Dear listmembers
It seems to me that the Federal Reserve is once again
operating under assumptions that may have been valid in years
past, in this case decades past, that are no longer valid. If
you will remember the Federal Reserve did this in the early
1980s when they should have known that financial deregulation
would change people's behavior and yet they still continued
to peg M1 which was a meaningless variable once funds started
crossing from other aggregates simply to chase high interest
rates.
Well, now that I have ripped on the Fed's past policy,
I have a hypothesis about the wrong headedness of the current
Fed actions. It seems as though the Fed has accepted that
unemployment below 6 percent is undesirable for the US economy.
(If this is truly the case then the Fed has created a permananet
industrial reserve army which I believe is much larger than
anything Marx would have ever dreamed of in its shere magnitude)
The reason, I presume, for the Feds desire to keep unemployment
about the 6 percent marker is to keep inflationary pressures
out of the economy. I do not know whether in the past inflation
has come about because of capacity utilitization or tight
labor markets, but there does seem to exist a Phillips Curve
relationship between unemployment and inflation, though not a
perfectly stable one.
It is my contention that whether inflation comes
primarily from capacity utilitization or a tight labor
market is irrelavant in the face of very real international
competition. As long as all nations, or at least all
"relevant" nations do not face this situation of high
capacity or a tight labor market there will be considerable
pressure downward toward stability in prices. This is true
because if a US firm raises prices substantially, or in
some cases even marginally, they will lose sales to their
internation competitors. In addition, in the input market
more generally known as the labor market (Neoclassicals mess
things up so much with the special little terms) wages
are kept from growing at any substantial rate by the threat
of international competition for these jobs. As such, I
would argue that the US economy can in fact have an unemployment
rate as low as 3 to 3.5 percent consistently without any
real inflationary pressure.
I am curious to see how many of you will respond to
my hypotheisis on this subject. If disagree please explain
your reasons as I wish to learn. If you agree, why if it is
obvious to us is the Fed ignoring it? In fact, the Fed
seems to believe that the international sector is a source
of inflation rather than a mitigating factor.
Loren Rice
The University of Science and Arts of Oklahoma
P.S. Much of this analysis comes indirectly from Paul
Davidson's lectures and readings which I was
fortunate enough to be able to experience during
graduate school.
