Monetary Incompetence begets the “jobs disaster”

Former CEA Chair Ed Lazear was doing a reasonable job of explaining the “Jobless Disaster” up to the last paragraph:

The Fed may draw two inferences from the experience of the past few years. The first is that it may be a very long time before the labor market strengthens enough to declare that the slump is over. The lackluster job creation and hiring that is reflected in the low employment-to-population ratio has persisted for three years and shows no clear signs of improving.

The second is that the various programs of quantitative easing (and other fiscal and monetary policies) have not been particularly effective at stimulating job growth. Consequently, the Fed may want to reconsider its decision to maintain a loose-money policy until the unemployment rate dips to 6.5%.

The Fed has not maintained a loose-money policy. Inflation is far below target, even with all the caveats unemployment is way above normal and, most importantly NGDP is far beneath any reasonable trend level. In fact, in the last few weeks with the disconnected talk about ‘tapering’ purchases, the Fed has tightened policy (see Lars).

The following chart helps to explain why the employment situation is a “disaster”. In short, the Fed is not being effective, and the thresholds adopted last December may be increasing confusion about future policy. The chart indicates that the employment situation could be markedly improved if the Fed changed its targeting regime and adopted an NGDP level target. Just picture where we would be if the policy had been adopted three years ago! One think I know: Krugman would have stopped moaning about the need for fiscal stimulus a long time ago!

Jobs Disaster_1


Jobs Disaster_2

13 thoughts on “Monetary Incompetence begets the “jobs disaster”

  1. “The Fed has not maintained a loose-money policy”

    Sigh. The “loose-money” myth just never dies, does it?

  2. “Just picture where we would be if the policy had been adopted three years ago!”

    It really is tragic, isn’t it? So much potential wasted.

  3. I don’t know whether I agree that “the Fed has not maintained a loose-money policy,” because I don’t understand the term ‘loose-money policy’. I understand the *relative* term ‘looser’: comparing two possible monetary policies I can determine which is the *looser*. But to apply the *absolute* term ‘loose’ I would have to know what would count as a *neutral* policy, since ‘loose’ means *looser than neutral*. But I see no one obvious candidate for the role of neutral policy.

    Might it be that what accounts for your seeming disagreement with Ed Lazear is that you and he have different candidates in mind: for you, ‘neutral’ means something like *ideal*, for him it means something like *holding interest rates at historically normal levels without engaging in QE*? (If there’s no general agreement on what counts as ‘neutral’ policy, absolute terms such as ‘loose’, ‘easy’, ‘accommodative’, and their antonyms, must be useless.)

    • Philo, I thought I had shown that MP could not be ‘loose’ given inflation, unemployment and the NGDP level. MMs don´t think interest rates are a good indicator of the stance of MP. Our preffered indicator is NGDP relative to ‘target’.

      • And the “target” is some combination of inflation and unemployment (as per the Fed’s mandate)? That seems reasonable to me; but obviously *that’s not what most commentators have in mind as the “neutral” policy*, since most journalists and most economists and most casual observers consider the Fed’s monetary policy to be *loose*.

  4. Pingback: Monetary Incompetence begets the “jobs disaster” | Fifth Estate

  5. Yes. Loose money, just like loose morals.

    Aside from the fact the last PCE deflator came in at 0.7 percent y-o-y, we Market Monetarists face another battle, and that i the language that has evolved around monetary policy in the last 30-40 years.

    “Loose” money and “debasing” the currency, and “doves.”

    We <MM'ers have not yet developed a rival language, of "monetary resolve for growth" or "monetary bulls" or "a strong, aggressive pro-grwoth monetary policy."

  6. Marcus, I’m watching Greenspan on CNBC right now. He says that QE is pushing long-term interest rates down. Kill me now!

    Maybe he’s not particularly brilliant.

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