World Video | Defence | Foreign Affairs | Natural Events | Trade | NZ in World News | NZ National News Video | NZ Regional News | Search

 


Encouraging Economic Leadership

Encouraging Economic Leadership
By William E. Spriggs

Last week, Janet Yellen made her second major speech as chair of the Federal Reserve Bank. Again, her talk as chair is fresh air compared with what is typically heard from Fed chairs. During her first speech in April in Chicago, she actually called out the names of specific unemployed workers-putting a human face on the real effects of Fed policy.

The Federal Reserve is an odd body. Its Board of Governors is nominated by the president and confirmed by the Senate. There are seven members of the board, and every two years, a new 14-year term will begin for a slot on the board. So, in theory, a president would appoint only four members, although board members rarely finish their terms and presidents normally appoint more. The chair and vice chair of the board are chosen by the president and confirmed by the Senate, from among the board members. Their terms of four years do allow more direction from the president.

The Board of Governors, the president of the New York Federal Reserve Regional Bank and four of the remaining 11 presidents of the regional federal reserve banks (who rotate their one-year membership) form the policy-making body that sets U.S. monetary policy-the Open Market Committee (FOMC). That committee sets interest rates for the United States, determining how easy it will be for banks to extend credit and businesses and consumers to borrow to invest in the economy or buy homes or cars-expanding the economy and creating jobs.

The five members of the FOMC who are regional bank presidents are chosen by their regional bank's board of directors, the majority of whom are elected by the commercial banks in that region, with approval from the Fed Board of Governors.

So, for such a powerful policy-making body, this clearly is a design giving more weight to America's financial elite. Though the operating tenet of U.S. monetary policy set by the Humphrey-Hawkins Full Employment Act is to promote full employment consistent with price stability, because banks loan money, they are clearly more nervous about inflation than unemployment. Inflation lowers the value of dollars, helping those who borrow and get to repay loans with dollars of smaller value. And workers, of course, are far more concerned with unemployment than are bankers.

For too long, the Fed has kept Wall Street happy by assuring everyone that inflation would remain under control, not unemployment. But that means keeping a tight rein on the economy, resulting in long periods of high unemployment. Weak labor markets break down the efficiency of labor markets. First, the bargaining power of employers is obviously higher when unemployment is high and there are lines of potential hires to choose from. Depressed wages weaken the signals that rising wages send of skill shortages that would encourage people to get training for occupations in demand. Second, many job openings are filled by word-of-mouth networks among friends, co-workers and neighbors. High levels of unemployment, like fallen telephone wires, break down the flow of information on jobs in the networks, making it more difficult for firms and workers to find matches of skills and wages-especially those who are high school educated.

In Yellen's New York talk, she emphasized the Fed would remain committed to moving toward full employment, warning that may be at least two years away. And, most importantly, she said that rather than a single target-like the unemployment rate-the FOMC would consider a range of information on the labor market.

Predictably, inflation hawks in the financial world don't like that message. They instead warn that if the economy overheats, it will cause the Fed to take "costly" actions to undo that. But, that is an odd reaction. The Congressional Budget Office estimates our unemployed resources will cost the economy more than $1 trillion compared with producing at our nation's potential this year. And that is five years into this "recovery." Given the unprecedented efforts of the Fed to move the economy forward, the lesson of this downturn is that the Fed should seriously doubt its ability to get America back to full employment if it takes actions that slow the economy. What could be more costly?

ENDS

© Scoop Media

 
 
 
 
 
World Headlines

 


Ebola Cases No Longer Rising In Guinea And Liberia

In Conakry, Guinea, a mobilizer teaches children about proper handwashing techniques, which help prevent the spread of diseases, including Ebola. Photo: UNICEF/Timothy La Rose More>>

ALSO:

UN: Alleged Mass Rape In North Darfur

UNAMID commanders from Rwanda and Ethiopia exhange duties in Tabit, North Darfur, to escort a convoy of World Food Programme (WFP) trucks travelling from El Fasher to Shangil Tobaya. Photo: UNAMID/Albert González Farran More>>

Illegal Fishermen Encroach On World’s Most Isolated Tribe

Due to their isolation the Sentinelese of India's Andaman Islands are the most vulnerable society on the planet. They face increasing threats from illegal fishermen who are targeting their waters. More>>

World War: Nearly 1,000 Dead Amid Shaky Ukraine Ceasefire

In latest report, UN rights office says nearly 1,000 dead amid shaky Ukraine ceasefire More>>

ALSO:


Palestinian Activists Cross Apartheid Wall

Friday morning around 50 Palestinian and international activists used makeshift bridges to cross the Apartheid wall between Qalandiya and Northern Jerusalem. This non-violent direct action was in response to the restrictions Israel had placed on Palestinian ... More>>

Police And Crime: FBI Warns Ferguson Decision ‘Will Likely’ Lead To Violence

As the nation waits to hear whether a Missouri police officer will face charges for killing unarmed teenager Michael Brown in Ferguson , Mo., the FBI is warning law enforcement agencies across the country that the decision “will likely” lead ... More>>

UK Local Council Boycotts Israeli Squatter Products

A British local council has voted to boycott products made in Jewish squatter colonies in the Israeli-occupied Palestinian West Bank, one of the first such moves by an elected body in the UK. More>>

Massive Illegal Forest Clearance Threatens Uncontacted Tribe

Brazilian rancher Marcelo Bastos Ferraz has rejected the Ayoreo's plea to stop destroying the forest inhabited by their uncontacted relatives . © OPIT More>>


Get More From Scoop

 
 
 
 
 
World
Search Scoop  
 
 
Powered by Vodafone
NZ independent news