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January 12, 2014

The Coming Fed Actions

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. Last weekend, at the Philadelphia meeting of the American Economic Association, Plosser argued that the continued Quantitative Easing 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 the new chair Janet Yellen. Its timing is also important, coming quickly on the heels of the Fed decision in December to reduce stimulus 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 sharp declines in economic activity in 2008 through 2009 were not simply a recession, but also included an unusual rapid shift in the types of jobs and skills needed to perform them. This affected tens of millions of jobs across the nation. The changes weren't new, but the bubble years of the mid ‘90s through mid ‘00s meant that many workers didn't have to make the adjustments to new technologies and skills.

The bubble itself offered a temporary protection for those with outdated skills. The recession ended this, casting millions of workers into a labor market, which now little values these skills. This marked a permanent loss of economic activity that the Federal Reserve 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 map to traverse more than 60 kilometers in a HMMWV across a dark, roadless, desert battlefield, arriving at night within only a few hundred feet from 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 is then that the lasting effect of the great recession cannot be remedied by maintaining low interest rates, and so the Fed must end the stimulus efforts sooner than later. This will no doubt have some effects; because higher interest rates cannot help but affect overall economic activity, they just aren’t a permanent fix to our problems.

Link to this commentary: https://commentaries.cberdata.org/712/the-coming-fed-actions

Tags: economic impact, jobs and employment, people


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Hicks earned doctoral and master’s degrees in economics from the University of Tennessee and a bachelor’s degree in economics from Virginia Military Institute. He has authored two books and more than 60 scholarly works focusing on state and local public policy, including tax and expenditure policy and the impact of Wal-Mart on local economies.

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