Construction workers
experienced the
highest percentage
point increase in longterm unemployment
during the recession.
Savannah River Site
42? Chapter 1
n
has given higher priority to low inflation rather than maximum employment. According to
Daniel L. Thornton, current vice president of the Federal Reserve Bank of St. Louis, despite
its dual mandate, the Fed has been “cautious not to state its policy objectives in terms of
either full employment or the unemployment rate, preferring instead to state its mandate in terms of price stability
“Elected officials—
and economic growth [emphasis Thornton].”21 The problem
and the public—have
is economic growth can take place without full employment
to make clear that
or rising wages. And in fact, with the exception of the late
monetary policy should
1990s, most workers in the United States have experienced
put more emphasis
“economic growth” that way, and as a result, have not shared
on full employment
in the benefits of that growth.
than it has in recent
“The most important lesson from the 1990s,” wrote Jared
decades.”
Bernstein and Dean Baker in their book The Benefits of Full
Employment: When Markets
Work for People, “is that the economy can sustain a 4
percent unemployment rate without accelerating inflation.”22 As the unemployment rate fell, Federal Reserve
Chairman Alan Greenspan decided not to raise
interest rates as Fed watchers might have expected.
Not everyone on the Federal Reserve’s Open Market
Committee (FOMC), the body within the Fed responsible for setting interest rates, agreed with his decision.
There were external pressures that Greenspan had to
consider. For one thing, a wave of financial crises in
Asia, Latin America, and Russia made it prudent to
hold down U.S. interest rates to try to stabilize global
capital markets.23 In 2001, the U.S. boom ended when
the stock market bubble that was fueling much of the
growth of the late 1990s burst. A stock bubble is not
a sustainable model for achieving full employment—so
the late 1990s economic situation could not have lasted
forever. But the point here is not how we got to low
unemployment—it’s showing that low unemployment
does not automatically lead to soaring inflation.
No one benefits when inflation is out of control.
But some groups benefit much more than others from
low inflation. The banking sector is a prime example—
because when inflation rises, the loans held by banks
are less valuable than they were before. The Federal
Reserve is composed mainly of representatives of the
banking sector, so it makes sense for them to view the
economy through an anti-inflation lens.
The Fed is an independent government agency, so
the president and Congress have limited influence over
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