Can Consuming More Save the Economy?
Recently, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, spoke in Michigan about the capacity of the Federal Reserve Bank to improve unemployment. In this speech, he seems to be reassuring us that monetary policy can improve employment opportunities by increasing our confidence in monetary policy, which will increase the goods and services consumed and increase the number of people employed.
To begin, he argues that while the unemployment rate has declined, a better picture of the number of people are out of work is the employment-to-population ratio.
Here, I’ve plotted the fraction of the population aged 25 to 54 who have a job. This ratio has improved somewhat more from its low point, but also remains lower than at any time between 1986 and 2007.
He proposes that unemployment can be viewed as the persistence of excess labor capacity, that this is a waste, and that changing the demand for goods can be achieved without increasing inflation.
These low levels of inflation tell us that monetary policy can be useful in increasing the rate of improvement in the labor market. Here’s what I mean. At a basic level, monetary stimulus increases the demand for goods among households and firms. This higher demand for goods tends to push upward on both prices and employment. Hence, the downside with using monetary policy to stimulate employment is that, when employment is near its maximum level, further stimulus can lead to unduly high inflation. But the data show …low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market.
Here’s how this works:
If households expect their incomes to be low in the future, they will save more and spend less today. If businesses expect low future demand for their products, they will invest less today and hire fewer people today.
This has me thinking. If we tell people that consuming less makes their life better (and I do), are we hurting the economy?
What do you think?