Bloomberg Businessweek - USA (2020-01-27)

◼ ECONOMICS Bloomberg Businessweek January 27, 2020

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sinceevenina dynamic,well-functioninglabor

markettherewillalwaysbesomepeoplewhoare

temporarilyunemployedastheymovebetween

jobs.Whatmonetaryauthoritiesfixateoninstead

isthesweetspotatwhichunemploymentislow

butnotlowenoughtosparkinflation.Yetthislevel

canonlybeextrapolatedfrompastexperience.

TestifyingbeforeCongressinFebruary2018,just

weeksafterbecomingFedchair,JeromePowell

acknowledgedtheinherentlackofprecision,say-

ing:“IfI hadtomakeanestimate,I’dsayit’ssome-

whereinthelow4s,butwhatthatreallymeansis it

couldbe5 andit couldbe3.5.”

Theterm“fullemployment”hadintenselypolit-

icalimplicationsfromitsinceptioninthedepthsof

theGreatDepression.It wasmorethanjusta sin-

glenumberestimatedunderscientificpretenses

bycentralbanktechnocrats.Inthelate1930s,

BritisheconomistJohnMaynardKeynesupended

thethen-prevailingideathatfreemarketswould

automaticallyprovidesufficientjobsforeveryone

whowantedone.WilliamBeveridge,who’soften

describedasthefatheroftheU.K.’smodernwelfare

state,elaboratedonKeynes’sideasina 1944book

titledFullEmploymentina FreeSociety. Itscentral

propositionwasthat“themarketforlaborshould

alwaysbea seller’smarket,”where“peopleactually

feelempoweredtosay,‘Thisjobis crummy—I’m

going to go and get a comparable job right across

the street,’ ” says David Stein, a historian at the

University of California at Los Angeles.

In Beveridge’s conception, the responsibility

for ensuring this blissful state fell not to the pri-

vate sector but to the government. His argument

found a receptive audience among voters in the

U.S., amid widespread fears that the end of World

War II would see a return to Depression-era levels

of unemployment. In the 1944 election, Democrat

Franklin D. Roosevelt and his Republican oppo-

nent, New York Governor Thomas E. Dewey, both

campaigned on assuring postwar full employment.

FDR won in a landslide, and the following

year Democrats in Congress introduced legisla-

tion to solidify that commitment in law. However,

Republicans and Southern Democrats balked

at institutionalizing a role for government as

employer of last resort and pushed for the words

“full employment” to be excised from the bill and

replaced with “maximum employment,” subject to

the “preservation of purchasing power.” And so the

Full Employment Bill of 1945 became merely the

Employment Act of 1946.

The belief that full employment is inimical to

price stability dates to at least the early 20th cen-

tury. But it was Milton Friedman who transformed

anideologylongpromotedbybusiness interests into

economic theory. In 1967 the University of Chicago

professor unveiled his framework for thinking about

the so-called natural rate of unemployment, which

posited that if policymakers used monetary and fis-

cal stimulus to push the unemployment rate below

its natural level, inflation would accelerate with-

out bound. The inflationary decade that followed

cemented Friedman’s influence.

In the mid-1970s, in response to rising jobless-

ness that was especially afflicting minority com-

munities, liberal Democrats—building on the work

of civil rights leaders such as Martin Luther King

Jr., who advocated a job guarantee program—tried

once more to enshrine in law a government com-

mitment to maintain full employment. But econo-

mists, including those in President Jimmy Carter’s

own administration, pushed back, and the effort

was once again defeated. The so-called Humphrey-

Hawkins Full Employment Act that finally emerged

from the process in 1978 did, however, instruct the

Federal Reserve to work with the White House

Q1 1949 Q4 2019 1/1995 12/2019

8%

5

2

20%

10

0

U.S.unemploymentrate,quarterlyaverage

CBOestimateofnaturalrateof

unemployment

◼UnemployedU.S.populationage25-54

◼Notin laborforce,wanta jobnow

◼ Not in labor force, don’t want a job now

The Labor Market’s Mixed Signals

andCongresstoensure“fullemployment”and

“reasonable price stability,” which is how the dual

mandate came into being.

In practice, the Fed has mostly prioritized rea-

sonable price stability over full employment. By

Friedman’s standard, the U.S. economy operated at

full employment two-thirds of the time from the end

of World War II through the 1970s, but only a third

of the time from 1980 to the present, according to

Congressional Budget Office estimates. “They basi-

cally haven’t run the economy at full employment

since they got the mandate,” says Claudia Sahm, an

economist who left the Fed last year.

Today’s Fed leadership came of age during the

so-called Volcker shock of 1980, which saw the

DATA: CONGRESSIONAL BUDGET OFFICE, BUREAU OF LABOR STATISTICS

ILLUSTRATION BY JOSEPH MELHUISH