How full employment became Washington's creed

WASHINGTON (NYTIMES) – As United States President-elect Joe Biden prepares to take office this week, his administration and the Federal Reserve are pointed towards a singular economic goal: Get the job market back to where it was before the pandemic hit.

The humming labour backdrop that existed 11 months ago – with 3.5 per cent unemployment, stable or rising workforce participation and steadily climbing wages – turned out to be a recipe for lifting all boats, creating economic opportunities for long-disenfranchised groups and lowering poverty rates. And price gains remained manageable and even a touch on the low side. That contrasts with efforts to push the labour market’s limits in the 1960s, which are widely blamed for laying the groundwork for runaway inflation.

Then the pandemic cut the test run short, and efforts to contain the virus prompted joblessness to skyrocket to levels not seen since the Great Depression. The recovery has since been interrupted by more waves of contagion, keeping millions of workers sidelined and causing job losses to recommence.

Policymakers across government agree that a return to that hot job market should be a central goal, a notable shift from the last economic expansion and one that could help shape the economic rebound.

Mr Biden has made clear that his administration will focus on workers and has chosen top officials with a job market focus. He has tapped Dr Janet Yellen, a labour economist and the former Fed chair, as his Treasury secretary, and Mr Marty Walsh, a former union leader, as his labour secretary.

In the past, lawmakers and Fed officials tended to preach allegiance to full employment – the lowest jobless rate an economy can sustain without stoking high inflation or other instabilities – while pulling back fiscal and monetary support before hitting that target as they worried that a less patient approach would cause price spikes and other problems.

That timidity appears less likely to rear its head this time around.

Mr Biden is set to take office as Democrats control the House and Senate and at a time when many politicians have become less worried about the government taking on debt, thanks to historically low borrowing costs. And the Fed, which has a track record of lifting interest rates as unemployment falls and as Congress spends more than it collects in taxes, has committed to greater patience this time around.

“Economic research confirms that with conditions like the crisis today, especially with such low interest rates, taking immediate action – even with deficit finance – is going to help the economy, long-term and short-term,” Mr Biden said at a news conference on Jan 8, highlighting that quick action would “reduce scarring in the workforce”. Mr Jerome Powell, the Fed chair, said on Thursday that his institution is tightly focused on restoring rock-bottom unemployment rates.

The stage is set for a macroeconomic experiment, one that will test whether big government spending packages and growth-friendly central bank policies can work together to foster a fast rebound that includes a broad swath of Americans without incurring harmful side effects.

“The thing about the Fed is that it really is the tide that lifts all boats,” said Dr Nela Richardson, chief economist at the payroll processor ADP, explaining that the labour-focused central bank can set the groundwork for robust growth. “What fiscal policy can do is target specific communities in ways that the Fed can’t.”

The government has spent readily to shore up the economy in the face of the pandemic, and analysts expect that more help is on the way. The Biden administration has suggested an ambitious US$1.9 trillion (S$2.5 trillion) spending package.

Fed officials are now much more modest about judging whether the economy is at “full employment”. In the wake of the 2008 crisis, they thought that joblessness was testing its healthy limits, but unemployment went on to drop sharply without fuelling runaway price increases.

In August 2020, Mr Powell said that he and his colleagues will now focus on “shortfalls” from full employment, rather than “deviations”. Unless inflation is actually picking up or financial risks loom large, they will view falling unemployment as a welcome development and not a risk to be averted.

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That means interest rates are likely to remain near zero for years. Top Fed officials have also signalled that they expect to continue buying vast sums of government-backed bonds, about US$120 billion per month, for at least months to come.

Fed support could help government spending kick demand into high gear. Households are expected to amass big savings stockpiles as they receive stimulus checks early in 2021, then draw them down as vaccines become widespread and normal economic life resumes. Low rates might make big investments – like houses – more attractive.

Still, some analysts warn that today’s policies could result in future problems, like runaway inflation, financial market risk-taking or a damaging debt overhang.

There are reasons to believe that this time is different. Inflation has been low for decades and remains contained across the world. The links between unemployment and wages, and wages and prices, have been more tenuous than in decades past. From Japan to Europe, the problem of the era is weak price gains that trap economies in cycles of stagnation by eroding room to cut interest rates during times of trouble, not excessively fast inflation.

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And economists increasingly say that, while there may be costs from long periods of growth-friendly fiscal and monetary policy, there are also costs from being too cautious. Tapping the brakes on a labour market expansion earlier than is needed can leave workers who would have gotten a boost from a strong job market on the sidelines.

The period before the pandemic showed just what an excessively cautious policy setting risks missing. By 2020, Black and Hispanic unemployment had dropped to record lows. Participation for prime-age workers, which was expected to remain permanently depressed, had actually picked up somewhat. Wages were climbing fastest for the lowest earners.

It is not clear whether 3.5 per cent unemployment will be the exact level America will achieve again. What is clear is that many policymakers want to test what the economy is capable of, rather than guessing at a magic figure in advance.

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