Dec 22, 2012 at 4:35 pm
Tim Noah has a nice piece up at TNR that tackles a question I recently posed here: Why are the members of the Federal Reserve—an unelected body, mind you—the only policy makers in town aggressively targeting the unemployment rate?
Tim’s answer is twofold. First, why is Congress less interested? It’s the toxic combination of wealth concentration and money in politics:
..as top earners’ shares of the nation’s income grew, so did their shares of politicians’ attention. And since involuntary unemployment is not something wealthy people typically fear, Congress gave the issue scant attention.
Second, why is the Fed more interested? Here, Tim suggests that the long and deep output gap, in tandem with some personnel who are just more sensitive to the human costs of such gaps, forced their hand on the unemployment (versus inflation) side of their mandate:
Not having given unemployment much thought before 2008, the Fed took several post-crash years to figure out that, with Congress abandoning the field, it could no longer keep thinking like a mere bank. It had to take seriously, for the first time, both parts of its dual mandate. “Imagine that inflation was running at five percent against our inflation objective of two,” Chicago Fed President Charles Evans said in a speech last year. “Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate?” Well, Evans said, the same goes for unemployment. That wouldn’t be a blazing insight to most people, but apparently it was to the Fed.
That’s true, though as I’ve documented elsewhere, the job market was far too slack for decades before the Great Recession, and the consequences in terms of reduced bargaining power have been steep for working families. That’s also one of the reasons inequality has grown. But Tim’s point is still well-taken—it’s one thing to ignore labor market slack—in Fed speak, to weight inflationary pressures over unemployment ones—when there’s an expansion afoot, even if it’s weak. It’s a lot harder when you’re stuck in a prolonged slog.
The personnel point provides another interesting dimension to all this. Members of the Fed board like Evans, Yellin, Bernanke and others seem to genuinely care about the human costs of unemployment and their concerns are driving Fed policy. This tells you something important about the “science” of economics. One would imagine that personal sensibilities don’t influence results in hard sciences–I wouldn’t imagine you’d decode genomes differently depending on how much you care about the struggles of your fellow men and women.
Finally, there’s interesting new research confirming the Fed’s increased emphasis on the unemployment side of their dual mandate (prices/jobs). The figure below, from GS researchers, is the result of a bunch of econometrics (and a bunch of assumptions, so take it with a grain of salt) to estimate the emphasis that the Fed is putting on the unemployment side of the tradeoff when they set interest rates.
The very end of the figure shows they’ve ratcheted up their responsiveness to high and persistent joblessness to historically very high levels (the λ=1 assumes they’re now equally weighting the social costs of elevated inflation and high unemployment). The figure also revealingly shows that the Fed down-weighted unemployment in the 1980s, a period when a weak job market began to erode the bargaining power and wage rates of middle and low-wage workers, heralding the ongoing era of inequality growth that persists today.
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