Schafer: How the Minneapolis Fed influenced the rest of the Fed on poverty and unemployment

The Beige Book of regional economic conditions produced by the Federal Reserve Bank of Minneapolis — named for their covers, not for their colorless writing — won a partly tongue-in-cheek "Beigie" award this year from a popular podcast and radio show.

That's because of a little innovation. In March, it added a section on how workers in the district are faring, "especially dislocated, marginally attached and historically disenfranchised members of the labor force," and another section on how minority and women-owned small businesses are doing.

The new and improved Minneapolis Beige Book is another sign of something important going on inside the Fed's influential outpost in Minneapolis. No other Fed banks are doing this, although it's puzzling that talking to workers is considered truly groundbreaking at the Fed.

"We are nudging the institution to be more focused, and more intentional … about making sure we hear from all voices," said Minneapolis Fed President Neel Kashkari last week.

That's the same thinking that led the Minneapolis Fed to launch its Opportunity & Inclusive Growth Institute in early 2017.

The story all starts with Kashkari taking over as the bank's president the year before.

After coming to town, he said he tried to get to know a sprawling district that stretches from Michigan to Western Montana. He met bankers, public officials and corporate executives, as a new Fed bank president should. Yet he also talked to immigrant and minority small-business owners and front-line workers.

It was about six years into a long economic expansion that would keep chugging along for four more years. Yet even back then, larger employers were complaining about a shortage of workers.

The workers he met, meanwhile, had no idea what that could even mean. They couldn't find good jobs or get enough hours.

"The more I dug into the messages I was hearing from low-income communities, the more inconsistent it was from what we were hearing from big businesses," he said.

Fed bank presidents, when they go to Washington to discuss monetary policy on the Fed's powerful Federal Open Market Committee, come armed with the work of their staffs and not just anecdotes.

Yet Kashkari doubted there could be anything close to a labor market so tight the Fed needed to raise interest rates, not when he could easily find people who said they needed work. So he would cast a lonely no vote on interest rate increases.

Not all Fed bank presidents have a vote on the committee each year, but all have the right to join the conversation. Early on, and Kashkari can't remember exactly when, he told a story from his days as an engineering graduate student.

The lesson came from the 1979 nuclear accident at Three Mile Island in Pennsylvania, about how the staffers at a nuclear power plant unfortunately relied on inaccurate information coming from an indicator in the control room.

The conversation at the Fed's policy meeting is driven by a reading of "slack" in the labor market, a measure of how close the economy is to the hard-to-pin-down point when a further tightening in the jobs market leads mostly to accelerating price inflation.

What if, Kashkari said, like at Three Mile Island, the main reading on the Fed's control panel is wrong? He didn't have a better number, but wondered if the gauge was broken.

Kashkari also had been asking the Minneapolis Fed research staff for convincing explanations for things like an unemployment rate for Black Americans that is consistently about twice that of white workers, in good times and bad.

Discrimination was clearly one answer, they responded, but they couldn't be clear how big a factor it was.

Then there was " 'Well, white and Black college graduates don't have the same opportunities to go to the same colleges, so maybe it's not apples and apples,' " Kashkari said. "And then they'd also point to vague notions of mismatches, and structural barriers, which is just a bunch of macroeconomic hand-waving. That showed me, wow, there's a huge, important policy issue here that we don't have very good answers for."

He proposed a new Federal Reserve research effort in Washington, but the Fed encouraged him to instead start it in Minneapolis.

So the Opportunity & Inclusive Growth Institute was launched to sponsor research, hold conferences and get other economists and policymakers involved in the conversation.

Kashkari greeted everyone the morning of the institute's first conference in May 2017, his brief welcome followed by the institute's first panel discussion, called "Segregation and Inequality."

At its heart, the institute wrestles with a conflict that has shaped debates for decades, between those who see the incoming tide lifting all the boats and others who can't help but point out that some boats never seem to get off the bottom of the bay.

It's important to understand Kashkari does not view this as zero-sum thinking, of taking from the relative few who enjoy big slices of the economic pie to give more to the many who seem to get only a tiny sliver. A great education for his kids, he said, should never mean that other kids cannot get an equally great education.

No one could be certain what kind of influence this kind of Fed initiative would have. But now, nearly five years in, it's been "a spectacular success," said Jason Furman, a Harvard University economist and former President Barack Obama's chairman of the Council of Economic Advisers.

It is a big deal that a regional Fed bank is doing this high-profile work on opportunity and inclusive growth, too, said Ohio State University economist Trevon Logan. It is a can't-miss signal of the kind of issues other economists ought to be studying more.

For instance, he said, there's now a working group on race and economic stratification at the National Bureau of Economic Research. And he recently heard the current head of the White House Council of Economic Advisers refer to the Minneapolis Fed and its work with Native American communities.

The conversation has been changing inside the Fed, too. The Fed has backed off its fixation on the natural rate of unemployment, an economywide measure that's basically what Kashkari was talking about in his Three Mile Island parable. Now Fed officials are focusing on factors like the Black unemployment rate, too.

There's been an even more fundamental shift when making monetary policy, what Chairman Jerome Powell described in detail about a year ago.

The Fed would now let an economic expansion keep rolling before preemptively tapping the brakes with higher short-term interest rates. That means the labor market could keep tightening, hopefully drawing low-income people into better jobs and letting them finally share in some of the good things that come with a thriving economy.

It's never easy to nail down cause and effect, of course.

But it sure looks like Kashkari, with an awful lot of help, has won an argument he was losing a few years ago.