7/27/2019 Stop Panic Kui Ng

1/4

n

stopPanickiribAboutInflationHysterical headlines, asquirrely Fed, a n d alarmist

CNBC talk shows are leading ustoward higher interest rateswhile the real problems thatcould give us inflation gounattended

B Y JOSHUA S H E N K

n S e p t e m b e r 2 3 , i n f l a t i o n w a s i n t h enews. This morning, the f inancial mar-k e t s a r e p r e o c c u p i e d w i t h i n f l a t i o n , trumpeted Nei l Cabuto, host of CNBCs morn-i n g s h o w , M o n e y W h e e l . The Washing tonPost warned of an immine nt painful correctionas the Federal Reserve Board m oved to raise in-t e r e s t r a t e s . The New York T imes r e p o r t e d ascramble on Wall Street, apparently touchedoff by rumors tha t some Fed governors mightn o t g o a l o n g w i t h t h e r a t e i n c r e a s e [ i t a l i c sadded] .On September 24, inflat ion was in the newsonce again . And on the 25th . And on the 26th .Th e truth is, inflation-or at least the threat ofit-always mak es goo d copy. An d the 1994 stam-pede-led by Alan Gree nspan and cheered on bye c o n o m i c c o m m e n t a t o r s a n d b u s i n e s s r e -porters-has kep t it in the new s. Bu t this inflatio nhype is based on a false premise that has some-how taken a p lace in the economics orthodoxy.In Am erica today, The New York Times reportedon October 2, economic growth a nd inflation arei n t e r t w i n ed , so t h a t f a v o r i n g b r i s k e c o n o m i cgrow th means tolerating a rising inflation rate.

Well , no. Economic growth does not a lwayslead to higher prices, as a look at American his-tory proves t ime and again . Between 1800 and1940, the economy grew rapidly , but the whole-sale price level was the same in 1940 as i t wasin 1800 . And f rom 1954 to 1 968 , the coun t ryhad nearly full employment, strong growth, andvirtually no inflation.Of course , in f la t ion can be a rea l p rob lem.B u t t ak e a l o o k a t h o w i t r ea l l y d ev e l o p s i nAmerica and you can see how ra i s ing in te res trates-which chok es off expa nding businessesand new hiring-is the last thing we ought to bedoing. The three periods of double-digi t infla-tion since World War 11-1946-47; 197 3-74 ; and1979-80-were all caus ed by real or perceivedshortages of goods. So making it harder for in-dustry to produce goods is insane.The sane th ing to do now is to s top speculat-ing about what Greenspan is thinking, what theJoshua Shenk s a Washington writer:

November 19941The W ashington M onthly 17LICENSED TO UNZ.ORG

ELECTRONIC REPRODUCTION PROHIBITED

7/27/2019 Stop Panic Kui Ng

2/4

Fed will or wont do, and whether rates willr i se o r fa l l . I f there i s any danger o f in f la -tion-and there may be-its cau ses do not liein the threa t of a-horror of horrors-growinge c o n o m y . T h e y l i e i n s t e a d i n t w o p l a c e swhere the business press and the banking ex-perts have not bothered to tread: the continu-ing downs iz ing o f American indus t ry and alittle-noticed, potential crisis in the oil supply.Inflated Fears

This fall , if you really wanted to get a gripon how inflation could come back, you wouldhave turned off Wall Street Week and TheNigh tly Bus iness Repor t and pa id c lose a t -tention to what w as happening in Flint, Michi-gan. There, you would have seen the outlinesof a new problem in the American economy:the po ten t ia l ly in f la t ionary consequences o fdownsizing.A t 10 a . m . o n S e p t e m b e r 27, 11,500 G Mwo rk e r s s t ru ck , co m p l a i n i n g t h a t t h ey w ereworking too many hours to meet demand forn e w c a r s . B e c a u s e c o m p a n i e s li k e G M , t henat ions top automaker, are reluctant to bearthe fu l l cos t s o f h i r ing more permanen t em-p l o y e e s , t h e l e n g t h of t h e A m e r i c a n w o r kweek has hi t a post-World War I1 high . Forworking men l ike Dave Felding, a welder atGMs sprawling Buick City com plex in Fl in t ,t h e r e s u l t is t o o m u c h e x h a u s t i n g w o r k .T h ey s p eed ed u p t h e l i n e s an d d o n t h av eenou gh people to do the job, Felding to ld re-porters.Feldings quandary may soon affect everyco n s u m e r b ecau s e i t u n d e r s co re s t h e ch an cet h a t s o m e p a r t s o f A m e r i c a n i n d u s t r y m a yhave cut too much too quickly in their break-neck quest for competitiveness beginning inthe late eight ies . G M , for example, has el imi-nated 52,000 hourly job s s ince 1991, meaningthat now that the demand for cars is up, theremight not be enough people or plants to turnou t the p roducts . And Ford Motor Companyhad to sto p production of som e popular pick-up trucks and large cars because workers at apar t s p lan t re fused to pu t in more over t ime.These shor tages o f the r igh t workers in t h eright place, not a generalized Fed projectiontha t g rowth equals in f la t ion , cou ld lead to a

scarcity of cars, which in turn could cause in-f lati on. -evertheless, news that labor disputes areg ro wi n g m i g h t l e ad y o u t o b e l i ev e t h a t t h et r ad i t i o n a l v i ew i s r ig h t- th e eco n o m y i sg r o w i n g , a n d w o r k e rs a r e s e e k i n g h i g h e rw a g e s , w h i c h w i l l i n t u r n c r e a t e h i g h e rprices . But look harder and you see that thef o l k s a t G M a n d F o r d a r e n t c l a m o r i n g f o rh i g h e r wag es . T h ey a re , i n s t ead , c l am o r i n gfo r m o re w o rk e r s . Pa r t of t h e p ro b l em wi t hd o w n s i z i n g h a s b e e n s h u t t i n g d o w n w h o l eplants , which means that ins tead of keepingtwo o r three factories open with the capaci ty ,in good t imes, to put people to work to meetdem and, b ig comp anies have downsized in away t h a t m ean s t h e re co u l d b e a q u i e t an dthu s-far-unnoticed reason t o w orry about in-f la t ion . I t i s th i s : Even though peop le wan twork, if they are idled in Van Nuys, for ex-a m p l e , t h e y m a y n o t w a n t t o u p r o o t t h e i rfamilies to go to work in Buick City, which iswhere the job s now are.And theres another, related problem: Eveni f these peop le were wi l l i n g t o m o v e , t h e remust be plants for them to work in and equip-ment for them to operate. You could have anabundant supply of skilled people who dontm i n d M i ch i g an wi n t e r s, b u t B u i ck C i t y canonly s tay open, obviously , for 24 hours in aday. So companies that are downsizing shouldthink very hard about closing entire plants al-together, because one result could be more ofwhat is happening in Flint today: overworkedlaborers unable to keep up with demand. Andt h e u l t i m a t e r e s u l t co u l d b e i n f l a t i o n i f d e -mand cant be met . This is not an immediatep ro b l em , b u t i t m er i t s co n s i d e ra t i o n i n t h elong term. [For more on the possible perils ofdownsizing, see page 22 in this issue.]In t h e s h o r t t e rm , wo r r i e s t h a t t o o m an yp eo p l e a re w o rk i n g a re p re t ty b as e l e s s . T h eFed and the press , of course, rout inely asserttha t when unemployment d rops , in f la t ion i ss u r e t o f o ll o w . T h i s , t o o , i s w r o n g : F r o m1 9 5 4 to 1 9 6 8 , u n em p l o y m en t av e rag ed f i v epercent, and there was virtually no inflation;today, the jobless rate hovers around six per-cen t . S t i l l , the fears pers i s t , desp i te the fac ttha t as ide f rom the mi l l ions o f unemployed ,t h e wo rk fo rce h as ev en m o re h i d d en s l ack .

18TheWashington Monthly/November I994LICENSED TO UNZ.ORG

ELECTRONIC REPRODUCTION PROHIBITED

7/27/2019 Stop Panic Kui Ng

3/4

More workers than ever are working in part -time or contract positions; the number of in-volun tary part - t im e employees-those wh owo u l d p re fe r fu l l - t i m e wo rk b u t can t f i n dit-ballooned to 6.3 millio n peo ple last year,accord ing to the Bureau o f Labor S ta t i s t i cs .The Bureau also es timates that temp work hasaccounted for 15 percent of new jobs in themos t rec en t recovery , ev en though i t m a k e su p o n l y 2 p e r c e n t o f th e w o r k f o r c e a s awhole.This trend is exemplified in the remarkablegrowth o f Manpower Inc . , the McDonald sof temp work. The Milwaukee-based compa-n y i s o n l y o n e o f 7 , 0 0 0 t e m p o r a r y s e r v ic efi rms, but i t a lone employed nearly 650,000people last year, making it the largest employ-er in the country, next to the Federal govern-ment. On top of all this, contracting work tosm aller firms-especially those sm all enou ghto qualify for exemptions from costly federalregulations-has grow n as well.T h e t r e n d t o w a r d d o w n s i z i n g a l s o h a sworkers rightfully fearful for their jobs, evenwhile their employers are making money. TheAmerican Management Associat ion found ini ts most recent survey that 47 percent of i ts7 ,000 members cut jobs in the las t year. Ther e l a t i o n s h i p b e t w e e n d o w n s i z i n g a n d t h egrowth of temporary work is clear: The pres-e n c e o f r e l i a b le f i r m s l i k e M a n p o w e r e a s ecorpora te managers fears tha t they wi l l cu tt o o d eep l y i n t o t h e i r wo rk fo rce . Wi t h s u chabundan t workers ava i lab le to f i l l the gaps ,theyre more likely to err on the side of cut-ting too many, rather than too little. I used tosneer and scoff at projections that showed 50percent of the American workforce would bework ing on a par t - t ime o r con t rac t bas i s bythe year 2000, says Greenberg. I still dontt h i n k i t l l b e t h a t h i g h , b u t I m n o l o n g e rsneering.Now fo r oil . You would never know it fromreading the papers or watching the news, butthe key villains in the two terrible periods ofi n f l a t i o n i n t h e s e v e n t i e s w e r e o i l s h o c k s .The re is a chance-just a chan ce, but historys h o w s u s w e n e e d t o p a y a t t e n t i o n t op e t ro l eu m s u p p l ie s - t h at an o t h e r p ro b l e mcould arise, creating a real or perceived short-age that could send crude prices up and with

them the p r ice o f jus t abou t every manufac-tured good in th e country.To deal with spikes like those we sufferedin the seventies, Congress created the Strate-gic Petroleum Reserve, which is designed toprotect us but may not. Since 1976, Cong resshas sp ent $33 billion (in 1994 dollars) to fil l av as t l ab y r i n t h o f cav e rn s i n L o u i s i an a an dTexas with a reserve supply of oil. It has a ca-pacity of 750 million barrels (i t could be ex-panded wi th fu r ther cons t ruc t ion) and ho lds5 9 0 m i l l i o n a t p re s en t . A t l e a s t t h a t s h o wmuch oil weve put in.Trouble is , it s far from clear how much oft h a t we can g e t b ack o u t i n t h e ev en t o f awo r l d wi d e s h o r t ag e . T h e o r i g i n a l p l an wasfor a maximum dai ly output of more than 4million barrels. But a recent investigation bythe General Accounting O ffice concluded thatt he r e a l m a x i m u m m i g h t b e m o r e l i k e800,000 barrels. And without extensive workan d t h e r ep l acem en t o f d ec rep i t eq u i p m en t ,two-thirds of those 590 million barrels couldbe lost forever. Both the am ount of oil avail-able for drawdown and the to tal dai ly draw-d o w n r a t e s h a v e b e e n l e s s e n e d , s a y s t h eGA O, because the temperatures of the s toresof crude oi l have been elevated by geother-mal heating and gas, primarily methane, fromt h e s u r r o u n d i n g s a l t f o r m a t i o n s h a s m i x e dwi th some of the o i l . In o ther words , in apinch, when w e turn on the hose to pum p thatoil out to save us from debilitating inflation,God on ly knows what migh t squ i r t ou t - i fanything. Clearly, we must get that system ins h ap e t o i n s u re t h e co u n t ry ag a i n s t an o th e roil shock.Beyond short-term shocks, the longer-termi n f la t i o na r y d a n g e r c o u l d b e t h e m o u n t in gth i rs t fo r pe t ro leum in the Th i rd World andd e v e l o p i n g e c o n o m i e s i n E a s t e r n E u r o p e ,Lat in Am erica, and Asia-especial ly Ch ina.All this may threaten a longer-term oil-driveninflation beginning in the late nineties. Thereare two ways to handle this. One, we shouldmake a peace with Iraq in a reasonable periodt h a t w i l l a l l o w t h e i r e n o r m o u s r e s e r v e s t ocom e on to the marke t . (Oi l exper t s ca l l I raqthe Phan tom of the Market because o f i t smarket-flooding potential .) If Iraqs reservesw e r e r e l e a s e d , w e w o u l d b e p r o b a b l y s a f e

November 1994/TheWashington Monthly 19LICENSED TO UNZ.ORG

ELECTRONIC REPRODUCTION PROHIBITED

7/27/2019 Stop Panic Kui Ng

4/4

r n o swhofro m inflation for som e time. The second essentialthing is that we must take practical steps to makeourselves less dependent on oil by requiring thatfleet vehicles (rental cars, delivery trucks, and bus-es, for example) run on electricity and natural gas.(Another factor today in determining interest ratesin the U.S. is the movement of rates in other coun-tries. But worries about the world dema nd for cred-it-which are legitimate-should not automaticallylead Americans to panic about inflation here.)McLaughlin Mania

In sum, baseless inflation hysteria has come upat least twice in the last five years and inflationhas not resulted. So why the hysteria? One reasonthat has not been noted is the rise of around-the-clock financial news television shows. Until re-cent years, financial information was passed alongcalmly, in the read-an d-reflec t parts of the news-paper, and people had time to consider each devel-opmen t carefully. Now, led by Cabutos CNBCnetwork, money new s is part of the headline-hun-gry and copy-hungry television culture where an-chors, comm entators, and reporters feel compelledto have some sexy new development to bringviewers every hour. This is not unlike w hat televi-sion talk show s have don e to our politics, too,where panelists on shows like The McLaughlinGroup sp ew out predictions and opinions at amanic pace. So now we have an equally jangly-nerved financial news culture in which NewFears of Inflation is an endlessly renewab le angleguaranteed to attract attention. And the more itssaid, the more real it seems to the bankers, bro-kers, traders, investors, and journalis ts who watch.A second reason why the press seems unableto understand that affluent bankers and brokersare wrong when they assert workers are demand -ing higher wages is that reporters simply dontknow the average man anym ore. If they did knowa few guys who are working in factories andplants, they w ould know that the working man to-day is terrified by the prospect of losing his joband therefore isnt thinking of walking in to theboss to threaten to walk unless theres more paycoming. And so reporters are entranced by theoryand imprisoned by a conventional wisdom whos enet effect-higher inte res t rates-stifle a grow ingeconomy, the very thing we all should be puttingour minds to creating. 0

It could not have been a reassuring moment forHenry Cisneros when, during one of his taped conver-sations with Linda Medlar, the former mistress towhom he has supplied at least $200,000 in cash sincethe termination of their relationship, she said, Honey,Im as smart as they come. I know exactly what woulddo you in.. ..The man who created those devastating Harry-and-Louise commercials that shot down Bill and HillaryClintons health initiative is Ben Goddard, whose ad-ve:rtising agency is located in Malibu and who seems tohave had a change of political heart recent1y:Goddardspast clients include Gary Hart and Jesse Jackson. .. .In the discussions of the possible use of militaryforce to reinstall the Aristide government, insider pro-ponents of the invasion included Tony Lake, StrobeTalbott, and Ma deleine Albright. Opponents were

led by John Deutch, the deputy secretary of defense,h is boss William Perry, and most of the top militarybrass. . . .The good side of AI Gore is that knowledgeable in-siders regard himas the soundest advisor closest to BillCllinton. The bad is that Gore has long been infamousas the kind of fellow who, when youre looking for-WiUd to a fun lunch, will sit down and start drawing sci-entific diagrams on the tablecloth. Lately, hes beenhosting a series of dinner parties at the Vice Presidentialmansion that are preceded by lectures. The discussions,

to put it kindly, can be abstruse. I had a very hardtime, one guest confided to The Wall Street JournalsTimothy Noah, wrapping my mind around anythinganybody said.. . .ThomasNiles, the U.S. ambassador to Greece, is sodevoted to his dog, Mr. Wheat, according to The Wash-ington Posts AI Kamen, that when a Greek monasterywhere Niles planned to spend the night refused to admitthe dog, Niles and his security guards slept outside thewall on cots with Mr.Wheat at their side. . . .All my gossip-loving friends were titillated by thistidbit from the Paula Jones lawsuit. According to herlawyer,Bffl Clintons attorneys, during settlement nego-tiations this spring, offered at one point to have the pres-ident say this: I have no recollection of meeting PaulaJones on May 8, 1991 in a room at the Excelsior Hotel.However, I do not challenge her claim that we met thereand I may very well have met her in the past.. . .The rumor is that Maggie Williams, HillaryRodham Clintons chief of staff, is looking for anew job. . . .-

20 TheWashington MonthlyiNovember 1994 LICENSED TO UNZ.ORGELECTRONIC REPRODUCTION PROHIBITED