he continues, the ``natural rate'' thesis is on ``very shaky theoretical grounds,'' with new economic work challenging it. And comparisons between various industrial economies do not square with the thesis, Eisner says.
The Fed's action has prompted a sharp boost in long-term interest rates as well as short-term rates. This has hit stock market values and could soon hurt sales of such durable goods as automobiles and houses. Furthermore, Eisner says, a resulting economic slowdown will raise the federal budget deficit and discourage business investment.
``The Fed move won't make us better off,'' he says. ``It will make us worse off.''
Cartoonists are having a field day with the Fed's move. One illustration shows Fed chairman Alan Greenspan stamping on the first signs of spring growth in the garden. ``This eliminates the need for pruning,'' Mr. Greenspan says in the final panel.
Another cartoonist has Greenspan pounding a broom on the ceiling to quiet a noisy economic party on the floor above.
James Medoff, a Harvard University economist, sees no economic party in the job market, however. In the 36 months since the start of the recovery in March 1991, there has been a 3.1 percent growth in jobs, he notes. That compares with 10.9 percent average growth in the number of jobs in the 36-month period following the previous six recessions.
Moreover, Mr. Medoff says, the quality of the jobs - a measure that takes into account wages and fringe benefits - has stagnated. Indeed, average real wages have declined since 1985, he says. Because corporations continue to make large layoffs, ``labor is scared about having any job at all,'' Medoff says. ``It makes employees very weak at the bargaining table.''
The Fed's monetary tightening, he concludes, ``doesn't make any sense at all.''
James Tobin, a Yale University winner of the Nobel Prize for economics, agrees. ``The economy was doing fine and [the Fed] should have let it go,'' he says. ``They have sort of messed everything up. The economy still had room to expand and inflation was very quiet. It seems to me they are seeing danger under the bed. The job market is not a strong market. The help-wanted index is extremely low. That should give us some more room to expand without ramping up wage inflation.''
Dr. Tobin argues that the weakness of the trade union movement today as well as increased international competition provide more discipline for prices and wages than there used to be. Productivity has been rising rapidly as well, decreasing the need for business to raise prices.
``The Fed jumped the gun,'' he concludes.
Toward the end of previous more-vigorous recoveries, the balance of power between labor and management shifted toward the employees as the competition for good workers increased. Even less-educated and less-motivated workers could get jobs, decreasing poverty. But in this recovery, consumer confidence has not yet risen to its pre-recession levels. Employees remain nervous.