In a recent NBC interview, President Obama blamed ATMs for taking away bank tellers’ jobs, and computerized airline check-in kiosks for eliminating aviation jobs. Communications Coordinator Lee Doren points out that innovation doesn’t affect the number of jobs so much as the types of jobs. Accomplishing more while using less labor is actually the key to prosperity. People looking for an explanation for today’s high unemployment need to look elsewhere.
Part I: The Fed is Competent?
Part II: The Natural Rate of Unemployment
Part III: Bernanke, Blinder, and Underpants Gnomes
Professor Blinder writes:
Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, ‘by lowering short-term interest rates,’ you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money. [Italics added]
But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.
I’m afraid that’s only partial credit, though. What the Federal Reserve has yet to elaborate on is why this “stimulates” the economy. You should know, Professor Blinder, that investment appears to be interest-rate inelastic. You wrote this in your journal article, “Is There a Core of Macroeconomics That We Should All Believe?”
The claim that QE2 is supposed to “stimulate the economy” bothers me. For those of you who watch the TV show, South Park, it reminds me of the underpants gnomes episode. The gnomes collect underpants and give the following explanation for why:
Underpants Gnomes:
Phase 1: Collect underpants.
Phase 2: ???
Phase 3: Profit!
Bernanke and Blinder:
Phase 1: QE2.
Phase 2: ???
Phase 3: Economic recovery!
I still want a better explanation for Phase 2… from the Fed. They say they want to be clear and explain their thinking, but I have yet to hear an explanation other than that.
If you want a more sane explanation for QE2: one could point out that many of the Fed’s current assets are maturing. This means that cash will be flowing back into the Fed and they want it out. Thus, the Fed is trying to keep its balance sheet steady rather than expand it per se.
I surmise that they intend to raise the opportunity cost of holding Treasuries, thus making private sector debt and equities relatively more enticing to hold. Then banks go back to private lending, commercial paper, corporate bonds, etc., and investment expands. So it looks like the people at the Fed have discovered a free lunch. But as ECON101 teaches us, Professor Blinder, There ain’t no such thing as a free lunch!
Part I: The Fed is Competent?
Part II: The Natural Rate of Unemployment
Part III: Bernanke, Blinder, and Underpants Gnomes
Professor Blinder writes: “All in all, it looks like the nation and the world need an Economics 101 refresher. So let’s start with the basics.”
All in all, it looks like Professor Blinder needs an Economics 101 refresher too. So let’s start with the basics.
There are three types of unemployment: (1) frictional, (2) structural, and (3) cyclical. I am frictionally unemployed if I leave my current job and take time off before starting my new one. I am structurally unemployed if I lose my job to globalization or minimum wage increases, etc. I am cyclically unemployed if the economy is in recession.
Keynes referred to cyclical unemployment in proposing his solutions. The Fed might be gravely mistaken to assume that today’s high, persistent unemployment rate is purely cyclical. The Fed can only impact cyclical unemployment, not structural or frictional. The sum of frictional and structural unemployment is the natural rate of unemployment. The Fed cannot alter this.
There are many reasons why structural unemployment rather than cyclical unemployment might be at play:
If 10 percent is the new natural rate of unemployment, then fiscal policy simply crowds out private investment — private sector spending declines 1 for 1 with increases in government spending in that case. Monetary policy is completely impotent.
Professor Blinder writes: “To create the fearsome inflation rates envisioned by the more hysterical critics, the Fed would have to be incredibly incompetent, which it is not.”
First off, I’ll admit that critics of Dr. Bernanke may use bad logic. Nevertheless, a good economist will tell you that people are rationally ignorant: The opportunity costs of becoming an expert at everything, such as nuclear physics, foreign policy, and macroeconomic policy are very high. Consequently, people take many mental shortcuts. Politics is no exception.
Politicians fill this void usually by concluding an argument such as, “that so and so is a Nazi.” Translation: “so and so” or “such and such” policy is bad. In econ-speak: the costs exceed the benefits to society. While the applied logic of politicians and pundits may be (probably) wrong, it doesn’t mean that Dr. Bernanke and the Federal Reserve don’t warrant criticism.
Now, truth be said, I believe Dr. Bernanke to be a first-rate academic and a very well-intentioned person. However, I doubt his ability (or anyone’s for that matter) as Federal Reserve chair. After all, they’ve been tasked with a fool’s errand: maintain full employment and a stable price level — and if there’s time, to maintain stable long-term interest rates. Underlying this is the premise that they can find the market-clearing interest rates better than the market itself.
You should give the Fed more credit, Professor Blinder. They failed in the early ’20s, they created and exacerbated the Great Depression, they let inflation get out of hand between the ’50s and ’80s, and there are strong theoretical propositions pinning the stock-market bubble of the 1990s and the housing bubble of the 2000s to the Federal Reserve.
If you were to read former Federal Reserve Governor Frederic Mishkin’s textbook on money and banking, one chapter documents how every decade since its inception, the Fed always found a new way to mess up. The Fed is just not that great.
Professor Blinder writes: “All in all, it looks like the nation and the world need an Economics 101 refresher. So let’s start with the basics.”
Let me conclude Part I by stating: All in all, it looks like Professor Blinder needs an Economics 101 refresher too. So let’s start with the basics.
See also:
Part II: The Natural Rate of Unemployment
Part III: Bernanke, Blinder, and Underpants Gnomes
In The Wall Street Journal, economists John F. Cogan and John B. Taylor argue that the impact of the $800 billion “Obama stimulus” was “zero” in terms of increasing economic growth.
I think its impact was less than zero — that it actually shrank the economy in several ways. One way was its use of “green jobs” subsidies to send American jobs overseas: 79 percent of the subsidies went to foreign firms, such as an Australian firm that imported Japanese wind turbines. Another was how it wiped out jobs in America’s export sector.
But it’s good to see more economists demonstrating that Obama was wrong when he claimed that economists support his stimulus package. In 2009, 200 economists signed a statement publicly opposing the stimulus package in an ad published in The Washington Post and New York Times. The “‘stimulus’ is not the road to economic recovery. It’s the problem, not the solution, wrote Nobel laureate economist Vernon L. Smith.”
Even the Congressional Budget Office admitted that the stimulus package would shrink the economy in the “long run” by driving up the national debt and thus crowding out private investment through increased debt-service costs.
Unemployment has jumped to 9.8 percent. The population has grown recently, but the number of jobs has remained virtually flat. The White House seems to have learned nothing from this, and there is talk of yet more wasteful stimulus spending.
The stimulus package’s costly “green jobs” subsidies sent American jobs overseas. Their biggest recipient was a bankrupt Australian company that imported Japanese turbines for a windmill farm. 79 percent of the subsidies went to foreign firms. Spain’s “green jobs” program, which Obama cited 8 times as a model for his own green jobs and global warming programs, completely failed, destroying jobs and driving up Spain’s skyrocketing government deficit. Each new green job “created” in Spain wiped out 2.2 existing jobs and cost $800,000. New EPA rules dealing with global warming are expected to wipe out more than 800,000 jobs, while proposed EPA ozone rules could wipe out millions more.
48 out of 50 states have lost jobs since passage of the $800 billion stimulus package. The Obama administration falsely claimed that passing the stimulus package would keep unemployment under 8 percent, but now it’s close to 10 percent. The stimulus also contained other provisions that wiped out jobs in America’s export sector, and it encouraged states to impose new job-killing burdens on business through changes to their statutory unemployment-compensation schemes.
Obama’s EEOC appointees are unprecedently hostile to employers, making the Carter-era EEOC look friendly to business by comparison. New laws backed by Obama, and Obama administration regulations governing employers, have discouraged employers from hiring new employees.
My colleague Ben Lieberman’s thoughtful op-ed in The Washington Times focuses on voters’ rejection of environmental alarmism about the Gulf oil spill. It appears that voters discounted the exaggerated claims of Gulf devastation and were more concerned instead about the moratorium on offshore drilling and its devastating effect on jobs. With a faltering economy, voters didn’t appreciate the Administration’s job-killing over-reaction.
As Lieberman said:
“For a while, it was fashionable to ridicule those who had chanted “Drill, baby, drill” during the 2008 race. Opponents of domestic drilling thought they had a defining issue heading into the midterms.
“Now the “Drill, baby, drill” crowd is back – and they’ll be returning to Washington with quite a few new allies.
“Ironically, it was not the spill itself but Mr. Obama‘s overreaction to it in the form of a job-killing moratorium on offshore drilling that really angered voters in Louisiana and other impacted states. The only reason the Obamatorium didn’t hurt Democratic candidates along the Gulf was that they were just as vocal as Republicans in their opposition to it.”
And he has some words of caution for policymakers who would try to ram through energy-restrictive policies:
So what does all of this tell us about voters? For one thing, it shows that they are getting wise to environmentalist alarmism and exaggeration. Just as the drumbeat of doom-and-gloom predictions about global warming didn’t generate public support for “cap-and-trade,” neither did overblown claims of oil-spill-induced ecological devastation create a backlash against offshore drilling. And given the still-struggling economy and stubbornly high unemployment, the electorate is not going to accept costly solutions to overstated threats.
Obamacare is going to wipe out 800,000 jobs through its disincentives to work. That contrasts sharply with false claims by House Speaker Nancy Pelosi (D-Calif.) that the new health care law would create jobs, ”400,000 of them almost immediately.” That 800,000 lost jobs “is 50% more than all the people who work for GM, Ford, and Chrysler combined,” yet the Congressional Budget Office regards it as a “small amount” compared to the overall labor force. To some people, the glass is always half full.
As we discussed earlier, it was the Congressional Budget Office’s own report that showed that Obamacare discourages work and thus shrinks the economy. Obamacare was so poorly drafted that some people are massively punished for working and earning more. One hypothetical 62-year old lost $7,836 in tax credits for a $22 increase in income, resulting in a 35,618 percent marginal tax rate on that additional income. Who would work longer hours, or seek to earn more, if they end up with less take-home pay at an income of $55,000 than $46,000 — as is true for some people under Obamacare?
As noted earlier, the new healthcare law raises taxes on the middle-class and investors, reduces lifesaving medical innovation, and drives up health insurance premiums. It also will bankrupt many “small to midsize” medical-device manufacturers, driving up unemployment.
After months of hearing that we are in a “jobless recovery,” 60 Minutes decided to report what everyone has been saying for quite some time: The real unemployment numbers are even worse than most people think. When one counts people who have had their hours cut to part-time work, or those who have given up looking for a job, real unemployment is at 17 percent (22 percent in California). See the video below.
What is astonishing about this is that the stimulus was supposed to have kept unemployment below 8%. I think it missed the mark.
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