April 06, 2015
Robert Samuelson comes down largely in the right place in arguing that the Fed should err on the side of raising employment in a context where we don’t know how far the unemployment rate can fall before triggering inflationary pressures. However, his warning that bad things happen if the Fed gets too carried away pushing high employment is misplaced.
First it is worth reminding everyone that the economics profession was far more confident (with far more evidence) back in the 1990s that the unemployment rate could not get much below 6.0 percent without leading to accelerating inflation. The profession was completely wrong in that belief as Alan Greenspan was able to prove by letting the unemployment rate fall to 4.0 percent as a year-round average for 2000 (without accelerating inflation).
The stories that the quest for full employment leads to bad things needs important qualifications. The main bad things in the 1970s were the OPEC price increases that quadrupled the price of oil in 1973-1974 and again in 1978-1980. These price increases would have led to enormous economic disruption even if the Fed had not been trying to sustain a high employment economy.
The other two bad stories, the stock bubble in the late 1990s and the housing bubble in the last decade both stemmed from an incredible failure of oversight by the Fed and other regulators. Both bubbles were easily seen by anyone with open eyes, and the recessions that would be caused by their collapse was 100 percent predictable.
The issue here is simply finding competent people to serve at the Fed and the relevant regulatory agencies. There has been much written about the skills shortage in the United States, but it should be possible to train enough people with the necessary skills to fill the small number of positions in question.
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