The recent employment report in the United States continues the pattern we’ve been seeing for a while. Unemployment is falling, and is now very close to previous estimates of the Nairu, or the unemployment rate at which inflation begins accelerating. But inflation isn’t accelerating. In particular, there is still no hint of wage pressure in the data. So what should the Federal Reserve do?
My answer is to apply Cromwell’s rule: “I beseech you, in the bowels of Christ, think it possible that you may be mistaken.”
O.K., maybe skip the bowels part.
The Nairu is, I’d still argue, a useful concept, mainly because it’s a caution against expecting too much from monetary policy in the long run. Much as I want full employment, there is some lower bound in the unemployment rate, a rate that you just can’t achieve on a sustained basis with demand-side policies. But the Nairu isn’t very useful as a guide to short- and medium-term policy, because we don’t have a good idea of where that lower bound lies.
I very much hope that the staff at the Fed remembers the 1990s. Around 1994 it was widely believed, based on seemingly solid research, that the Nairu was around 6 percent. But Fed Chairman Alan Greenspan and company decided to wait for actual evidence of rising inflation, and the result was a long run of job growth that brought unemployment below 4 percent without any kind of inflationary explosion. Suppose they had targeted the presumed Nairu instead; they would have sacrificed trillions in foregone output, plus all the good things that come from a tight labor market.
This time around there is even more reason not to assume that we know where the Nairu is, because we now know that premature rate hikes can all too easily land you in a low-inflation trap that’s very hard to escape. Think Japan in 2000 (a time I think many people have forgotten), the European Central Bank in 2011 or Sweden after 2010.
Maybe full employment really is a 5.3 percent unemployment rate, and by the time that’s clear, the inflation rate will have ticked up a bit above the Fed’s target. But that would not be a large cost, whereas sliding back into a liquidity trap would be very costly indeed.
The Employment Truthers
Ben Casselman read a recent op-ed in The Wall Street Journal by Daniel Quinn Mills, a professor at Harvard Business School, and declared that “it is, without exaggeration, one of the dumbest things I’ve ever read.”
I think you can get much, much dumber. Still, as a diatribe against seasonally adjusted employment figures, Mr. Quinn Mills’s piece is so amazingly ignorant that you might wonder how it got published in The Journal. You might wonder, that is, if you didn’t understand what’s happening: We’re witnessing the coming of the employment truthers.
When President Obama and the Fed began their efforts to rescue the economy from the worst financial crisis since the 1930s, conservatives knew, just knew, what was going to happen. Inflation was going to soar thanks to money-printing and deficits, and private employment would stagnate because of the Affordable Care Act and because Mr. Obama was hurting the feelings of job creators.
When inflation failed to take off, in came the inflation truthers, insisting that the official numbers were wrong, and probably a deliberate fake. Now, how is that employment prediction doing?
Witness the terrible effects of a socialist who trash-talks capitalism on the chart on this page. Hence the eagerness to publish any argument claiming that the numbers are somehow fake.
Expect more dumbness.