Friday, July 06, 2012

Another sh*&^y jobs report

Wow. 80,000 net new jobs in June. The last three months (after revisions) now come out to 68,000 - 77,000 - 80,000 and that "trend" is not going to help anyone anytime soon. As Mungo noted, job growth needs to almost triple for unemployment to significantly fall.

People, an infrastructure bank is not going to fix this. QE III is not going to fix this. Retroactive NGDP level targeting is not going to fix this. Tax increases are not going to fix this.

This morning Twitter is again ablaze with calls for the Fed to "finally" act.

Remember this is a Fed that has already kept its policy rate at nearly zero for multiple years and promised to do so until late 2014. A Fed that has vastly expanded its balance sheet pumping trillions of new reserves into the system. A Fed that has already engaged in a couple rounds of quantitative easing.

I believe that at the core of the calls for the Fed to act is a desire for higher inflation. Sure, that's fine with me, lets give it a try. But I don't think running inflation at say 4% is going to be a magic bullet.

Are there still nominal contracts that haven't yet been expired, adjusted or abrogated 4 years into this mess?

Can inflation double and nominal interest rates stick at their current rates? Will the Fisher effect really be neutered?

Even if real rates become a bit negative, will firms really start to make massive investments in projects they would expect to be unprofitable when discounted at zero percent or one percent?

When people call for the Fed to finally act or accuse Bernanke of dereliction of duty ask them this question:  What can the Fed do that will fix this mess, how exactly would the policy action be implemented and by what mechanism would it effect the cure?

And if their answer is that merely adopting a new policy target will cause an expectational change that fixes the mess?



James R. Otteson PhD said...

Angus, you overestimate the number of steps in their thinking that people demanding the Fed should do something have taken. Their thoughts have gone this far: (1) Things are bad; (2) there is a Fed; (3) therefore, the Fed should fix things. That's it. Your question of what, exactly, the Fed should do, or--yet further--how the Fed might do it, or--even further--what the likelihood is of the Fed actually being able to help things requires waay too much thought.

Jeff said...

Angus and James: The argument is (1) the Fed controls the price level-even at the zero lower bound. The price level can be manipulated using a variety of non-standard techniques such as interest rate on reserves or asset purchases. (2) The price level has a real effect on economic activity via sticky-wages or sticky prices. (3) Thus by increasing the price level above the apparent 2% ceiling the Fed could induce more real activity. And if you aren't convinced by this story and want empirical evidence, take a look at Australia or Switzerland.

Angus said...

Jeff: what nominal contracts are still sitting unexpired or unadjusted 4 years after the crisis? Is unemployment really due to too high of real wages?

Oh, and Switzerland is not experiencing inflation but rather deflation. Check this story: