Monetary Policy and 80,000 Votes

A couple of weeks ago, Congresswoman Ocasio-Cortez made a very important point in a congressional hearing involving the Federal Reserve (boldface mine):

When Federal Reserve chair Jerome Powell testifed before the House Wednesday, Team Blue’s freshmen lawmakers posed some of the hearings most incisive questions.

Alexandria Ocasio-Cortez noted that over the past five years, the central bank had repeatedly suggested that unemployment could not fall much lower without triggering high inflation — only to see unemployment fall much lower without triggering high inflation.

Ocasio-Cortez: In early 2014, the Federal Reserve believed that the long run unemployment rate was around 5.4 percent. In early 2018, it as estimated that this was now lower, around 4.5 percent. Now, the estimate is around 4.2 percent. What is the current unemployment rate today?

Powell: 3.7 percent.

Ocasio 3.7 percent…Unemployment has fallen about three full points since 2014 but inflation is no higher today than it was five years ago. Given these facts, do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?

Powell: Absolutely.

This exchange may sound dull and technical. But the congresswoman’s point has real human stakes. America’s central bank has a dual mandate: to promote full employment and price stability. How the Fed chooses to balance those two objectives has redistributive implications. The wealthy have far more to lose from inflation than they do from modest levels of unemployment. In fact, many business owners may actually prefer for the U.S. economy not to achieve full employment, since workers tend to be less demanding when jobs are scarce. By contrast, the most vulnerable workers in the U.S. — such as those with criminal records or little experience — will struggle to get a foothold in the labor market unless policy makers err on the side of letting unemployment fall “too low.”

And this is what AOC’s questions are implicitly about. If the Federal Reserve believes that the U.S. economy cannot sustain unemployment below 5 percent without suffering high inflation, then it will raise interest rates to cool off investment, thereby preventing too many workers from getting jobs. Ocasio-Cortez’s implication is that, by raising interest rates out of a fear of illusory inflation, the Fed may have needlessly hurt American workers.

As some asshole with a blog once noted:

NAIRU is the Non-Accelerating Inflation Rate of Unemployment. NAIRU is also referred to as the “natural rate of unemployment.” Essentially, once unemployment drops below a certain rate-and there is little theory to indicate just exactly what this rate is-inflation will rise. I’ve never really liked NAIRU because, during the Clinton era, it kept being revised downward as unemployment fell and inflation didn’t soar. Nonetheless, it was essentially a cornerstone of Fed policy under Greenspan. As a result of this concept, the Fed would often attempt to ‘slow’ the economy through monetary policy (i.e., slow or even stall job creation).

(Once is doing a lot of work: I wrote that post in 2005).

I can’t help but think that a slighly looser Fed policy gets you 80,000 more Democrats to bother to show up and vote in 2016 in swing states. Yes, Trump did a racism, but it’s an extraordinarily strong statement to suggest that a small amount of voters wouldn’t have been more motivated to vote had they and their communities been doing better.

Like war and generals, economics is too important to be left to the (Fed) economists.

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