I really hate having to criticize Janet Yellen given that she’s the one of the least hawkish of flock. But the speech she gave to the Fed’s gathering at Jackson Hole, WY, today is disappointing to say the least as she says this about older workers who got the shaft during the Great Recession and then follows with some astounding statements about IT on the whole:

What is more difficult to determine is whether some portion of the increase in disability rates, retirements, and school enrollments since the Great Recession reflects cyclical forces. While structural factors have clearly and importantly affected each of these three trends, some portion of the decline in labor force participation resulting from these trends could be related to the recession and slow recovery and therefore might reverse in a stronger labor market. Disability applications and educational enrollments typically are affected by cyclical factors, and existing evidence suggests that the elevated levels of both may partly reflect perceptions of poor job prospects. Moreover, the rapid pace of retirements over the past few years might reflect some degree of pull-forward of future retirements in the face of a weak labor market. If so, retirements might contribute less to declining participation in the period ahead than would otherwise be expected based on the aging workforce.

I had to read that paragraph a couple of times for the “pull-forward” phrase to sink in. So you’re over 55, got canned in a persistent demand side recession and couldn’t find another job because there were none. Instead of being among the problem of the long-term unemployed, you’re labeled as a “pull-forward retirement.”

It’s not that I disagree with the statement. I agree with it almost entirely. I’ve written some about involuntary retirement, a label I think is more accurate in describing the problem, and how these people are basically written off in most conversations about the “aging” workforce as If this is something natural.

What I find the most disappointing is that the tone of the speech is on the more pessimistic side of what I was expecting to hear given at least a slight acknowledgement that, in my words, cyclical unemployment has caused quite a lot of permanent damage. This paragraph says so much about these people being gone and not coming back, they will never get back the last 5 years, and she stops very short of the leadership needed to keep it from happening again as she discusses the shape of monetary policy going forward.

So, what is a monetary policymaker to do? Some have argued that, in light of the uncertainties associated with estimating labor market slack, policymakers should focus mainly on inflation developments in determining appropriate policy. To take an extreme case, if labor market slack was the dominant and predictable driver of inflation, we could largely ignore labor market indicators and look instead at the behavior of inflation to determine the extent of slack in the labor market. In present circumstances, with inflation still running below the FOMC’s 2 percent objective, such an approach would suggest that we could maintain policy accommodation until inflation is clearly moving back toward 2 percent, at which point we could also be confident that slack had diminished.

Of course, our task is not nearly so straightforward. Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction. For example, as I discussed earlier, if downward nominal wage rigidities created a stock of pent-up wage deflation during the economic downturn, observed wage and price pressures associated with a given amount of slack or pace of reduction in slack might be unusually low for a time. If so, the first clear signs of inflation pressure could come later than usual in the progression toward maximum employment. As a result, maintaining a high degree of monetary policy accommodation until inflation pressures emerge could, in this case, unduly delay the removal of accommodation, necessitating an abrupt and potentially disruptive tightening of policy later on.

Conversely, profound dislocations in the labor market in recent years–such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment–may cause inflation pressures to arise earlier than usual as the degree of slack in the labor market declines. However, some of the resulting wage and price pressures could subsequently ease as higher real wages draw workers back into the labor force and lower long-term unemployment. As a consequence, tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully and so would not be consistent with the dual mandate.

The 2% marker is supposed to be a long-term objective, meaning that if inflation has been persistently below target for five years, running inflation at 2% for the next five still means the Fed is well behind the curve. And perhaps this is some sort of confirmation bias, but in her contrasting scenario, she spells out what would happen if the Fed tightens too early, appearing to think this is some sort of dilemma. I say why not let it run a little bit hot to ensure the labor market is healed and then gradually tighten, there is more than room to do so. The only reason it would be a hurried tightening is that they can’t breech that arbitrary 2% ceiling even if it means causing more permanent damage – bygones are still bygones.

I am completely perplexed about how someone such as Yellen can say all of the things she has about the very recent history of the labor market without doing a double take on whether the target is the problem when one has to be willing to throw the baby out with the bath water and foist everything that comes with that upon the American economy to defend it. It’s close to being among the most irrational things I’ve read. It’s just wrong and entirely unjustified.

I expected much more than this.

 

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