Nov 1 1998

Inflated Fears of Full Employment

That jobs cause higher prices is a media article of faith

In an article this summer celebrating good economic news (7/31/98), the New York Times’ Sylvia Nasar paused to caution readers that even amid what she has called “the best economy since the 1960s” (8/2/98), a specter lurked: “Ever since the unemployment rate first slipped below the level that most economists regard as consistent with steady inflation, the Federal Reserve has been on the lookout for any hint that wage pressures are getting out of hand.”

While those who earn their living from wages will likely puzzle over the notion that their pay might be getting out of hand, Nasar’s trope is familiar to consumers of “business news.” Since the economic recovery began pushing down the official unemployment rate, reporters have been warning that joblessness may be too low. This apparently perverse worry is based on the idea that if there are not enough workers without jobs, inflation will materialize, and that once it does there will be no way of getting rid of it.

That is not the way things have turned out. Unemployment has fallen steadily since 1992, and inflation, rather than rising, has fallen with it (see chart). Yet the news media have been persistent in their conviction that more people working is something to fear.

A useful prop in this play is the theory of the “natural rate of unemployment,” which posits that if the unemployment rate falls below a certain number, inflation will accelerate. Or as Newsweek’s Robert Samuelson—a dogged apostle of the theory—explains (11/21/94), “It means ‘full employment’ in the sense that, if joblessness goes lower, inflationary wage pressures emerge.” With the natural rate theory has come a proliferation of “estimates” from economists of what the natural rate might be, estimates that reporters have dutifully relayed in their articles. But unemployment has continued to fall below the estimates without producing the predicted inflation. This has left the experts—and the reporters—unfazed: They have simply lowered their estimates, usually to a level at or just below the actual unemployment rate.

In April 1994, when the unemployment rate stood at 6.5 percent, U.S. News & World Report’s Susan Dentzer (4/18/94) wrote: “Many top economists believe that the natural rate now stands at around 6.5 percent.” In June 1994, when the unemployment rate was 6.1 percent, the New York Times’ Keith Bradsher (6/6/94) reported that, according to Council of Economic Advisers chair Laura D’Andrea Tyson, the natural rate was between 5.9 percent and 6.3 percent. In October 1995, with unemployment at 5.6 percent, New York Times economics columnist Peter Passell (10/25/95) wrote that some people “speculate that the natural rate has fallen to 5.5 percent or even lower.” (This came after an acknowledgment that previous estimates of about 6 percent had failed to produce the expected inflation, after well over a year of sub-6 percent joblessness.)

By September 1996, the unemployment rate had fallen to 5.2 percent with no significant increases in inflation; the Dow Jones news service (9/14/96) wrote that “economists say the level could be significantly lower than 6 percent—though pinpointing a specific figure is tough.” Tough indeed. Last year the Associated Press (2/10/97) reported that the Council of Economic Advisers had a brand new estimate of about 5 percent. Within three months, the unemployment rate had dropped below that number, eventually falling as low as 4.3 percent. Inflation continued to decline.

The Certainty of Pseudo-Science

Armed with the certainty of pseudo-science, reporters brooded over the dilemma of low unemployment. On ABC’s World News Tonight (7/30/98), anchor Charles Gibson reported that in the previous month “the tight labor market helped boost wages and benefits for workers” above the rate of inflation, “which is also reason for some concern.” He explained: “When wages go up too fast, companies are more likely to raise prices, which can then spur inflation.” In the two months following Gibson’s warning, inflation fell from 1.7 percent to 1.6 percent, its lowest level in more than 30 years.

In a news analysis piece noting good economic news, the Los Angeles Times reported (1/6/98): “To be sure, not everything is rosy. While businesses are enjoying lower raw materials prices, they’re paying higher wages.”

The net effect of all this dogma is to give cover to the Federal Reserve, and to Fed chair Alan Greenspan, should they decide to raise interest rates and slow down the economy. Although Greenspan’s publicly stated goal is to prevent inflation from rising too much, he often raises rates when inflation is nowhere in sight. This has kept real wage growth during the ’90s even slower than during the ’70s or ’80s. But media coverage of the economy has worked to deflect attention from the Fed’s responsibility for sluggish wages with tendentious talk of natural unemployment rates and ominous wage growth—creating the impression that any increase in wages beyond what the Fed wants would be bad for us anyway. So although the Federal Reserve’s “concerns” are frequently mentioned, they are almost never questioned.

In fact, reporters often portray the Fed as if it had no choice but to pursue its zealous anti-inflation policies. The Milwaukee Journal Sentinel (4/20/98) wrote that “wage pressures building in the economy could soon force the Federal Reserve to raise interest rates.” USA Today speculated (5/7/98) that wage increases might cause companies to raise prices, “triggering rising inflation that would have to be squelched by a Fed-engineered rate increase.”

Reporters rarely address even the most glaringly obvious questions surrounding the Federal Reserve and inflation. How fast can wages grow before they create inflation? How much inflation is too much?

Although the Federal Reserve’s opinions dominate the news media, they are not the only opinions around. Joseph Stiglitz, chief economist of the World Bank (and one of the world’s most highly regarded economists, for what that’s worth), recently said (World Bank, 1/7/98) that “when countries cross the threshold of 40 percent annual inflation, they fall into a high-inflation/low-growth trap. Below that level, however, there is little evidence that inflation is costly.” (Stiglitz’s emphasis.) The U.S. has never experienced 40 percent inflation in this century. If Stiglitz is right, the premise of virtually every article written about inflation and unemployment in this decade is wrong. Yet skepticism is almost nowhere to be found.

The natural rate theory, too, is something less than divine wisdom. Robert Eisner, a former president of the American Economics Association, believes “there is no basis for the conclusion that low unemployment rates threaten permanently accelerating inflation” (American Prospect, Spring/95). While a few articles delicately questioning the theory have appeared, they swim in a sea of day-to-day business stories, monthly inflation updates, and exegeses of the latest Greenspan pronouncement—all of which take the theory as gospel.

The principle that guides coverage of unemployment, inflation and the Fed seems to be that if Wall Street and the Federal Reserve believe it, it’s probably true. And for a press corps that feels compelled to interrogate the president’s account of his sex life, that is an astonishing failure of skepticism.

Additional Research: Janine Jackson

See Sidebar: “To Press, Lower Profits Are Not an Option.”