Fed QE policy has limits
My wife is a dental care professional, so her return from professional meetings means that our family is showered with all kinds of useful samples of new dental implements. When I come back from something like the recent American Economic Association meeting, I bring only a suitcase full of ideas.
Among the more tantalizing of the recent ideas from an economic conference is a restatement of the Federal Reserve stimulus debate by economist Charles Plosser, the president of the Philadelphia Fed. At the recent meeting of the American Economic Association in Philadelphia, Plosser argued that the continued quantitative easing (QE) should be quickly reduced. While this is not a new sentiment, it is important because Plosser's research into Federal Reserve policy is as respected as that of Janet Yellen, the new Fed chair. Its timing is also important, coming quickly on the heels of the Fed decision in December to reduce stimulus by so little as to be unnoticeable.
The most important part of Plosser's argument is something that few have spoken aloud, the limits to policy in a world where the recession was accompanied by a lasting change to the U.S. economy. Let me offer my twist on this argument.
The bubble itself offered temporary protection for those with outdated skills. The recession ended this, casting millions of workers into a labor market that little values these skills. This marked a permanent loss of economic activity that the Fed is helpless to remedy with all the stimulus in the world.
In talking about changing jobs, I mean no disrespect to workers who may have been successful and productive in their old jobs. For example, just over two decades ago, I used only a compass and a map to traverse more than 60 kilometers on a dark, roadless, desert battlefield, arriving at night within a few hundred feet of my destination. My acquisition of that skill cost the U.S. government tens of thousands of training dollars. A $50 GPS is far more effective today, rendering that skill valueless.
For workers with good but no longer meaningful skills, the road to a good economic future is less well-marked than my desert battlefield. What is certain, though, is that the policy options the Fed possesses cannot help.
Plosser's argument, then, is that the lasting effect of the Great Recession cannot be remedied by maintaining low interest rates, so the Federal Reserve must end the stimulus efforts sooner rather than later. This will no doubt have some effects; higher interest rates cannot help but affect overall economic activity. They just aren't a permanent fix for our problems.
Michael Hicks is the director of the Center for Business and Economic Research and a professor of economics in the Miller College of Business at Ball State University. firstname.lastname@example.org