Can monetary policy address U.S. long-term unemployment?


My latest contribution to Global Risk Insights examines whether monetary policy alone can cure the problem of chronic unemployment.  Key points include:

  • Can infer that new Fed Chair Janet Yellen will maintain current monetary policy due to continued labor market weakness, even though the unemployment rate is falling.
  • Impact of U.S. monetary policy can have negative consequences to emerging markets in Asia, Africa, and South America.
  • Questionable whether monetary policy can effectively address long-term unemployment.
  • Fiscal policy should be tailored to specifically address the needs of the low-to-medium skilled worker.

Global Risk Insights

With Janet Yellen newly confirmed as Chairman of the Federal Reserve, investors are now parsing her testimony to gain insight on the future direction of interest rates.  

One particularly interesting piece of her testimony involved the persistence of long-term unemployment and a high number of part-time workers: “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

This statement is significant because previous Fed Chairman Ben Bernanke identified a threshold of 6.5% unemployment rate as a starting point for reversing bond purchases aimed at stimulating employment. Currently, the U.S. unemployment rate is very close at 6.6%, but it now looks as if the Fed is hedging its bets.

By continuing to purchase long-term bonds even if it is at a slower pace, the Fed will drive down the interest rate of the 30-year Treasury bonds. Since mortgage rates and…

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Yellen Infers Easy Money Strategy


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With newly confirmed Federal Reserve Chairman Janet Yellen, investors often parse her testimony to gain insight on the future direction of interest rates.  In last week’s testimony, Yellen inferred that easy money policy is still plausible because labor markets remain slack.  Here’s Jon Hilsenrath of Wall Street Journal’s Real Time Economics take,

“In her testimony to Congress Tuesday, Federal Reserve Chairwoman Janet Yellen said high levels of long-term U.S. unemployment signaled high levels of slack in the economy which will keep inflation low.”

First, Janet Yellen heads up the Federal Open Market Committee that influences interest rates through their monetary policy.  They have a dual mandate of stabilizing prices and achieving full employment.  While both are attractive, it is very difficult to choose a strategy that can accomplish both.

By saying that U.S. long-term unemployment remains high, while inflation is low, we can guess that Yellen will maintain an easy money strategy, as opposed to a tight money strategy.  This means that access to credit for consumers and businesses will continue to be relatively cheap, thus interest rates should not rise much based on the announcement.  It is hoped that this action will improve labor markets and alleviate the plight of the long-term unemployed.

The downside of this strategy is that it might continue to create turmoil in emerging countries.  Their concerns are rooted in U.S. exports being cheaper than theirs.  In order for them to compete more effectively, they might choose to devalue their currencies, which could result in rapid inflation, which erodes living standards and impedes growth.  Therefore, this policy can still be problematic even if current labor markets are keeping wages depressed, thus minimizing the impact of higher U.S. inflation.

With the U.S. economy so interconnected with the rest of the world, the long-term implications can be severe for the U.S., even if it might be bright in the near future.

If Bernanke’s Superman, Then…


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The U.S. economy is his kryptonite.  Al Lewis of MarketWatch offers a satirical comparison of Federal Reserve chairman Ben Bernanke to the “Man of Steel”.  Both Lewis and my comment could be described as cheap shots to him.  However, being fair to Bernanke, his tools are limited in turning around the economy and unemployment.

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Still, if it was up to me to grade Bernanke’s performance, it would rate from a C- to C.  His best work was preventing a huge collapse of our financial system in 2008.  Even though some of his actions might have been questionable, many people do not realize how close the U.S. was to experiencing a depression.  Through creative monetary policy, he was able to create liquidity within the financial system without spurring significant inflation and for that he deserves credit.

While Bernanke’s critics have predicted that his aggressive monetary policy would result in high inflation, it has been four years now and inflation remains moderate.

Having said that, we cannot say that his efforts have not caused any negative consequences.  Some of the global instability, such as high food prices in the Middle East, Africa, and other developing nations, can be attributed to the U.S. and their efforts to keeping the value of the dollar low in order to kick-start the economy.  With U.S. dollars serving as the primary financial vehicle in the global economy, a cheaper dollar made credit more accessible not only in the U.S., but throughout the world.

On the surface, that sounds good.  When developing countries are able to access more credit, then that will lead to more investment and consumer spending.  However, the downside is that it can lead to over-investment and cause asset bubbles.  It is similar to U.S. households, who cannot resist low interest rate offers, and get into trouble by increasing their debt levels.  Even though it will enhance their standard of living in the short-run, it can result in devastating outcomes when economic conditions change.

We have seen potential asset bubbles start to emerge in China, India, Brazil and other emerging countries.  With this occurring, inflation has started to rise in all of those countries and there is concern that their economy will suffer severely as a result.  Even though that has not happened yet, its threat remains and the U.S. should bear some of that blame.

Referring back to U.S. performance, it is true that the U.S. has grown steadily since its collapse during the end of the Bush administration when our economy contracted by a staggering rate of -8.9% during the 4th quarter of 2008.  Since that time, we have shown steady improvement, but it has been very slow.  Subsequently, our economy would shrink further the next two quarters, but at a much slower rate.  But since then, our economy has grown consistently, albeit modestly.  Historically, we want to see economic growth of at least 3%.  In over four years, we have only exceeded that benchmark three times out of seventeen quarters.

When looking at unemployment, the figures are even worse.  Historically, an economy is performing at capacity when the unemployment rate is between 5-6%.  The last time that the unemployment rate fell below the 6% mark was July 2008.  While we should be encouraged by the drop in the unemployment rate from 10% in October 2010 to its current rate of 7.6%, that is still a very high number.  Another disturbing measure is long-term unemployment, which continues to be a problem.  Pew Fiscal Studies showed that 9.5% of the unemployed were searching for work for at least a year in the first quarter of 2008 and that has jumped up dramatically to 29.5% in the first quarter of 2012.  These high rates have never been close to being matched in past history.

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The economic evidence is clear.  Bernanke is no Superman.

New Jobs Lack Quality


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If you do not subscribe to econprofaj, then you might miss out on this nugget from the Wall Street Journal’s Real Time Economics.  When Federal Reserve Governor Sarah Bloom Raskin bemoaned, “I didn’t think life guard was a job that required an advanced degree.”, she is speaking to a level of frustration that describes many throughout the U.S.  It also highlights the disconnect between education and the skills required by employers.  Even if this does not surprise many, especially those unsuccessfully seeking work, this phenomenon carries significant implications for the future.

While we should be encouraged about the gradual decline in the unemployment rate, we must also be aware of the hidden cost of long-term unemployment.  Individuals that remain jobless for a long period of time will find it difficult to ever become marketable.  That is because firms are reluctant to hire workers with gaps in their resume and the idleness from work negatively affects their skills.

If you are out of work, it is imperative that you find ways to update your skills.  That might involve going back to school; getting additional certifications in a needed area; or volunteering at a non-profit organization.