Minneapolis Fed chief mutes argument (and lowers 2011 economic forecast)

Narayana Kocherlakota
Narayana Kocherlakota

Minneapolis Federal Reserve Bank President Narayana Kocherlakota this week came in for some harsh and very visible criticism from Nobel Prize-winning economist Paul Krugman in his New York Times column, and the Fed official seems to be moderating his comments in response.

In a speech earlier this month in Missoula, Mont., Kocherlakota had argued that much of the current high unemployment is structural in nature, resulting from “a mismatch … Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.” (See my summary of that speech here.)

On Sunday, Krugman criticized Kocherlakota and former President Bill Clinton for their descriptions of the current high unemployment levels as a “structural unemployment” problem. In a piece titled “Structure of Excuses,” Krugman charged that “structural unemployment is a fake problem, which mainly serves as an excuse for not pursuing real solutions,” including additional federal stimulus spending.

And here’s where it seems Kocherlakota might be pulling back. Speaking Wednesday to an audience at the European Economics and Financial Centre in London, Kocherlakota drew on much of the speech he had given in Missoula, touching on the same topics — inflation, unemployment, GDP growth and Fed policy choices.

But the London speech dropped any reference to issues of structural unemployment as an explanation for persistent high jobless rates. Instead, Kocherlakota briefly listed statistics on unemployment, job openings, layoffs and labor force participation rates, described the unemployment picture as “deeply troubling” and left it at that.

Paul Krugman
Paul Krugman

Granted, they were two different audiences and talks delivered a few weeks apart. The London speech had an additional lengthy technical discussion of policy actions the Federal Open Market Committee might take to address economic growth. But the disappearance of any reference to structural unemployment was noteworthy, nonetheless.

When asked if Kocherlakota’s comments were modified in response to the Krugman Op-Ed column, Fed spokesperson Patti Lorenzen said, “I couldn’t answer that, and I can tell you he [President Kocherlakota] won’t either.”

Also noteworthy — and generating headlines in financial blogs — was Kocherlakota’s forecast revision for GDP growth nationwide in 2011 — lowering the outlook from 3 percent to 2.5 percent.  The Fed president said his forecast is “distinctly lower” than one issued earlier this month. He also lowered the outlook for the second half of 2010 by 0.1 percentage point to 2.4 percent.

“There is a recovery under way in the United States. But it is a distinctly modest one — and even more modest than I expected at the beginning of this year,” Kocherlakota told the London audience. “In contrast, in my first speech about seven months ago, I predicted that GDP would grow around 3.0 percent per year over 2010 and 2011.”

The Minneapolis Fed’s forecasting model relies on historical data to produce both national and regional economic forecasts, which are used in preparation for FOMC deliberations, according to Fed Regional Economist Toby Madden. As monthly statistics are updated and new data received, the forecasts can change, he said.

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Comments (2)

  1. Submitted by Richard Schulze on 09/30/2010 - 01:13 pm.

    Consider how much of GDP growth was housing-related before the bubble popped. Those are the primary unemployed, and the rest are consequences of that collapse. We could put lots of construction workers back to work repairing our roads and bridges. Check out what the American Society of Civil Engineers has to say about their condition; even allowing for their self-interest, it’s grim.

  2. Submitted by William Pappas on 10/03/2010 - 10:31 am.

    It’s about time someone took the Minneapolis Fed to task for its very neoliberal outlook on economics, fostered by the retired Art Rolnick. The idea that employment opportunities exist but our economy can’t produce qualified applicants is indeed a fantasy born of the ideological dislike of stimulus spending versus the darling of tax cuts for the rich and the abolishment of the corporate income tax. Structural problems with our economy exist but they are rooted in the current political will to cut benefits and social programs that advance the middle class, enabling them to participate more fully in our consumer economy. Serious structural problems, such as the increasing cost of higher education and student loans, health care and retirement combined with falling salaries, will delay the entry into the housing market of young college graduates or force others out. Until the will exists to once again invest in programs that benefit the middle class the economy will continue to flatline, unable to find the ecnomic activity that generates small business gains which traditionally herald a stronger recovery.

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