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- iHaveNet.com: Economy
by Josh Bivens
Fed should be doing more to reduce joblessness
Accusations that the Fed is overstepping its mandate generally imply that it is underweighting the imperative to keep inflation low in favor of trying to lower today's stubbornly high unemployment. This accusation is profoundly misplaced, for three reasons.
First, the idea that high rates of unemployment and inflation demand equal weight in Fed deliberations is bad economics.
Second, even if one granted that unemployment and inflation demand this equal weight, current data still suggests that the Fed should be doing much more to generate lower rates of unemployment.
Third, higher core inflation today would be good, not bad, for the economy.
[Read about what more the Fed might do to spur recovery.]
On the first point, the danger of high unemployment is clear and large -- every percentage point of unemployment above the full-employment rate translates into about $260 billion in foregone income in the economy. Take the Congressional Budget Office's conservative estimate of 5.2 percent as the full-employment rate -- this implies that today's 9.1 percent unemployment is letting $1 trillion be wasted by failing to do more to drive joblessness down. On the other hand, no serious economic research finds that annual inflation rates below double-digits cause any appreciable harm to economies.
On the second point, a standard monetary policy rule named for Greg Mankiw (former Chair of George W. Bush's
On the third point, given the substantial overhang of household debt left by the bursting housing bubble, a bout of higher inflation would actually help the economy by eroding this debt and freeing up consumer spending. This is not a radical suggestion -- former
In short, there's no reason at all to think that the Fed is doing too much to help reduce joblessness -- in fact it should be doing much more. And fears about purely hypothetical inflation spikes should not stop them.
Available at Amazon.com:
Inflation Could Help Flagging Economy
Jimmy Carter: The American Presidents Series: The 39th President, 1977-81
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Inflation Could Help Flagging Economy