In Confidential Memo, Treasury Secretary Janet Yellen Celebrated Unemployment as a "Worker-Discipline Device"
Yellen wanted this to be the best of all possible worlds, but the best world she could conceive of was terrible. Jon Schwarz January 24 2023,
The memo is titled "Job Insecurity, the Natural Rate of Unemployment, and the Phillips Curve." Barker learned of it from references in the books "Maestro" by Bob Woodward and "Empathy Economics" by Owen Ullmann. Greenspan distributed the memo to the entire Federal Open Market Committee, or FOMC — the group that decides interest rates — and it worked. As Ullmann puts it, "Yellen rescued Greenspan from his tight spot."
Here's the context in which Yellen was writing.
By mid-1996, unemployment had fallen to 5.3 percent. To understand the significance of this, it's necessary to understand the standard economics model at the Fed (and the other centers of U.S. powers). There is, they believe, an inescapable trade-off between unemployment and inflation: If unemployment gets low, workers across the economy will have the bargaining power to bid up their wages, which will cause unstoppable inflation, which a few steps later will cause the rise of another Hitler. (Germany's hyperinflation during the 1920s is generally believed to be one reason the country was open to extreme leadership.) You might think it would be nice for everyone to have jobs and good pay, but that just shows you are naïve and/or a Nazi.
Therefore, as previous Fed Chair William McChesney Martin said in 1955, the job of the Federal Reserve is to be "the chaperone who has ordered the punch bowl removed just when the party was really warming up." They can't let unemployment get too low, or the party will get out of hand.
...members of the FOMC were "prodding Greenspan to raise interest rates right away." But Greenspan was resisting this; no one knew for sure where the NAIRU was..... Greenspan's rationale was not that higher inflation was OK. Rather, as he eventually explained, "greater worker insecurity" had made possible a "healthy economic performance" with both low inflation and lower unemployment. This increased worker insecurity, he believed, could be measured by surveys finding that in 1991, in the middle of a recession, 25 percent of workers agreed with the statement, "I am frequently concerned about being laid off" — yet five years later, with far lower unemployment, 46 percent did.
Yellen's memo was an attempt to provide intellectual support for Greenspan's belief that increased worker insecurity could coexist with low unemployment. She writes in the memo that "unemployment serves as a worker-discipline device."
In her view of how economics works, the insecurity that working people hate is positive for everyone, including them, because this is the best we can do without provoking catastrophe. But is she right?....
The Yellen memo is available at https://ourtime.substack.com/api/v1/file/ca14e08f-387e-4425-ac23-ab343c846be4.pdf
Note that employed workers can feel less secure even at lower rates of unemployment. jz
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