No, this one is not at all a joke. Harvard Professor and former AIG director (yes, the one the government bailed out in 2008) Martin Feldstein wants the Fed to stop worrying about unemployment and just focus on inflation. His Wall Street Journal column argues for ending the Fed's dual mandate and instead just having an inflation target.
Before getting to the substance, it is worth a short digression on Feldstein's track record. Feldstein was sitting on AIG's board of directors as the insurer issued hundreds of billions of dollars worth of credit default swaps on mortgage-backed securities at the peak of the housing bubble. Mr. Feldstein apparently saw no problem with this. While the company had to be saved from bankruptcy by a massive government bailout, Feldstein was pocketing well over $100,000 a year for his oversight work as a director.
While Feldstein missed the bubble that sank the economy, he did manage to finger a bubble that didn't exist. Four years ago he wrote a column with former Citigroup honcho (yes, the one the government bailed out in 2008) Robert Rubin, his Democratic counterpart as a purveyor of wisdom from the financial sector. The column urged the Fed to raise interest rates in order to deflate the bubble they saw building in financial markets. (Here is my comment at the time.) Had the Fed taken their advice, the unemployment rate would almost certainly be several percentage points higher today and tens of millions of workers would not have seen the modest real wage gains they've experienced in the last four years.
The fact that someone with a track record as consistently bad as Martin Feldstein can get a column in the country's leading financial paper (he also argued in the 1993 that Clinton's tax increase wouldn't raise any revenue) shows what a great country we have. But let's get to the substance.
Feldstein argues that artificial intelligence and robots will create massive disruptions to the labor market. The displacement from these supply shocks will leave millions unemployed, who Feldstein contends cannot be helped by more expansionary monetary policy. For this reason, the best thing the Fed can do is to maintain a stable inflation rate to provide a more certain investment environment.
First, it is worth noting that Feldstein's concern with a massive wave of displacement from these technologies is 180 degrees at odds with the vast majority of economic projections, including those from agencies like the Congressional Budget Office and the Office of Management and Budget. These projections all show the relatively slow productivity growth of the last thirteen years will persist. Feldstein is instead projecting a huge uptick in the rate of growth.
The second point is there is no obvious reason why, in an economy with strong demand, technology should lead to unemployment. We averaged 3.0 percent annual productivity growth from 1947 to 1973, yet the unemployment rate was relatively low through most of this period and workers secured large wage gains. In a strong labor market, workers are able to secure the benefits of higher productivity in the form of shorter hours and higher pay, however this requires that the Fed pursue a policy that sustains high levels of employment.
The third point is that Feldstein seems to believe that these technologies will primarily displace less-educated workers. (Others say this explicitly.) There is little reason to assume this will be the case. The greater precision of robots is likely to displace surgeons in coming decades. Search technologies should drastically reduce the need for lawyers doing legal research. There are many other areas where technology should lead to the displacement of highly educated workers (journalism is another obvious example).
If we do actually see a new surge in productivity growth, as Feldstein is arguing, then it will be more important than ever to have the Fed committed to sustaining demand so that new jobs get created. That's what the economic logic looks like to me, but hey, I don't have the same sort of track record as Martin Feldstein.