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

 

Israel’s Demolition Of Palestinian Homes

Makarim Wibisono, Special Rapporteur on the situation of human rights in the Palestinian territories. UN Photo/Violaine Martin More>>

ALSO:

  • Palestinian Centre For Human Rights - Israeli Settlers Continue Their Attacks against Palestinians
  • Tribespeople Call On WWF To Stop Funding Abuse

    This Baka man from Ndongo village reported that he was severely beaten by anti-poaching squads on two occasions. His neighbors have appealed to WWF to stop funding such abuses. More>>

    Ebola: UN Crisis Response Mission Opens New Office In Mali

    Workers build an enclosure at the Mayagba Ebola community care centre construction site in Bombali District, which is among the areas worst affected by the disease in Sierra Leone. Photo: UNICEF/John James More>>

    ALSO:

    UNESCO Chief Denounces Murder Of Somali Radio Journalist

    Director-General of the UN Educational, Scientific and Cultural Organization (UNESCO), Irina Bokova. UN Photo/Devra Berkowitz More>>

    Palestinian Refugees From Syria Face Worsening Situation

    Palestinian women at a UNRWA distribution centre in the Jaramana refugee camp, Damascus, Syria. Photo: UNRWA/Carole Alfarah More>>

    ALSO:

    Greece Risks Prolonged Social Crisis

    Greece’s severe financial crisis has bred social unrest and intolerance of the nearly one million irregular migrants living in the country (October 2012). Photo: IRIN/Kristy Siegfried More>>

    Madagascar: Warning Of ‘rapid’ Spread Of Plague In Capital

    Ny Hantra Andriatsifasoa survived the bubonic plague after being infected in Madagascar in 2011. Photo: IRIN/Tiana Randriaharimalala More>>

    New Bird Flu Strain In Europe Threatens Poultry Sector

    24 November 2014 – The United Nations Food and Agriculture Organization ( FAO ) today warned that a new bird flu strain detected in Europe poses a significant threat to the poultry sector, especially in low-resourced countries situated along ... More>>


    Get More From Scoop

     
     
     
     
     
    World
    Search Scoop  
     
     
    Powered by Vodafone
    NZ independent news