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Jawboning Gains Respect

February 25, 1994

NEW YORK (AP) _ The head of the Fed is jawboning.

Federal Reserve Chairman Alan Greenspan is trying to talk inflation down, telling Congress and the people that sometime in the future he might have to raise short-term interest rates again.

The purpose of such a move, of course, would be to restrain inflation, which generally sets in when demand outraces supply. It is better, says the Fed, to slow the economy to a sustainable pace with steady prices.

Yes, but prices are steady right now. Overall, consumer prices showed no increase in January, which is as rare as a thunderstorm in the Yukon at that time of year. December’s inflation rise wasn’t bad either, only 0.2 percent.

So why is the Fed raising rates? Well, it really isn’t, at least to a meaningful degree. On Feb. 4 the central bank nudged short-term rates higher to help curb future inflation pressures, and Greenspan told Congress this week that further increases are inevitable.

But the Fed hopes the mere threat will restrain inflation now.

Jawboning is an old technique, often effective, sometimes not.

Lyndon Johnson discovered its limitations when he tried to talk down inflation - and avoid higher interest rates - while simultaneously spending for a war.

That was seen as a contradiction, an attempt to have a booming economy without rising inflation and interest rates - an attempt to provide guns for war simultaneously with butter for a stable consumer economy.

More recently, however, jawboning has seemed to work, most notably in helping to slow the medical care cost spiral. Medical care inflation last year rose 5.4 percent, the lowest in 20 years, and the restraint is likely to continue.

Hardly a person in America hasn’t heard the threats to impose mandates and controls - jawboning from the president and wife Hillary. The ensuing slowdown is too much to dismiss as a mere coincidence.

Change in the medical care industry has spread beyond cost controls.

Hospitals are attempting what might had been thought impossible at one time, the dispensing of good medical care while cutting costs. It might not work, but the effort is being made.

Insurance companies have become more aggressive and competitive participants, employing common sense procedures for checking charges and handling paper rather than simply paying and then raising rates.

Entrepreneurial companies with great ideas in business management and medicine have found their niche in the industry and are offering their cost- cutting services to providers, users and insurers.

In addition to these efforts, it hardly taxes the imagination to believe that pharmaceutical concerns, physicians, insurers, hospitals and equipment manufacturers have examined existing procedures in search of savings.

Underlying their concerns is the same motivation as that of the Fed - that it is better to take action now, to suffer some pain, in order to make the future more secure.

The battle to restrain medical care inflation might seem more obvious and pertinent to the ordinary individual, but the battle the Fed is waging is probably more critical. History suggests that.

The inflation that began in the late 1960s and which ravaged the 1970s, was a sorry phase in the American economic story. Consumer prices rose 12.3 percent from December 1973 to December 1974, and 13.3 percent in 1979.

The response to inflation was delayed; it did not begin before the damage began. Beginning in 1979, the prime lending rate rose into double digits for six straight years, reaching a peak of nearly 19 percent in 1981.

It was much worse than that for many small businesses, some of which paid 25 percent in a survival effort that often ended in bankruptcy. Homebuilding almost died under the load of mortgage rates that exceeded 15 percent in 1982.

Meanwhile, many savers, once considered the salt of the earth, saw their life savings disappear, lost to inflation. By some measures, it might be considered the biggest bank heist of all time.

That’s why the Fed is jawboning now, when inflation is at its lowest in two decades.

End Adv AMs, Friday, Feb. 25

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