Wednesday, June 18, 2014

A Clueless Federal Reserve

There is a silly discussion going on now between the Janet Yellen folks and the Alan Krueger folks.  It's worth noting that both Fed Chairman Yellen and former head of the Council of Economic Advisors Alan Krueger are Obama acolytes.  The debate between Yellen and Krueger is whether or not the 6 million workers who have bailed out of the work force in the Obama era are lost for good or can be coaxed back into the labor force.  Krueger thinks they may be gone for good while Yellen thinks they are lurking nearby and may return to the work force.

You might wonder why this discussion is going on.  It reflects the idea that if the long term unemployed are leaving the work force for good, then wage pressures may hit the economy sooner than expected and inflation could tick up.  While both Yellen and Krueger are doves (meaning that they are not too worried about inflation),  Yellen is clearly the more dovish of the two.

The problem with this discussion is that it is largely irrelevant.  Inflation is not caused by tightness in the labor market.  Recall the 1970s?  Both inflation and unemployment rose over the decade substantially.  So much for the idea that tightness in the labor market causes inflation.  Facts overwhelm naive theories in this case.

The issue of solving the unemployment problem has nothing to do with Fed policy.  Fed policy is most likely going to lead to an unstoppable rise in inflation at some point.  The fact that it hasn't happened yet will not prove to be much comfort when it does happen. 

Solving unemployment is relatively straight forward.  Eliminate the roadblocks government has put up that makes hiring an employee an irrational decision for many businesses.  Until these roadblocks are removed, job creation will remain a twentieth century phenomenon.  The Obama era will continue to be the new "jobless" economy, regardless of what Yellen and Krueger think.

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