One has to be crazy to disagree with Brad DeLong. Then, I must be crazy. He said…
“After being wrong for eight straight years, critics of expansionary macro policies in a high-slack low-inflation economy–” Link
It is true that if we look across America, we will see lots of slack and underemployment. Labor force participation is low. Labor hours are at the same level as 15 years ago. (link) Part-time work is higher than in the past.
So why do I disagree with Brad?
Monetary policy is coordinated with the hope that the high-slack will eventually be utilized. In the words of my daughter, “Not gonna happen”. Much of the labor force is simply not going to be needed for the equilibrium economy. Much of labor has been cut out (marginalized) from the equilibrium economy.
The reason is growing inequality…
more concentrated wealth and income = more concentrated consumption demand = more concentrated production
We need fewer labor hours to serve those with the concentrated wealth. The equilibrium level of labor is lower. So we will now always see slack and more underemployment, because the labor force is being concentrated due to income inequality.
The hope of low interest rates is for lower-level businesses to hire the marginalized labor and tighten the labor market so that inflation will return. But the larger marginalized labor force sitting outside the equilibrium economy helps keep wages down. So inflation will stay weak. The low Fed rate is in a delusional attempt. The Fed rate will stay low for a long time until it recognizes that a significant portion of the high-slack is simply gone causing inflation to remain weak.
The Two Groups within Slack
When you look at the high-slack, a relatively smaller portion of it currently will be utilized to bring the economy into an “equilibrium” state of full-employment. The slack that we see is comprised of two groups.
- Those who will be utilized.
- Those who will not be utilized… the marginalized.
The “true slack” only corresponds to the first group. It is an error to put both groups into the potential slack to be utilized, because as the second group grows relative to the first, you drive down the Fed rate unwisely… unless you see institutions and policies reversing inequality. But inequality in the US is not reversing.
It is like expecting 100 people to come to a party, so you make enough food for 100 people. But then, really only 50 people have any chance of getting to the party. It was an inefficient error expecting 100 people. Too much food will be prepared. Too many people will be hired to prepare the food. Yet, businesses are smart. They know to hire enough labor to prepare food for only 50 people. That is what the “true demand” is.
Brad DeLong should know that inequality marginalizes portions of the labor force. He works in an organization that deals with inequality. And he sponsored a forum on inequality with Oscar Landerretche (economist from Chile who speaks against inequality) Youtube video link. In the video link Oscar Landerretche seeks to articulate his direct experience and deep insights of inequality.
Inequality produces higher levels of underemployment within the effective demand limits. I wonder if Brad DeLong has any measure of an effective demand limit upon an economy as Keynes tried to describe it. (link)
As the Fed rate rises, the marginalized workers will become more visible as to what they really are… marginalized. The marginalized workers really are unusable, unprofitable and unneeded slack. “True” slack in the economy is actually low. The unemployment rate would most likely rise as the Fed rate normalizes trimming out the weakly-incorporated marginalized.
At some point though, the Fed rate will have to let go of these marginalized workers as dead weight on the equilibrium economy so that it can normalize… Otherwise a way has to be found to reverse the trend of inequality.