Yellen shows her hand
The difference between the Federal Reserve Board of Chairwoman Janet Yellen and that of her immediate predecessor Ben Bernanke is becoming clear. No more so than in their approach to the problem of joblessness.
Bernanke made clear that in the post-2008 economy, his principal goal was the creation of jobs, not curbing inflation. He settled on a figure, 6.5 percent unemployment, as the threshold that would guide his actions.
While remaining true to the spirit of Bernanke’s principal goal, Yellen and the rest of her board refined the target in their meeting on March 18 and 19, a change in approach that at first sent the wrong signal to the stock and bond markets. At the press conference following the meeting, Yellen said she would not be raising interest rates “for a considerable time,” which could mean “something on the order of around six months.”
The Fed decided it would no longer be tied to the “quantitative” 6.5 percent jobless figure, which is fast being approached. The February unemployment numbers, for example, are 6.7 percent. After listening to Yellen, the markets assumed — wrongly — that the Fed was about to abandon the jobless target, end quantitative easing and start raising interest rates.
That misreading by the markets was evidence of what might be called the “Thumper Rule” for Fed chairmen, named after the rabbit in Walt Disney’s Bambi, whose father told him, “If you can’t say something nice, don’t say nothing at all.” To avoid saying anything, Yellen’s wily predecessor at the Fed, Alan Greenspan, only spoke in gobbledegook.
Before scampering off to sell their stocks, the traders would have done well to wait to read the full Fed statement that revealed there had been a secret session of the Fed board on March 4, a week before the full session. The minutes of that meeting reveal the board’s interest in “qualitative language” about jobs that focus “on a broader set of economic indicators” — that is, seeing the true unemployment picture beyond the bald percentages.
As the minutes show, the board was concerned to avoid “uncertainty associated with defining and measuring the unemployment rate and the level of employment that would be most consistent with the Committee’s maximum employment objective.” Reiterating that policy in a speech Wednesday, Yellen declared, “there is little question that the economy has remained far from maximum employment.”
The notion of “full employment” has always been something of a will-o’-the-wisp and always fell short of the common-sense idea that an economy has attained full employment when everyone who is capable of work or wants to work is employed. At the very least, full employment allows for people to move between jobs, or temporarily remove themselves from the workforce for personal reasons such as pregnancy, or take time out to spend the savings they had hoarded on an activity outside the world of work, such as sailing around the world.
To this vague definition of full employment, recent years have added the effect of the technological changes that have increased working from home and Internet entrepreneurial activity. Such workers are rarely employed full time, but because they do not register themselves as jobless, they are not counted in the official figures.
The 2008 financial crisis forced a readjustment in the employment capacity of the economy. This was on top of the growing number of independent workers.
When the crisis hit and the federal government intervened in early 2009 with $800 billion in spending to shore up employment by subsidizing public sector jobs in states and by funding infrastructure projects that would otherwise have been cancelled, there was a great deal of talk about “an L-shaped recovery.” It was thought that when the dust settled, long after vast public borrowing had held off the Great Recession, we would not return to the booming economy of the first eight years of the century. There would be a “new normal” in which traditional notions such as what counted as “full employment” would have to be reassessed.
That is indeed what has happened. If not exactly “L-shaped,” the recovery has been long, slow and sluggish. It was perhaps no more dilatory than the snails’-pace recovery of the 1930s, the last time the world economy careered off a cliff. The up-tick is slow, with predictable effects on unemployment, which are not reflected in the apparent progress made in the official figures. The jobless rate is coming down in part because of the return of growth — but even more because people without jobs are giving up looking for a full-time or conventional job.
This failure to fully employ the number of workers the economy did five years ago, before the crisis, goes a long way to explain why prices are rising slowly. In the “new normal” economy, not only is the jobless figure misleading, so is the inflation rate.
Yellen said this week that she is more worried that a shock to the economy might lead to deflation — a debilitating spiral downward in prices and demand — than rampant inflation.
Those who cling to old certainties about the economic notions that dominated policy between the 1980s and late 2008 find themselves today tilting at windmills such as the likelihood of a return to high inflation. They have been overtaken by events.
We are now in a period of “secular stagnation,” in which the unemployed can expect to be jobless for a very long time, perhaps forever, and the scourge of inflation has been replaced by the threat of deflation.
Yellen acknowledges these changes. She understands that to effect a true recovery, the economy must first find jobs for all Americans. The Fed is not the best agency to prompt an economic revival, as it has a single instrument — monetary policy through interest rates — with which to encourage and goad people to stop saving and invest in job-creating endeavors.
By far the most effective way of stimulating the economy and creating new jobs, as former Treasury Secretary Lawrence Summers told new graduates at Smith College recently, is for the federal and state governments to spend freely on infrastructure.
Money has never been cheaper; labor has never been cheaper; there is no risk of inflation; the new facilities, whether roads, schools, colleges, railways, power stations, airports or whatever, would help supply the economy with a well-trained workforce and a set of commonly used amenities that private enterprise desperately needs to spur growth.
So long as there is a rump in the House that stands in the way of such spending, the economy will continue to totter along. Imposing austerity, paying down the debt and other dogmatic panaceas will only further slow growth and reduce the size of the economy — as the British and European examples readily attest. (Despite what they say, the British coalition is borrowing its way to growth.)
So Yellen and her board are the best hope of recovery until and unless the complexion of Congress changes. This year’s mid-term elections will likely see the tide going further out on the Democrats.
Which makes the 2016 presidential election a pivotal referendum on whether Americans wish the whole of the nation to live in prosperity — or whether they wish to retrench and ignore those left behind by the “new normal?”
Nicholas Wapshott is the author of Ronald Reagan and Margaret Thatcher: A Political Marriage, and Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.
PHOTO (TOP): Federal Reserve Chairwoman Janet Yellen speaks to the Economic Club of New York in New York, April 16, 2014. REUTERS/Brendan McDermid
PHOTO (INSERT 1): Federal Reserve Board Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, July 22, 2009. REUTERS/Kevin Lamarque
PHOTO (INSERT 2): Former Fed Chairman, Alan Greenspan, speaks during the SIFMA annual meeting in New York, October 23, 2012. REUTERS/Lucas Jackson