The Fed Doesn’t Care Much About Unemployment, But It Could Do Much Worse

Paul Krugman writes that wages are stagnant because unemployment is high and the owners of capital/corporations like that just fine.  Their profits are up 60% above where they were before the recession began whereas compensation of employees is only up about 11% and much of that is likely compensation for the high-income employees.

Krugman writes that wages are not rising

Because [workers] have so little bargaining power. Leave or lose your job, and the chances of getting another comparable job, or any job at all, are definitely not good. And workers know it: quit rates, the percentage of workers voluntarily leaving jobs, remain far below pre-crisis levels, and very very far below what they were in the true boom economy of the late 90s:

employment is, in many though not all cases, a power relationship. In good economic times, or where workers’ position is protected by legal restraints and/or strong unions, that relationship may be relatively symmetric. In times like these, it’s hugely asymmetric: employers and employees alike know that workers are easy to replace, lost jobs very hard to replace.

And may I suggest that employers, although they’ll never say so in public, like this situation? That is, there’s a significant upside to them from the still-weak economy. I don’t think I’d go so far as to say that there’s a deliberate effort to keep the economy weak; but corporate America certainly isn’t feeling much pain, and the plight of workers is actually a plus from their point of view.

The economy has been working great for corporate America, but lousy for the median worker and so the Fed recently announced that it is tapering because the Fed feels like it is already nearing its final objective.  As I wrote earlier, the Fed has never really cared about unemployment.  It mostly cares about the banks.  The Economist magazine recently celebrated the Fed’s 100th birthday and pointed out that the Fed was not even given its official “dual mandate” to fight unemployment until 1977. Before that, the Fed’s mandate had always been to help the banks although there has always been a tension between the Fed’s public servant role and its role to serve the banks.  The Economist explains the history:

Congress set up a commission led by Nelson Aldrich, a Republican senator, which consulted bankers and studied the central banks of Britain, Germany and France. It recommended setting up a largely private association of banks that would issue its own currency to members facing runs. But many Democrats feared that a central bank run by bankers would keep too tight a grip on the supply of money, starving businesses and farmers of credit. They thought the government would be more liberal if it were in charge.

Campaigning for president in 1912, Wilson, a Democrat, had attacked the Aldrich plan as a sop to “money power”. In office, he directed Congress to rewrite the plan to reduce the influence of bankers at the 12 regional banks that make up the Fed network, and to add a board appointed by the president to oversee it… Bankers hated this “socialistic” scheme. Wilson stood firm, and signed the Fed into existence on December 23rd 1913

…[A hundred years later] Many Republicans pine for the days when Washington held less sway at the Fed and gold held more.  One Republican-sponsored bill would strip the Fed of any responsibility for full employment, limit its ability to buy bonds and give more say to the heads of its 12 regional banks.

They are swimming against the tide of history. A century ago Wilson sought a central bank that would support the entire economy, not just Wall Street. With each new crisis his successors have concluded that that requires a bigger, burlier Fed.