How the Democrats' big jobs idea could upend the Fed

This afternoon, the Federal Reserve will announce what it's doing with interest rates. These regular announcements are part of the central bank's sweeping role as the American economy's Great Balancer: eternally choosing how many jobs to create or destroy in exchange for higher or lower inflation.

But this almost God-like mission would be completely remade if some ambitious Senate Democrats get their way.

I'm referring to a national job guarantee. It's basically a public option for employment: The government would set up a system to track the work that local communities and groups need done, and then everyone who wants work can come and get matched to a job in their area. The government would pay everyone working for the program $15 an hour, plus health benefits.

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The idea is to drive unemployment as low as it can possibly go, especially for marginalized groups, and keep it there. The job guarantee would also create a floor for pay and benefits that the entire economy would have to meet or exceed.

Sen. Cory Booker (D-N.J.) already has legislation that would test run the idea in 15 localities around the country, presumably as a prelude to eventually going national. Sens. Kirsten Gillibrand (D-N.Y.), Jeff Merkley (D-Ore.), Elizabeth Warren (D-Mass.), and Kamala Harris (D-Calif.) are co-sponsors. Meanwhile, Sen. Bernie Sanders (I-Vt.) is working on a separate bill that would create a national version right away.

What does all this have to do with the Federal Reserve?

Like I said, Congress has given the central bank a two-part job: maximize employment and keep prices low and stable. By cutting interest rates, the Fed accelerates job creation, but also potentially accelerates inflation as well. By hiking interest rates, as it's done recently, the Fed applies the brakes to both. This requires an eternal balance between the two priorities.

But the issue goes deeper: Right now, the Fed assumes that if unemployment gets too low, inflation will rise unsustainably. The theory is that as jobless Americans become scarce, businesses have to attract already-employed workers to keep expanding. That sets off a bidding war between employers that drives wages up and up, and eventually forces the prices of goods up as well. And we get inflation.

As Steve Goldstein pointedly put it, the Fed's mission is to guarantee that everyone doesn't have a job.

Of course, that also means a job guarantee would instantly make the Fed a more benign force in the economy. The central bank would no longer move people from employment to unemployment when it hiked interest rates. It would simply move them from private sector employment to job guarantee employment. (This point is made repeatedly by pro-job guarantee economists.) It would also allow the Fed to concentrate on keeping prices low and stable — a change that, ironically enough, right-wing inflation hawks might appreciate.

But by taking unemployment out of the Fed's control, we would also upend the conceptual framework it currently relies on. The central bank would have to come up with a whole new strategy, and a whole new set of principles, for when and how to adjust interest rates.

The job guarantee would also create millions of new public employees — something conservatives definitely would not appreciate. This might force them to accept higher inflation levels, lest they expand a "nationalized" labor force. On the other hand, they might deliberately try to drive interest rates way up, and flood the program with more workers than it can handle.

Then there's the question of how inflation itself would react.

Experts who support the job guarantee argue it's not designed to compete with private employers for labor. During recessions, when private businesses lay people off, the size and spending of the job guarantee would naturally expand. That would also stimulate the rest of the economy back to health. As the private sector recovered, it would offer more jobs, outbidding the job guarantee's $15-an-hour floor. That would draw workers back into private employment, and the program's size and spending should shrink.

As a result, job guarantee supporters argue the program will hit the economy's sweet spot: Maximizing employment without setting off a perpetual wage-price spiral. Sustained low unemployment will probably juice productivity rates as well, which should also lessen inflationary pressure.

Making $15-an-hour the new minimum for the whole economy would likely force a one-time adjustment in wages across the income spectrum. That could lead to a temporary burst of inflation, at least. (Happily, the more private businesses adjust wages to meet that floor, the more workers they'll hold onto, and the more manageable the job guarantee's employment numbers are.)

A job guarantee program would likely need some workers with prior experience in a host of fields, to mentor new workers and help them learn on the job. That may require at least some wage bidding wars with private employers. One group of economists also recommended building a wage scale into the job guarantee — i.e. make it possible for workers to get promotions. That would be a good non-punitive incentive for people to work hard and take job guarantee employment seriously. And it wouldn't necessarily lead to bidding wars over workers. (Private businesses promote workers to incentivize them as well, even when they're not looking to expand.) But it's a potential complicating factor.

We've just never tried a policy like this before. We don't quite know how it will play out. It would be helpful to prepare the Fed for that, and keep its control over interest rates as a backstop. The simplest fix is probably just changing the Fed's mission: from maximizing employment and stabilizing inflation, to minimizing job guarantee employment and stabilizing inflation.

Point being, Congress gave the Fed its current mandate, and it can give the Fed a new one. Should a job guarantee ever pass, the Fed will need the update.