One of the main reasons that the labor market recession has lasted so long is that relatively few people in office genuinely seem to want to end it. An important exception to that is Chicago Federal Reserve President Charles Evans who’s becoming increasingly vocal about the need for additional monetary stimulus and delivered an excellent speech on this subject earlier today. His bottom line that “if 5% inflation would have our hair on fire, so should 9% unemployment” is a straightforward reading of the Fed’s statutory mandate but seems all too rare.
He also does an excellent job of tackling the weird Reinhardt/Rogoff-induced sense of malaise that sometimes seems to me to be paralyzing the savvier sections of the capital. Basically, Carmen Reinhardt and Ken Rogoff did an empirical study of past financial crises and found that governments normally do a bad job of responding to them, leading to prolonged recessions. Tons of people seem to have turned that analysis around to reach the conclusion that it’s OK for American policymakers to do a bad job of responding to the financial crisis. Let me quote Evans:
It bears keeping in mind that the Reinhart-Rogoff predictions of a slow recovery are based on historical averages of macroeconomic performances across many different countries at many different times. They highlight a challenge we face today, but from the standpoint of the underlying economic analysis, there is nothing pre-ordained about these outcomes. They are not theoretical predictions—rather, they are reduced form correlations. The economy can perform better than it did in these past episodes if policy responds better than it did in those situations. In my opinion, maintaining the Fed’s focus on both of our dual-mandate responsibilities is a necessary and critical element of an appropriate response to the financial crisis that can produce better economic outcomes.
Imagine a section of highway that’s poorly constructed and where drivers often crash their cars in the fog. Next thing you know, you’re driving on the section of highway in question and a fog hits. You don’t just crash the car and say “well, Reinhardt and Rogoff have shown that fog typically results from car wrecks.” You’re supposed to use your foresight to help you avoid the problems that have been typical in the past. Watch the central banks that are succeeding.