Back in 2003, Jared Bernstein and Dean Baker published a book called The Benefits of Full Employment that I really think is one of the great underrated public policy books of our time. They are out this week with a sequel called Getting Back to Full Employment that’s also great.
The best part of the new book is largely an updating of the old one, so if you haven’t read either, I would start with the new book and go back to the old one if you want more backfill. The point in both cases is to take a look at the myths and realities of the 1990s economy. They show that the full employment era of the late-1990s really delivered on the promise of equitable and broadly shared growth. It is true that there was a stock-market bubble, but it is also true that most people didn’t own much in the way of stock and nonetheless shared in prosperity. Wages rose for working people. And in some ways even more incredibly, jobs became available for people who weren’t previously working. With wages on the rise, employers were suddenly willing to invest in training or in taking risks on the “unemployable.”
And they show that while of course the economy is a complicated place, this happy era of full employment was largely driven by a single factor—as the unemployment rate hit about 6 percent, conventional wisdom starting braying about the need for tighter money to head off incipient inflation, and Alan Greenspan ignored the conventional wisdom. Some other good things were happening in American public policy at the time, but none of them would have produced this wage growth and growth in job availability if Greenspan had deliberately kept unemployment high as an anti-inflation tactic.
This makes it a little disappointing that when they get to their prescriptions for bringing us back to the nirvana of full employment, the Federal Reserve falls a bit out of focus.
Their main prescriptions for obtaining full employment are currency depreciation to boost net exports and taking advantage of low borrowing costs to engage in fiscal stimulus. The former is pretty clearly a monetary operation. And Bernstein and Baker even say that pursuing their favored course would be slightly inflationary, it’s just that the slightly inflationary consequences would be a price well worth paying for the benefits of full employment. But if you can assume a central bank willing to undertake a slightly inflationary monetary policy for the sake of obtaining full employment, then the exchange rate impacts become just one of a suite of ways in which monetary stimulus can create jobs. On the stimulus front, it’s a back-door issue. For fiscal policy to work, you have to assume that creating jobs and closing the output gap won’t simply lead the Fed to implement its “exit strategy” quicker and slow things back down.
Neither of these prescriptions are wrong, nor are the monetary assumptions behind them crazy, but I think it’s important to confront the Federal Reserve’s role head-on, as the Fed is the institution with primary responsibility for full employment. The Fed “moves last,” reacting to anything Congress does on the budget or trade fronts. That quibble aside, these are two excellent books. The rhetoric of job creation and good jobs plays a huge role in American politics, but the specific concept of full employment and the important distributive consequences of the rigor with which it’s pursued don’t play nearly as big a role as their should in progressive advocacy. Willingness to risk moderate amounts of inflation for the sake of working-class job and income growth is a crucial prerequisite for broad-based prosperity, but few people in politics talk about it at all.