Does too much economic growth and employment cause inflation?
This alleged tradeoff, called the "Phillips Curve," is very
controversial. But based on what they see on the news, many
Americans could be forgiven if they think there's no debate on the
Network journalists typically report as a given that high rates
of growth and low unemployment cause inflation when, in fact, some
economists question the link.
This was evident when, in late March, the Federal Reserve Board
raised short-term interest rates. The only evening news show that
didn't show a devotion to Phillips Curve thinking was the CBS
Evening News, which refrained from analyzing at all the reasons for
NBC's Tom Brokaw, on the March 25 Nightly News, announced that
times were just too good: "It's been two years now since the Federal
Reserve raised short-term interest rates in this country. The stock
market and the economy have been booming; well, maybe booming a
little too much."
ABC's Peter Jennings, on that same evening's World News Tonight,
agreed: "It's been a long time coming, but today the chairman of the
Federal Reserve Board made good on his threat to raise interest
rates if, in his view, the economy was in danger of overheating."
Correspondent Aaron Brown then contended that "consumer spending has
been strong for two straight quarters; that sort of increased demand
can lead to higher prices. Businesses need more workers to meet that
demand and may have to pay higher wages to get them. Unchecked,
that's a prescription for inflation."
In a report following Brown's, economics correspondent Robert
Krulwich provided an outline of Phillips Curve thinking: "Tradition
says if I'm the boss of a company and my workers come to me and say,
`Boss, we want a raise,' if I know that there are thousands of
people out of work in my town looking for jobs, I'm likely to turn
to my employees and say, `Get lost,' because I can replace them.
"But right now, the situation is quite different," Krulwich
argued. "People are saying jobs in general are easier to get
nowadays than anytime since 1992. So now if they say, `Boss, give us
a raise,' I've got to be more careful because some of them can leave
me now and it will be much harder for me to replace them, so I might
just give them that raise." According to Krulwich, if workers "take
the raise and do not increase their productivity, then prices will
start to rise."
But reporter Peter Pfabe points out in the April 9 Investor's
Business Daily (IBD) that, historically speaking, "It's excessive
money growth -- not jumps in employment or stronger economic growth
-- that usually precedes higher inflation."
While some economists and most reporters worry about "wage-push"
inflation, i.e., higher wages causing higher prices, Pfabe argues
that "inflation is actually an increase in the rate at which overall
prices rise. If oil or wages rise, those are simply relative price
increases -- not inflation."
Pfabe reminds readers that inflation soared during the low-growth
late 1970s, but was tamed during the high-growth 1980s. "The data
show the relationship [between growth and inflation] is simply not
true," economist Thomas Nugent, of IRM Advisors, told IBD. "Economic
growth is far more likely to be coincident with lower inflation than
with higher inflation."
"Inflation, then, is a monetary phenomenon," Pfabe concludes. "It
is the relationship between the supply of and demand for money."
Excessive money growth, not strong economic growth, has triggered
inflation in the past. But viewers wouldn't know it from watching