Get me a Job, Ben!

So the demand uttered in a recent article on Slate. The author Daniel Gross refers to the many things the Federal Reserve is responsible for according to its mandate. Plaintively Gross asks:


“Fed Chairman Bernanke does not seem to care about high unemployment. Why?”


He just doesn't care! The Fed chief is mean! Now, we happen to think that in spite of being extremely misguided, Fed chief Bernanke is in fact a well-meaning bureaucrat, by and large.

At least he has so far not said or done anything that would lead us to believe otherwise. As a Keynesian from Princeton, his macro-economic studies have without a doubt revolved primarily around the employment question.

His bad luck is that Keynesian theory can not give him a good answer to this question, in spite of the great weight it puts on it. In a truly free economy, we would not have to worry about this – there is always 'work to do', as long as we have not achieved a Utopia where scarcity has been abolished. In short, as long as there remain human wants in need of satisfaction, there will be demand for labor. The problem arises when the state begins to intervene in markets, and there are few markets that are subject to more intervention than the labor market.

To name an example, minimum wages, which look good on paper, exclude a large number of unskilled workers from the labor market forever. This is because the value the market puts on their services is below the mandated minimum wage. An unskilled laborer who, by decree, costs more than his labor is worth, will simply remain unemployed. The government can mandate a minimum wage, but it can not mandate the repudiation of economic laws.

Gross continues by reminding us of the Fed's mandate:


“The central bank says it has a trio of missions. The Fed "sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates."


As former Fed governor Frederic Mishkin reminded us in a speech on 'Monetary Policy and the Dual Mandate':


“In the United States, as in virtually every other country, the central bank has a more specific set of objectives that have been established by the government. This mandate was originally specified by the Federal Reserve Act of 1913 and was most recently clarified by an amendment to the Federal Reserve Act in 1977. According to this legislation, the Federal Reserve's mandate is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Because long-term interest rates can remain low only in a stable macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal Reserve seeks to promote the two coequal objectives of maximum employment and price stability.”


Mishkin promised that his speech would reveal how the Fed could in fact achieve this astonishing feat.


“In the remainder of my remarks today, I will describe how these two objectives are consistent with our ultimate purpose of fostering economic prosperity and social welfare. I will then talk about some important practical challenges in implementing these goals.” And here's by the way a really funny one – Mishkin invents yet another mandate as an afterthought: “(By the way, I wish that I could also discuss the Federal Reserve's role in promoting the stability of the financial system, another key objective of central banks, but unfortunately that would violate my own personal mandate of finishing this speech in the allotted time.)”


When you're finished laughing, consider that this speech was given in April of 2007 – a time when the 'Great Moderation' was still widely thought to be alive and well, in spite of the first worrisome signs that something might be going wrong (the first major bankruptcies of sub-prime mortgage lenders had occurred in February).

What governor Mishkin engaged in in his speech, similar to chairman Bernanke before him when he brought us his glowing report about the 'Great Moderation', and what Daniel Gross is likewise doing in his article,  is what we call 'Magical Thinking'. It is a variation of the 'potent directors fallacy', which holds that an elite group of men endowed with sufficient power or wealth can, if only it applies itself with the necessary vigor, create the Keynesian pipe-dream of the 'eternal boom'.

As Roger Garrison remarks in the context of Keynes' Utopianism:


“Keynes advocated the "socialization of investment" and the "euthanasia of the rentier." The rate of interest, which "rewards no genuine sacrifice," could and should be driven to zero, at which point capital would cease to be scarce and the distribution of income would be more equitable. In a matter of two generations, the economic problem of scarcity can be solved, such that our grandchildren can occupy themselves with questions of aesthetics rather than questions of economics.”


Well, that sounds simple enough doesn't it? In fact, given that the Fed has now indeed driven the rate of interest to zero, we should by now all be free to occupy ourselves with questions of aesthetics rather than economics. After all, the problem of scarcity has apparently just been 'solved' by the central planners! So why is Daniel Gross still wasting valuable time worrying about unemployment? He should be busy contemplating Modiglianis or Rembrandts in the art gallery!

Ludwig von Mises has succinctly brought the Keynesian view and its shortcomings to the point:


“There are still teachers who tell their students that “an economy can lift itself by its own bootstraps” and that “we can spend our way into prosperity.” But the Keynesian miracle fails to materialize; the stones do not turn into bread.”


Mishkin belongs firmly in the camp of the believers however. At the end of his speech he appears ready to reveal the Fed's great secret:


“Given the possible pitfalls of trying to anchor the level of output or employment, what is the best way for a central bank to minimize deviations of employment from its maximum sustainable level?”


Alrighty, now we will learn how it's done….


“To be sure, central banks need to form some views about the economy's potential to produce on a sustained basis. After all, as I have already noted, the amount of slack in the economy is a key determinant of inflation. But, rather than focusing on fixed estimates of potential output or the natural rate of unemployment, central banks should take an eclectic approach in assessing the overall balance of economic activity relative to productive capacity.

In other words, in pursuing the dual mandate, the central bank should recognize that a wide variety of indicators drawn from labor, product, and financial markets provide information about the overall balance of supply and demand in the economy. In addition, central banks should use information from various price indicators to tell them whether the economy is overheating or running well below productive capacity.”


Nope, no revelation yet. “The central bank needs, to be sure, 'form some views' about the economy's potential”, and to do so apparently needs to engage in vast data collection efforts, but how does it actually ensure both low inflation and low unemployment? Leaving aside that this sounds suspiciously like GOSPLAN is at work, he won't say just yet…


“In some circumstances, a temporary tradeoff between the two elements of the dual mandate may exist. Unforeseen shocks to the economy–an adverse supply shock, for example–might lead to inflation that is temporarily above levels consistent with price stability at the same time that employment is growing more slowly than its maximum sustainable pace. In such a situation, returning inflation too quickly to levels consistent with price stability might unnecessarily exacerbate the economic weakness. Instead, while restoring price stability remains critical, the central bank should do so at a pace that does not do undue harm to the economy.

Finally, central banks should respond aggressively to output and employment fluctuations on those (hopefully rare) occasions when the economy is very far below any reasonable measure of its potential. In this case, errors in measuring potential output or the natural rate of unemployment are likely to be swamped by the large magnitude of resource gaps, so it is far clearer that expansionary policy is appropriate. Furthermore, taking such actions need not threaten the central bank's credibility in its pursuit of price stability.

It should be clear from my remarks today that although as a Federal Reserve official I am legally obligated to fulfill the dual mandate, I am actually an enthusiastic supporter. The best way to achieve the mandate is for the Federal Reserve to have a strong commitment to a nominal anchor to promote price stability, but with a focus on keeping employment as close as possible to its maximum sustainable level.”


(emphasis  ours)

As far as we can tell,  nowhere in the speech does Mishkin mention how exactly the Fed is supposed to achieve this impossible feat. An 'enthusiastic supporter' of central planning and the dual mandate he may well be, but there is no hint as to how it's supposedly done. It sounds like the Fed is a vast data collection apparatus that can somehow assimilate and interpret all the phenomena of the market economy in such a way as to optimally plan it. This as we know is however impossible. It is not merely a question of 'doing it well' – it simply runs into the calculation problem that central planners face, as we have  mentioned on several previous occasions.


The Effect of Decades of Propaganda

Coming back to Daniel Gross' article in Slate, Gross goes on the complain at great length how the Fed chairman has apparently deserted wage earners by 'not doing more to create jobs'. He mentions previous instances of how magical thinking was – apparently – rewarded:


“When the crisis hit, as David Wessel showed in 'In Fed We Trust', Bernanke acted with courage, urgency, and imagination. He used all the Fed's powers, and some it may not have possessed, to avert collapse. His actions won him reappointment to a second term.”


'In Fed We Trust'! Uh-oh. We can actually imagine that this isn't going to end well.

Gross continues:


“But he's showed no such urgency in grappling with high unemployment. Why? There's no shortage of explanations. It could be ideology. Around the world, central bankers seem much more worried about inflation than slow growth. It could be a class issue. Federal Reserve Governors and tenured Ivy League economists simply don't know many people who are unemployed.

It could be political. Bernanke is a Republican, and perhaps he'd secretly like this Democratic White House and Democratic Congress to fail. It could be a sense of modesty. He might believe that it's not appropriate for the Fed to go beyond its traditional scope of activities and to lend moral support for legislative action and fiscal policy that he favors.”


Alas, none of this 'explains' Bernanke's seeming disinterest in the woes of the legions of unemployed.

Gross does believe in Bernanke's gutmensch credits:


“Given Bernanke's record, none of these explanations is compelling. He's pushed a more expansionary monetary policy than any central banker in the world and has avoided the self-destructive and increasingly belligerent austerity seen in Europe. He's been pragmatic and has worked well with both parties. And he hasn't shied away from suggesting that Congress take certain actions.”


No, Benny is a good guy. He wouldn't just not care. So what then is the explanation?


“I think there are two more compelling explanations. First, it could be that Bernanke and the Fed are simply exhausted. In 2008 and 2009, the central bank did everything in its power and then some to rescue the economy from depression. It took rates to zero, lent directly to companies, and expanded the Fed's balance sheet massively. More recently, it has bought $1 trillion of mortgage-backed securities to prop up the ailing housing market. The Fed used up all its resources saving the system. Now it's time for the political system and the private sector to do their thing.”


(emphasis  ours)

Ahem. We can actually dispel that worry. The Fed can not 'use up its resources' dear Daniel. It doesn't actually have any. What it does have is the power to create unlimited amounts of 'money' from thin air. All it takes is the pushing of a button on a computer keyboard. That shouldn't be too hard we would think.

Gross continues with his explanations fishing expedition:


“Second, it could be a failure of imagination. In recent years, Bernanke and the Federal Reserve have proved themselves to be poor predictors of how big macroeconomic trends—low interest rates, unregulated subprime lending, the rampant use of derivatives—can have negative social, economic, and political impacts. Whether it was forecasting continued growth as the economy was about to slip into recession, or underestimating subprime losses, Bernanke hasn't shown much clairvoyance.

So perhaps it's not surprising that the Fed doesn't see how persistent long-term unemployment can erode labor force skills. Or that it doesn't fully grasp how a spell of high long-term unemployment—something we haven't seen in more than a generation—can harm the economy at large. Unemployment is bad for the unemployed—duh! But persistent excess capacity in the labor force limits the ability of workers at all levels to get higher wages and better benefits.

It's bad for government finances, as payroll taxes provide an important source of revenue. It's bad for the housing market and for the financial sector as a whole: People with jobs are less likely to fall behind on loans. And it undermines consumer spending, which accounts for 70 percent of economic activity.”


A failure of imagination! Gross interestingly mentions the utter lack of Federal Reserve 'clairvoyance', which is in odd contrast to Mishkin's solemn assertions regarding its vast data collection and planning capabilities. Instead of wondering why and how this 'well informed' agency of central planning could have failed so completely in foreseeing any of the problems the economy has encountered since 2007/8, Gross goes on the show how unemployment can be a bad thing.

A little memo to Gross: Consumer spending does not account for 70% of economic activity. It may account for 70% of 'GDP', but it accounts at best for about 35% – 40% of all economic activity (we will tackle this topic in more detail on another occasion).

Gross concludes that in spite of unemployment evidently being a really bad thing, the combination of 'used up resources' and 'lack of imagination' must shape our expectations regarding the Fed thusly:


“And yet, expecting this Fed to have a sense of urgency about the unemployment rate may be as futile as looking for a Cadillac at the bottom of a Cracker Jack box.”


If only they had a 'sense of urgency' the implication is, we would be saved! Looking through comments on his article we find that many, but thankfully far from all, of the readers unquestioningly share this belief in the Fed's power to 'create employment'. As one reader complains, not entirely unreasonably:


“Nobody seems to be surprised about this, and they shouldn't be. Bernanke, along with Geithner and Summers, doesn't work for the interest of people or the country. He works for Big Finance.”


Well, the Fed is the center of the banking cartel, and as such it does of course care primarily about the banks. However, as we already said earlier – we happen to believe that chairman Bernanke  does probably mean well. That is not the problem. The problem as we see it is that the Fed simply can not create one iota of wealth. It can pump up the money supply and lower interest rates to zero, but contrary to Keynesian belief, this can not possibly overcome the problem of scarcity or actually 'help' the economy.

The exact opposite is true. Monetary pumping in fact undermines true wealth generation, and as such the Fed's policies harm the economy on a structural level.  The reason for this is that monetary pumping creates an illusion – the illusion that the pool of savings is bigger than it actually is. This in turn leads to the malinvestment of capital, and the boom-bust cycle. In reality, the Fed can not possibly fulfill its dual mandate. However, decades of propaganda have suggested to people that it actually can perform such a feat.

This has created a danger for the interventionists and their dogmas, namely the danger of 'blow-back'. In fact, Gross' article already exemplifies  why, from a socionomics perspective, the growing anger of the masses will increasingly turn on institutions that were revered during the long bull market as being instrumental in creating prosperity. After all, if it were true, as the Fed has long maintained, that it actually can create low unemployment, then it would follow logically if unemployment is high that it just doesn't want to do anything about it – which is precisely what Gross actually suggests.

By convincing people of its non-existent ability to plan the economy, the Fed may well have dug its own grave. On the one hand, there are those who have decried the institution as harmful from the beginning, on the other hand even those who believe the preposterous claims of what it can achieve will be increasingly dismayed as evidence of its failure proliferates.

We happen to believe that the Fed's so-called 'exit strategy' is not going to be implemented – instead, economic weakness will lead to an even bigger effort in monetary pumping, as former Fed governor Broaddus indicates in this recent Bloomberg interview . It will probably grow its already bloated balance sheet even further as the secular contraction progresses. If we are lucky, interventionist dogma will finally be discarded at the end of this road. Until then, we fear a lot more economic harm will be done by futile intervention.



Former Fed governor Mishkin: a firm believer in the Fed's planning abilities.

(Photo credit: Chung Sung-Jun / Getty Images)




In a recent missive by Bob Hoye, we discovered the following gem regarding Alan Blinder, whom we extensively criticized previously: Apparently Blinder didn't hold back with his admiration of central economic planning, Soviet Union-style, as recently as 1989. Hoye quotes him as saying:


"The real question is not whether we want elements of socialism on planning to abridge our personal freedom, but by how much."


Harvard's Robert B. Reich, former labor secretary, and a very active leftist blogger these days (who snipes at the Obama administration from the Left, if you can believe that), was even more specific – this is also a quote from 1989, shortly before the communist system imploded and was revealed as essentially the biggest economic bankruptcy in history:


"Stalin's economic organization has been remarkably successful."


So when you see exhortations by these gentlemen for more money printing and more fiscal spending in editorials, always remember how utterly wrong they have always been, and where their ideological allegiance really lies. It is definitely not with free market capitalism.





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