Chicago fed


Ready for the big job speech? Ezra Klein thinks it already happened, and it came from Charles Evans of the Chicago Fed. It is good, and since it comes not from the White House but from an official of the rhetorically moderate Federal Reserve, there’s none of that "win the future" filler:

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.

The gist of the speech is: we have to pull two levers, and we are pulling on the wrong one very hard. So what’s the problem? Emphasis mine:

Without a compelling explanation for the hypothesis that the productive capability of the U.S. has been diminished, I think the evidence favors the belief that aggregate demand is simply much too low today. After all, today there are roughly 14 million unemployed Americans. Only a few years ago, there were only about half that many. It is hard to believe that an additional 7 million Americans have suddenly lost the necessary skills to work in today’s economy, and I have not seen any evidence supporting such a dramatic and rapid loss of skills.

And what can the Fed do?

By now, the third obstacle is quite well-known: the federal funds rate in the U.S. is currently constrained by the zero lower bound on interest rates. Given the economic scenario and inflation outlook I have discussed, were it possible, I would favor cutting the federal funds rate by several percentage points. But since the federal funds rate is already near zero now, that’s not an option.

In part: we are trying our darndest to keep you people from saving money (right now my bank offers six-month CDs that are, oh, a slightly better investment than my savings account, about a tenth of the rate I could get on those a few years ago, if not less), and yet you persist.

In fairness to Evans, he concedes that the massive household leveraging that was one element of the financial crisis might be a problem, and even for those of us who didn’t or were too young to go into epic debt, it might have spooked us a bit:

The household balance sheet is in worse condition than at any other point in history since the Great Depression. From 2001 to 2007, debt for U.S. households increased to $14 trillion from $7 trillion, and the ratio of household debt to gross domestic product was higher in 2007 than at any time since 1929 (and we know how that turned out).

That’s from a June piece by Amir Sufi of the U. of C.’s Booth school. Here’s what Mark Thoma wrote in January about "balance sheet recessions":

This is one of the main reasons why recovery from these “balance sheet recessions” is notoriously slow. As households rebuild their balance sheets, resources are directed away from consumption, and the reduction in aggregate demand is a drag on the economy. It takes a long time for households to recover what is lost, and the recovery will be slow so long as this rebuilding process continues. Fiscal policy attempts to restore the lost aggregate demand, and that is important, but it does very little to directly address the household balance sheet issue.

I am not an economist, but even from my own experience with a relative paucity of debt (I only did three years at a private college, and had Pell Grants and subsidized Stafford Loans beyond generous financial aid), I think the fear—caution is probably a better word—is a further drag.

For instance, I’m at the tail end of the generation that was old enough to have close relatives who lived through the Depression. And despite the FDIC and Social Security and Medicare, all of which were intended in part just to ensure that average Americans would never be completely wiped out as long as they were relatively cautious, people who came of age in that era were left with the fear. When my grandparents moved out of their home, we found cash money squirreled away in nooks and crannies throughout the basement. When my grandfather died, he had little bits and pieces of savings in multiple banks; it took my mother months to track it all down.

It’s not just a matter of rationally deleveraging, which is actually going swimmingly. Joe Wiesenthal writes:

This chart from CFR sums it up pretty nicely. For the first time ever, total household debt has shrunk, even as the economy has notionally "recovered."

Even if it were just flat, that would make this recession wildly abnormal, and as you can see it’s actually going down.

It is, to borrow a friend’s phrase, Hangover Sunday. In which you sit around staring out the window and drinking V-8 and telling yourself, "no way am I ever doing that again."

So: the government wants us to spend money. Businesses, obviously, want us to spend money. We’re saying sorry, we’re broke, you first. Well, some of us are; others are telling the government that it should be deleveraging just as much as the rest of us are. It’s a consumerist staring contest.

And so that’s what we have to look forward to tonight: whether Uncle Sam will blink or roll his eyes.

A month after his inauguration, Obama outlined for a joint session of Congress “an agenda that begins with jobs.” Eight months later, the unemployment rate had climbed to a peak of 10.2 percent, more than two percentage points higher than when he spoke.

Then: football! Being a competition of rational actors, it will be a relief.


Photograph: juggernautco (CC by 2.0)