Chronic. Notwithstanding noisy controversies over the scale of the Biden plan, a consensus is now emerging in the United States: the best strategy to erase the after-effects of the health crisis and alleviate the country’s heavy social problems is to place the economy at high pressure.
The idea is not new. It dates back to Arthur Okun (1928-1980), a Keynesian economist, former adviser to Lyndon Johnson. But it was mentioned by Janet Yellen, shortly before her appointment as Secretary of the Treasury, and visibly inspires Jerome Powell, the chairman of the Federal Reserve (Fed).
What is it about ? Since a famous lecture by Milton Friedman in 1968, macroeconomic policies have generally revolved around the idea that there is an equilibrium unemployment rate below which one can only fall at the cost of increasing inflation. . At the approach of this threshold, it is necessary to slow down the growth to avoid overheating. This is what we have done regularly since the 1980s, to the point of leading to too low inflation which we cannot get rid of.
Okun’s thesis, formulated in 1973, is on the contrary that it is necessary to test the limits to the fall of unemployment in order to try to make the economy function in a regime of scarcity of labor resources. This requires a little more efforts to recruit and train companies, but brings back to employment those who are furthest from it: long-term unemployed, people who have fallen into inactivity, low-skilled employees, minorities. . If successful, the benefit is twofold: a higher production potential (from 2 to 3 points for each point of decline in unemployment, according to Okun) and a significant improvement in the situation of the most disadvantaged.
All-round expansion
Never completely forgotten on the other side of the Atlantic, the idea is once again in vogue. In August 2020, the Fed has revised its monetary strategy. It now aims to minimize the employment deficit compared to the maximum achievable. This formulation means that the inflationary risks associated with too high a level of employment are considered less serious than those induced by too low a level of employment. And Jerome Powell, in text explanation that he gave on the same day, underlines the benefits that a tight labor market brings to “Low income communities”, especially to ethnic minorities.
In early 2020, before the shock of Covid-19, these benefits were visible. While the unemployment rate for blacks and non-graduates was, in 2009, five points higher than average unemployment, the gap was only two and a half points at the start of 2020. At the same time, participation rates were increasing and wages at the bottom of the ladder grew significantly faster than average. Donald Trump’s all-out expansion had produced the effects Okun announced.
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