Why “Full” Employment is an Empty Promise

By Karen Shaw Petrou

In her speech on September 26, FRB Gov. Brainard deploys a lot of data to raise, but then duck, what I think is the most critical question about post-crisis monetary policy:  Is U.S. employment really “full” enough to justify wider wealth inequality that is in part the Fed’s fault?  Chair Yellen and others defend quantitative easing (QE) and ultra-low rates on grounds that U.S. “full” employment will eventually be matched by growth, consumption, and resilient, robust recovery.

There are a lot of problems with this line of reasoning, most notably the fact that wealth accumulation is cumulative absent confiscatory fiscal policy.  As a result, QE’s clear role making the richest American’s still richer – as noted in a previous blog post and examined in more depth – will unquestionably make it harder for any of those now finally entering the labor force to use new-found income for long-term economic equality. 

What Brainard Says

The most important aspect of Brainard’s speech is her effort to disaggregate full employment to see for whom the cup is half-empty or even dry.  In all of their defenses of post-crisis policy, Yellen and Bernanke point to traditional employment data, which indeed show significant improvement since 2008 and, now, employment at or even below the 5% level long considered the unemployment floor.  But, as Brainard says, “To the extent that disparities in income and wealth across race, ethnicity, gender, or geography reflect such disparities in opportunity, families and small businesses from the disadvantaged groups will then underinvest in education or business endeavors, and potential growth will fall short of the levels it might otherwise attain.”

How far short?  Brainard also discusses new Fed data here that show U.S. income and wealth inequality is at “historically-high levels.”  Brainard does not discuss how the huge gap in asset valuation spurred by QE created a wide gap long before employment picked up.  She does, though, rightly say that the wealthy generally spend less than lower-income individuals as wealth rises, meaning that worsening inequality dampens spending and is a significant drag on growth. 

Brainard also sheds new, troubling light on racial and ethnic labor-force participation:  “unemployment rates ranged from 3.9 percent for whites to 4 percent for Asians, 5.2 percent for Hispanics, and 7.7 percent for African Americans.”  You might feel better since she also says that these disparities are better than they were at the worst of the recession, but read on:

“…[T]he average income for white families in 2015 was about $123,000 per year, compared with $54,000 for black families and $57,000 for Hispanic families.  Disparities in wealth … are even larger: Average wealth holdings for white families in 2016 were about $933,000, compared with $191,000 for Hispanic families and $138,000 for black families.”

What the Fed Should Do

Our previous blog post shows how dangerous it is to consider overall net worth when assessing who wins and loses under current U.S. financial policy, and the same holds true for aggregate credit availability.  The Fed all too often resorts to aggregate data or – still more beloved by macroeconomists – the “representative-agent” model, to defend itself.  Brainard’s disaggregated data are often to be found in Fed databases, but her effort to pull them out and then emphasize their policy impact is an important step forward to better Fed monetary and regulatory policy.

What should this better policy entail?  First, we need a look below the top-line data to see if structural flaws in income and wealth distribution have changed the way the U.S. economy generates consumption, employment, and sustainable, stable growth.  Second, the Fed needs to understand that monetary policy not only does not act in the vacuum created by data- and model-driven policy, but also interacts in complex and critical ways with the other strand in U.S. financial policy:  all of the rules that change the way money intermediates across the financial system and who gets most of it.  More on this can be found here, and future posts will dig deeper into this critical issue.