- Since the financial crisis, liberals have been correct that the proper economic remedy was aggressive monetary and fiscal policy.
- But things are changing. Economists increasingly think the job market is getting tight and that there’s little the Fed can do about long-term unemployment.
- Liberals, who are rightly concerned about the long-term unemployed, don’t buy that the job market is tightening and think the Fed must remain ultra-aggressive.
For the most part, the “left” has been on the correct side of all the big economic policy debates since the economic crisis hit.
Inflation has not been an issue at all, meriting exceptionally aggressive Fed policy.
The public debt has also not been an issue at all, and attempts to cut spending have been completely counterproductive and damaging to the short and long-term health of the economy.
Liberals were on the correct side of these debates. Conservatives were, by and large, not. You can get into debates about other issues (taxation, healthcare policy, trade, etc.) but the two ones above were the real biggies.
But times change, and a gap is starting to grow between the liberal view of things, and how economists are seeing things.
This is most evident in the view of the labour market.
The liberal view is that there’s tons of room for the Fed to be more aggressive in the pursuit of full employment.
Meanwhile, economists are starting to come to the conclusion that the job market is not far from being “tight.” More specifically, the view among more and more economists is that the headline unemployment rate (which is currently at 6.6%) is a fairly accurate gauge of the job market, and that various measures of long-term unemployment (and labour force participation) tell us very little.
The New York Fed recently published a study, for example, that showed that short-term, not long-term unemployment, is the best thing to look at if you want to to predict wage growth. In other words, if you want to know if the job market is tight enough to induce a rise in worker wages, the best input is short-term unemployment. The large numbers of long-term unemployed don’t seem to have a big depressant effect on wages.
Evan Soltas posted this chart yesterday, showing the relationship between the headline unemployment rate (also known as U-3) and the rate at which workers quite their jobs. Workers quitting their jobs at a higher rate is a good sign, since it’s an expression of confidence. When the economy is bad, workers don’t quit their jobs. What the chart shows is that the relationship between unemployment rate and quite-rates has remained steady suggesting that it’s the headline unemployment rate (not long-term unemployment) that best captures the state of the workforce.
Up until recently, the left was very much in step with where the mainstream of economics was (more easing, wherever you can get it).
But daylight between the two is emerging. Economists are increasingly talking about a tightish job market.
As the unemployment rate continues to fall, Fed Chair Janet Yellen is going to face increasing pressure to tighten money before inflation starts to creep up. This would be a tremendous mistake, and the left must mobilize against it.
The view from the left is basically: even if the labour market is getting tight (which they deny), the Fed should press hard on the gas pedal, so that employers start to employ the long-term unemployed.
And that might be the proper path, and if there’s anyone who has the stomach to engage in the strategy, it’s probably Janet Yellen.
Meanwhile, the view of more and more people in the economics-sphere is that the job market is getting tight, and there’s little more the Fed can do.