September 18, 1997, New York Times
Old School Inflation Fighter Resists Notion of a New Economic Era
By RICHARD W. STEVENSONWASHINGTON -- Inflation is almost nonexistent despite steady growth and an unemployment rate hovering near a quarter-century low. Companies are chalking up ever-higher profits. Millions of investors are basking in the glow of the longest, strongest bull market on record. Even curmudgeons like Alan Greenspan, the chairman of the Federal Reserve, are increasingly optimistic that the economy is undergoing a transformation that should yield more good times ahead.
So who would dare to rain on the parade?
Larry Meyer might, for one. Meyer, one of Greenspan's fellow governors on the Federal Reserve Board, has emerged as one of the most outspoken and influential of those disputing the notion that the economy has entered some new era in which the old rules about the interplay between growth, unemployment and inflation are becoming less reliable and less relevant.
In doing so, Meyer is subtly but unmistakably challenging some of the views held by Greenspan, whose thinking so dominates monetary policy that it is rarely questioned in public by other Fed officials.
Yet at the same time, Fed officials said, Meyer's role as an intellectual foil for Greenspan has helped invigorate the debate within the central bank over some of the most critical issues of the day.
And they said that by articulating the cautious, traditionalist point of view, Meyer is acting as an powerful anchor at the Fed. That gives Greenspan greater leeway to show Congress and the public that the central bank takes seriously the possibility that the economy's ability to grow faster without inflation has been permanently improved by factors like corporate America's huge investments in technology.
Meyer, who prefers Larry over the formal Laurence H., is a 53-year-old Bronx, N.Y., native who joined the Fed last year largely unknown to the general public but with a professional reputation as one of the nation's most brilliant economic forecasters. He says that the economy's stellar performance of late might require tweaking some rules that have long governed interest-rate policy, but by no means invalidates them.
Reduced to its simplest form, his argument is that there is little evidence so far to overturn what has long been a central tenet of policy making at the Fed: If the economy grows faster than around 2.2 percent a year for a sustained period when unemployment is low and factories are running near full tilt, it will eventually ignite inflation, threaten the continuation of the expansion and require raising interest rates to cool things off.
Just Wednesday, in a speech in Pittsburgh, Meyer pointedly emphasized that the Fed could not afford to ignore the lessons economists have gleaned from long study of the past in assessing whether the present has changed so much that it promises a rosier future.
"There are limits," Meyer said. "They may not be the old limits that disciplined policy in the past. But even if the limits are new, they must be respected. Overheating is a natural product of expansions that overtax these limits. Recessions typically follow overheating. Good policy must therefore balance regularities and possibilities."
As a sparring match, the intellectual face-off between Greenspan and Meyer is not much. There is no animosity between the men, and their statements on the subject are directed at answering the most vexing question to face policy makers in years, rather than at each other.
Their debate is couched in the dense reasoning and the cautious language employed by Fed officials whenever they speak publicly. And despite their differing perspectives, Meyer has voted in lockstep with Greenspan over whether and when to change interest rate policy, and seems likely to continue doing so.
But Meyer is the only member of the Fed's policy-making body other than Greenspan to have spent his career dissecting the business cycle and rooting out clues to incipient inflation. And he is the only one to have delivered a series of carefully constructed defenses of the rules and equations that economists have long used to track the inflationary risks from strong growth and declining unemployment.
"Larry Meyer is somebody who's worthy to challenge Chairman Greenspan's breadth and scope of knowledge on monetary policy," said Allen Sinai, an economist at Primark Decisions Economics. "He provides a check on the power that Chairman Greenspan may hold over the Fed in terms of his knowledge of the nitty-gritty and his presumed forecasting power."
Some analysts believe Meyer is consciously positioning himself to become the Fed board's most determined inflation-fighter in an effort to vault himself over the central bank's vice chairman, Alice M. Rivlin, as the leading inside candidate to succeed Greenspan.
But Fed officials said that was unlikely, and Meyer has told colleagues he does not consider himself to have any chance at the job.
Still, Meyer's willingness to stake out a clear position is one manifestation of how the conundrum over what is happening to the economy has upset the traditional roles within the Fed. Greenspan, a Republican who was long viewed as a dogmatic, uncompromising inflation fighter, has emerged in the last year as far more pragmatic and patient in assessing possible changes than either his supporters or critics would have believed a year ago.
Meyer and, to a lesser extent, Mrs. Rivlin have been far more cautious. They were both appointed to the Fed last year by President Clinton, who had suggested in a public statement not long before he nominated them that he favored the argument that the nation's potential to grow faster without worsening inflation was higher than most mainstream economists believed.
In speaking up, Meyer is reflecting growing frustration among many prominent economists that the speculation about a New Age Economy -- fueled in part by Greenspan's public flirtation with the idea -- has simply gone too far.
"Whatever one calls it, this new view of the economy has spread with a rapidity rare in the annals of economic thought," Paul Krugman, an economics professor at the Massachusetts Institute of Technology, wrote in a recent article in the Harvard Business Review. "There is only one problem: When you think about it carefully, you realize that the new paradigm simply does not make sense."
In many ways, Meyer has been preparing for this debate his entire career. After receiving a B.A. at Yale University in 1965 and a doctorate in economics at MIT in 1970, he went on to teach at Washington University in St. Louis. In 1982 he founded Laurence H. Meyer & Associates, a consulting firm that soon became known for its sophisticated computer forecasting model of the American economy.
When he joined the Fed, he was initially taken aback at the power of the platform he had been given; he still winces when recalling how even his banal public statements moved the financial markets. But he has appeared increasingly comfortable lately in using his position to advance his argument -- both to the public and to other Fed members, who communicate remarkably little among themselves outside their eight monetary policy meetings each year.
While Greenspan closely studies a combination of long-term historical trends and immediate indicators of what is happening in the real world -- one recent favorite of his has been the rate at which people voluntarily leave their jobs -- Meyer tends to put more trust in broad formulas.
In particular, Meyer remains a defender of a concept known as the nonaccelerating inflation rate of unemployment, or NAIRU. It holds that if the rate of unemployment falls below a certain level and stays under the line, that wages, and ultimately prices, too, will begin to rise. And if the economy continues to grow faster than what many analysts consider its "speed limit" -- 2.2 percent or so annually -- such an increase in inflation is almost unavoidable.
Meyer, like many other economists, long pegged the NAIRU at about 6 percent. With unemployment now running below 5 percent and no signs of inflation in sight, he has lately lowered his estimate to around 5.5 percent. Still, even though the level may be flexible depending on changes in labor markets and other long-term factors, he insists that there is no reason to believe that the concept is any less valid than it has ever been. The same is true, he said, of the Phillips curve, an equation that economists use to predict how fast inflation will accelerate when growth exceeds its speed limit.
"It is possible that the Phillips curve and NAIRU is simply the wrong analytical framework, but I doubt it and am not aware of another model of inflation dynamics that is ready to take its place," Meyer said in his speech Wednesday.
The implication is that Meyer believes that the economy has been growing well above its noninflationary potential -- a trend that if continued would ultimately create inflationary pressures.
Greenspan, by contrast, has long expressed doubts about NAIRU, and has stressed recently the need for policy makers to be flexible in how they assess the economy.
"We are constantly evaluating how much we can infer from the past and how relationships might have changed," Greenspan said in a speech at Stanford University earlier this month. "In an ever-changing world, some element of discretion appears to be an unavoidable aspect of policy making."
The implication drawn by many analysts from Greenspan's position is that he will need some firmer evidence that inflation is on the verge of accelerating before he decides to raise interest rates -- and that formulas like NAIRU by themselves do not provide that evidence.
Meyer, while willing to concede that some fundamental changes may be under way in the economy, strongly suggested that the biggest factors in explaining the current lack of inflation might be temporary, including the strong dollar, the reduction in the growth rate of health care costs, declining computer prices and low energy and food costs.
"Uncertainty about the source of the recent performance might be viewed as so great that the best course for monetary policy is a reactive posture, waiting for clear signs that inflation is rising and only tightening in response to such evidence," Meyer said. "I agree that the current uncertainty encourages caution, but not to the point of paralysis."