Business school, in the early 80s, I recall that 5% unemployment was good, because it kept wages reasonable (down). This Bloomberg article says that the big brains may have changed their views. Sad to say, the Fed considers 5.2 percent to 6 percent the economy’s long-run normal rate of unemployment. Achieving that rate would be a vast improvement over today. Still, once upon a time and not all that long ago, America’s elites strived for full employment, a catchphrase now relegated to economic history. . . . The post-World War II public goal of full employment was a reaction to the trauma of the Great Depression. The ambition foundered on the double-digit inflation rates of the 1970s. Economists at the time became convinced the only way to keep inflation down was to tolerate higher rates of unemployment. Economists didn’t ever quite put it this way, but too much economic growth and too much employment was bad for the overall price level, and a reserve army of unemployed and underemployed workers is good for inflation. STORY: Interest Rates and Jobs—the Fed Watches Unemployment Nevertheless, scholars now know that the trade-off between inflation and employment is theoretically mistaken and, in many cases, historically inaccurate. Throughout U.S. history, periods of rapid economic growth and technological innovation have often been times of declining inflation rates. Technological advances, productivity improvements, and open borders can hike growth prospects and still keep overall prices stable (the experience of the late 90s). “It is simply not logical (or correct) to argue that an increase in production will foster a general rise of prices. Concerns that faster total growth of output in the economy will cause a fall in the purchasing power of money—inflation—are simply wrong,” writes (pdf) Jerry Jordan, former president of the Federal Reserve Bank of Cleveland and a well-known monetarist. “Similarly, it is false to say that ‘too many people working’ or ‘too low unemployment’ can ‘cause inflation.’” What counts is that the Fed maintains the credibility of its commitment to a target rate of 2 percent inflation. Seared by the experience of the 1970s, the Fed and the wide network of monetary mandarins in academia have developed a deeper understanding of its inflation-fighting toolkit. The result: the underlying trend toward subdued inflation over the past three decades. At the same time, the human toll from long spells of unemployment is too high. When you’re unemployed, it’s hard to pay bills, but the damage runs much deeper. People lose purpose. Their health deteriorates. Families break apart. Laid-off workers can’t save for retirement and borrow too much to stay afloat. Work nourishes our sense of belonging to a much larger community. “How do we connect the disconnected?’ wonders Crystal Palmer, a lifelong public housing resident in Chicago and an employee at the Henry Horner public housing project. “That’s the key to success in this community and any other community.” businessweek/articles/2013-05-02/why-not-target-a-3-percent-unemployment-rate
Posted on: Fri, 29 Nov 2013 23:22:10 +0000
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