The Kocherlakota Line

A bunch of interesting ideas in today’s David Brooks piece but his invocation of Narayana Kocherlakota’s “let’s do nothing” analysis does an unusually good job of highlighting why we shouldn’t listen to Narayana Kocherlakota:

Manufacturing firms can’t find skilled machinists. Narayana Kocherlakota of the Minneapolis Federal Reserve Bank calculates that if we had a normal match between the skills workers possess and the skills employers require, then the unemployment rate would be 6.5 percent, not 9.6 percent.

Now here’s the thing. If the unemployment rate were 6.5 percent, we’d be in a serious labor market recession:

Now I remember that recession we had about ten years ago. People recognized that it was hardly the worst recession in American history, but also that it was a recession. The recession was bad. Policymakers were upset about it. The Federal Reserve took action to turn it around. And according to one of the Fed’s leading hawks analysis we have an equally bad demand-side problem right now. The obvious upshot of Kocherlakota’s own analysis is that we should have expansionary monetary policy to drive the unemployment rate down a percentage point or two. Maybe the “structural” issues he blames mean we’ll crap out at 6.5 or 7 percent rather than getting all the way back to the 4–5 percent range. But that would be a huge improvement. So why wait?