by Gary North
Bernanke’s speech on March 26 began with a familiar analytical error. Specifically, he continued to give the impression that the Federal Open Market Committee (FOMC) is the cause of today’s low short-term interest rates. It isn’t. The .25% rate is the result of Federal Reserve policy, but not FOMC policy. The FED pays commercial banks .25% on excess reserves. If it did not pay an interest rate of .25%, the rate would be even lower. He always gives the impression that, without the FED’s intervention, rates would be higher.
The causes of today’s low rates are the widespread decisions of commercial bankers to hold excess reserves with the FED, which is what the FedFunds rate reflects. Banks are not borrowing overnight money from other banks in order to meet bank reserve requirements set by the FED. They do not need the money. They have plenty of excess reserves. So, because there is no rival demand for this money, banks put their money with the FED, which pays .25%. Better to earn something than nothing.
THE LABOR MARKET
His speech focused on the rate of unemployment, as well it should. This rate is also called the “Presidential incumbent’s chance in election years.” In the post-World War II era, an unemployment rate above 7% at the time of the election is the kiss of death.
Bernanke said this: “We have seen some positive signs on the jobs front recently, including a pickup in monthly payroll gains and a notable decline in the unemployment rate.” The unemployment rate is 8.3%. “That is good news.” For Republicans, yes. Not for Obama.
Importantly, despite the recent improvement, the job market remains far from normal; for example, the number of people working and total hours worked are still significantly below pre-crisis peaks, while the unemployment rate remains well above what most economists judge to be its long-run sustainable level.
Correct on both points. “Of particular concern is the large number of people who have been unemployed for more than six months.” Also correct. Not having anything else to do, they are likely to vote in November.
He raised the question of whether this unemployment is cyclical or permanent. He defines “cyclical” as every Keynesian does, that is, incorrectly: the result of a temporary lack of aggregate demand. “Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand. . . .?”
The cause of high unemployment is not insufficient aggregate demand in general. Rather, it is the high aggregate demand to stay home and watch TV. The problem is that some of the unemployed workers refuse to work for lower (non-labor union) wages. They do not want available jobs. Other unemployed workers are no longer worth the minimum wage. They cannot find jobs. All of them are getting paid not to work by the federal government’s unemployed workers’ bailout program, called unemployment insurance, which the government keeps extending.
He also mentioned “a worsening mismatch between workers’ skills and employers’ requirements.” He did not mention the key phrase, which every economist should always use when discussing gluts: “at the prevailing market price.” Had he done so, his audience would have expected him to discuss prevailing market wages in specific labor markets. He did not want to do this. To do so would point to the causes of unemployment: government interference with wages.
If cyclical factors predominate, then policies that support a broader economic recovery should be effective in addressing long-term unemployment as well; if the causes are structural, then other policy tools will be needed. I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.
Bernanke was justifying the FED’s inflationary policies, which bankroll the Federal government, which in turn spends the newly counterfeited money to “increase aggregate demand.” This has been the Keynesian solution ever since 1936. It will be the Keynesian solution forever. The Keynesian sees unemployment in terms of insufficient aggregate demand, which means insufficiently large federal deficits and insufficiently inflationary central bank policies.
Jobs are increasing in the private sector, he said. Layoffs are moderating in the public sector. But currently, hours worked are 4% less than in 2007. The job market remains weak, he said. Private sector employment is down by 5 million jobs. But the population has increased. The unemployment rate was 3 percentage points above its average over the past 20 years. Let me put it another way. The difference between 8.3% and 5.3% is 3 percentage points. What percent of 5.3% is 3%? It is about 57%. That means that the present unemployment rate is 57% above what has been normal for 20 years. Put this way, the present unemployment rate in 2012, over three years after the recession began, is a disaster.
“Moreover, a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring.” In short, the job-creation process is not recovering. “Taking the difference between gross hires and separations, the net monthly change in payrolls during this period was, on average, less than 100,000 jobs per month – a small figure compared to the gross flows.”
We need more hiring, he said. Quite true. How will this come about? With more rapid economic growth. Terrific. How will this growth take place?