More on Yellen and Black Unemployment

In an earlier post, we recounted testimony Janet Yellen, Chair of the Federal Reserve, gave on July 15th before the House Financial Services Committee. In response to a question about Black unemployment, Ms. Yellen stated “there really isn’t anything directly the Federal Reserve can do to affect the structure of unemployment across groups, And unfortunately, it’s long been the case that African-American unemployment rates tend to be higher than those on average in the nation as a whole.” Her testimony on this topic can be viewed at:
http://www.c-span.org/video/?c4544563/yellen-african-american-unemployment

The problem with her analysis is that it is wrong: having limited tools is not the same thing as having no tools.

The Fed Chair incorrectly assessed the situation by ignoring the fact that racial discrimination in employment at the Federal, State and local level is one factor holding Black employment down. (This probably reflects the impact of having no African American representation at the Board level: the President just nominated another white female, insuring there will be no African American representation on the Federal Reserve Board for the foreseeable future.)

Below, a few Q&A's on the issue.

Q. "I think Janet Yellen would like to be able to reduce Black unemployment more. But, she is correct that the Fed has little ability to affect specific groups in the economy in terms of unemployment. More does need to be done - it is a travesty that high unemployment rates for blacks are not addressed - but Congress and the President need to act."

A. It is doubtful the Fed will accurately assess the issue. I am sure if the Chair could wave a wand to bring Black unemployment down she would. That is, if she could take an action that requires minimal effort and risk to deal with a problem that affects "other people" she would (and that's saying something because there are several policymakers and Fed Board members who would not even do that....)  No such option is realistic, however.

Q - Does the Fed have the authority to single out Black unemployment as a separate mandate among it core responsibilities?

A. - Yes. The Fed has direct responsibility for insuring the stability of the financial system, and racial discrimination, by reducing income and spending for a significant portion of the US population, tends to be a market destabilizing factor over the long run. This supports the notion of a targeted effort. The Fed has significantly and positively impacted employment and earnings at selected financial institutions who have been on the receiving end of QE transactions. This is, in essence, a Fed mandated and managed welfare program for large, non-minority firms.

And remember, the Fed was, in part, responsible for the crisis to begin with, resulting in a 54% decline in African American wealth.

Q. What are the "critical infrastructure needs" of the Black community mentioned?

A.  "Gross investment includes what government spends on structures, equipment, and software, such as new highways, schools, and computers.” This is particularly meaningful for Black communities.

Q. Are the Black unemployed qualified and equipped to fill the jobs created by the infrastructure you put forth?

A. To question if "Black unemployed would be equipped to fill the jobs created" is simply more Black inferiority talk, an assumption that Black people have to prove their worth before they can be helped, a requirement not imposed on the majority-owned financial institutions who have, to date, gotten $4.5 trillion in assistance.

It goes without saying that Black unemployment would be reduced with a set of Federal, State and local infrastructure projects designed to significantly improve critical infrastructure assets in Black communities. As one analyst noted,

“..this recession..has been particularly damaging for women and African Americans: the decision by many state and local governments to respond to diminished revenues and budget shortfalls by cutting public-sector jobs. Because women and African Americans have historically been overrepresented in public-sector employment, they have been disproportionately affected by state and local government budget cuts.”

State, local and federal government spending, normally countercyclical, has been purposefully held down and is a drag on the recovery.

Q. Are Hispanic and Latino labor the main source of "non-African American minority" labor?

A.  Well, the person just nominated to be on the Fed is Hispanic, but we refer to the substitution for Black labor of all minority groups. This accelerates when efforts like these are announced.

Q. Do you make the problem worse by creating an effort focused on the Black population?

A.  No. As rising tide does NOT lift all boats if  some boats are anchored down by the weight of racial discrimination. In a modern economy, assisting one group does not disadvantage another. To claim otherwise is selfish, greedy, and unAmerican.

Q. How about the poverty pimps who always get in the way by misappropriating resources designated for Black poverty relief? Won't they get in the way here, too?

A. This is why we suggest the Fed purchase municipal and state securities with a high and positive Black Employment Multiplier (BEM). This multiplier measures the efficiency and effectiveness of a given locality, municipality or State security in helping to lower Black unemployment. While we agree that there is a risk that the poverty pimps of "racial opportunism" would seek to gain, the market based nature of the effort serves to limit this risk.

Q. "The Black Employment Multiplier (BEM) (appears to be) a well crafted social engineering tool of government intervention that has continuously failed as an indicator of positive results for the Black community."

A. In 1989, we created the first consistent methodology for measuring the social impact of banking activities, which we discussed on August 3, 2006 at a seminar sponsored by Fannie Mae and the Federal Reserve: http://www.knowledgeplex.org/showdoc.html?id=188307

We invented the BEM measure as part of the Fully Adjusted Return Methodology and have not utilized it publically before now as a way to evaluate and select investments. This follows recommendations we made repeatedly that the Fed purchase securities with the highest financial and social return:

• We designed the first MBS securities originated by African-American financial institutions. (See: Security Backed Exclusively by Minority Loans, The American Banker Newspaper. Friday, December 2, 1994.)
• We created the first investment tool to deal with the housing foreclosure crisis. http://www.socialfunds.com/news/article.cgi/article682.html
• We also designed the first targeted MBS securities backed by energy efficient home mortgage loans. 

We were told by Fed officials at the time that policy prohibited the Fed from taking an active role in the MBS marketplace, and that the Fed would probably not ever purchase MBS securities. Of course, that policy changed. It can change here, too.

Q. "Not mentioned is chronic undereducation, poor habits, single parent households, the criminal industrial complex perpetuated by the failed Drug War, or a lack of understanding fundamental market principles among the causes of Black unemployment. Nor is America's debt," etc.

A. These issues are irrelevant to the discussion and represent more Black inferiority talk. We do mention the fact that "American Honda Finance Corp, the loan arm for Honda, has agreed to pay $24m to settle claims that it discriminated against African Americans and other minorities based on race.American Honda Finance Corp has received billions in direct and indirect financial support from the Federal Reserve."

Surely the Fed Chair is aware of the fact that American Honda Finance Corp has received millions in indirect financial support from the Federal Reserve via the financial institutions that benefited from QE1 and QE2 since "car loans are the third-largest source of household debt in the US, after mortgages and student loans." If she was awareof this fact, she did not acknowledge it.

This lack of acknowledgement points to the second issue. Without acknowledgement that a problem exists, solution are unlikely to be developed and implemented.

As one of the regulatory agencies that helped cause the crisis, surely the Fed has a responsibility to repair the damage done to specific communities impacted by its lax, TBTF policies.

Thus, we see that the Fed has tools to address this issue. The Fed simply has no desire to address the problem.

Q. What's wrong with Clarence Thomas?

A. Nothing, except competence. Mr. Thomas is one of the least competent Supreme Court Justices ever to sit on the Bench, according to several objective reviews of Supreme Court Justices.

Why Yellen is wrong on Black Employment

We note that "The Federal Reserve Act requires the Federal Reserve Board to submit written reports to Congress containing discussions of 'the conduct of monetary policy and economic developments and prospects for the future.' This report--called the Monetary Policy Report--is submitted semiannually to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services, along with testimony from the Federal Reserve Board Chair."

The current Chairperson of the Federal Reserve, Janet Yellen, testified on July 15th before the House Financial Services Committee. In response to a question about Black unemployment, Ms. Yellen indicated, as one analyst noted, that "the Fed's concerns about inflation limit its ability to address high African-American unemployment."

Ms. Yellen went on to state.. “there really isn’t anything directly the Federal Reserve can do to affect the structure of unemployment across groups, And unfortunately, it’s long been the case that African-American unemployment rates tend to be higher than those on average in the nation as a whole.”

Her testimony on this topic can be viewed at: http://www.c-span.org/video/?c4544563/yellen-african-american-unemployment

The problem with her analysis is that it is wrong. While it is true to say that the Fed has limited tools, that is not the same thing as having no tools. The Fed Chair failed, in two major ways, to accurately assess the issue.

The chart at left shows the change in government expenditures on consumption and investment.

It goes without saying that Black unemployment would be reduced with a set of Federal, State and local infrastructure projects designed to significantly impact critical infrastructure needs in Black communities.

Black unemployment would be lower as long as the desire and intent to utilize Black labor was mandated and actually implemented. One issue keeping Black unemployment at elevated levels has been the substitution of other, non-African American minority labor for Black labor.


The chart at left shows the change in State and local government employment. We know that Black employment is, in general, significantly and positively related to State and local government employment.

The fact is that racial discrimination in employment at the State and local level is one factor holding Black employment down.

So, as we see, it is incorrect to state that "there really isn’t anything directly the Federal Reserve can do to affect the structure of unemployment across groups.."

As the Fed itself noted, "After the conclusion of the large-scale asset purchase program at the end of October 2014..total assets have held steady at around $4.5 trillion. Holdings of U.S. Treasury securities in the System Open Market Account (SOMA) have remained at $2.5 trillion, and holdings of agency debt and agency MBS at $1.8 trillion." The prime beneficiaries of these efforts have been majority-owned financial institutions. This is, in essence, a Fed mandated and managed welfare program for large, non-minority firms.

We note that the Fed has direct responsibility for insuring the stability of the financial system. We also note that discrimination and racism tend to be market destabilizing factors over the long run. We further note that "Car loans are the third-largest source of household debt in the US, after mortgages and student loans." One major provider of car loans, American Honda Finance Corp, the loan arm for Honda, has agreed to pay $24m to settle claims that it discriminated against African Americans and other minorities based on race.

American Honda Finance Corp has received billions in direct and indirect financial support from the Federal Reserve.

http://www.federalreserve.gov/monetarypolicy/mpr_20150715_part2.htm

To implement the Black Unemployment-lowering initiatives outlined above, we suggest the Fed use its huge balance sheet.

The Fed would purchase municipal and state securities with a high and positive Black Employment Multiplier (BEM). This multiplier measures the efficiency and effectiveness of a given municipality or State offering in helping to lower Black unemployment.

Thus, we see that the Fed has tools to address this problem. The Fed simply has no desire to address the problem. This is the impact of having no African American representation at the Board level: there is no one in a position to counter, as a peer, biased analysis like that put forward by the Fed Chair.

Note finally that the Clarence Thomas effect means that having a token Black person on the Board will not be effective. In other words, just any ole minority or Black person won't do.