Wanted at the Fed: An Inflation Dove

(Whether or not the Senate confirms Ben Bernanke for another term as Fed chairman, this diary raises a critical issue. - promoted by desmoinesdem)

I was just reading that Janet Yellen, recently mentioned as a possible replacement for Fed chair Ben Bernanke, is considered on Wall Street to be an “inflation dove,” which means that she considers maintaining full employment to be -gasp!- “as important” as controlling inflation.

I also wonder about Brad DeLong at Berkeley. He was in the Treasury Department in the Clinton Administration. He's a free trader, which I guess is neither here nor there when it comes to monetary policy (and not necessarily bad in any case), but I like that he's an economic historian.

In any case, we strongly need someone who will put reducing unemployment tops on the list. I know, from personal experience, how unemployment can convulse a family…


Back in 1983, my dad, a middle manager in corporate America, died at age 41 after being laid off from five separate companies in five years. Chasing new work forced him to move his young family from Kansas to Texas to Iowa in the space of two years. Then, just as he seemed to find stability in a new job in Iowa, the brutal double-dip recession of 1980 – 1982 cost him his job again. He never recovered from that one.

The costs to my family of that loss are obvious. But the costs are broader than that. When the economy lost my dad, it lost a certain amount of knowledge and experience, and the productivity that went with it. Now I can't say with certainty that if my dad hadn't lost his job of 11 years in 1978, that he wouldn't have died five years later anyway. And, the vast majority of unemployed people will survive, obviously. And, I'm not arguing for an open-ended dole. But, research has shown over and over that bouts of unemployment, especially for the father in a family, carry with them permanent and “baked-in” costs, both to the unemployed person's family, and to the economy at large. I just ask that these costs of unemployment to productivity and economic growth be somehow factored in when the balance between inflation and unemployment is being struck.

Yes, reducing unemployment by tolerating higher inflation transfers money from the financiers to the workers. But given the enormous increase in inequality over the last 30 years, most of it driven by skyrocketing returns to capital, I'd say it's time for a re-balancing.

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  • you shouldn't have to ask

    for factoring in those costs of unemployment, because in theory the Federal Reserve has a mission to strive for full employment.

    Unfortunately, we haven’t had a Fed chairman focus on that for a long time, and at the White House we are getting Rubinomics 2.0 without the revenue increases that made Rubinomics 1.0 more successful than the subsequent decade.

    Good post, PrairieBreezeCheese.

  • Even the IMF wants an inflation dove

    From Friday’s Wall Street Journal:  

    The International Monetary Fund’s top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession.

    Mr. Blanchard, a macroeconomist on leave from the Massachusetts Institute of Technology, said the global economic downturn revealed flaws in macroeconomic policy, especially the reliance primarily on interest rates to manage economies. Although Japan had fallen into a decade-long funk despite low inflation and low interest rates, “most people convinced themselves that the Japanese didn’t know what they were doing,” Mr. Blanchard said in an interview.

    In a new paper with two other IMF economists, Giovanni Dell’Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks.

    In particular, the IMF paper suggests shooting for a higher-level inflation in “normal time in order to increase the room for monetary policy to react to such shocks.” Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

    At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further.

  • Obama appoints Janet Yellen to Fed Vice-Chair

    As I wrote in this post from a few weeks ago, I would have preferred Yellen as a replacement for Bernanke as Fed Chair, but I guess vice-chair is better than nothing. It will be interesting to see if she is able to persuade Bernanke and the rest of the Board of Governors to re-calibrate Fed policy in the direction of promoting full employment. The lack of urgency on the jobs issue from the administration so far has been maddening.

    Of course the nightmare scenario is that Yellen has been promoted in order to silence her. From her perch at the San Francisco Fed, she could safely dissent without ruffling too many feathers. I’m not a Fed watcher, but I would guess that the Fed Vice-Chair doesn’t get to publicly disagree with the Fed Chair. Any influence she exerts will have to be behind closed doors.

    • this would merit a new diary

      if you have time to post one. Charles Lemos wrote recently that the Obama administration “can significantly have an imprint on the direction of US monetary policy over the next decade” because of the number of vacancies at the Fed.

      Let’s hope your nightmare scenario doesn’t prove accurate.