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What The Media Tell Americans About Free Enterprise

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April 1997


Network Reporters Wedded to the Phillips Curve
Too Much Growth? Too Many Jobs?

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 topic.

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 the increase.

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 the networks.


Rich Noyes


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