Eco-nomics

REAL INFLATION FIGHTING
Federal Reserve should act to curb executive greed

By John Gamboa and Gelly Borromeo

FEDERAL RESERVE Chairman Alan Greenspan, fearing inflation despite stable consumer prices and surprisingly modest wage increases, has threatened a third consecutive 1999 interest rate hike early next month. This increase could impede the economic growth essential to reducing the politically destabilizing gap between the rich and poor.

It may be time for 250 million American' "have nots" (defined as those dependent primarily on wages, not stock options) to fight back with creative solutions that Chairman Greenspan might support, including two instituted under Ronald Reagan, the president who first appointed him chairman of the Federal Reserve.

As acknowledged by the Federal Reserve, higher interest rates reduce economic expansion, job opportunities, home ownership and small business development. Since this Federal Reserve "nuclear threat" could further widen the gap between the rich and poor, it should be used only as a weapon of last resort.

We propose a series of tactical corrections, many taken from the Reagan era, to attack the Federal Reserve's underlying fear, what Greenspan has referred to as the "irrational exuberance" of the stock market. (Stocks have increased more than 500 percent during a decade when most workers'wages have actually declined.)

Such efforts might also eliminate the need for unions to fight for wage increases that match those secured by top executives, some of whom have tripled their earnings during the last decade.

Our suggestions: Chairman Greenspan should appoint a Blue Ribbon Commission to determine the inflationary effect of excessive executive compensation packages. For example, the compensation package given to Bank of America's former CEO of more than $100 million was the equivalent of a 25 percent wage increase to every BofA bank teller.

This inflationary nonperformance based menace, unless tamed by the Federal Reserve, is likely to force even the most restrained union leader to seek some sort of wage parity.

To date, despite scores of Federal Reserve studies on the inflationary impact of increases in the minimum wage for the average American, no Federal Reserve study has ever been released on the inflationary or "trickle down" impact of excessive executive compensation packages.

Another inflation fighter designed to avoid future interest rate hikes is to create surgical remedies aimed specifically at the long term threat of irrational stock market exuberance.

The simplest remedy, one immediately available, is for the Federal Reserve to announce an increase in the margin requirements for stock purchases from the present 50 percent to 60 percent. And, to ensure that the anti speculation message is heard on Wall Street, threaten to increase the margin requirement to 80 percent or more, if necessary. To compliment this remedy, the Federal Reserve should urge President Clinton and Congress to follow the Reagan era model by raising the capital gains tax on stock market speculation.

An initial step, one used by Reagan, would be to seek full parity between capital gains taxes on stock market increases and the present tax on wage income. This could double the present capital gains tax rate from under 20 percent to almost 40 percent.

A second related step, also used in the Reagan era, would be to specifically penalize speculation by invoking higher tax rates for stocks held for less than, one year, and lower rates for stocks held for retirement investment or more than five years. Thus, a 25 to 50 percent surcharge could be imposed on stock held for under one year.

The mere announcement by Chairman Greenspan of these tactical anti inflationary tools could stabilize the stock market and eliminate the specter of interest rate hikes that stultify economic expansion and small business development. Most importantly for democracy, the availability of these tools could help forestall the potential destabilizing impact of thousand to one compensation gaps between Wall Street and Main Street.

John Gamboa, member of the Federal Reserve Consumer Advisory Council and executive director of the Greenlining Institute, and Gelly Borromeo, president of the National Asian Pacific Publishers Association.


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