Fed ache: an insider's account of the Greenspan machine.

• Author: Galbraith, James K.
• Position: On Political Books - Book Review

A Term at the Fed: An Insider's View By Laurence H. Meyer Harper Business, $26.95

Laurence Meyer is a leading advocate of one of the worst ideas in the modern history of economics. It therefore pains me to say this, but he has written a fine account of his five and a half years as a governor of the Federal Reserve Board. This is a book about policy, about the theory that tries to inform policy decisions. And it contains small but instructive insights into the personalities of the key decision-makers, especially the ever-enigmatic Alan Greenspan.

It takes real talent to turn Meyer's experience, which lacks not only sex and scandal but even drama, into a good read. But Meyer achieves it with a clear professor's tone combined with jaunty self-effacement and a willingness to honestly appraise when he was right and when he was wrong. And considering that he was wrong on the central issue most of the time, this was a wise and disarming choice of style.

Meyer's terrible idea is known as the Non-Accelerating Inflation Rate of Unemployment (NAIRU): the notion that there exists a threshold unemployment rate below which inflation increases without limit. The NAIRU was invented, mainly by Milton Friedman in 1968, in dissent from the prior doctrine of the Phillips Curve, the idea that full employment would entail only a modest rise in the permanent rate of inflation. Then, in the early 1970s, high inflation combined with unemployment to shatter the Phillips Curve. The NAIRU doctrine taught that even trying to push the unemployment rate down with monetary policy was futile; and, worse, that if unemployment were to fall for a substantial time below the NAIRU threshold, inflation would not only rise but also accelerate. This would lead over time to hyperinflation--to financial and social disaster.

Economists, therefore, came to see full employment as a poisoned chalice, something to be avoided by the most aggressive and, if necessary, painful measures. This assumption dominated macroeconomies for about 30 years, causing enormous damage. In particular, it prompted the Federal Reserve to raise interest rates and provoke repeated recessions. Millions were left unemployed, their families in stress, and their human potential wasted. It was all entirely unnecessary as we eventually learned.

Forecasters built the NAIRU into their models. In the 1980s, the usual estimate held that inflation would begin to accelerate if unemployment fell below 6 percent (which it...