The Revolution Has Just Begun.

• Author: McTeer, Robert D. Jr.
• Position: Dallas Fed President Bob McTeer

The International Economy sat down with Dallas Fed President Bob McTeer, an early and outspoken apostle of the New Paradigm. He talks about the economic outlook, his critics, and possible troubles ahead for the New Economy.

TIE: You were among a group of central bankers who suggested there was a new dynamic at work in the economy. What are your views of the great productivity New Paradigm debate?

McTEER: I'm not sure there were any great revelations. I was making speeches using the term "new paradigm," and talking about technology and the "third wave" and all that, in '97. I know I gave a couple of graduation speeches in '98 entitled, "Graduating Into the New Paradigm Economy" So, I was impressed with that, but I wasn't necessarily thinking too much about monetary policy implications at that point. You have a meeting and you look around and you say, "Should you tighten or should you not tighten, or should you ease?" It was usually fairly clear that there's not much mason to tighten, but as unemployment kept getting lower and growth kept getting faster, they started reaching the limits of the old NAIRU [non-accelerating inflation rate of unemployment] and the old "speed limit." Everyone realized we were reaching levels here that normally are associated with inflation. I didn't have any alternative theory; I just looked around and didn't see any inflation.

Now, we tightened preemptively in '94. So what was different about '94? Well, before then, we had short-term rates down to 3 percent for a year and a half, with inflation at 3 percent, which meant the short-term rates were zero in real terms. And all during '94, commodity prices were going straight up, so you could see the inflation coming. Neither one of those things was true in '97, '98, and '99. By the time I dissented [when the Fed decided to tighten] in June 1999, we'd had about three years of commodity price deflation, and real short-term rates were about what they normally are, around 3 percent in real terms. So I didn't see the same need to be preemptive. One might argue that's because I wasn't a very good economist. But I was influenced by Richard Pryor's famous line, "Who are you going to believe, me or your own lying eyes?" And Yogi Berra, who said, "You can observe a lot just by watching." So, it became a choice between looking at the models of the economy and looking at the actual economy. We were piling up these 4 percent growth rates with no build-up of inflation, and economists were almost literally saying, "Well, it may be working in practice, but can it work in theory?"

TIE: How did you feel about critics, such as economist Paul Krugman, who sneered at the notion that the NAIRU was no longer valid? Does their scorn get to you?

McTEER: I spoke about the new paradigm economy in London a little over a year ago, and the guy on the panel with me virtually accused the United States of fudging the numbers, they were so good. Then he said something like, "Well, you put all your potentially unemployed people in prison, and you keep them out of the numbers." -- I joked, "We go farther than that in Texas."

There are only a few people who doubt anymore, and I joke that they're from elite universities that don't have good football teams. Yet, there's an element of truth to that. There's an element of elitism there. The established elite always has the most invested in the old paradigm. When the Republicans won the House in the '94 election, and started naming people to chairmanships, the Wall Street Journal had an article on what schools they were coming from, compared to the ones that the Clinton administration got their people from. Clinton was getting his from M.I.T. and Harvard, and here's [House Speaker] Newt Gingrich from Emory University and [Majority Leader] Dick Armey from Oklahoma State. I went to the University of Georgia and so did [Senator] Phil Gramm. So, I think there's some elitism. Plus, when someone says, "Things are different this...