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.