Opinion

Nicholas Wapshott

Yellen shows her hand

Nicholas Wapshott
Apr 19, 2014 05:19 UTC

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.

No, austerity did not work

Nicholas Wapshott
Nov 7, 2013 18:09 UTC

There have been a lot of sighs of relief in Europe lately, where countries like Britain and Spain, long in recession, have finally started to grow. Not by much, nor for long. But such is the political imperative to suggest that all the misery of fiscally tight economic policies was worth the pain that there are tentative claims the worst is now over and, ipso facto, austerity worked.

Hold on a minute. Growth is good. Growth is what allows countries to pay down their national debt by increasing economic activity, putting the unemployed to work and making people prosperous enough to pay taxes. But gross domestic product growth alone is not enough to provide adequate sustained prosperity if it does not also lead to significant job growth.

Take Spain, which has just emerged from two years of recession by posting a third quarter growth rate of 0.1 percent. Technically the Spanish slump is over. But a glance at their job figures shows the country has a long way to go before it can genuinely say it has escaped the diminishing effects of austerity — in the form of tight fiscal policies, public spending cuts and labor and entitlement reforms — imposed indirectly by Germany through the European Union.

The real scandal is jobs

Nicholas Wapshott
Jun 10, 2013 20:06 UTC

Job seekers stand in line to meet with prospective employers at a career fair in New York City, Oct. 24, 2012. REUTERS/Mike Segar

The number of American jobless remains dire.

The latest figures, released Friday, show employment increased by 175,000 in May — but the jobless rate nudged up from 7.5 percent to 7.6 percent. A typical response was the Financial Times, which slipped apparently unwitting ideological commentary into its otherwise bland report, saying the new jobs figure was “a number that will encourage the Fed to start slowing its $85 billion-a-month asset purchases.”

For some, every new indicator is a prompt to bring on more austerity.

A more appropriate response to these new figures is to say that 4.4 million long-term jobless, the 7.9 million with part-time work but looking for a full-time job, the 2.2 million who have taken themselves off the jobless rolls because they cannot find work, and 780,000 who have abandoned looking for work because they believe there is no job for them, is 15.3 million jobless too many.

Austerity is a moral issue

Nicholas Wapshott
May 17, 2013 20:29 UTC

Security worker opens the door of a government job center as people wait to enter in Marbella, Spain, December 2, 2011. REUTERS/Jon Nazca

In the nearly five years since the worst financial crash since the Great Depression, the remedy for the world’s economic doldrums has swung from full-on Keynesianism to unforgiving austerity and back.

The initial Keynesian response halted the collapse in economic activity. But it was soon met by borrowers’ remorse in the shape of paying down debt and raising taxes without delay. In the last year, full-throttle austerity has fallen out of favor with those charged with monitoring the world economy.

Central bankers have abandoned Milton Friedman

Nicholas Wapshott
Dec 17, 2012 18:38 UTC

It is a cruel irony of fate that 2012, the year that celebrates the centennial of Milton Friedman’s birth, is the year that marks the end of his preeminence as an influence over economic policy. Since the emergence in the early 1970s of stagflation – a corrosive combination of lack of growth matched by inflation in double figures – Friedman’s dictums on the causes and cures of rising prices have been the mood music behind management of many leading economies. Since the Great Recession took hold, however, the priorities of government economists have evolved, and once more growth and employment are emerging as the prime goals of public policy.

In the 33 years since Paul Volcker was made Federal Reserve chairman by President Jimmy Carter in 1979, Friedman’s idea that inflation is the economy’s greatest danger has ruled the roost. So long as inflation is kept at around 2 percent, unemployment has been allowed to find its own level. But times have changed. At the first meeting of the Federal Reserve since Barack Obama’s re-election, Federal Reserve Chairman Ben Bernanke has made the creation of jobs a principal aim alongside keeping inflation in check.

In practice, this means interest rates will not be raised so long as unemployment remains above 6.5 percent and inflation is forecast to remain below 2.5 percent. With this tap on the tiller, Bernanke has quietly dispatched the Age of Friedman, replacing it with a policy that harks back to the Keynesian days when “full employment” was the sole target. (Technical note: In economics, “full employment” does not mean when everyone is employed; to allow for the churn as workers move among employers and other adjustments to the labor force, “full employment” is usually deemed to be when 94 percent to 97 percent of those seeking jobs are employed.)

  •