Paul Krugman: Slackers at the Fed:
To taper or not to taper… is… two questions: (1) Are we getting close enough to “full employment”[?]… (2) To the extent that the economy still needs a boost, are purchases of long-term Treasuries the way?… The answer to question 2 is probably no… replac[e] the current policy with something better, like purchases of MBS and/or stronger forward guidance, not… taper… which serves as… forward anti-guidance….
But what about question 1? The measured unemployment rate is… at 7.3 percent…. But most of the fall in unemployment reflects lower labor force participation…. How much should we look at the employment versus the unemployment numbers, which are telling different stories?… I suspect that the apparent downward trend in participation actually reflects differences in how boomy different booms have been. The US economy in 2000 had really, really full employment…. The peak in 2007 was nothing like that. So what looks like a secular downward trend may in large part reflect instead the extent to which the “Bush boom”, such as it was, fell far short of the Clinton boom. Still, there is some legitimate argument…. The Fed needs to balance the risks… Inflation is well below [a] target… [that] there’s good reason to believe… is too low…. Sustained high unemployment leaves lasting scars…. Why not wait for clear evidence that the economy is really approaching capacity before doing anything that could be interpreted as tightening?