The Fed, economists, and African American #unemployment | Blog#42

Precious little is written anymore about economic policy and Black unemployment. Here are two brand new related posts by Jared Bernstein. My own commentary follows, at the end.


Paul K, the Fed, and asymmetric risk | Jared Bernstein | On the Economy

July 17, 2015

Ever since Fed officials started talking about raising rates, I and others have raised the spectre of asymmetric risk: the risk that a forthcoming rate hike will lead to slower growth is greater than the risk of faster inflation, and the former would be much more damaging to American households than the latter.

Paul K put this all very well in an interview the other day:

If the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.

[See my recent piece on the racial implications of these risks.]

It’s not obvious that the FOMC (the committee that sets rates) is necessarily going to be wrong, though I suspect Paul’s right, in that I don’t see pressures from nascent wage or price growth waiting pounce around the next corner…I still see considerable slack, especially in paychecks.

Those who want to argue that the Fed may actually be timing this right are making a preemptive case, but given the asymmetries, they need MUCH more in the way of data to make a persuasive case.

If it were me, I wouldn’t be talking about raising yet, but I do think there’s one reason for doing so: there’s another recession out there somewhere and the Fed, worried about hitting the zero lower bound again, wants the fed funds rate to be on a perch high enough such that they have room to come down without hitting zero.

This is especially important if you believe, as I do, that an austerity-smitten Congress will not move fast enough with counter-cyclical fiscal policy.

If that’s truly their motivation–and again, I wouldn’t go there but I don’t think it’s crazy to do so–then the thing to do is to keep the rate path very shallow at first. The expectation is for the first rate hike to be 25 basis points (0.25%), which meets this criterion.

Read the rest of this article on Paul K, the Fed, and asymmetric risk | Jared Bernstein | On the Economy


The Fed and African-American Unemployment

July 16th, 2015 at 11:42 am

Fed Chair Janet Yellen has to engage in a pretty serious balancing act when she speaks publically. She doesn’t want to shock the markets (unless there’s a good reason to do so), and she’s under pressure from hawks and doves to raise and not raise rates, respectively. Meanwhile, in her heart and brain she’s a deeply nerdly and insightful macroeconomist, so she’s also trying to explain the economy, often to people who don’t listen that well. FWIW, I think she does an admirable job juggling all of that.

But everyone under such scrutiny will on occasion say things the wrong way, and I thought she did so yesterday in an exchange with a few members of the House during testimony. She was asked about the extent to which the Fed could make a difference in “the fact that minority communities still face unacceptable high rates of unemployment.”

Her response (beginning with her characteristic “so”):

“So, there really isn’t anything directly that the Federal Reserve can do to affect the structure of unemployment across groups, and unfortunately, it’s long been the case that African-American unemployment rates tend to be higher than those of on average among — in the nation as a whole. It reflects a number of different sources of disadvantage that are operative there.”

What’s missing here—though it was probably implicit in Yellen’s thinking—is the critical observation that black unemployment tends to be twice that of the overall rate, and more than twice the white rate. Moreover, this level difference translates into change differences such that a one percentage point decline in overall unemployment often leads to a two point decline for blacks. See here for more details, e.g., “black unemployment has averaged almost twice that of overall unemployment since the monthly data begin in 1972 (average: 1.9, with standard deviation of 0.15, so not a ton of variation around that mean).”

In that sense, the Fed has the potential to make a huge structural difference in the economic lives of blacks and other minorities by heavily weighting the full employment part of the their mandate relative to the inflation part, especially since there’s still considerable slack in the job market, with lower-wage, minority workers facing the brunt of it, and—importantly—little evidence of inflationary pressure (if anything, the Fed has missed their inflation target on the low side for a few years running now).

“So,” as Chair Yellen might say, it would have been useful to acknowledge this structural relationship and the importance to black workers of getting the “weights” right at this point, emphasizing the critical role of the Fed in holding off on tightening too soon such that the recovery can reach those who still haven’t been lifted by it.

Chair Yellen well knows this 2:1 problem, and I take her comments to mean that there’s not much the Fed can do to change it, though, again, she needed to say that the Fed can tap it to the great benefit of un- and underemployed minorities. However, economist Bill Spriggs, who knows a lot about this, argues something that is true and important in this space—I know this because I’ve seen it with my own eyes, both in the data and in the anecdotes: at full employment, employers cannot afford to discriminate against minorities the same way they can in slack markets.

And what Bill will tell you is that this phenomenon has the potential to reduce that 2:1 ratio, which would be a tremendously beneficial structural advance.

This post reprinted with the permission of Jared Bernstein


I’ve written a lot about Black unemployment and linked to a lot of sources in my writings over this past year. While there is nothing fundamental to disagree with in the second post, I would be loathe to rely solely on full employment to redress the catastrophic situation that has been Black unemployment in the post-Great Recession economy, nor would I advocate it. While all boats need to be lifted, without a doubt, there is also no doubt in my mind that truth, reconciliation, and reparations must be a part of the process of lifting. This nation has a responsibility to own up to and redress by way of general improvement of the national lot cannot be it. This is something that economists must spell out specifically in their analyses, and something which the presidential candidates must be held to in their campaigns.

 Additional related readings:

MLK warned us about inequality back in the 60’s:

In her Huffington Post article, Avis Jones-DeWeever describes the effect of the Great Recession on Black women:

“As was detailed in the recently released report,“The State of Black Women in America, 2015″, Black women have uniquely suffered throughout the entire recovery period. In fact, in the initial years of the economy’s bounce back, Black women were routinely pushed out of jobs as others made their way back into the nation’s economy. The tendency was so great, that more Black women lost jobs in the first two years of the recovery, than was the case during the entire Great Recession itself.”

 From my in-depth analysis of Hillary Clinton’s economic speech:

Black youth unemployment, which Clinton did briefly mention, is higher than the imprecise “quarter of young Black men” figure she quoted. Bernie Sanders has been speaking out on Black unemployment at all of his events and quoting the EPI’s figure of 51% unemployment among young Black men. That figure corresponds to the U6 unemployment number published by the Bureau of Labor statistics that includes those who are actively looking for work, or are underemployed, or discouraged but still looking, and is restricted to high school graduates.

Other related essays: