Creating Jobs: Oh, It's So Complicated!

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Thursday, 01 September 2011 05:22

The Post notes the division among the members of the Fed's Open Market Committee over the best course to reduce unemployment and maintain price stability. It then tells readers,

"The Fed will always have its critics, internal as well as external, and that is as it should be in a democracy. It would be more honest, though, if purveyors of economic solutions — whether in Washington, on Wall Street or in the media — displayed a little more humility and a little less certitude."

It is worth noting that these lines were written by people who are employed at relatively well-paying jobs. People who are not employed or working at low-paying jobs with little security and few benefits might feel more need for action.

It is remarkable that the relatively well-paid Post editorial writers failed to notice the specifics of the division in views at the Fed. There are 5 Federal Reserve district bank presidents who are voting members of the open market committee. For practical purposes, these bank presidents are appointed by the banks within the district. These 5 bank presidents voted 3 to 2 against the statement committing the Fed to maintaining a near zero interest rate for the next two years.

By contrast, the 5 governors, all of whom are appointed by the President (3 appointed by President Obama, 1 appointed by President Bush and 1 [Chairman Bernanke] appointed by both) and approved by Congress voted unanimously in favor of this statement. This remarkable gap between the views of people appointed by democratically elected officials and the views of people selected by the financial industry should have jumped out at anyone reviewing the minutes and the vote. 

The financial industry tends to be very concerned about inflation, since this erodes the value of its assets. They are less concerned about unemployment, since top executives in the industry can do very well even in a time of high unemployment. Profits for the financial industry hit a record as a share of corporate profits in 2010. On the other hand, Fed governors who are appointed through the political process are likely to be concerned about unemployment, since this jobs are the primary concern for most people.

This break suggests that it is not just confusion that caused the divisions within the Fed, it was fundamental differences in interests. The Post editorial writers should have been able to see this.