Ben Bernanke and the Case of the Missing Jobs
by Gary North: Will
Bernanke Become 'Hurricane Ben'?
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.
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
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.
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.
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.
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.
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.
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.
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
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?
He then went
into a spasm of Keynesian babble: a discussion of Okun's law, a
50-year old observation about unemployment and economic growth,
for which there was little evidence then, and which is now long
defunct. You are not expected to follow what he said next. He went
professorial on his audience. This is what passes for meaningful
communications in a graduate school classroom at Princeton.
50 years ago, the economist and presidential adviser Arthur Okun
identified a rule of thumb that has come to be known as Okun's law.
That rule of thumb describes the observed relationship between changes
in the unemployment rate and the growth rate of real gross domestic
product (GDP). Okun noted that, because of ongoing increases in
the size of the labor force and in the level of productivity, real
GDP growth close to the rate of growth of its potential is normally
required just to hold the unemployment rate steady. To reduce the
unemployment rate, therefore, the economy must grow at a pace above
its potential. More specifically, according to currently accepted
versions of Okun's law, to achieve a 1 percentage point decline
in the unemployment rate in the course of a year, real GDP must
grow approximately 2 percentage points faster than the rate of growth
of potential GDP over that period. So, for illustration, if the
potential rate of GDP growth is 2 percent, Okun's law says that
GDP must grow at about a 4 percent rate for one year to achieve
a 1 percentage point reduction in the rate of unemployment.
of this historical regularity, the combination of relatively modest
GDP growth with the more substantial improvement in the labor
market over the past year is something of a puzzle. Resolving
this puzzle could give us important insight into how the economy
is likely to evolve. To illustrate the tension, consider the relationship
between the recent changes in the unemployment rate and in real
GDP relative to the predictions of Okun's law. As illustrated
by the position of the square labeled "2011" relative to the Okun's
law relationship, represented by the line, the decline in the
unemployment rate over the course of 2011 was greater than would
seem consistent with GDP growth over that period. Indeed, with
last year's real GDP growth below 2 percent, less than what most
economists would estimate to be the U.S. economy's potential rate
of growth, one might have expected little change in the unemployment
rate last year or even a slight increase. What is this confluence
of the significant decline in the unemployment rate and the modest
recent increase in real GDP telling us about the state of the
economy, and how will the Okun's law puzzle be resolved?
It is typical
of Bernanke that he really expects his verbal constipation to persuade
an audience of anything other than this: "This guy is utterly incoherent."
Greenspan was deliberately incoherent. In contrast, Bernanke is
unaware of his own incoherence.
spoke in English. He still does. We have had only one person like
him since William McChesney Martin retired in 1970.
"In light of
this historical regularity" which isn't "the combination
of relatively modest GDP growth with the more substantial improvement
in the labor market over the past year is something of a puzzle.
Resolving this puzzle could give us important insight into how the
economy is likely to evolve."
is that he should believe that Okun's law is a law.
If Okun's law
were a law, there would be some logical explanation for it. There
isn't. There would be detailed studies of the regularity of this
law over the last half century, not just in the United States but
in other nations. There aren't. Okun's law is not a law. It was
a one-time statistical indicator.
ever speaks of the unwillingness of unemployed workers to seek minimum
wage jobs, or move to regions where there are jobs. That would indicate
personal responsibility for unemployment, case by case, rather than
insufficient aggregate demand.
pessimistic view is that a large share of the unemployment we are
seeing, particularly the longer-term unemployment, is structural
in nature, reflecting factors such as inadequate skills or mismatches
between the types of skills that workers have and the skills that
employers demand. If this view is correct, then high levels of long-term
unemployment could persist for quite a while, even after the economy
has more fully recovered.
unemployment" is a code phrase in Keynesian circles for "unwillingness
to take a lower wage."
He blamed at
least some of this unemployment on structural unemployment over
the past two decades. "And it appears true that over the past two
decades or so, structural factors have been responsible for some
increase in long-term unemployment." In short, he blamed the free
market for long-term unemployment, meaning equilibrium with unemployment.
Hey, Ben: you
Keynesians have been running the economic policy-making show ever
since 1940. How come you haven't got the structural unemployment
problem licked yet? Keynes offered his general theory to show governments
how to solve it. What seems to be the problem?
Then he said
that it's probably not structural unemployment. "However, although
structural shifts are no doubt important in the longer term, my
reading of the research is that, at most, a modest portion of the
recent sharp increase in long-term unemployment is due to persistent
structural factors." He blamed cyclical factors. He offered some
statistical examples. He offered a curve, called the Beveridge curve.
Supposedly, this curve proves that the unemployment is more cyclical
Hey, Ben. It's
2012. You have increased the monetary base by a factor of three
since late 2008. The government has been running deficits of $1.3
trillion a year. What does it take for your Keynesian policies to
get this cyclical labor market into the normal range?
he summarized his speech. The summary added nothing new. The
speech said nothing new. It offered no grand theory of what is causing
the unemployment. It suggested no new policy that might turn this
supposedly cyclical recessionary job market into a recovery.
an examination of recent deviations from Okun's law suggests that
the recent decline in the unemployment rate may reflect, at least
in part, a reversal of the unusually large layoffs that occurred
during late 2008 and over 2009. To the extent that this reversal
has been completed, further significant improvements in the unemployment
rate will likely require a more-rapid expansion of production and
demand from consumers and businesses, a process that can be supported
by continued accommodative policies.
Hey, Ben. How
do we get this "more-rapid expansion of production and demand from
consumers"? If you have been unable to get it since 2008, why should
anyone believe that you will get it in 2012, an election year?
also discussed long-term unemployment today, arguing that cyclical
rather than structural factors are likely the primary source of
its substantial increase during the recession. If this assessment
is correct, then accommodative policies to support the economic
recovery will help address this problem as well.
He has been
accommodating this job market for over three years. The rate of
unemployment is still 57% higher than the long-term average, he
What will the
FED do next? What it always does: monitor the situation. "We must
watch long-term unemployment especially carefully, however." The
FED will produce the Goldilocks condition: just right.
if the primary cause of high long-term unemployment is insufficient
aggregate demand, if progress in reducing unemployment is too slow,
the long-term unemployed will see their skills and labor force attachment
atrophy further, possibly converting a cyclical problem into a structural
one. If this hypothesis is wrong and structural factors are in fact
explaining much of the increase in long-term unemployment, then
the scope for countercyclical policies to address this problem will
be more limited. Even if that proves to be the case, however, we
should not conclude that nothing can be done. If structural factors
are the predominant explanation for the increase in long-term unemployment,
it will become even more important to take the steps needed to ensure
that workers are able to obtain the skills needed to meet the demands
of our rapidly changing economy.
steps? What has the FOMC got up its collective sleeve?
In short, even
though the policies have failed to bring recovery, we are supposed
to rest assured that the same policies will work someday, assuming
that today's mostly cyclical unemployment becomes mostly structural
FED policies and Keynesian deficits have not yet converted cyclical
unemployment into cyclical recovery, why should anyone believe that
more of the same unprecedented peacetime expansion of the
monetary base and unprecedented federal deficits will overcome
Keynesian analytical framework blinds him to the cause of the missing
jobs, namely, the unwillingness of unemployed workers to take jobs
at prevailing wages. The government's policy of paying them not
to work is the contributing cause. It is subsidizing workers' refusal
to cut their wage demands.
The rate of
unemployment is structural because the problem is structural: (1)
the FED's prior monetary policies; (2) the minimum wage law; (3)
the government's extension of unemployment insurance; (4) the unwillingness
of workers to move to where the jobs are; (5) their refusal to work
at wages offered.
The FED's policy-makers
are ready to expand the monetary base in order to subsidize the
federal debt, which Keynesians think will create aggregate demand.
But the FOMC is not ready to do this yet.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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