Gerald Epstein, of the Political Economy Research Institute (PERI), interviewed by Jessica Desvarieux of the Real News Network:
Lambert here: I have to say that Epstein’s comments seem a little mild to me. The seventy-five cent word hysteresis escaped from the labs at NEBR into the mainstream discourse at about the time its operational definition did, when having been disemployed became a pretext for employment discrimination, meaning that if you don’t already have a job you can’t get hired. Whoa, how very meta! Anyhow, I would have liked to see some table pounding and shouting about pseudo-scientific constructs like the “Natural Rate of Unemployment” — what’s “natural” about it? — or a heartfelt plea for a well-funded study to find out how the permanently disemployed actually eat, and find shelter, and stay alive — System D? — or even a dim recognition that regulating the economy by throwing people out of work is just as barbaric and inhumane as the medieval remedy of bloodletting. None of that here, though, sadly; an early indicator that nothing much will come from the Fed on disemployment, and how could it? Aggregate demand isn’t in their remit. So to the interview. These portions caught my eye.
DESVARIEUX: So, Gerry, last week, Janet Yellen, Fed chair, she had a conference and gave a speech at Jackson Hole, Wyoming. First of all, let us know what is the significance of this conference.
EPSTEIN: … This year was a little different in several respects. Typically in the past the Federal Reserve has been inviting a lot of investment bankers and financial market economists to come and get inside information and hobnob with the glitterati, and it’s become a real kind of club-building exercise for the in crowd versus the out crowd. This year’s a little different. Janet Yellen and the Fed people didn’t invite so many investment bankers. Instead, they invited a bunch of labor economists, which was a big change.
Readers will correct me if I’m wrong, but in terms of club-building, it’s my impression that labor economists are pretty low on the academic totem pole; this is like inviting a bunch of engineers to a conference on string theory (“Say, prof, you’re trying to push it!”). That said, it would have been more than a “little different” had the Fed invited some actual union representatives to the table, like those whacky Germans do.
DESVARIEUX: And what did she actually say?
EPSTEIN: Well, the topic of the conference was about the job market and what’s going on, why is unemployment still so high, what does it mean for monetary policy.
Profits are up. Wages are flat. The rich are richer than ever. What’s not to like? Nobody gives consideration to the great unmentionable: Disemployment is where it is because that’s the preferred policy option of elites by default. Given that the Fed is only getting round to bringing in second-tier academics and talking about it six years after Lehman Brothers, it’s certainly the most obvious assumption that things like shoveling trillions to the banks are “have-to-haves,” and things like millions of people out of work are “nice-to-haves,” handled only when the important stuff is out of the way. (I know, I know, the eternal question: Are they stupid, or evil?) And did we really have to wait for a change in Fed leadership to get a change in agenda? My Kremlinology says no; if the issue was important to elites, Bernanke would have given it attention. Back to the interview.
EPSTEIN: And this is important in a number of respects. First of all, the Federal Reserve has a dual mandate. One of the objectives is supposed to be price stability. The other objective is supposed to be maximum employment. Now, central bankers at that Fed typically have kind of ignored the employment mandate and they haven’t paid all that much attention to it.
But Janet Yellen has made this a big focus of her objectives. And so I think it’s significant that they devoted the entire conference to a discussion of what’s going on in the labor market. That’s very positive, and that’s something that I think central bankers in other parts of the world should pay attention to rather than just focusing entirely on price stability and low inflation.
Words are wind, leaving aside the amazing throwaway that they don’t know “what’s going on in the labor market.” How can they not know? That is, only policy outcomes matter. “Attention,” “focus,” “discussion,” (and dashboards) don’t matter. Yellen could “focus” on disemployment, decide that 6% was the “new normal” “natural” rate of unemployment, and move the discussion along to other, more interesting topics. And why would that be surprising?
DESVARIEUX: But, Gerry, if you had to be critical, would you say that she left out certain things? What didn’t she say, essentially?
EPSTEIN: Well, so I just told you what I thought the good news was, but there’s some bad news in what happened at this conference and in particular Janet Yellen was talking about. …
[I]n talking about the state of the unemployment, she gave very mixed signals. She was saying that, well, maybe we have all these structural factors in the economy that explain why unemployment is so high, and perhaps there’s not all that much more that monetary policy can do on its own to reduce unemployment.
Why accept/assume/concede that monetary policy has done anything to reduce unemployment? Readers will correct me, and Yves will probably whack me with her shooting stick for talking about finance on a weekday, but my understanding is that at the end of the day all the Fed is doing, and all it can do, is manipulate interest rates, that right now they are keeping them low, and that the only real effect of that policy is to suck money into the U.S. stock market, because that’s the only place where there’s even a promise of a return (unless you want to play the ponies with private equity or hedge funds). There is a presumed, cargo cultish effect that when interest rates are low, businesses will borrow money and invest it, and some of that investment will “trickle down” to people who need jobs; that is, the the “loanable funds” fallacy. I somehow got some Silicon Vally founders on my Twitter feed, and whatever drives those guys, how much it costs to borrow money is way down on the list, like at number one million.
EPSTEIN: Now, to some extent there’s some truth to what she said. That is, there have been a lot of factors going on in the U.S. and the global economy in the last 15 or 20 years that has undermined the employment and wage picture for American workers. But instead of talking about a variety of tools and a variety of things that the central bank could do to try to address the employment problem, she basically said, well, it’s very complicated and we’re not sure where the picture’s taking us.
But I’m not sure the Epstein’s posited “variety of tools” is there for the Fed, short of taking a whack at the aggregate demand problem by sending every American a huge honkin’ check in the mail, instead of just banksters, and I don’t know if the Fed even has the power to do that. So it could be that “It’s complicated” — that would be Janet Yellen’s relationship with the economy on her Facebook page — is really Yellen’s way of saying “Sorry! Can’t do a thing.” And correctly.
DESVARIEUX: What could they do, Gerry?
EPSTEIN: Well, when the financial crisis hit, the central bank, the Federal Reserve, created about ten to 15 new tools of policy to try to bail out the banks.
I’d call them forms of obfuscation, not “tools.” In fact, there was only one tool: What James Galbraith, IIRC, called the largest upward transfer of wealth in world history.
EPSTEIN:And while it’s a very good thing that they devoted this conference and a lot of research to trying to figure out what’s going on with the labor market, they need to do a lot more research and devote a lot more attention into what other kinds of tools the central bank can use to generate more and better employment.
Hmmm. “A lot more research” sounds like an academic program, not a policy option. The uncharitable might go so far as to call it temporizing.
So, for example, my colleagues here at PERI, Bob Pollin and others, have talked about loan guarantees, asset-based reserve requirements, various kinds of credit lines, and so forth for institutions that are trying to generate more and better jobs to create infrastructure, make the green transition to a fossil [fuel] free economy, and so forth. The Federal Reserve isn’t even talking about these kinds of expanded tools of monetary policy to deal with unemployment. They should do that just as they developed a whole bunch of new tools to deal with the financial crisis. So those are some examples, I think, of what Janet Yellen should have been talking about before going flyfishing at Jackson Hole.
Hmmm. Again, to my simple mind, “loan guarantees,” “reserve requirements,” and “credit lines” all seem like complicated variations on the loanable funds fallacy, to me. (They also assume that people would regard the banks as good faith actors, as opposed to randomly thrashing uber-predators that you should run a mile to avoid. But I digress.) Couldn’t we keep it simple, and ask the Fed to throw up their collective hands, admit they don’t have the “tools” to do anything about today’s unemployement, and ask Janet Yellen to make a speech saying “Only fiscal policy can help, so we need plenty of deficit spending”? (#MintTheCoin is probably a bridge too far for Yellen and Epstein, both.) And while we’re at it, does it seem a little weird to you that we’d be asking the Fed to assist in the transition to a green economy instead of, say, an elected branch of government?
UPDATE I should add that I don’t want to be too snarkly about labor economists; there are many of “the econ” far more snark-worthy than they! We do but jest, poison in jest….