Alan Greenspan doesn't think you should get a raise. And he doesn't
want you to feel too secure in your job, because otherwise you might
demand that raise.
I'm not putting words in his mouth. A few weeks ago, addressing an
audience of bankers, the usually Delphic chairman of the Federal Reserve
Board was uncharacteristically clear, warning that the United States
economy is ''steadily depleting the pool of available workers'' -- that
is, giving jobs to the previously unemployed. As a result, ''labor
market conditions can become so tight that the rise in nominal wages
will start increasingly outpacing the gains in labor productivity'' --
that is, workers who know that jobs are plentiful will get big raises.
And that, Greenspan implied, would be a very bad thing. He didn't say
what he would do about it, but markets got the hint: bond prices
immediately plunged, on fears that the Fed would soon raise interest
Now to a man from Mars -- or for that matter to a normal human being
-- Greenspan's concerns might sound very peculiar. After all, what's
wrong with giving jobs to the jobless and higher wages to the employed?
But Greenspan is probably right to be worried. What is less clear is
whether it was a good idea for him to be so explicit.
Think of it this way. Once upon a time (say, back in the mid-70's,
when Gerald Ford was President and Alan Greenspan was his chief
economist), the U.S. economy was like a trendy restaurant -- one of
those places where the tables are set close together and the ceiling
seems custom-designed to maximize the din. What happens in that kind of
environment is that everyone tries to talk above the background noise so
as to be heard by his or her companions. But by talking louder, you
yourself raise the noise level, forcing everyone else to talk louder,
raising the noise level still further, and eventually everyone is
shouting themselves hoarse. Substitute wage and price increases for
speaking volume and inflation for the overall noise level, and you have
a capsule analysis of the kind of inflationary spiral that the U.S.
faced in the 1970's. And the only way that the noise level (inflation)
could be kept under control was to keep a substantial number of tables
vacant -- that is, by maintaining a large reserve army of unemployed.
Today, of course, the situation is vastly improved. The economy is
flourishing, with unemployment at a 25-year low. (The restaurant is full
again.) Yet so far inflation is quiescent. (The noise level is
tolerable.) This is partly because exceptional productivity gains have
made it possible for companies to pay higher wages without raising
prices. (A sound-absorbing ceiling?) But it is also because, for reasons
that nobody fully understands, workers have been remarkably diffident
about demanding higher wages, even in the face of labor shortages.
(Diners have mysteriously become more polite?) Everyone is happy. But
will the very exuberance of the diners bring the bad old days back?
That's what Greenspan is worried about. What he said to the bankers
was, in effect, that no matter how good the acoustics, no matter how
well behaved the customers, if the restaurant gets sufficiently crowded
there will be a shouting match. And if that happens -- well, he'll just
have to limit the number of patrons. It's not that he is mean-spirited
or a tool of capitalist oppression; he's just doing his job. But you
still have to wonder whether it was a good idea to describe that job so
explicitly and so honestly.
For there is, when you come down to it, always something slightly
unsavory about the business of central banking. A market economy -- even
the Goldilocks economy of America in the 90's -- requires that a certain
number of people who want to work be unable to find jobs so that their
example will discipline the wage demands of those who are already
employed. Even liberal economists like myself grudgingly accept the
conclusion that a responsible Fed must sometimes raise interest rates in
order to limit the number of jobs and maintain a suitably high rate of
unemployment. But the scene remains an ugly one: when the Fed acts to
cool off an overheated economy, what that literally means is that a
group of comfortable men and women in suits are deliberately acting to
limit the job prospects of some of their worst-off fellow citizens.
How is one supposed to explain that scene to the general public? Many
of Greenspan's counterparts deal with the ugliness by denying that it
exists -- by denying that they have any influence over employment at
all. Greenspan, to his credit, tells the truth about what he does, but
until now, he has done it in a way that only the cognoscenti can
understand. Well, now he has said it clearly. But is America ready to