Hicks: Fed might as well throw in the towel on easing

My wife returns from professional dental care meetings to shower our family 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 a suitcase full of ideas.

Among the more tantalizing ideas from a recent 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 not a new sentiment, it is important because Plosser’s research into Federal Reserve policy is as respected as is its new chair, Janet Yellen. Plosser’s 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 few have spoken aloud—the limits to policy in a world where the recession was accompanied by a lasting change to the economy. Let me offer my twist.

The sharp declines in activity in 2008 through 2009 were not simply a recession, but were also an unusual rapid shift in the types of jobs and skills needed to perform them. This affected tens of millions of jobs.

The changes weren’t new, but the bubble years of the mid-1990s through mid-2000s meant many workers didn’t have to adjust to new technologies and skills.

The recession ended this, casting millions of workers into a labor market that 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.

I mean no disrespect to workers who succeeded 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 Humvee across a dark, roadless, desert battlefield, arriving at night within only a few hundred feet of my destination. My acquisition of that skill cost the government tens of thousands of dollars. A $50 GPS is far more effective today.

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 Fed’s policy options cannot help.

Plosser’s argument, then, is that the Fed must end the stimulus soon. This will have some effects, because higher interest rates cannot help but affect overall economic activity; they just aren’t a permanent fix to our problems.•


Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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