Sahm's Song

Barron's Leslie Norton, in one of the last pieces of her nearly 30 years with the magazine, chatted with former Federal Reserve and Obama administration economist Claudia Sahm about the return to work, the outlook for inflation, and the need for diversity in economics. 

Sahm, who is a senior fellow at the Jain Family Institute and runs an economics consultancy, Stay-At-Home Macro, last year stirred up some controversy on the lack of diversity and inclusion in her field, saying on her blog that it undermined the work.

Here are some highlights from the Q&A:

You’re an expert on jobs. What’s happening with the labor force? There are 10 million job openings and 8.7 million unemployed. When are people going back to work?

Covid-19 is the root of all evil in the economic crisis that we are still living through. The economic dislocations are exacerbating economic problems we had before Covid. The extremely thin silver lining is that we had just finished the longest expansion in history. But [during the pandemic] we had a massive loss of jobs. The people hardest hit were the least well-off. We found that our social safety net wasn’t robust. We still don’t have this pandemic under control in the labor market. It takes time to reconnect workers to businesses.

Last month, we saw nearly one million jobs created. About half of the workers who came back had been laid off by employers who kept ties with them. They are easier to bring back than workers whose employers cut them loose entirely, and often rapidly, in the depths of the crisis. I wouldn’t have much loyalty to that employer and rearrange my life when they say, “Please come back.”

With Covid, what was extremely unusual is that millions of people quit jobs and left the labor market. A lot were parents who had to stay home with their kids, some were older workers who didn’t want to die at work. Some aren’t ready to go back for legitimate reasons that go way beyond getting jobless benefits: They don’t have child care, they don’t feel safe. Delta causes a big problem with the feeling of safety.

What do you think of the Federal Reserve’s handling of this crisis?

We’re experiencing a sea change in monetary and fiscal policies. These are very welcome developments. In the summer of 2020, the Fed introduced a new framework for [achieving] stable prices and maximum employment.

I worked at the Fed from 2007 to 2019 and saw its reaction to the financial crisis and slow recovery firsthand. I knew that the new framework the Fed adopted last year [which puts more weight on employment] was the result of years of introspection. The Fed needed a new approach to avoid making those mistakes again and raising interest rates too soon. So, they promised to wait until the higher inflation this year averages out the lower inflation last year. They also promised to wait until people are back to work.

Their new framework is being tested now by the jump in inflation. Many people, especially academic macroeconomists, say it’s a bad idea and they should raise rates now. If not, they say inflation could get out of hand. I give credit to Fed Chairman Jay Powell and other Fed officials for holding firm. It helps that Wall Street is with them and agrees that inflation will come back down soon. That means a lot, because Wall Street has skin in the game.

The Fed moves very slowly. And when it moves, it doesn’t move back in a heartbeat, because it has done all this work to justify moving.

Read the rest of Leslie's interview, including Sahm's thoughts on her controversial blog post and whether the Fed is behind the curve, here.