How ‘Party Z’ Is Killing the Recovery : Jobs policy: Retirees and others on fixed incomes are rightly paranoid about inflation.

American economic policy has long been dictated not by the Democrats or Republicans but by “Party Z.” Party Z has no membership rolls, no officers, no conventions. In fact, it has no formal existence. Party Z is the tacit alliance among the tens of millions of voters who fear inflation because it has reduces their standard of living. Alan Greenspan, the head of the Federal Reserve System, operates as an agent of Party Z when he raises the discount rate and takes other actions to “dampen inflationary pressures.”

Party Z’ers vote against politicians in office when inflation rages and for those who preside while prices are flat. It’s not that Z’ers are against a robust job market; it’s just that an anti-inflation policy translates into an anemic employment situation.

Why the hang-up about inflation? If you live on a fixed income, 10% annual inflation--a rate that occurred in the later years of the Carter Administration--will cut your purchasing power in half in seven years. Ever-growing numbers of people live on mostly fixed incomes. Although Social Security and some public-employee retirement plans may incorporate built-in cost-of-living adjustments, few private pensions do. Instead, they are essentially annuities that pay a set amount per year as long as you live. The typical retiree gets say, $10,000 a year from Social Security and another $20,000 from a private pension provided through a former employer.

People like these would be fools if they didn’t fear inflation. That’s why they helped trounce Jimmy Carter in 1980. The potential for an anti-inflation backlash explains Helmet Kohl’s insistence on holding the lid on the German economy, to the consternation of many Germans and other Europeans. Similar policies guide the economies of Japan, France and Britain.

Retirees are by no means the only members of Party Z. Bankers hate it when they lend you dollars worth 100 cents and you pay them back dollars worth only 80 cents. Stockbrokers know that inflation kills a bull market: When inflation threatens, the Fed raises interest rates, investors switch out of stocks to take advantage and stock prices plummet.

What does all this have to do with jobs? Economists boast about their ability to “fine tune” the economy. Don’t believe it. Short-order cooking is a better metaphor. It’s as if the economy were a pot of soup. The stove burner has only two positions, high and low. Think of the interest rate as the flame. Turn it up (by lowering interest rates so that businesses and consumers will borrow and spend more) and the soup boils--that is, the demand for labor increases, but with that comes inflation. Turn it down and the soup starts to cool--that is, we get little or no inflation, but the economy generates too few jobs, particularly the kind that pay decent wages. The President and the Congress, who have ultimate authority over the cook (the Fed chairman), can order soup that is either too hot or unsatisfyingly tepid. Those seem to be the only choices.

I don’t want to argue that the job problems of the United States and other industrial countries arise solely out of the trade-off between low inflation and high employment. There are other factors. The hyper-mobility caused by the revolution in communications technology and the emergence of a global economy means that many jobs migrate to low-wage countries. Productivity growth here and in Europe remains too low. Poorly educated, poorly trained and poorly motivated workers will have trouble finding good jobs. But deliberately keeping the economy on a low simmer for fear of inflation is a major cause of the weak labor markets we have experienced over the past 15 years.

Why? During the 1960s and most of the ‘70s, we were willing to accept 5% to 10% yearly inflation in exchange for strong labor markets and fast job creation. Now, we get nervous at 2% inflation. The relationship between inflation and job creation has not changed. The effects of inflation are just what they always were. It’s simply that Party Z’ers, perennially fearful of inflation, constitute a much larger share of the electorate. The tipping of electoral numbers in favor of the Z’ers is truly huge when compared with voters who have most to lose from the continuation of tight money policies--young workers just starting out plus people who are unemployed. We may be talking about Party Z versus Generation X.

Consider: In recent national elections, people over 65 cast three votes for every one cast by 18- to 24-year-olds. As individuals approach retirement and start to look ahead, they tend to vote more like those already retired. There were eight times as many voters over 45 as there were under 25. As for votes by the unemployed, the retired swamp them by almost 10 to 1. Including all the people affiliated with banking, stock brokerage and others with a stake in a rising stock market would swell the size of Party Z enormously.

That’s it. Our leaders don’t know how to produce fast growth of good jobs without at the same time inducing too much inflation. And inflation is a killer for politicians these days. Knowing that a lot of people are going to be without work, they try to compensate by cooking up palliative programs--extended unemployment benefits, welfare for the moms, easier disability qualifications, even mega-payoff state lotteries to ease the sting of hopelessness.

What’s the solution? It would help if we were to index pensions to changes in the price level. That would reduce the anti-inflation paranoia of Party Z, take some presure off the government and the Fed and add some zip to our job markets.