You can’t blame Janet Yellen entirely for the growing prospect that the Fed will take a powder on Wednesday and opt for the 81st straight month of ZIRP. After all, she’s basically a fuddy duddy school marm caught in a 1970s labor economics time warp – a branch of the “home economics” taught by John Maynard Keynes after he turned protectionist in 1930.
Accordingly, she does apparently believe that the US economy resembles a giant bathtub, and that it is the Fed’s job to see that employment and output rise full to the brim. Nor does that mission take much special doing – at least according to the primitive macroeconomic plumbing theories of Keynes’ disciples like her PhD supervisor, Professor James Tobin of Yale. Just crank the interest rate valve lower until the economic ether thereby released called aggregate demand works its magic.
Indeed, the good professor did help ignite a rip-roaring inflationary boom in one country during the Kennedy-Johnson years. Back then the world economy was still segmented and unmonetized enough to at last partially encompass a closed economy model of state managed pump-priming. That was especially possible because more than a billion potential workers were trapped in the economic Gulag of Mao’s China and the post-Stalinist Soviet bloc.
Never mind that today the US GDP bathtub leaks like a sieve and that massive trade, capital and financial flows transmit economic and financial impulses from around the globe. Accordingly, the marginal price of labor is set in the rice paddies of China, the call centers of Bangalore, the temp agency body shops of America and on the “bid for gigs” sites of the worldwide web.
The Bureau of Labor Statistics, which is apparently the Keynesian chapel where Yellen worships, captures none of this; it ought to be put in the Francis Perkins memorial museum along with souvenirs from the WPA and FDR’s Fair Labor Standards Act of 1938.
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