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A Sensible and Articulate Fed Chair?

12:00 AM, Feb 15, 2014 • By IRWIN M. STELZER
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These negative bits of news prompted the nonpartisan Congressional Budget Office (CBO) to downgrade its intermediate-term growth forecast. Yellen, however, remains unperturbed, at least so far. She and her colleagues “anticipate that economic activity and employment will expand at a moderate pace this year and next. … Recent volatility in global markets … do[es] not pose a substantial risk to the US economic outlook.” My own guess is that when next they meet Yellen & Co. will find that the economy is indeed recovering, but that the labor market is not responding to that recovery as positively as the chairman would wish.

Economists are debating just how much of the decline in employment and increase in retreat to the couch and the dole—the impolite way of saying the fall in the labor force participation rate—is cyclical, how much is structural, and how much is due to misbegotten policy initiatives. A close reading of Yellen's testimony suggests that although she recognizes the effect of demographic factors such as an increase in retirements, she believes that a faster growing economy would solve much of the unemployment problem. So, unlike some of her colleagues on the monetary policy committee, and emboldened by a low (below 2 percent) inflation rate, she believes the Fed should continue to attempt to stimulate growth in order to reduce unemployment, which I believe she sees as largely, although not entirely, cyclical in nature.  

Other equally respectable economists argue that Fed-induced more rapid growth—if indeed such a speed-up is in the Fed’s power—will do little to give the unemployed the skills and incentive they need to return to full-time employment. And then there are those who believe that even if Fed policies could stimulate economic growth, the bank can do little to speed up hiring significantly. They cite a recent CBO report that Obamacare, by substituting subsidies for a job as a condition for obtaining affordable health insurance, will destroy the equivalent of 2.5 million jobs and reduce the economy’s long-term growth rate. And add that hiring is restrained by new safety regulations, refusal to permit construction of an oil pipeline from Canada, efforts to close down the coal industry, and a perverse system that causes unemployed workers taking a job to lose almost as much in benefits and taxes as they gain in wages. The list of job-killing policies goes on and on.

If Yellen attempts to overcome these difficulties by running the printing presses ever faster, as her concern for the unemployed might tempt her to do, she will make her predecessor seem a reluctant money-creator indeed.

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