St. Louis Post-Dispatch David Nicklaus column [St. Louis Post-Dispatch]

Nov. 20--The longer the unemployment rate stays at 9 percent, the louder the debate grows over what to do about it.

That's true both in Congress, which has approved only a few small pieces of President Barack Obama's jobs package, and among high-ranking officials of the Federal Reserve.

Charles Evans, the president of the Chicago Federal Reserve Bank, has been arguing lately that the Fed should pay more attention to unemployment. Specifically, he thinks the central bank should pledge to keep short-term interest rates at zero as long as unemployment is above 7 percent and inflation is below 3 percent.

It sounds innocuous enough. The Fed wouldn't change anything it's doing right now; it would merely be more specific about its intentions. The signal would be similar to one the Fed sent this summer, when it promised to keep rates at zero until 2013.

If Evans' suggestion is far from revolutionary, it nevertheless is drawing some sharp criticism from his Fed colleagues.

James Bullard, president of the St. Louis Fed, is among the critics. In a recent speech in Clayton, he didn't mention Evans by name, but he called the unemployment-targeting proposal "potentially a disaster in the making for the U.S. economy."

Bullard showed his audience a chart of European unemployment rates, which stayed high throughout the 1980s and 1990s even during periods of strong economic growth. "You don't want to be tied to a numeric target for unemployment when you have the potential for something like this to happen," he said.

If the Fed established a specific target for unemployment, and unemployment remained higher than the target for a long time, "monetary policy could be pulled off course for a generation," Bullard said.

R.W. Hafer, a professor of economics at Southern Illinois University Edwardsville, says proponents of an unemployment target are essentially arguing for more inflation. "The Fed was engaged in that process in the '60s and '70s, and the outcome was a pretty noticeable increase in the rate of inflation," Hafer said.

Evans' speeches emphasize the Fed's dual mandate, which is the legal requirement for it to pursue both full employment and steady prices, but Evans has expressed a willingness to accept a bit more inflation.

"Given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of polices aimed at lowering unemployment," Evans said last month.

The conventional view within the Fed is that by keeping inflation low and stable, the central bank creates a predictable environment in which businesses will feel confident about hiring. When business is clearly not hiring, though, it's not clear what the Fed should do.

The problem, Bullard says, is that interest rate policy is a blunt instrument. It affects everyone, when the incentives we really need to change are those facing job seekers and potential employers.

The best way to attack unemployment, Bullard argues, is through labor-market-specific policies such as unemployment insurance and job training programs.

That isn't as simple as it sounds. Unemployment insurance is part of society's safety net, but economists say that as it becomes more generous, the unemployment rate goes up. As for job training programs, some research says they're not very effective at getting people re-employed.

Unfortunately, the jobs problem has no easy answer. If there were one, Fed presidents with economics Ph.D.'s wouldn't be arguing about how to put people back to work.

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