Robert Samuelson on full employment; my own concerns as to our readiness for the next downturn

April 6th, 2015 at 9:51 am

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.

Stay tuned…

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3 comments in reply to "Robert Samuelson on full employment; my own concerns as to our readiness for the next downturn"

  1. Smith says:

    The overwhelming power of business to raise prices at will means in a full employment situation where labor would otherwise be able to fairly bargain for a real wage increase, instead, things blow up (spiraling inflation, that 70s show). Try enforcing anti trust measures first (see also Comcast TimeWarner and AT&T Direct TV)

  2. Tom in MN says:

    “we very possibly could be looking at the zero lower bound again in the next recession”

    The Fed first has to raise their Funds Rate significantly above zero and not cause a recession before we get to see if this is true. They talk about getting up to 3 or 4%, which looks unlikely given that 10 year rates are at 2% and as you pointed out their predictions of 10 year rates increasing have always been wrong.

    Just as the natural rate of unemployment is not known, neither is the steady state level of inflation. And the current 2% target has resulted in falling 10 year Treasury rates for the last several decades, so it is clearly below the steady state value.

  3. Fred Donaldson says:

    A shortage of decent paying jobs – with benefits – is far more troubling to me than the possibility of an excess number of minimum wage, part time or just plain onerous jobs in our economy. I fear that Mr. Samuelson has been, historically, more an austerity fan, worried about so-called entitlements and their replacement, than he has been concerned with promoting wage fairness, ending miserable living standards for the middle class, and at least preserving most of an income tax system that puts at least some of the burden on the wealthy, rather than promoting a wealth-insuring “Fair”, sales tax. WAPO financial gurus in general have a handicap; It’s very difficult to see deprivation from an ivory tower, whether at a once famous newspaper or in the extravagantly decorated White House. A walk through all the neighborhoods in Washington D.C. or nearby Baltimore is suggested for improving perspective.