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President Narayana Kocherlakota of the Federal Reserve Bank of Minneapolis was one of three Federal Reserve Board members who dissented from their recent decision to keep interest rates low until at least the middle of 2013.
He has taken the step of stating why he opposed this more accommodative policy in a public letter. His opinion seems to be that unemployment may be high, but at least it is not as high as it was in 2010 in absolute terms:
while unemployment does remain disturbingly high, it has fallen since November. I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy.
Kocherlakota refers to a falling unemployment rate, but it has not been a steady decline or a steep one.
According to the Bureau of Labor Statistics, the seasonally adjusted unemployment rate was 9.8% in November 2010. It fell to 8.8% in March but then rose back to 9% in April. It is currently at 9.1%.
In an absolute sense, 9.1% is lower than 9.8% but that is hardly an improvement. In addition, some analysts attribute the (slightly) lower unemployment rate to people dropping out of the job market and not actively seeking employment.
Taking Kocherlakota’s statement at face value, it would seem that a decline of 0.7% in the unemployment rate is enough to take a stance against further easing.
To provide a contrast, consider how the Deputy Governor of Sweden’s national bank, Lars E. O. Svensson, regards unemployment. Sweden is notable for having tried some very unconventional monetary easing policies such as negative interest rates. Some believe that these policies have been very successful. According to economist Scott Sumner, Sweden is ”the only western European country expected to achieve rapid growth during 2009-12.”
Svensson gave a speech in March where he discussed what metrics the Swedish bank uses to set policy. Here is why he said that measuring the unemployment gap is a priority for how the Swedish bank sets its policy:
Unemployment is also directly related to welfare – one of the worst things that can happen to a household is that one of the members of the household loses his or her job. Unemployment is also the indicator of resource utilisation that is best known and easiest for the public to understand. The preparatory works for the Sveriges Riksbank Act state that the Riksbank should support the objectives of general economic policy. One of the main objectives of economy policy in Sweden is to limit unemployment, for example by improving the functioning of the labour market and increasing the incentives to look for work.
Svensson goes on to state that while inflation targeting takes precedence that the bank also “[supports] the objectives of general economic policy through its endeavors[sic] to stabilise unemployment around a sustainable rate.” He earlier defines a sustainable rate of unemployment as being between 5.5% and 6%.
Which attitude towards unemployment is better? Well the proof might be in the pudding, such as this graph from Svensson’s speech which shows that Sweden is projected to hit its potential GDP much sooner than America:
We need to stop endless unemployment checks. Should only be about 12 weeks then tough luck, pardner. We’re broke, too.
You’ve obviously never been unemployed. It can take 3, 6, 9 months or more to find a job again, especially in an economy like this. The money the government give you for unemployement (which isn’t very much) is instantly pumped back into the local economy to by groceries, gas, pay your electric bill etc. How would cutting someone off after 12 weeks help the economy? Would having them losing their house or apartment be beneficial to society in some way? Would that be cost-free? Or would it in fact cost us many times more to deal with the problems of people being homeless, hungry, sick, living with relatives (if they’re lucky) because they have no other choice; than to go ahead and pay them a few hundred bucks a week to be able to keep their apartment and keep looking for a job. Seriously, I want to know what you expect someone to do after they’re unemployment runs out and it’s only been 12 weeks?
Notice how Smarg is only vaguely speaking to the topic at hand, which is unemployment. I am now convinced he is a troll of the most simple-minded kind. Please don’t feed him.
Thank you. You are, of course, correct. He’s reached the uppermost limits of his emotional and intellectual capacities.
Actually unemployment is like SS, you get what you pay in.
It doesn’t make much sense. Inflation is as Bernanke predicted going to fall. Oil is now down in the mid 80′s and other commodity prices have fallen. There is zero danger of inflation taking off.
Conservatives hate it when other people get government help, yet they’re the first in line for that Blue State money streaming from the Feds. I’d love to see some of those Red States try a few years on their own…
Yes, and let’s not forget how quickly they muster their armies of lobbyists whenever one of their special treatments is at risk. The hypocrisy is amazing.
….and so many ‘conservatives’ pride themselves on going to church on Sundays and getting involved in all terrible social issues that are ‘bringing America down.’
Poor people? It’s now a crime to be poor in this country. Struggling? Doing your best? Well, ‘your best ain’t good enough buster…. go to a charity, none of my tax dollars are going to the likes of you shiftless people!”
Such lovely folk, these hypocritical ‘conservatives.’ Charles Dickens could be a man of our times.
Oh no! Inflation might happen. Whatever will we do about all that debt the nation owes if the currency underlying that debt lost value? If wages and prices (and the taxes they trigger) increased nominally because of inflation, our national debt, credit card debt, student loan debts, and casino markers might actually become manageable. Worse still, cash stockpiles gathering dust in corporate coffers might need to find better places to go, maybe even into new equipment, payrolls, commodities, Doritos, etc.
Truly an apocalyptic vision of the future.
Great point Mr. Evans The thought had crossed my mind that inflation might help many of us.
Negative interest rates? O.o
Did Sweden accomplish these results with monetary policy only? Did they accompany this monetary policy with fiscal stimulus?
Since Smarg brought it up (can’t believe I’m saying those words), here’s a question. Is there ever a date when unemployment should be cut off? In 1990 (the last banking related recesssion), I spent 9 months out of work looking for a banking job. Unemployment helped us pay the basic bills. I was looking for work every day, even spent thousands of dollars on headhunter stuff.
On the other hand, right now my 51 year old brother-in-law who lives with his mom for the last 7 years won’t get off his lazy a** to find a job and keeps collecting checks (he’s a hard core Tea Partier/Obama hater, not that they are all mooches). He almost got a job driving truck, but he lied on his application so they terminated him during training. This is the guy Smarg loves to hate (even though they share the same philosophy – oh the irony).
So do we keep allowing my brother-in-law to mooch off the gov’t like he mooches off the family?
Every program, public or private, has a percentage of people who game it. But to root them all out would probably require more resources than the net savings.
I’ve never been able to picture Smarg actually holding down gainful employment–he seems too bitter and anti-social for that. Maybe he and your brother-in-law are one and the same person.
Seriously, though, keep in mind that distasteful as it is to subsidize mooching, in the aggregate unemployment benefits are about more than helping the unemployed alone. They are stimulus for the local economies in which those unemployed live. As you describe him, your in-law sounds like a waste of space, but he if he does nothing else he at least provides minor support to local business. In good times that would be superfluous and wasteful. At the moment some of them undoubtedly need every dollar they get.
How do you get unemployment for 7 years? When it happened to me, an other time to my husband, it was something like 9 months. Then you had to work a few months to get it again. And welfare has been limited as well, a lifetime cap.
So you married into the wrong family (lol)
Unemployment insurance is an automatic stabilizer. As the economy sours, unemployment rises, and consumer spending drops. Unemployment insurance kicks in automatically and helps to bump up aggregate demand. This reduces the severity of the recession and boosts the recovery. It’s good that UI reduces the problems of unemployed individuals, but the automatic stabilizer function is the important thing. Unemployment insurance should be expanded in times like this. The unemployed need the money, but we all need the spending.
All systems are abused to some extent. The fact that your brother in law abuses the system doesn’t mean unemployment insurance shouldn’t exist any more than $800 hammers mean we shouldn’t have a Defense Department.
Mr Kocherlakota cites a couple of ‘facts’ to support his opinion. Data quickly available on the internet (and my intuition) would indicate that he is simply mistaken. He says, “Since November inflation has risen and unemployment has fallen.”
Taking the one-year period used by the Bureau of Labor Standards (June ’10 to June ’11) inflation has not risen. Consumer prices rose 3.6% over that period. And in June ’11, the rate of increase had declined; some markers were in negatives. And the ‘core inflation’ (leaving out food & fuel because of volatility) for that year was only 1.6%
Employment as a percentage of the population has declined to it’s lowest level since 1983 (www.usatoday.com/money/economy/employment/2011-04-13-more-americans-leave-labor-force.html) . Not surprisingly household income has declined along with it; adjusted for inflation, American families have seen their wages fall from $52,163 in ’07 to $49,077 in ’10. That’s a drop of 6%! Does not include, of course, the drop in retirement funds when banks collapsed or the effect on family’s economic calculations when their homes went underwater. (www.davemanuel.com/median-household-income.php)
Overall, a strikingly poor evaluation of our situation from a person who should know better.
No wonder we’re in such a sad sack state! Maybe ‘the Onion’ isn’t simply funny: (www.theonion.com/articles/drunken-ben-bernanke-tells-everyone-at-neighborhoo.21059)
http://www.theonion.com/articles/drunken-ben-bernanke-tells-everyone-at-neighborhoo,21059/
Did Kocherlakota notice that there has been absolutely no inflation in real wages for American workers?
Probably not.
Probably because he really doesn’t care.
It is unfortunate that the tyranny of fixed terms prevents Kocherlakota from increasing the tally of unemployed by one.
Unemployment numbers are comprised of those that are in the job market for the past 30 days. It does not include those that have not been in the job market in the last 30 days: people who have given up looking; those that have gone off unemployment because it has run out. One solution to unemployment is “High Speed University” check it out
As shown in this article, St. Louis FRB states that it has no idea how to fix the stubborn jobless issue that their policies, in part, have been responsible for:
http://viableopposition.blogspot.com/2011/07/job-friction-why-economists-employed-at.html
We should not be looking to the Fed to fix the problems that their easy credit and fiat currency policies have created in the first place.
TheMoneyIllusion » Some recent links // Aug 19, 2011 at 4:11 pm
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