Yellen’s Second Rookie Mistake

As I argued yesterday, Fed Chair Janet Yellen made her first rookie mistake during her first press conference on March 19 when she defined the “considerable time” mentioned in the latest FOMC statement to mean “something on the order of around six months or that type of thing.” That was widely interpreted as suggesting that the Fed might start raising the federal funds rate six months after QE was terminated, which is widely expected to happen by the end of this year.

She seemed to back away from that prediction in her extraordinarily impassioned and personal speech on Monday in Chicago, when she said that the Fed remains committed “to do what is necessary to help our nation recover from the Great Recession.” In her speech, she briefly described the struggle of three workers in the Windy City--Dorine Poole, Jermaine Brownlee, and Vicki Lira--in the labor market, implying that she intends to maintain ultra-easy monetary policy until they and people like them have good jobs

That was her second rookie mistake. On April Fools’ Day, Jon Hilsenrath reported in the WSJ:

One person cited as an example of the hurdles faced by the long-term unemployed had a two-decade-old theft conviction. Another mentioned as an example of someone whose wages have dropped since the recession had a past drug conviction. Academic research suggests people with criminal backgrounds face unique obstacles to employment.

Sadly, this is no laughing matter. I’ve heard from a few CEOs that they would like to hire more workers, but they are shocked that even if candidates have the right skills, quite a few don’t pass their drug tests. I’m shocked that a “Fed spokeswoman said Tuesday that Ms. Yellen knew of the people's criminal backgrounds and that they were ‘very forthright’ about it in conversations with the chairwoman before the speech. In her remarks she said they exemplified the trends she was discussing, such as downward pressure on wages or the challenge of finding a job for the long-term unemployed."

Wait a minute: What can ultra-easy monetary policy do to help people with criminal convictions and drug problems get a good job? Nothing, of course. Perhaps, the Fed should commission a survey company to determine how many of the long-term unemployed have these issues. Furthermore, how many of those who have dropped out of the labor force have these issues and obviously prefer to receive government benefits than continue to hunt unsuccessfully for a job given their flaws?

The survey results should show that the vast majority of the unemployed and labor force dropouts have clean records and don’t abuse drugs. Yellen’s idea of humanizing the problem of the unemployed is a good one, but it should be based on statistically valid samples rather than three people.

(Based on an excerpt from YRI Morning Briefing)