TCS Daily

America Is Not an Island

By John E. Tamny - March 1, 2007 12:00 AM

In his book Labyrinths of Prosperity, Canadian economist Reuven Brenner noted that for measuring country-specific economic growth, "Macroeconomics is a tautology and a myth, a dangerous one at that, sustaining the illusion that prosperity is necessarily linked with territory, national units, and government spending in general." In light of the happy news that the Federal Reserve is looking to de-emphasize U.S. employment figures in measuring inflation, Brenner's words should be heeded.

As the Wall Street Journal's Greg Ip recently reported, for decades "a simple rule has governed how the Federal Reserve views the nation's economy: When unemployment falls too low, inflation goes up, and vice versa." According to Ip, Fed officials are rethinking this theory based on the belief that it "takes a far bigger change in unemployment to affect inflation than it did 25 years ago."

When central bankers target employment levels in the U.S. economy, they distort the process by which laborers allocate their skills. If the level of unemployment is falling it can drive up wages as a result. But rather than an inflationary signal, this is a necessary price signal that workers respond to in choosing whether to switch employment, or in some cases, resume working altogether. Attempts by the Fed to manage these market signals by fine-tuning employment levels and wages serves to rob workers of the true compensation they could normally command in a totally free market.

Markets do a great job on their own of sorting out problems resulting from labor shortages. That most of us no longer deal with a human while at the gas station, when purchasing movie and airline tickets, or when at the bank are just a few examples of how private enterprise and technical change regularly handles worker imbalances. These advances have made our economy more efficient, thus freeing up capital and labor to fund higher-value work that our labor force can gravitate towards. If the Fed targets the economy and employment levels in seeking to manage inflation, to the extent that it slows the economy it will retard the capital formation necessary for future labor-saving innovations.

Returning to Brenner's point about the folly of the macro-view, it should be remembered that the United States is not an economic entity unto itself, but a participant in the global economy. As is well known by all the hand-wringing about "outsourcing," U.S. companies regularly source labor well beyond our shores. Even if there were an economic correlation between inflation and low unemployment, the positive inflow of Chinese and Indian (to name but two countries) workers into what is a worldwide labor force shows that we're a long way away from running out of able-bodied workers.

Rather than de-emphasizing the role of employment in its inflation calculations, the Fed would serve the U.S. and world economy best by ignoring employment levels altogether. Markets have proven time and again their ability to work out any supposed supply/demand imbalances.

John Tamny is a senior fellow at the Manhattan Institute, and editor of He can be reached at


1 Comment

islands unto
Good article giving more examples of how organs of the government distort economies. Indeed, there are economists who maintain that there is no reason at all for central bankers; that they are just another self serving special interest group.

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