Cite?
You need a cite for the way raising and lowering interest rates affect employment?
Thanks for the reminder, the presumtion that this is US-centric was starting to annoy. Specially when the actual questionnaire we’re discussing is not of US origin.
I need a cite to support your statement that Greenspan can control the unemployment rate to within a few percetage points. Or, if you don’t have a cite, a retraction will do. 
(-2.50, -0.26) Agree
But can I vote twice?
I don’t believe that using the Fed to control the unemployment rate is a practical thing, and certainly not the Fed’s primary mission. At best, controlling interest rates has an indirect influence on unemployment. (By essentially controlling the level of capital investment) There are several better,and more direct, ways to control employment. Fiscal policy (read: budget deficits), legislative policy (read: NAFTA & trade policy, GATT, labor laws, government regulation like OSHA, EPA etc,) Tax policy and business decisions, and the quality and strength of the labor movement **world wide ** has more effect on the rate of employment than the Fed’s actions.
Not to belittle the Fed, they can bring an enonomy to it’s knees. (intentionally as Paul Volcker did in the 70’s, or unintentionally) But I think we may be giving the Fed too much credit here. They are not omnipotent. And much of what they do is reactive in nature. The Fed has to factor in worldwide political and economic conditions in their decisions, the overwhelming amount of which they can’t control. A couple times a year the Fed comes to Capital Hill to warn the politicos as to their excesses. He similarly chastises the financial community. (Remember Greenspan’s comments about “irrational exhuberance” in the markets?) The Fed chairman may be the most powerful person in our country as far as the economy is concerned, but it is the chairman of AT&T, GE, IBM & GM that we should look to for help in the economy, or the chairman of the various senate subcommittees. Apos stated that the Fed can control unemployment to within a few points. I’ve read Forbes, Fortune, Business Week, Financial Times and the WSJ daily for 25 years and I’ve never read anything close to that. I don’t believe it for one minute. There are too many other powerful factors that determine global commerce and U.S. interest rates are just one (important) component. Consider this: The Fed has lowered rates over the last 3 years to the lowest in 40 years, but at the same time unemployment has risen, or remained unchanged. Controlling unemployment is not the Fed’s primary mission, nor should it be IMHO.
I think it’s worth noting what inflation really is. I’m not an expert, and the global economic system can get extremely complicayted very fast. Very fast. My understanding as to the effect of inflation is that it erodes the value of non-tangible financial assets. This hurts most those in our society who are “net creditors.” For example, if you held a $10,000 bond paying 10% and held it until maturity, you’d obviously earn your 10 points. In the meantime, it as a financial asset to you. You could sell that bond for some amount. If interest rates rise though, to 12% for example, a potential buyer would find your bond less attractive as he could buy a similar bond yielding 12% elsewhere. For you to sell your bond, you would have to “discount” the face value of your bond (10K) to a point that it would effectively produce a 12% yield for him. That discount is a loss for you. Conversely, if you are a “net debtor” you are in a position to pay off existing debt in cheaper, devalued dollars.
But that’s for non-tanglible financial assets. We can manipulate the supply of money, but we can’t manipulate the amount of land, gold or pork bellies. Because of that fact, inflation has the effect of tranferring wealth to those who are “net debtors” and to those who own tangible assets. During times of inflation, or even fears of inflation, investors rush to tangible financial assets. Gold, real estate, grain etc. You may have noticed that in the last 2 years the price of gold has been rising. That is a sign that some in the market anticipate inflationary pressures. But, for those who owned homes in the 70’s, runaway inflation caused the value of their home to double or sometimes triple in value. That was a boon to many. For the middle income earner, who keeps a reasonable debt level and owns a home or a small property, inflation can substantially increase his net worth. That increase will come out of the hide of the “net creditor”, like the people/institutions holding his mortgage in the secondary mortgage market. (See the bond example above and amplify it across the financial markets) A bout of inflation can act like Robin Hood and erode the net wealth of net creditors holding non-tangible financial assets, while allowing net debtors to pay debt in cheaper dollars and see the value of their homes rise substantially in value. I believe that inflation represents a (albeit painful) transfer of wealth from the wealthy to the middle class. (The lowest slice of the workforce get mostly pain…)
It’s for this reason that I wouldn’t mind seeing a year or two of 7-9& inflation. (can you tell my financial position?) I am troubled on what seems to be a polarization of wealth; the rich seem to be getting richer, while the poor get poorer. The middle class is being squeezed (outsourced) and it is harder to make ends meet. My meager understanding of the financial markets suggests that some inflation would help the little guy who keeps his debt level low, and doesn’t respond to higher real estate values by taking out a second mortgage to go to Cozumel. My instincts tell me that Alan Greenspan thinks Robin hood is nothing but a thief. So, in this context I vote for a year or two of inflation. But as a long term policy to encourage full employment, nope. It just won’t work.
I may be crazy, and my assumptions may be wrong. (It wouldn’t be the first time…) If anyone is interested there is a non-fiction book about the Fed and it’s origin, how it operates and it’s a great primer on how the whole financial system works. It’s called “Secrets of the Temple” and if you’re interested in that kind of stuff, it is an extremely well written book. You don’t need to be a financial person or a policy wonk to enjoy it. The author is a William Something, and he was a writer for Rollong Stone. (The book had no discernable bias) The book received very high reviews. It’s about 15 years or so since I read it.
IMHO, asking Alan Greenspan to guarantee me a job is a mistake. Rather, I think we need to:
1)Increase our savings rate as a nation. We’re pathetic. One of the lowest savings rate in the industrialzed world. You want money for capital investment, increase the savings rate!
2)Lower personal and corporate debt. We carry more personal debt than almost any other nation. The credit card debt alone is staggering.
3)Balance the federal budget. Approve the line item veto. End pork barrell spending.
4)Strenghten the labor movement worldwide. Don’t throw up protectionist rules. Raise the standard of living worldwide and the Americam worker will be more competitive.
5)Enact sensible tax policy. I can borrow a gazillion dollars to do corporate takeovers, and all the interest on that crushing debt reduces my tax burden while doing nothing for my competitiveness. Long term planning gets no such perks.
6) Shareholders need to get tough with corporate bosses. The greed gets all the press, (TYCO, Worldcom, Encon) but that’s nothing compared to the ineptitude that is in many boardrooms. In today’s WSJ is an intriguing article about CALPLERS kicking some butt with some big name companies. It’s about time the CEOs are held accountable for performance.
There’s lot’s to be done, but barking up the Fed money tree is not the way to go IMHO.
(ok…rant done…)
If only it were that simple:
Greenspan: Let’s see, unemployment is too high. I’ve got the inflation dial set at 3% right now, so I’ll just crank it up to 6% for while and then we’ll get that unemployment rate down accordingly.
Most of the industrialized, 1st world nations have learned the hard way that keeping inflation in check is doable, as long as one is very disciplined about monetary policy. It’s not an exact science, but at least we haven’t been thru “stagflation” since the 70s. Unemployment, however, is a whole 'nother thing. Do you honestly think that European governments would live with the near 10% unemployment they have if there was a known answer? And don’t think it’s for lack of trying. I think we can all agree that governments in Europe take a more active role in trying to manage unemployment that the US does.
This is not what anyone here is suggesting. What is being suggested is that inflation can be controlled by changing interest rates, rises in which are known to throw people out of work.
The proposition asks us whether control of inflation is more important than the effects such controls may have on unemployment. I am minded to agree that inflation is more controllable than unemployment, but I do not agree that such control is more important than its effects; both must be considered.
That seems to be exactly what people are suggesting.
If Greenspan wanted to right now, could he lower the unemployment rate by 3%? I doubt it. Interest rates are already very low. During the tech boom 90’s, the interest rate was raised by the fed and employment stayed high.
The fed’s control of the discount rate does have an effect on the economy. Inflation and unemployment are both indirectly affected by it. However, the fed does not control anything directly.
The economy is like a stream whose water raises and lowers of it’s own accord. The discount rate is a faucet pouring into the stream. By raising/lowering the discount rate the fed does increase/decrease the level of the water. However, a good storm or a long dry spell has much more of an impact.
Well… not quite.
Problematically, European governments have tended to bloat their states to unreasonable levels (and I personally think the US government has too many employees, and too many in the wrong places), while creating lots of regulations that stifle business. Its very difficult to lay off people in France, which has the rather regrettable side effect that companies don’t hire many people.
Now, the EU is another problem. They told the European central bank that their only objective was to control inflation. This is being done (and is a major reason why the Euro is creeping up over the dollar), but its causing some problems with unemployment. only time will tell whats going on, but I see major economic crisis in Europe’s future.