Now that we’ve determined that the economy is destined for a decade or more of depressed growth with no hope, it’s perhaps a small comfort that one important policymaker actually views this as a huge problem which he could play a role in solving. Charles Evans of the Chicago Federal Reserve released a paper yesterday spelling out why high unemployment is a huge failure of Fed policymakers.
In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.
The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.
That this is a refreshing change of pace is truly an indictment of Fed biases. 5% inflation would inspire comparisons to Zimbabwe in this country. 9% unemployment elicits a yawn. That’s ridiculous, and Evans is right to point that out.
He also makes the greatest rebuttal I’ve seen to the Rogoff-Reinhart idea that financial crises automatically lead to a long period of recovery. Basically, he says this is a chicken-or-the-egg fallacy: