2: Tax Cut Deal vs. the FOMC Announcement; Defenders of Full Employment, Richard Fisher Edition

1: Contrasting the Tax Cut Deal and the FOMC Announcement

I’m capable of getting nostalgic for things that happened 7 weeks ago. Remember the debate over the tax cut deal? Remember that week with the fighting, the charts, the estimates, the hostage situation, the risks to Social Security, the Bernie Sanders filibuster, Obama blowing up over the public option, the cable news arguments about marginal tax cut rates and investment credits? Putting aside the debate on who got what, liberals got $60 billion in unemployment benefits as well as some other credits that will help with the economic recovery.

Yesterday the Federal Reserve’s Federal Open Market Committee (FOMC) released its first policy statement of the year. I completely forgot about it until now. Ryan Avent covers it here, and the short of it is that they “remains wary about the weakness of the American economy.” I like Avent’s blogging, but he isn’t a substitute for a wide-scale national debate of an important event, and this FOMC statement got less than 1% of the energy or coverage that the tax deal received.

Because here’s the interesting thing: if the report came back that they were optimistic and they were likely to stop QE2 early, and perhaps even raise interest rates earlier than anyone expected, that $60 billion in unemployment benefits would have been for nothing. The Federal Reserve would have immediately cancelled out any potential growth and job creation the economy was getting and negated the meager extra fuel the Democrats were able to get by bribing the richest Americans with tax cuts.

The Federal Reserve is necessary for any type of movement towards getting our economy back to full employment. There’s a robust debate about whether or not it is sufficient, but everyone should agree that it is necessary in so much as they can cancel out what the government does. I think a goal of the progressive movement in 2011 should be to get people as organized and energized about discussing Federal Reserve appointments as we are about the Supreme Court (or at least the Right is about the Supreme Court).   Yglesias is very correct to point out that the failure here by the Obama team is a massive one.

2: Defenders of Full Employment, Richard Fisher Edition

Because you should see who is on the thing.  There’s also an online debate about whether or not the Federal Reserve can deliver full employment without unions and without the government intervening in the labor market (see: Yglesias, Kevin Drum).  Certainly we’ve abandoned government fiscal responses and labor union pressure motivating the ideal of full employment in hopes that monetary policy will alone do this.

So with that said, let’s take a good look at one of the new people who gained a vote at the FOMC this year and who is our replacement for unions in terms of getting us to full employment: president and CEO of the Federal Reserve Bank of Dallas Richard Fisher. Krugman noted that he redefines price stability as “keeping inflation extremely low and stable” and blames health care reform and financial reform as the reason unemployment is current high. Simon van Norden at Worthwhile Canadian Initative (in an amazing critique) found that Fisher thought (my bold):

[in March 2008] the paramount risk to the US economy is expected loose monetary policy. But what about the recession? the dual mandate? financial turmoil? He went on to clearly chart his preferred course (with multiple nautical references) in the same speech:

…We cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored. Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient. To some, this may appear a Hobson’s choice. I don’t see it that way. Our obligation is to prevent inflation in order to sustain long-term employment growth. I believe that the best way to cut through the treacherous economic waves that are upon us and keep our ship steaming forward is to stick to our purpose. [Speech, March 4, 2008]

He could not have been more wrong in 2008.  The graduating class of 2011 will enter a brutal job market that will hurt its ability to be rewarded for its labor, and thus lead a full life, for at least a decade. A note to these graduates: take comfort that you must “endure” this suffering in order to placate invisible bond vigilantes and protect rentier income.

In addition, Dylan Ratigan made two interesting catches from recently released 2005 transcripts of the FOMC and found:

[Fisher] complaining about the enormous quantity of Chinese goods flowing into America….Only, he isn’t complaining that there are too many Chinese imports, he is frustrated there aren’t enough imports. Even though China has built special export-only ports to ship goods out of China, he says, the ports at “Long Beach and Northwest” can’t absorb what China wants to sell us, because of work rules (i.e. unions). This is a huge problem, Fisher continues, because it is blocking his CEO contacts from outsourcing as much work abroad as quickly as possible. They cannot “exploit China” fast enough….

As late as 2005, Richard Fisher was celebrating this trend. In that same meeting where he complained about too few Chinese goods coming into the US, he bragged about the weakness of one of the most significant employers in the United States: “My most delicious irony is the fact that similarly dated Vietnamese debt now trades on a price basis richer, and on a yield basis lower, than that of Ford Motor Company. [Laughter].”

This is the guy whose job it is to bring us to full employment in 2011. And yes, “[Laughter]” is in the transcript.

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5 Responses to 2: Tax Cut Deal vs. the FOMC Announcement; Defenders of Full Employment, Richard Fisher Edition

  1. “$60 billion in unemployment benefits would have been for nothing [with regards to AD policy]”

    I think the hardest thing about understanding monetary policy and aggregate demand policy in general is that this statement is true whatever tone, rosy or dim, the FOMC’s policy statement had. To the extent UI is about insurance and redistribution, then monetary policy has no impact on its effect.

  2. Petey says:

    “Certainly we’ve abandoned government fiscal responses and labor union pressure motivating the ideal of full employment in hopes that monetary policy will alone do this.”

    As usual, it’s worth noting that this selfish and amoral abandonment was a choice by this administration.

    They could’ve enacted some really good stimulus policy out of the 111th Congress if the WH’s Mayberry Machiavellis hadn’t been calling the shots on economic policy.

    Instead, we’re looking at the bulk of a decade with U-6 unemployment in double digits even if growth proceeds under good case scenarios…

  3. You know the problem with these guys is they a) overplay their hands, and b) are on the wrong side of the historical trend.

    Overplay leads to Iceland in all senses of the word.

    16 months and no meaningful improvement — out they all go! That’s where the history part comes in.

    The world is changing under our feet. The ‘growth at all costs’ economy has run its course. The challenge is to invent a non- destructive version which is a task the establishment refuses to consider (or is incapable of considering). The current economy cannot earn a profit when inputs are correctly priced. The establishment is fixated on a particular kind of productivity regime which leaves them behind the curve (and results in high and growing structural unemployment).

    Which leads to the issue of central bank relevance. Assuming the establishment is completely blindered, attempts by any central bank to effect employment are going to be pro- forma. The issue becomes one of expectations. Nobody expects the ECB to effect unemployment in the EU, expect more from the Fed?

    If the establishment is NOT blindered (and thereby cynical) the Fed acknowledges its own irrelevance and is acting as Richard Fisher as seen to do in 2005, helping their ‘friends’ cash out of illiquid positions.

  4. Pingback: FT Alphaville » Further reading

  5. Pingback: FT Alphaville » On not accepting QE3, with Bob the Bear

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