The news cycle is fast, but political change is slow. Consequently, a president often faces the problem of how to create the appearance of action on a problem without actually doing anything. Hence such gambits as the idea of a White House “jobs summit” gathering together business and union figures, thought leaders, etc. It’s a way of showing that the president is concerned about the lousy labor market situation—that he hasn’t gotten so carried away with health-care reform, the Copenhagen summit, his imminent Nobel Peace Prize, etc. that he’s forgotten about the suffering taking place all across America. Obviously, though, White House jobs summits don’t create jobs.
The summit did set the stage for some decent ideas outlined by the president at speech yesterday including "additional resources, in areas like advanced manufacturing of wind turbines and solar panels" but the speech was heavy on tax subsidies to expanding small businesses—something that will only be useful if incomes are rising fast enough for business to have more customers, and they're not.
What’s not as well understood is that job creation isn’t primarily the job of the White House at all—it’s the job of the Federal Reserve system, especially its Open Market Committee, and, most of all, its chairman, Ben Bernanke.
Job creation is primarily the job of the Fed in two ways, neither of which are widely understood. The first: Creating jobs is part of the Fed’s explicit legal mandate. Many central banks are charged exclusively with maintaining price stability, but America’s central bank is supposed to pursue a dual mandate of price stability and the maximum feasible level of stable employment. In normal times, the Fed achieves this goal by moving interest rates around to try to achieve an implicit target of about 2 percent inflation. Crucially, in normal times it’s not only the Fed’s job to control the level of jobs, but the Fed’s decisions essentially trump those of the elected officials the public is more likely to hold responsible. Indeed, “normal” spikes in unemployment associated with “normal” recessions are deliberately caused by Fed policy. With inflation out of control, the Fed raises interest rates to spark a slowdown in economic activity and a weakening of the job market. That causes consumers to pull back and workers to moderate their wage demands, bringing inflation down.
This means that if Congress and the president want to boost employment, but the Fed doesn’t, the Fed almost always wins. If unemployment is rising because the Fed wants it to rise, then anything elected officials do to bring it down can and will be countered by additional Fed action.
• CEOs on what they told Obama about jobs Today, of course, we’re not in a “normal” recession. Instead of being caused by Fed policy, the downturn was driven by a collapse in home values and an associated plummet in demand, credit availability, and the soundness of banks. What’s more, the drop was so severe that the Fed swiftly exhausted its main conventional lever and brought interest rates down to essentially zero. That led, in the winter of 2008-2009, to extraordinary measures. On the fiscal policy side, Congress enacted the American Recovery and Reinvestment Act to stimulate the economy. And on the monetary policy side, the Fed engaged in temporary purchases of a wide array of monetary instruments, seeking to bring down long-term interest rates on mortgages and other aspects of credit. These emergency measures prevented the economy from entering a depression-like spiral from which there could be no return. But even though a moderate level of economic growth has returned and the situation is now improving, a year later the labor-market situation is very bleak.
The unemployment rate has risen sky-high—over 10 percent. And with more than 100,000 new people entering the labor market every month, it will take a sustained period of rapid growth to get the unemployment rate back down to an acceptable level.
But the political situation has reached a point of paralysis. Pivotal members of Congress—the House Blue Dogs, the two moderate Senate Republicans, and several centrist Senate Democrats—have become convinced that the country’s debt level is too high to enact more stimulus. And the Fed has stopped talking about things it could do to boost growth and started talking about things it can do to nip inflation in the bud. Which is nice, but according to the Fed’s own analysis high levels of unemployment are overwhelmingly likely to persist for years, whereas inflation is not an imminent threat.
The jobs summit Obama needs to have is a huddle with his advisers to figure out if there’s some plausible way to withdraw Bernanke’s renomination.
What’s more, as Berkeley economist Brad DeLong points out, the belief that additional fiscal policy is unwise and the belief that additional monetary policy is unwise are based on inconsistent theories. If “the economy is so awash in liquidity that the Federal Reserve cannot do much to boost spending” then there’s no problem with bigger deficits since they won’t raise interest rates and crowd out private spending. Alternatively “additional government spending will crowd out investment as businesses scramble for liquidity and interest rates rise—in which case the economy is not awash in liquidity, and quantitative easing by the Federal Reserve could do a lot right now to boost spending and employment.” Indeed, Bernanke’s former aide Joe Gagnon has developed a plan to do just that. And in remarks about Japan just a few years back, Bernanke seemed to have a clear picture of appropriate measures—allow above-target inflation for a few years until the price level returns to the long-term trend.
DeLong suggests that the jobs summit we need is a meeting between the Fed and centrist members of Congress in which they try to figure out which situation we’re in. It’s a cute conceit, but Bernanke already addressed the contradictions in his Senate testimony, saying clearly that he favors neither additional stimulus spending nor additional monetary easing. Instead, he just wants the country to groan through several more years of elevated unemployment. This is a huge problem and, frankly, a bigger deal than the transparency issues that activists have been raising of late. Arguably, then, the jobs summit Obama needs to have is a huddle with his advisers to figure out if there’s some plausible way to withdraw Bernanke’s renomination and instead put forward a candidate committed to steering the economy back to growth and full employment.
Matthew Yglesias is a fellow at the Center for American Progress Action Fund. He is the author of Heads in the Sand: How the Republicans Screw Up Foreign Policy and Foreign Policy Screws Up the Democrats.