As astonishment over her congressional testimony has started to fade, Janet Yellen has been focused in my thoughts today. I recalled this post I made correcting the record for something she had said:
I anticipate that the recent jump in the unemployment rate will place some additional downward pressure on growth in labor compensation, which has been quite low, and in core inflation. Although the jump in the unemployment rate probably partly reflects the extension of unemployment insurance coverage, a back-of-the-envelope calculation suggests that the upper bound on this effect is just a few tenths of a percent. I would agree with the Greenbook estimates. We have also examined the possibility that the increase in unemployment reflects a rise in the NAIRU due to sectoral employment shifts out of construction and finance and into other industries. Ned Phelps has argued that the sectoral shift story implies a sizable dispersion of employment growth across industries and states. But we looked at these data and found no significant increase, so I don’t find this Phelps argument particularly convincing. Considering all of these factors, I expect both headline and core PCE price inflation to fall to about 2 percent for 2009 as a whole, and I see the risks to this projection as roughly balanced.
And I wondered if there were any important lessons learned from the crisis because it seems like if I took out the last sentence of the second paragraph, it feels like the same Janet of today. Mentally, block out everything else except for the first sentence and take clue from it. The context is inflation. If in her position, and you are worried about inflation, which she now says she is, what goes hand in hand with reducing it? If one wants to control inflation, the go-to tool is the demand shock.
Of course she wouldn’t say this so directly in public earshot. But everything in her monetary world is about people being employed or not, divorced from supply side and market realities. Too many people have jobs and we just simply cannot have it. Even if it’s only 50/50 odds of producing the desired effect, it’s better to just do it than not, tolerate unemployment (or create it) for a percentage point off of inflation, either for the inflation of 2008 or for the inflation that might have been, but now won’t ever be because of her present diligence.
It really was no help to my mood after her testimony listing to the PIMCO talking head on Bloomberg trying to tie the tight money turmoil to oil. It reminded me of Cheech and Chong riding along in the lowrider mobile filled thickly with doobie smoke…
“Hey, man, the Fed just hiked interest rates and the stock market started crashing. Yeah, man, it must be that oil. Really, man? Yeah, man, it’s so cool those Russians are taking it in those little cutesy heart shorts, man.”
Then I started thinking that this guy should consider himself lucky he made his money while making it was good because he’d be in real trouble if he actually had to work for a living. They say the jobs of the present require highly skilled workers, and I am positive he wouldn’t make the cut. Does he have someone to tie his shoes in the morning or does new “bond king” in waiting have some kind of agenda? I wonder…
PS: In Yellen’s testimony, it struck me that a senator from Indiana would inquire of Janet Yellen why United Technologies would fire all 21,000 of its employees in Indiana, pack up and head to Mexico, implying some kind of corporate greed by saying that those employees produced $6B in earnings but it wasn’t enough.
Yellen, of course, dodged the question as if she has no control over this phenomenon.But in putting some thought to the matter, since it is not cheap to move, there had to be more to the calculus involved. It’s probably the same for other kinds of inversions, but the possibility occurred to me that there might have been some element of the United States not having monetary policy under control involved, and packing up and moving to Mexico to use Pesos, in the case of United Technologies, beats sitting around in the Dollar block waiting to be deflated into bankruptcy. Even with the prospect of dealing with drug lords armed better than the military, it seems like a more certain future. How many banks in Mexico went down in the 2008 crisis?
The Fed is the largest job-killer on the planet.