“Multiculturalism”

First Plosser (Philadelphia Fed) at the WSJ:

Monetary policy has little ability to help the U.S. jobs market in current economic circumstances, a top Federal Reserve official said Thursday.

“I am really doubtful that monetary policy is a tool that is going to help us very much” to help spur demand and improve hiring in an economy where many households and companies are still looking to cut borrowing levels, rather than to increase them, Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview with Dow Jones Newswires and The Wall Street Journal.

Plosser said he sees a high bar to new Fed action. “Broadly speaking, there are two things the Fed should respond to,” he said. “If there were some kind of financial crisis, like Europe, it would be appropriate for us to step in” and be the lender of last resort. Also, if deflationary fears “became a real threat again, that would be a justification for the Fed to step in again.”

“I don’t see either one of those happening,” Plosser said.

 Then a speech by Charles Evans of the Chicago Fed

There are other policies that could give clearer communications of our policy conditionality with respect to observable data. For example, I have previously discussed how state-contingent, price-level targeting would work in this regard. Another possibility might be to target the level of nominal GDP, with the goal of bringing it back to the growth trend that existed before the recession. I think these kinds of policies are worth contemplating—they may provide useful monetary policy guidance during extraordinary circumstances such as we find ourselves in today.

The trigger policy I noted above and level-targeting policies may result in inflation running at rates that would make us uncomfortable during normal times. But we should not be afraid of such temporarily higher inflation results today. As I noted earlier, Ken Rogoff (1985) has written that in normal times, we may want conservative central bankers as institutional offsets to what would otherwise be inflationary biases in the monetary policy process. But these are not usual times—we are in the aftermath of a financial crisis with stubborn debt overhangs that are weighing on activity. And as Rogoff himself wrote in a recent piece in the Financial Times, higher inflation could aid the deleveraging process. To quote him: ‘Any inflation above 2 per cent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.

Can you really interpret data in such a widely and divergent way?

The focus is on employment, and according to the WSJ:

President Obama will use his speech tonight before a joint session of Congress to marshal a sense of urgency behind his jobs agenda and to try to open a new phase in the fight over proposals to fix the economy.

Unfortunately, no matter what he says or how well received his proposals are, prospects for significant change in the employment situation are weak, unless the Fed in the upcoming FOMC meeting of September 21-22 adopts policies in line with those suggested by Charles Evans, i.e. basically measures to foster spending.

Contrary to Plosser´s arguments, the figures below indicate that low spending (aggregate demand) dominates “structural” views in explaining the dearth of employment.

The first figure correlates proportional changes in employment (NFP) with the output gap (an average of different gap estimates). Why, oh why, did employment drop by more than twice the drop observed in the 1981 recession given the comparable size of the output gaps?

The answer “spits in your face” when you look at the next graph, which shows the plunge in nominal spending growth after mid 2008, something that was last seen in 1938! Since that didn´t happen in 1981 the drop in employment was much smaller and short lived.

So please Mr. Plosser, get real!