Pity the person who must write a press release each week that summarizes
a preacher's sermon; after all, the message is essentially the sameweek
after week, year after year.
That's how one member describes the job of the Shadow Open Market
Committee (SOMC), a group of business and academic economists that
gathers twice a year to comment on the policies of the Federal Open
Market Committee (FOMC), which conducts the country's monetary policy.
For 20 years the message of the SOMCwhich has no public affiliation
and is funded through foundation grantshas been the same:
It is more important for the FOMC, in its efforts to control inflation,
to pay attention to the growth rate of money rather than to movements
in interest rates (or other economic indicators).
The views of these monetarist economists are accorded more weight
today than in 1973 when the first SOMC gathered and Keynesianism
was the vanguard. The increased acceptance of monetarist views is
due in part to the work of economists who have served on the SOMC
over the yearsespecially founders Karl Brunner and Allan Meltzeras
well as others like Milton Friedman.
However, like the preacher who after many years still finds his church
barely half-full, monetarism does not dominate policy debate and the SOMC
continues its efforts to convert the heathen. Consider this rebuke of the
Federal Reserve at the SOMC's latest meeting, March 1993: "... the Federal
Reserve now bases its actions on changes in the real economy, particularly
changes in the unemployment rate. This procedure ensures that the Federal
Reserve will fail to act in a timely way to prevent a rise in inflation."
Even in 1980, when the FOMC moved toward the use of monetary aggregates
to set monetary policy, the SOMC was skeptical: "... there is no evidence yet
that the Federal Reserve can be relied on to reach announced targets
consistently. Current procedures generate avoidable uncertainty and should be
And in 1973, when it announced its formation, the SOMC's message set a
tone for the coming years: "... there is little doubt that, on balance,
government policies have increased economic instability during recent months
and during the past eight years. The failure to control inflation was not
Meltzer and Brunner, heart and soul
Without exception, current and former members of the SOMC mention the
privilege of having served with Karl Brunner, who died in 1989, and working
with Allan Meltzer, economics professor at Carnegie Mellon University in
Pittsburgh and chairman of the SOMC, as a major inducement to joining the
group. Brunner was educated in his native Switzerland and came to America in
1943, where he spent time at Harvard and the University of Chicago before
teaching at UCLA and Ohio State University; in 1971, he moved to the
University of Rochester in New York. It was at UCLA, where Meltzer was a
student, that the two economists began a collaboration that endured throughout
Brunner and Meltzer started the SOMC in 1973, but it had its genesis in
1971 when, "out of a sense of frustration," they enlisted about a dozen
economists to sign a statement of opposition to the newly imposed wage and
But Brunner and Meltzer didn't think the statement garnered enough
attention. So, two years later, they decided that a group of dissenting
economists, meeting regularly, would have a better chance of reaching the
public. "We wanted to talk to a public audience, not an academic audience,"
To the extent that the SOMC has succeeded in focusing attention on
monetary policy over the years, Erich Heinemann says the credit is due to
Brunner and Meltzer. Heinemann, a Shadow member and an economist at Ladenburg,
Thalman & Co. in New York, described Brunner as a "commanding figure" in
economics with a "huge intellectual range."
As for Meltzer, Heinemann says his "drive and intellect" keep the SOMC focused.
"Our credibility is a function of our analysis," he says, and Meltzerwho
sets the SOMC's agenda in consultation with the membersis
the committee's guiding force.
In addition to their affiliation with the founding members, Shadow
members also say that they like serving on the SOMC because of the chance to
regularly rub elbows with the other economists on the committee. Mickey Levy,
economist with CRT Government Securities in New York, says he feels privileged
to sit on the SOMC, not only to contribute papers and analysis, but to simply
discuss issues with the other economists. "The SOMC provides a great network
of scholars to interact with and to ask questions about difficult issues. It's
a huge plus for me."
Over the years, members of the SOMC who have left the committee while
serving in the government have usually gone back to the Shadow after their
government service, according to charter member Anna Schwartz, economist at
the National Bureau of Economic Research in New York and long-time
collaborator with Milton Friedman. The Shadow members share a common
orientation, Schwartz says, and the committee offers them an opportunity to
refine their views among those with shared beliefs.
In that respect, Friedmanwho views the SOMC as an oasis
of independent thinking in a desert of conformityapplauds
the existence of the Shadow group. He maintains that since the Federal
Reserve Board and its district banks hire a large number of economists
in the field of money, the central bank has a sort of oligopoly
on monetary opinion. In other words, if you want to advance in the
field of monetary research, according to Friedman, you would be
disinclined to criticize the major employer in the field.
"This problem with the Fed is why the Shadow is so relevant," says
Friedman, who has never been a member of the SOMC, even though he usually
agrees with the group. "I prefer to work as an individual," he says. "I always
thought it would be better for me and better for them," he says of his absence
from the SOMC.
Debate is encouraged, challenges are expected
Every March and September, the eight economists (the number has
varied between seven and 10) meet in Washington, D.C., for a
two-day meeting that includes a working session and a press conference.
(A ninth economist, Jagdish Bhagwati, professor of economics at
Columbia University in New York, contributes analysis on trade policy
but does not consider himself a monetarist or an expert on macroeconomics;
as such, he says he is not a formal member of the SOMC.)
At the working session, which begins on a Sunday afternoon and lasts well
into the evening, the economists present papers on particular topics (such as
fiscal and trade policy, as well as monetary policy), after which they prepare
a policy statement. If the SOMC's March meeting is any indication, debate
during these working sessions ranges from points of grammar ("The antecedent
is ambiguous") to the most reliable way to measure and predict inflation
("We're not going to settle this tonight").
And debate is encouraged. There is a camaraderie among the Shadow members
that makes for interesting and sometimes humorous discussion, but there is
also an intellectual rigor that means the economists can expect critiques of
their presentations. For example, at its recent meeting, the following
statements were typical:
"The way the first sentence reads, it confuses me ..."
"I'm puzzled about your reasoning ..."
"I think that's not right ..."
"Wait, wait, I was trying to be careful ..."
"The problem you run into there ..."
"Just one more question ..."
There's always one more question, and it is Meltzer's job to move the debate
along so the committee can complete its work. The debate is sometimes
extended because the committee invites participation from those who
observe the working session. Economists, business reporters and other
interested parties may attend the Sunday session and are welcome to
interject with comments or questions of their own. Often, a member of
the SOMC will solicit an opinion from one of the observers.
"It's a collegial atmosphere," Meltzer says of the committee's working
session. "We have invited that interchange."
The day after the working session, the SOMC releases its policy statement
at a press conference, a quick turnaround that was not lost on Lee Hoskins,
former president of the Federal Reserve Bank of Cleveland and now president
of Huntington Banks in Columbus, Ohio. "I'm used to waiting six weeks,"
Hoskins joked to the nearly 30 reporters at the March press conference.
He was referring, of course, to the FOMC, which releases minutes of
its meetings six weeks after they occur to avoid undue influence on
the markets. "I believe this sets a healthy example for the Federal
Reserve," added Hoskins, who attended SOMC meetings as an observer prior
to his years at the Fed.
Even though copies of the SOMC policy statement, as well as the
individual papers, are mailed to journalists and economists, the SOMC's press
conferences are the primary forum for the group's message. In large part, the
SOMC measures its impact by the amount of press coverage it obtains. Over the
years, the media's interest in the SOMC seems to have coincided with periods
of high inflation; that is, when the Fed is under scrutiny the media is more
interested in alternative views.
When times are relatively stable, as they are now, news coverage is often
limited. "I don't know how much attention people pay to a paragraph in a
newspaper," Schwartz says.
William Wolman, a member of the SOMC in the early '70s and now chief
economist at Business Week, says that just because inflation has been
relatively under control in recent years doesn't mean the SOMC is wrong. "But
it does make it hard for [the SOMC] to present its case," he says.
Regardless of how the SOMC is covered by the media, the news conferences
are always well-attended, which attests to the reporters' desire to engage the
Shadow members in discussions about the economy. Those discussions continue
after the news conference at a press luncheon, which marks the end of the SOMC
Extending the shadow ...
Over time, to broaden its impact on policy debate, the SOMC began
to comment on topics beyond monetary policy, such as fiscal and
trade policy. Rachel Balbach, former chief economist at Boatmen's
National Bank in St. Louis, who has attended the meetings for many
years as an observer, says the group's decision to branch out beyond
monetary policy has brought the group more attention. She also says
the SOMC's move to Washington, DC, from New York in 1988 for its
semiannual meetings has brought more policy-oriented questions from
reporters. Many New York reporters were only interested in interest
rate speculation, she says.
"Our aim is not to get people to do what we say, but to inform people,"
Meltzer says. "We're never going to get good economic policies until we get
public understanding." When the public is properly informed, he says, the SOMC
will be out of business.
If imitation is the highest form of praise, than certainly the SOMC has
had an impact. Since the SOMC was formed, a Shadow Financial Regulatory
Committee has started, as well as a Shadow Securities Exchange Commission, a
short-lived Shadow European Policy Committee, another one in England that used
a report by Schwartz as a guide, and the SOMC's Heinemann reports that there
is a counter-SOMC that has been established to shadow the original Shadow.
... But for how long?
While the SOMC warns of increased inflation in coming years if the
Federal Reserve continues its current policy, Meltzer admits that
the reduced inflation rates of recent yearsand the concurrent
disinterest in Fed criticismhas caused him to ponder the possible
demise of the SOMC.
At the same time, though, like Friedman, he recognizes the need for
effective analysis and thoughtful criticism of monetary and other economic
policies. As Karl Brunner once joked to Meltzer when referring to the
abundance of economic problems: "I can see us wandering in here in our dotage
with our beards growing to the floor."
SOMC paper (September 1992) "The singular distinction between
the present funds rate operating procedure and that of the 1970s
is that the current FOMC appears to be much more aggressive about
implementing changes in the funds rate target, and hence the operating
procedure is not characterized by the inertia of the 1970s."
Robert H. Rasche
Professor, Department of Economics
Michigan State University, East Lansing, Mich.
SOMC paper (March 1993): "The productivity-driven growth has
a highly favorable impact on economic performance. It has increased
output while easing pressure on wage compensation, thus generating
a dramatic decline in unit labor cost ... Moreover, the productivity
gains have raised the international competitiveness of U.S. firms,
supporting continued growth in exports."
Mickey D. Levy
CRT Government Securities, New York
SOMC paper (March 1992): "Some propose a new Marshall Plan [for
the former Soviet Union] ... This, too, is a mistake. The Marshall
Plan provided capital to market economies in which competition
was the norm. All of these economies had legal, financial and
accounting systems, property rights and enforceable contracts.
None of these institutions are present in the former Soviet states."
Allan H. Meltzer
Carnegie Mellon University, Pittsburgh
SOMC paper (March 1993): "We also continue to hear reports from
Washington and the business press that either more economic growth
causes inflation or that inflation is good for economic growth.
Neither story has much evidence to support it. ... If anything,
the picture indicates that higher inflation rates are more frequently
associated with lower rates of real economic growth."
University of Rochester, Rochester, N.Y.
- SOMC paper (March 1993): "... the depressing effects of future
tax increases will arrive in 1993; the combination of fiscal stimulus
and restraint at the same time is equivalent to driving with one
foot on the accelerator and one on the brake. This policy is just
as bad for the economy as it is for a car."
Professor, Department of Economics
Brown University, Providence, R.I.
SOMC paper (March 1993): "... there remains the dilemma that
no public policymakerhowever selectedshould enjoy
complete autonomy. The answer is to give central bankers freedom
of action (independence) in the pursuit of a single, clear, measurable,
and attainable objective, while making them answerable (accountable)
for the results of their actions."
W. Lee Hoskins
Huntington National Bank, Columbus, Ohio
SOMC paper (September 1992): "The Fed and other central banks
have intervened in the exchange markets to slow the decline of
the dollar. However, central banks have simultaneously executed
offsetting transactions in their own money markets to 'sterilize'
the effect of the intervention on preexisting domestic monetary
policies. This exercise was a silly waste of taxpayers' money."
H. Erich Heinemann
Ladenburg, Thalmann & Co., New York
SOMC paper (March 1993): "One concern of the U.S. authorities
was to resist episodes of either weakness of the dollar vis-a-vis
the mark or strength vis-a-vis the yen, however futile the resistance.
In January 1992, for example ... the Federal Reserve and Treasury
Exchange Stabilization Fund shared a $50 million yen purchase
Anna J. Schwartz
Economist, National Bureau of Economic Research