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Sunday, November 16, 2014

Maybe Janet Yellen Should Meet Next with Bankruptcy Lawyers Whose Business Has Dropped Off

Yesterday the New York Times ran a story about a meeting Janet Yellen, Stanley Fischer and some other  Fed colleagues took the day before with about 30 people who aren't making as much money as they would like.  The meeting was organized by an advocacy group based in Brooklyn and the reporter chose to focus on one attendee, a photographer resident in Queens, who cannot get steady work and finds that, when he does work, he now makes only $250-300 per day instead of $400 that he used to make.  Neither number was verified and the man's statements are the only quantitative data in the story (although the story says the attendees wore T-shirts with charts on the back).  I suppose if you think of the Times as a local paper it made sense to focus on that person, but $250-300 per day would not seem like a struggling income level in many other regions of the country outside of New York City. 

The meeting had some similarities to a meeting Dr. Yellen took earlier this year at a community center in Chicago, just before her first speech as Fed Chair, in which, as Bloomberg reported it, she "told the stories of three people who had trouble finding work to illustrate her concern about the unemployed -- omitting the fact that two had criminal records [felony theft and heroin possession] that might have influenced employers’ decisions on whether to hire them."

The Times reporter, Binyamin Applebaum, described the latest meeting as a "gesture of concern"  for Americans who are still struggling to make a living.  The advocacy groups that organized the meeting believe that the Fed should continue aggressively easy monetary policy on the belief it will help wages rise and minority employment rise as well.  The story says nothing about whether the advocates considered whether prolonged easy money would cause prices to rise as well, given that in a service economy, one person's wage is another person's price, and whether their constituencies' net purchasing power would really change that much.

Whatever the political value of symbolic gestures, about which I am incredibly cynical (I think they are either false and disingenuous, or, if tendered and received in good faith as I assume this one was, make for dangerous substitutes for the intellectual rigor that ought to be applied to policy questions, and can lead ultimately to a politics of demagoguery), I think meetings like this are just poor ways to make policy of a macro-economic nature. 

First of all, most obviously, only people who aren't working full-time can take the time to travel to Washington DC to vent.  People who are working hard and succeeding are just as "real" as the people who aren't, but they can't take time off to meet with the Fed.  So meetings like this are biased inputs that proffer a misleading sample and a myopic view of the economy as a whole.  If the Fed wants to sample the views of "real people" in formulating policy, polling firms have tried and true methods to generate demographically accurate samplings, as opposed to just listening to self-selected squeaky wheels. 

Second, macro-economic policies (and particularly monetary policy) really can't determine community or sector level outcomes, let alone individual outcomes, like whether a photographer in New York City makes $300 or $400 a day.  Macro policies and factors can only affect the macro-environment.   What happens within that environment is primarily driven by factors far beyond the purview of monetary authorities; technological change, demographics, consumers' tastes, infrastructure, education, incentives, red tape, cultural norms about work and success and what is good in life, to name just a few of those factors.

Taking the photographer as an example, since he is the lone data point in the article, there are all kinds of secular factors that might explain his drop in income.  As for still photos, there is the drop in circulation of print; the leap in quality of cameras in mobile telephones and the proliferation of social media channels of distribution of the images captured by amateurs.  As for film shoots, there are plenty of cities where films can be shot more cheaply than New York: the website  before the trailer.com lists, Albuquerque, Atlanta, Austin, Boston, New Orleans and Seattle ahead of Brooklyn in ranking best locations to film in the U.S.  Did the meeting include photographers from those other cities as well?   Local government rules on doing business can affect the costs of doing business and may impact positively or negatively where a film is shot, regardless of the macro environment.  Furthermore, the type of film being made today has changed significantly from 20-25 years ago, featuring much more CGI and much less photography of actual backgrounds.  Were CGI professionals included in the meeting?  None of those developments can be meaningfully affected by monetary policy -- obviously, we have the same monetary policy in each of the cities named in this paragraph.

Of course, there are a few sectors -- those closely tied to financial services -- that are affected by monetary policy.  For example,  bankruptcy lawyers are much less busy than they were 4 or 5 years ago.  By the logic of these advocacy groups, maybe the Fed chair should take a meeting with some bankruptcy lawyers whose work has dropped off to understand the harm easy money does to the bankruptcy business.  (Or maybe Congress should reform the bankruptcy laws to make bankruptcy cases take longer and be more expensive, as seems to be the aim of a some reform proposals that have been floated by bankruptcy lawyers in recent years).

Obviously that's absurd, since the activity level of bankruptcy lawyers moves in the opposite direction of the overall economy, but it does make the point that focusing on small, unrepresentative groups within the economy is not going to provide useful insights for macro policies.  The whole point of technocratic organizations like the Fed is to be at a remove from populist pressures.  The best thing is for macro policy makers to focus on macro-level data or other data that are known to be highly correlated with macro-level developments, but most of all to understand and explain the limits of macro-level policy in affecting disparate and diverse sectors, communities and individuals