Against employment targets
This tweet raises an interesting question:
I believe that it’s a big mistake to use monetary policy to target employment (as we saw in the 1960s and 1970s). The counterargument is that Congress gave the Fed a mandate that included “maximum employment” and thus the Fed is sort of forced to set a target for maximum employment. But that Fed mandate does not force the Fed to precisely define maximum employment for the simple reason that the Fed cannot precisely define maximum employment, nor can anyone else. No one knows how many jobs can be created through monetary stimulus without threatening the other part of the dual mandate, which is price stability (defined as 2% inflation, but that’s another issue.)
That doesn’t mean the Fed should ignore the maximum employment mandate, rather the implication is that the Fed needs a model as to how best to address the dual mandate. And one basic model that the Fed has been working with in recent decades is the Natural Rate Hypothesis, which is the idea that you cannot permanently push employment above its natural rate with expansionary monetary and fiscal policies.
Philosophers tell us that the best way to be happy is to directly aim for some goal other than happiness—perhaps devotion to a cause. Similarly, the best way to promote maximum employment is to aim for some other policy target, such as steady growth in NGDP at a rate that is broadly consistent with expectations of the public. Whatever level of employment results from that policy (in the long run) can be inferred to be the “natural rate of employment”. That doesn’t mean that other policy reforms cannot boost employment further, just that you cannot use monetary policy to produce consistently higher employment than what you’d get with a steady rate of NGDP growth of say 4% or 5%.
In my view, the Fed will define “maximum employment” as the actual rate of employment when two things have occurred:
1. NGDP growth has been pretty stable for an extended period.
2. The actual unemployment rate has stopped falling, and has leveled off for a period of years.
As far as I know, that’s never happened in all of US history (but did happen in the UK from 2001-07). If not for Covid, I believe this would have happened here in the early 2020s. Now I wonder if I’ll live long enough to see a “soft landing”, i.e. whether I’ll live long enough to see a sustained period of steady and low unemployment and steady NGDP growth.
PS. Even if the Fed does eventually figure out the definition of maximum employment, it will be a pyrrhic victory, as this elusive figure continually changes over time.