Robert Samuelson has a few good words for full employment, coming off of our event a few weeks ago. He makes some useful points:
–not only is full employment an important goal, but it’s a bipartisan one, or at least it should be;
–no one really knows with any precision what the “natural rate” of unemployment is, i.e., the lowest level of unemployment consistent with stable prices, so that concept is not a very useful guidepost for monetary policy right now;
–there’s no evidence of either wage pressures yet, nor, importantly, are wage pressures bleeding into price pressures, thus…
–“Given the uncertainties, the Fed should now err on the side of job creation.” Amen to that!
Samuelson worries, however, that the pursuit of “permanent” full employment will lead to overheating and recession, as per the late 1970s. That seems a bit overwrought.
First, while of course it’s possible to use monetary and fiscal policy to push growth to the point where all of our resources are fully employed and any more demand would simply be inflationary, it’s hard to imagine that occurring in reality.
I’d argue there are biases against such pressure among both the fiscal and monetary “authorities”–the Fed and the Congress. There’s also considerable slack in capital markets (lots of cheap, loanable funds), a global excess of savings over investment (“sec stag”), investment deficits in public goods, and if anything, a deflationary bias in economies across the globe, including here and especially in Europe. Not to mention cheap oil.
Second, who’s pushing for “permanent” full employment? My primary goal is to get to a point where the matchup in the US labor market between jobs and job seekers is tightly drawn, such that a) workers have the bargaining power they now lack to claim their fair share of productivity growth, and b) by pulling some labor force sideliners back into the game, our macroeconomy can regain some of the supply-side growth it lost as a result of the Great Recession.
My secondary goal is to provide the necessary oversight to financial markets so they don’t blow up the primary goal, as has been their pattern in recent years. In fact, if I were RS, I’d worry more about financial and other sectoral (housing) bubbles ending expansions more than I’d worry about full employment driving wage-push inflation.
Finally, and again, discounting this “permanent” stuff, I’m sure there’s another recession out there somewhere, which adds yet another important topic to my to-do list: getting our policy response ready. Keynesian stimulus, which actually worked well in the last downturn, is on the political ropes. That needs to change before we hit the next recession. Moreover, we need to learn what worked well and what didn’t so we can hit the ground running when ground next collapses beneath our feet.
That also implies the need for smart fiscal triggers, so we can quickly get the water to the fire and not shut the hoses off too soon, as we did last time.
Finally, some of the observations above re the deflationary bias suggest that interest rates may well be too low when we hit the next recession to give the Fed much of a perch to climb down from. Which means–you guessed it: we very possibly could be looking at the zero lower bound again in the next recession, making the fiscal response all the more important (and amping up the multipliers).
That–not the dangers posed by pushing for “permanent full employment”–is what I’m worrying about. And thus I take solace from the fact that my highly able CBPP colleague Ben Spielberg is taking the lead on what I think may be an important paper on being ready for the next downturn.