DECEMBER 21, 2012
-
Read Later
READ LATERAvailable only to subscribers. SUBSCRIBE TODAY
-
Listen
ARTICLE AUDIO
- Font Size
JARED BERNSTEIN, a Washington wonk and former economic adviser to Joe Biden, recently posed an interesting question. Why is it, Bernstein asked on his blog, that the only part of the government acting with any urgency to ease joblessness—the economic problem affecting the greatest number of Americans—is the unelected Federal Reserve?
Bernstein was referring to Chairman Ben Bernanke’s announcement that the Fed would keep interest rates close to zero as long as unemployment remained above 6.5 percent. (It’s currently 7.7 percent.) Such a pledge is apparently unprecedented for the Fed, which like most banks is usually far less interested in boosting employment than in curbing inflation. But the Fed is also a regulatory body that makes economic policy affecting actual human beings. Now it’s finally acting like one.
Human beings (i.e., voters) are more typically the bailiwick of Congress and the White House. Those are the institutions we would expect to be maximally responsive to unemployment, especially in an election year. Yet, while Mitt Romney said again and again that persistent joblessness reflected poorly on President Barack Obama’s first four years, neither candidate offered much in the way of solutions. Romney pretended unemployment could be magically reduced by shrinking the size and reach of government. Obama talked up his proposed American Jobs Act, but he could do that only so much, given his failure to move the bill past recalcitrant Republicans in Congress. And spotlighting the unacceptably high unemployment rate was hardly a winning strategy for the guy who’d presided over it.
Now that the election has concluded, Obama is more interested in talking about unemployment, but Congress, puzzlingly, is not. Is the legislative branch less responsive to the people than it used to be? Quite the opposite. Over the last three decades, political parties have declined, reliance on polling has increased, congressional majorities have shrunk, and the money chase has become ever-more desperate. These trends all conspire to make Congress more responsive to outside influence than it was, for instance, during the 1960s. But those same three decades saw a steep rise in income inequality. The Princeton political scientist Martin Gilens has shown that 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.
That leaves the other half of Bernstein’s question: Why is the imperious Fed suddenly so interested in curbing unemployment? It’s worth remembering that, for most of its history, the Fed wasn’t a major economic policymaker at all. It was just a regulator of—and lender to—banks. Even during the Great Depression the Fed played a minimal role—fatally so, in the view of conservative economist Milton Friedman. Friedman believed that, if the Fed had printed enough money in 1929 and 1930, the whole unpleasantness would have been over by 1931. By the same logic, as inflation spiked in the mid-’60s and then spun wildly out of control in the ’70s, Friedman was able to persuade policymakers that the Fed could halt it by reducing the money supply. So the Fed got into the business of jacking up interest rates and tightening credit to keep wage and price increases in check. These experiments were at best marginally successful until 1982, when the Fed, led by Paul Volcker, twirled the monetary vise so tight that unemployment peaked at 10.8 percent, a level higher than any since World War II.
In 1978, Congress formalized the Fed’s new role as macroeconomic poobah by giving it a dual mandate to curb inflation and maximize employment. But the Fed mostly ignored the employment part, especially after Volcker. Nobody wanted to relive the Great Inflation. Instead, the Fed favored tight money over tight labor markets. This policy accelerated the same growth in income inequality that turned Congress indifferent to unemployment. Indeed, University of Texas economist James K. Galbraith goes so far as to argue that the Fed is “primarily responsible” for the growth in income inequality. But except during the Volcker-induced recession of 1981–1982, there were few complaints. As Washington Post columnist Robert Samuelson argues in The Great Inflation and Its Aftermath, after 1982 the economy mostly expanded, creating jobs, raising living standards, and acting “as a social shock absorber.” That all came to a halt in the aughts, especially with the onset of the 2007–2009 recession. Since then, the economy has barely expanded and median income has declined. The shock absorber is gone.
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. The new Fed policy targeting unemployment is Evans’s brainchild.
The bland official reason Bernanke gave for adopting the so-called “Evans Rule” was transparency. Previously, the Fed had said it would keep interest rates low through mid-2015, and that’s about when its projections indicate that unemployment will finally fall to 6.5 percent. “There is no real change in policy,” Bernanke said at a recent press conference. But he also spoke of his hometown of Dillon, South Carolina. Dillon has “a very high unemployment rate,” Bernanke said. “People are having a hard time there.” Remember when members of Congress talked like that?
Bernanke is a scholar of the Great Depression, and in a 2002 speech celebrating Milton Friedman’s ninetieth birthday, Bernanke told Friedman he’d been right when he blamed the Depression on the Fed. “We did it,” he said. “We won’t do it again.” In a small but significant way, Bernanke is refocusing some attention on the Forgotten Man (and Woman). It’s long past time somebody did.
Update, 12/23: Bernstein responds to this column here.
Timothy Noah is a senior editor at The New Republic. This article appeared in the December 20, 2012 issue of the magazine under the headline “Big Ben’s Big Heart.”
6 comments
The output gap is still rather large. The economy is still zero-lower-bound-constrained. Just imagine what a second stimulus composed of projects like the first would do. Measures like direct aid to the states and construction and infrastructure. I'd prefer larger programs in the former to continued tax cuts, but I also recognize that a rise in taxes would be bad, so that continued tax cut is something I would bargain over with Republicans. Get Republicans to agree to vote present on it and let them court the apocalyptic as they get out of the way and allow Obama to be painted a big spender. The Fed has promised to do all things needful to get unemployment below 6.5% as long as inflation doesn't climb above 2.5%. What's important here is that they won't act to impede the continued recovery but will rather support it. This is all you need. The stage is set for a bet and a battle between Obama and the Republicans, and an actual understanding of economics says that we would go from creating jobs at a rate just keeping up with population growth (~120-150,000) to more Clintonian levels of growth. That would redound to Democrats' favour in 2014, regardless of however much baying people do about the deficit (see, for example, 1981-1997), because when people start to make more money and see the unemployment crisis coming to an end, they'll reward the party that did something about it. And Republicans will have made sure their hands didn't touch it. If this is something that we can get for the price of continuing the upper income (but not capital gains or dividends or estate) tax rates for two years, I'll take it. If a continuation of all the cuts is necessary to secure cooperation on this measure, then it's necessary to convene all Democratic Senators to get them ready for the nuclear option (an end to the filibuster as we know it) to raise the bargaining stakes and exact more leverage. At this point, it's also helpful to get a determination from Hillary over whether she is definitely running in 2016, so as to ensure that the good economy of the tail end of Obama's presidency is handed over to a Democrat with good prospects of keeping the Senate majority in the Democratic column, so as to keep appointments liberal for the foreseeable future. Hillary can usher in a House Democratic majority in 2016, by which point what we're talking about is getting the liberal platform through that Obama intended to before sidetracked by the Great Recession. It's possible that a Biden can do it too if Hillary doesn't want to run, but knowing who is inheriting the wind changes the calculations for action somewhat.
- chaitless
December 25, 2012 at 6:30pm
I assume Noah's mischievous point is that Keynes was right and Friedman was wrong: it's impossible to push on a string. Now I'll read Bernstein's response and see if he and I agree about Noah. [Why did it take so long to post this column on the web?]
- rayward
January 17, 2013 at 7:14am
Nope, Bernstein focuses on Noah's observation about the Fed's dual mandate and the Fed's new-found concern for unemployment as opposed to inflation, and how the slack job market has also contributed to rising levels of inequality. My question: what if Bernanke's efforts prove to be quixotic, then what? Unless and until inflation expectations change considerably, so that all that cash sitting mostly idle is put to productive use, high rates of unemployment and low output will persist. Increasing the inflation target to 2% ain't gonna do it. The Fed is faced with the impossible task of both raising inflation expectations and mitigating those expectations at the same time, the latter a necessity when the government is borrowing $1 trillion a year. Pushing on a string, indeed! So what's the way out? At best, a slow and gradual improvement in unemployment and output, but never returning to the pre-2007 levels. At worst (what is worst?), continued increases in the level of inequality, ultimately reaching the point of self-correction, and then another crash, a crash that won't be mitigated by government intervention to save the banks and the bankers like the last one. Sure, Bernanke should be applauded for his new-found concern for unemployment, as quixotic as they may be.
- rayward
January 17, 2013 at 7:36am
Here's a question: so why aren't Congress and the White House more concerned about, you know, the voters? Workers? The absurdly low pay and short hours that are becoming the norm? Everybody's having a fit about the "deficit" and accusing poor people including seniors and the disabled and sick people and kids of "mooching" and sucking on the Federal titty etc and nobody is willing to take responsibility for what created the mess in the first place.
- Sophia
January 17, 2013 at 4:59pm
PS "what created the mess" isn't the workers. Nor is it a failure of "liberalism" (see NYT) it's the success of Voodoo Economics. The End.
- Sophia
January 17, 2013 at 5:00pm
Once again, it is neither the Fed nor government that is the chief engine of sustained job creation sufficient to bring the economy to its full potential. Discussions about what either the Fed or government should be doing to directly boost hiring are misplaced and largely futile. The focus should be on entrepreneurs and private job creators and what the Fed and government can do to raise business confidence, which in 2012 fell to a 30-year low because of the out-of-control tax-and-spend thrust of the Administration and the constant anti-business, anti-profit, rhetoric, policies and actions of the President and his supporters. Fortunately, the pace of job creation is about to pick up, no thanks to the Administration, whose anti-job-creation rhetoric, policies, and actions have been suppressing job creation for the past 4 years. Entrepreneurs and other job creators are sick of waiting for Washington to get its act together. They’ve been putting needed replacement and expansion capital spending and hiring on the shelf for 4 years now and the unused cash and borrowing power keeps piling up and returning next to nothing. Now that some of the uncertainties are moving toward resolution, they are ready to pick up the pace, and the resulting increase in hiring and capital spending will mean a stronger than expected economy in 2013. Entrepreneurs don’t worry about demand. They are the most optimistic persons on the planet. To a person, they believe that if they build it, demand will come. The demand needed to justify the new hiring will come from where it always comes from, from the newly created salaries and wages of the new hires, and not from lower saving or increased borrowing of those already employed (which incremental demand is unsustainable), or from government transfer payments from one consumer to another (which is a wash). That’s the process that has driven economic growth for thousands of years, even though many Nobel-prize winners in economics still don’t get it (academic economists tend to work from theoretical models and not understand how the real world actually works). An example is restaurants: Entrepreneurs open tens of thousands every year, each requiring a substantial investment in space, equipment, and workers, all before there is even a single dinner reservation. There is no line of people outside waiting to be fed. Jobs first, then demand. That’s what will drive the economy at an accelerated pace this year, not the Fed and not government.
- truthman
January 18, 2013 at 2:31pm