Is Economy Closer To Max Employment?

Minneapolis Federal Reserve Bank President Narayana Kocherlakota is an inflation hawk, who thinks that the US economy is close to maximum employment.

Kocherlakota said that, for him, the inflation rate is key to determining how close the Fed is to the maximum achievable level of employment or the minimum achievable level of unemployment. And the signals are not good, he suggested.

“Inflation was distinctly higher in 2011 than in 2010 and continues to run above the FOMC’s target of 2%,” he noted. “Even core measures of inflation, which strip out energy goods and services, and food, went up notably.”

“I see these changes as a signal that our country’s current labor market performance is much closer to ‘maximum employment,’ given the tools available to the FOMC, than the post-World War II U.S. data alone would suggest,” he said.

He thinks there is less slack in the labor market potentially resulting in more inflation.

He said the maximum employment level the Fed can expect to attain through monetary stimulus may well have been reduced (or the unemployment rate increased) because of a “considerable deterioration” in labor market efficiency.

Citing the increased difficulty firms are having filling job openings in the face of reduced labor force participation, Kocherlakota said some of the high unemployment may be “persistent,” not “reversible.” If that is the case, he suggested, there is less justification for further monetary accommodation.

Sounds to me that he is making a case for structural problems like David Brooks,

The diverse people in this camp — and I’m one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. […]

There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows.

Then there are the structural issues surrounding the decline in human capital. […] Unemployment is high, but companies still have trouble finding skilled workers.

Paul Krugman counters this with data and charts.

You can try to refine this stuff by disaggregating, but on first pass the signature of a structural problem just isn’t there. (And trust me, a closer look doesn’t do much better).

So who you gonna believe. Kocherlakota is a powerful voice within Federal Reserve even though his views are in minority. Last year, he voted twice against the monetary easing. David Brooks’ views seem to be ideologically driven and are consistent with many right-wing conservatives. Paul Krugman is a Nobel laureate who believes in Keynesian solution to the current economic problems.

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