There has been a small dispute going on in the blogosphere that could have big implications for economic policy-making: Is the labor market tightening up?
In other words, has the labor market reached a point at which it is impervious to fiscal and monetary stimulus? Wonks like Evan Soltas and Joe Weisenthal are arguing that it might have, which would mean that any additional stimulus could risk stoking inflation.
The technical debate is largely uninteresting. But the way the debate pertains to politics is hugely important — particularly since it could be a gift to a moneyed class that might not have the nation's best interests at heart.
The argument for a tightening labor market, according to Soltas, essentially goes like this: when you chart the unemployment rate versus the quit rate, you get a curve. That curve is currently in line with prerecession years, implying that there might not be as much slack in the labor market as others have projected.
For argument's sake, let's assume Soltas' method is right. What does that change about the relative merits of stimulus? Almost nothing. More stimulus is worth the risk, whatever you think about the labor market model.
Just consider the competing claims. We currently have mass unemployment, a combination of stupendous misery and waste that has led to a sharp spike in the suicide rate. If we got some real stimulus, there's a chance of making up some of the roughly 7.3 percent of GDP — $1.2 trillion and 10 million jobs — in lost output from the Great Recession. More stimulus could cause some moderate inflation, but probably at a minor cost. Indeed, it might actually help matters by lowering real interest rates and eroding debt burdens. And as Dean Baker and Jared Bernstein point out in their new book, the U.S. got unemployment down to 4 percent for the whole of 2000 with flat inflation.
Those are my priorities, and one can of course have different ones. What is more troubling is when Soltas uses his results to deploy political arguments about the Federal Reserve's proper role in buttressing the economy.
1. That I think labor markets may be tighter than I did before does not imply I'm suddenly a hawk. It means I have an open mind.— Evan Soltas (@esoltas) March 2, 2014
2. Monetary policy is made by looking at costs, risks, and benefits. The expected path of policy (as seen in futures) seems broadly right.— Evan Soltas (@esoltas) March 2, 2014
3. Saying that the Fed should prioritize long-term unemployment misunderstands both its statutory goals and actual capacity.— Evan Soltas (@esoltas) March 2, 2014
Make no mistake, Soltas is a really smart guy who could probably beat me handily in a chart-analysis-to-the-death. But this pose of above-it-all evenhandedness is bollocks. When he writes that an emphasis on long-term unemployment is a misunderstanding of the Fed's "statutory goals and actual capacity," he is making a political argument in the guise of an analytical one, whether he realizes it or not. The Fed's charter is broadly worded, and its capacities are debated. Regardless of one's economic model, the statement of what the Fed should prioritize and do is necessarily bound up with the kind of political priority structure like the one I outlined above.
As it happens, I think saying that the risk of inflation is more worrisome than long-term unemployment is a grotesque set of priorities. As Jared Bernstein points out, running the economy hot and chancing a bit of inflation — as Alan Greenspan did in the '90s — can pull the long-term unemployed into the labor market and have all sorts of other enormously positive social effects.
But the main point is that when it comes to the Fed and unemployment, there is a danger that "objective" economic analyses will be used to justify certain class interests that do not benefit the economy as a whole. Elites are doing quite well — corporate profits are at all-time highs, and the 1 percent has captured something like 95 percent of the income gains during this recovery. Both inflation and a tighter labor market would be against their class interest, since it would erode their nominal wealth and increase the wage share of national income respectively.
Thus there is constant demand for new models and arguments that can slide past this conflict and be presented as an "objective" necessity. "Sorry, long-term unemployed," the 1 percent would like to say, "reducing mass unemployment is just not what the Fed is for!"
So yes, it's true, if you squint and stand on your head and make a few well-chosen assumptions, you can make the prediction that the labor market is tight. But the policy ramifications of that conclusion are far from objectively clear.
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