Classon Avenue, Brooklyn NY – As many of my friends get engaged, finish school, or go legit make major career decisions, our deluge into adulthood is colored by the bleak economic outlook. As chronicled in a recent New York Magazine cover story, Millennials, have a special relationship with the Lesser Depression. Unemployment is highest among Americans between the ages of 16-24. Real wages of college graduates between the ages of 25-34 are down almost 20% since the early 2000’s. The gotcha moment for many of the Dawon’s Creek cohort is the realization that a BA does little to inoculate from the contours of the economy’s armpit. It seems everything we’d been told about merit, education, and hard word was wrong.
Although college graduates still fare better than those without degrees, they are often saddled with student loans. A cursory glance at Occupy Wall Street Tumblr reveals that many of the “99 percent” are overburdened with education-related debt. If subprime lending tanked the economy in 2007, student loans now represent the gathering storm. Default rates have climbed, as graduates are unable to find employment or have settled for work that doesn’t cash in on their diplomas. Unemployed twentysomethings are rooming with their underemployed-under-water-mortgage-having parents. What do you say to a generation that was sold on the notion that educational debt represented a “down payment” on the path to prosperity? (Fun fact of the day: Did you know that student loans are the ONLY type of debt that can be taken from your Social Security check?)
The President, realizing that Republicans intend to offer only a pale full moon, has sought to provide relief through unilateral action. This week Obama announced measures targeting homeowners and students who cannot meet outstanding debts. Such steps are welcomed and will potentially help millions of Americans. Yet since the Presidency is not empowered to take a more robust approach, barring drastic action from Congress, it is unlikely the economy will be revived in the near future.
Recall, that it is in the best interests of Republicans that the economy continues to stall. Their expectation is that voters will blame the President for high levels of unemployment and economic stagnation. So long as they can gum up the works, and not get caught holding the Winterfresh, 2012 is theirs. Unless of course we get some help from the Federal Reserve.
For the uninitiated, the Federal Reserve (“the Fed”) is one of the most powerful actors in the economy. The Fed has two primary responsibilities, together known as the “dual mandate”. The mandate reads: “maintain full employment in the context of price stability”, which is egghead speak for “our responsibility is to keep people working, while making sure shit doesn’t get too expensive.” Has the Fed been doing its job recently? No need to audit Econ 101 to catch the Fed with its pants down.
The Fed has done little to strengthen the labor market because certain members of the Fed fear that resuscitating the economy, might involve—gasp—inflation! Inflation occurs when the price of goods and services increases—think of milk going from $4.00 to $4.05. High levels of inflation are, of course, very bad. Efforts to create full employment can lead to undesirable levels of inflation, thus violating the “price stability” part of the dual mandate. But there is little to no evidence that inflation should be a concern for policy makers at this point. In fact, after its most recent meeting, the Fed stated that it expected inflation to remain “at or below” what it would generally hope for. While announcing that it had no plans to stimulate the economy, the Fed rather plainly stated that it would be years before unemployment reaches levels “consistent with its dual mandate”. In other words, Fed Chairman Ben Bernanke to Millennials: Yea, I know I’m not doing my job, and btw go fuck yourself.
This is the kind of stuff that causes a guy to drink red wine while writing columns about politics in his kitchen. Yet, in this moment of despair, you remember that The Wonder Years is now available on Netflix, original soundtrack in tact, and are thus reminded that in America, anything is possible. If only someone, somewhere was thinking of something that could be done. That someone is economist Scott Sumner. Sumner has been on a two-year crusade to push the Fed to adopt what is known as Nominal Gross Domestic Product (NGDP) targeting. Adopting a NGDP would represent a dramatic change of course for the Fed. NGDP targeting would involve a somewhat higher level of inflation in order to get the economy back in line with its pre-Lesser Depression trajectory. This would spur employment while prices and wages increased at a slightly faster pace than they are today. Once employment returned to normal levels, The Fed would then “tighten” its policies to ensure inflation didn’t become problematic. The buzz around NGDP targeting is spreading faster than a new Dark Knight Rises trailer. (More thorough and wonky explanations of NGDP targeting can be found in the links)
Debt strapped millennials should be very excited about NGDP. Aside from strengthening the labor market, a little inflation would ease the burden of outstanding debt:
The alternative to increasing growth is reducing the outstanding debt… [I]nflation as an undesirable but feasible mechanism for reducing the burden of debt. By inflation I mean a sustained increase in both wages and prices. For example, an inflation rate of 4% would raise the nominal level of wages by 50% over ten years, making debt much less onerous.
How does this work? During periods of inflation, the dollar amount of wages increases relative to the dollar amount of outstanding debts, making it easier to pay down debts. For example, if the of principle a student loan is $5000, and inflation causes the dollar amount in wages to rise, that $5000 has a lighter impact on your paycheck. That is, we could live in a world where the economy stabilizes; unemployment drops, (nominal) wages rise, and debts become more manageable.
This begs the question, what the fuck is The Fed waiting for? Recall, that in his statement, Bernanke said that there were things he could be doing, but had no immediate intention of getting around to. Bernanke then went further by asking for “assistance from some other parts of the government” in reviving the economy. It is difficult to calibrate the level of anger Bernanke’s appeal for Congressional action should evoke. It could be considered a demonstration of a rather curious understanding of American politics on the part of the Chairman. Or worse it could be a display of rank indifference towards the welfare of millions of Americans. Everyone knows that “assistance” from Congress will arrive sometime after rainbow colored unicorns. Bernanke would do better to take the Fed’s dual mandate a bit more seriously. The negligence of the Fed highlights that the single biggest failure of the President Obama’s was reappointing Chairman Bernanke.
Without a significant change of course by the Fed, it is unlikely that major action on the economy will happen until after the election. Should Republicans take control of the Senate and White House, look for things to get a lot worse, as they make further cuts into the public sector. If President Obama is reelected without larger majorities in Congress and a stiffer set of brass, Democrats will only be able to take piecemeal steps. Millennials looking for immediate action on the economy would do well to turn their ire towards The Fed. After all, if the economy doesn’t rebound, the weddings coming up are going to be a lot less awesome.





Writing in today’s Washington Post Steve Pearlstein tells the 