Lynn Turgeon's report of the AEA discussion of Feldstein, et al.

[MMEEROPO%WNEC.BITNET@xxxxxxxxxxxxxx]

>"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.

*stuff deleted*

>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.

I was in a "discussion" with Ed Deak, head of the dept at Fairfield U., right
after the meetings and he argued that the only way to convince the bond market
to let the long rate continue to fall was to RAISE the short rate.  My
response was that this is an abominable state of affairs where the Clinton
Administration is totally hostage to the Bond Market.  I think we on the left
need to begin making as much noise as we can (there aren't many of us but we
can try...) about how outrageous this situation is.  Democratic control of
monetary policy and a little "reflation" should cure the bond market of their
arrogance .... (but such a government policy would need to be forthright and
very politically up front about what was going on and why ... fat chance!) --
>
>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.

another abomination --- How anyone can think that the NAIRU is as high as six
percent with the tremendous amount of international competition American
business is subjected to is beyond me.  Also, what's happening to the price of
energy --- that's often a wild-card in the inflation numbers --
>
>My own view is that most of the inflation today is supply-side inflation.

driven by medical costs?  what?
>
>And the rate of inflation as measured by the CPI is an overestimate due
>to a weighting system dating back to 1982.

If the weighting system underestimates the importance of medical and long term
nursing care because those have grown in importance since 1982, then the
current inflation rate might UNDERSTATE total inflation.  What's the basis of
your point?

>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.

oops!! answers my question about energy costs...

>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.
>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)

Very interesting post.  Thanks, Lynn

Mike Meeropol
(bitnet%"mmeeropo@wnec")
(in%"mmeeropo@xxxxxxxxxxx")
(#100)