Mike Meeropol's request for a report on ASSA meetings

[ECOELT@xxxxxxxxxxxxxxxx]

"Economists Trade Barbs Over President'sPolicy" was the headline in the
New York Times, January 5, 1994, p. D-2, for a meeting I attended.

Martin Feldstein, who chaired the CEA in the second half of Reagan's
first term, acknowledged that "to complain too loudly about an economy
that is growing by an annual rate of 2.5 percent or better, has a 6.4
percent unemployment rate and inflation of only about 3 percent" is
hard to do.  Robert Barro admitted that there was "less misery" showing
up in his misery index. Both Republicans gave the Fed under Alan Greenspan
most of the credit for the good year.

Robert Solow, the Nobel Laureate from MIT, said that all discussions
among economists have roots in the question of what will happen to income
distribution. In this respect, the Clinton Administration deserves praise
for the progressive tax increase and the higher earned income tax credit
for the working poor.

Both Rudy Dornbusch and Solow argued for restraints on consumption to
permit more investment. Dornbusch's favorite prescription was the VAT.
No mention was made of the effect of the VAT on prices via supply-side
inflation and the possible reaction of the Fed.

Although the final verdict for 1993 is not yet available, it seems
likely that th e rate of growth for GDP will be less than 3.0 percent,
the growth rate in the last Bush year.  This relatively low growth rate
occurred despite what Laura Tyson calls the "flood factor" which will stimulate
growth in the final quarter of 1993.

I would argue that the continuation of relatively high real interest rates
by the Fed is responsible for this sluggishness.  The prime rate is still
circa 6 percent which gives a real interest rate of at least 3 percent,
higher than in any postwar year before 1980.  Secretary of the Treasury
Bentsen is willing to concede that therewill be an uptick in short-term
interest rates in 1994. And there is an almost universal belief that any
continuation of the present rate of expansion will move the U.S. economy
close to full employment and hence necessarily increase the rate of inflation.

What is full employment? This year, we will have a new measure of the rate
of unemployment to take into account past underestimates of the unemployment
rate.  This should add ab out a .5 percentage point to the overall unemployment
rate and bring it up to 7 percent.  Most economists seem satisfied to regard 6
percent unemployment as full employment, although Lawrence Klein apparently
calledfor a lower definition of 5 percent.

My own view is that most of the inflation today is supply-side inflation.
And the rate of inflation as measured by the CPI is an overestimate due
to a weighting system dating back to 1982. In reality we are close to zero inflation with the possibility of deflation in the cards. Almost all advanced
capitalist countries are in the same situation due to the long run effects
of monetarist prescriptions emanating from the Bundesbank and the IMF.

Thus, there is more room for expansion than is commonlybelieved before there
would be any significant uptick in the CPI.  The decline in raw material
prices due to the distress sales by Russia of petroleum and aluminum also
tend to produce deflation rather than demand-pull inflation.

The contractionary impact of the Clinton budget, the continuation of relatively
high real interest rates, and the general world stagnation outside of Greater China should hold back gains in United States output in 1994.

The universal view is that the passing of both GATT and NAFTA represent "the
most successful year for American international economic policy than any
yearsince World WarII," to cite an evaluation of Lawrence H. Summers, who
received the  prize for the most outstanding young economist this year.

With so much bullish agreement among United States economists, we should
be alert to the possibility that they may all be out on a limb.

Lynn Turgeon (ECOELT@xxxxxxxxxxxxxxxx)