He Told Us So
For more than two decades, UT economist Jamie Galbraith has been preaching the gospel of full employment. Finally, someone is listening.
THIS FALL, as the Asian financial crisis threatened to cross the Pacific, economists in Washington, D.C.—including Alan Greenspan, the chairman of the Federal Reserve—suddenly started echoing the words of James K. Galbraith, an economist who teaches at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. For more than two decades, against the prevailing opinion of others in his field, Galbraith has chided the Fed every time it has raised interest rates in the name of preventing inflation. In a host of publications—most recently his second book, Created Unequal: The Crisis in American Pay (Free Press), which was published in August—he has accused the Fed of paying far too much attention to inflation and not enough to unemployment, which he believes has created a yawning chasm between the rich and the poor that imperils our democracy. His point has been that we can have our cake and eat it too: We can have low unemployment without inflation; and if we have low unemployment, we will begin to reduce inner-city poverty.
In the eighties Galbraith’s attacks on high interest rates were dismissed as heretical by policymakers in the Reagan and Bush administrations and by critics around the country. Reviewing his 1989 book, Balancing Acts: Technology, Finance, and the American Future, a Chicago Tribune financial editor commented that it was “hard to imagine how any of Galbraith’s ideas will attract a significant constituency,” and a New York Times writer characterized Galbraith’s theories as “contrarian, sometimes fanciful.” But in the nineties, as unemployment has continued to drop without spurring inflation, many of the skeptics have come around. “Recent developments lend credence to Galbraith’s theory,” Business Week proclaimed in its review of Created Unequal, noting that Greenspan “has behaved in the past year or so much as Galbraith would want.” Indeed, in October, the Fed cut interest rates for the second time time in three months.
At 46, Galbraith is slighter and considerably shorter than his father, John Kenneth Galbraith, the venerable economist, author, and professor emeritus at Harvard University. He is known by the diminutive “Jamie,” and there is, as he peers out at you from rimless spectacles, a boyish shyness about him. But when he begins to talk about Greenspan, labor markets, and neoclassical economists, what appears to be a self-effacing grin is transformed into quiet and self-confident amusement at the folly of his critics. “I grew up with the idea that you stick with what you think is right,” Galbraith says. “My father was never popular with the economics profession, so I grew up not worrying about those things.”
After graduating magna cum laude from Harvard in 1974 and spending a year at Cambridge University studying economics under disciples of John Maynard Keynes, Galbraith came to Washington—working first as a staff economist at the U.S. House Banking Committee, then, after earning his Ph.D. in economics from Yale University, as a director of the Joint Economic Committee, Congress’ highest-level policy group, and finally as a visiting fellow at the Brookings Institution, a liberal think tank. In 1985 he was invited to join the faculty at the LBJ School. He liked the idea of going someplace where it was okay to worry about how his ideas would affect the real world. He also liked Austin, which reminded him of fifties and early sixties Cambridge, Massachusetts, where he grew up. He and his family settled in a house that Larry McMurtry had immortalized in his novel All My Friends Are Going to Be Strangers.
After arriving in Austin, Galbraith began to make the same argument over and over in articles and books—a singular focus that is the defining characteristic of his personality. Isaiah Berlin, the British intellectual historian, once distinguished between “hedgehogs,” who burrow deeply into a single subject, and “foxes,” who roam effortlessly around the plains of inquiry. Jamie Galbraith is clearly a hedgehog; his father is a fox. Jamie has doggedly pursued a single subject, amassing reams of figures to buttress his argument, while John Kenneth Galbraith has been, at times, a policy analyst, a historian, and a practitioner of belles lettres. Jamie “has a stronger analytical commitment, particularly in quantitative matters,” says his father. “I have always emphasized the language. He has always emphasized figures. He is more specific than I am. He doesn’t do anything until it is thoroughly checked.”
Jamie Galbraith’s mission of late has been to dethrone the principle of the NAIRU. “NAIRU” (pronounced “Na-roo”) is an acronym for the “non-accelerating inflation rate of unemployment,” and it has been used to determine fiscal and monetary policy in Washington since the early seventies. The idea, introduced by conservative economist Milton Friedman in 1968, is that there is a natural rate of unemployment at which inflation is stable. If unemployment dips below that rate, we’ll have not only inflation but spiraling inflation, as businesses make their pricing decisions based on an expectation that prices and wages will accelerate. Friedman proposed that the Fed set monetary policy to prevent unemployment from going below the NAIRU, and a succession of Fed chairmen—from Arthur Burns to Paul Volcker to Alan Greenspan—complied: When unemployment began to fall below what economists deemed to be the NAIRU, they began raising interest rates to slow the economy and limit the growth of jobs.
The only trouble was that bankers and economists kept changing their mind about what the NAIRU was. By 1980 they decided it was a whopping 7.25 percent, more than double the lowest rate of unemployment in previous decades. In the early nineties, when Bill Clinton took office, they thought it was 6 percent, and by the 1996 election, some were conceding it could be as low as 5.5 percent. Lately, each meeting of Greenspan’s Open Market Committee, which convenes every six weeks to set interest rates, has been a pitched battle over what the NAIRU really is.
Galbraith has always contended that the concept of the NAIRU is nonsense. He maintained that America’s bouts of serious inflation in the late sixties and the seventies were not the result of rising employment but of the external strains created by the Vietnam War and by foreign oil embargoes; once these causes were removed, he believed, inflation would diminish. In the early eighties he rejected Fed chairman Volcker’s argument—never stated in so many words, but certainly acted upon—that only a severe recession could end the inflation spiral. During the nineties Galbraith dismissed the contention of the inflation hawks on the Open Market Committee that interest rates should be raised because unemployment was becoming dangerously low. In 1994 Galbraith argued in a New York Times op-ed piece that “the war on inflation was fought against an enemy that existed only in the imaginations and perhaps in the economic models of Mr. Greenspan and his colleagues.” For the past three years, however, Greenspan appears to be listening to Galbraith’s muse. And—lo and behold!—as Greenspan has refused to raise interest rates, the economy has responded exactly as Galbraith had predicted: Unemployment has dropped and inflation has actually fallen.
Most economists make no connection between the rise in unemployment since the early seventies and the growing gap between the rich and the poor. They argue that rising inequality is caused by new computer technology bidding up the wages of highly educated workers and rendering superfluous the work of bank tellers and department store clerks. Galbraith disagrees. In Created Unequal he lays the blame for inequality on rising unemployment and, by extension, the Fed chairmen and fiscal conservatives who have insisted on keeping interest rates high. He shows that the growing gap between the rich and the poor has almost coincided exactly with the rise in unemployment, not with the coming of high tech. By creating more competition for job openings, higher unemployment has destroyed the bargaining power of lower-paid workers. When unemployment has fallen, as it has in the past few years, the gap between the rich and the poor has stopped growing.
These days Galbraith’s greatest worry is that Asia’s economic crisis will bring unemployment and further inequality to America; he’s looking to both the Fed and Congress to do something to prevent that from happening. As he contemplates the gravity of the crisis, his brow furrows, and he appears to focus on an invisible blackboard. He explains that he wants Congress to cut taxes “for those Americans who never benefited from the credit boom,” and he thinks the Fed should make a “sharp cut” in interest rates. “That would be the right first step,” he says. He also wants Congress and the White House to agree to new public spending on things like education and transportation, though he doubts that will happen because everyone hates big government. “Hopefully it will not take a recession to demolish the notion that the new economics of deregulation and small government can produce sustained prosperity,” he says.
Galbraith looks up after making this pronouncement and grins. It is the expression of a man who knows he has been vindicated but realizes that in the real world of politics and policy, the debate has only just begun.