The Federal Reserve's small hike in interest rates Tuesday has revived a national dispute over what constitutes full employment. Economists, business people, labor leaders, and politicians are joining the fray.
To its critics, the Fed wants to prevent the bustling American economy from creating too many jobs. But, the Fed counters, too many jobs would mean workers could demand large wage increases because there are fewer unemployed workers to compete for their jobs. These rising wages could prompt businesses to raise prices.
"It was a ridiculous thing to do," says Robert Eisner, an economist at Northwestern University in Chicago. What he dislikes is the concept held by some Fed economists and policymakers that inflation will pick up when unemployment drops below a certain point. "I don't understand why prosperity is bad," says Lawrence Kudlow, chief economist of American Skandia Life Assurance Company in Shelton, Conn.
Mr. Eisner teases Fed officials by calling them "closet Marxists," because Marx held that capitalists wanted "a reserve army of the unemployed" to hold wages down.
The modern term is NAIRU (non-accelerating-inflation rate of unemployment). Fed economists used to calculate NAIRU at 6.2 percent. But since unemployment has been below that rate for 2-1/2 years without clear signs of accelerating inflation, many economists have lowered their estimate for NAIRU.
The critics do not expect the Fed's shift in interest rates to create a recession. But they regard the Fed's action as unnecessary - and based on wrong economic theory. Some suspect the Fed will raise rates further at later policymaking sessions.
A vast majority of financial analysts, though, regard the Fed's action as wise and good for the economy in the long run. They agree with Fed chairman Alan Greenspan that because of the nine-months-or-so lag between a shift in interest rates and its impact on the economy, the Fed must act on the suspicion of accelerating inflation, rather than its actual presence.
"A prudent move," says Peter Kretzmer, an economist with NationsBank Capital Markets Inc. in New York. "The Fed got itself in a position where its credibility could have been damaged by not acting."
Both labor leaders and industrialists oppose the move, however.
"Tens of millions of Americans will be casualties," says David Smith, public policy director for the AFL-CIO, referring to the higher interest rates on credit-card balances, car loans, home-equity loans, and some mortgages they will soon pay.
He also takes "strong exception" to the thesis of Mr. Greenspan in congressional testimony that feelings of job insecurity have been salutary in restraining wages.
The National Association of Manufacturers' chief economist, Gordon Richards, argues that the Fed's action was unnecessary because real interest rates, after subtracting inflation, are already "quite high." He estimates NAIRU at 5.2 percent - below the February unemployment rate - and he holds that the economy is growing at a significantly slower rate than its potential.
So there is little chance inflation will accelerate, he says.
Another Northwestern University economist, Robert Gordon, whom Eisner likes to call "the guru of NAIRU," has marked down his estimate sharply to 5.3 percent - February's unemployment level.