The Fed can fix high unemployment, it can’t fix low employment

Tyler Cowen links to Binyamin Appelbaum:

These results,” wrote the economists Stephen J. Davis, of the University of Chicago, and John Haltiwanger, of the University of Maryland, “suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.”

Their findings contribute to the growing genre of papers that purport to show that the weakness of the American economy is caused largely by problems that predate the recession “” and that the Federal Reserve can’t remedy them with low interest rates.

My response?  I said it all in the post title.



17 Responses to “The Fed can fix high unemployment, it can’t fix low employment”

  1. Gravatar of benjamin cole benjamin cole
    22. August 2014 at 16:47

    Well…perhaps sustained aggregate demand could draw Americans out of early retirement. It may take coordination with a reduction of Social Security disability or VA disability programs.

  2. Gravatar of Major.Freedom Major.Freedom
    22. August 2014 at 19:58

    Can MM theory distnguish between the two?

  3. Gravatar of TallDave TallDave
    23. August 2014 at 10:06

    “can’t remedy them with low interest rates.”


  4. Gravatar of Becky Hargrove Becky Hargrove
    23. August 2014 at 10:28

    But they’ll go on and on anyway about low employment so as to “feel better”, and then raise the interest rates anyway. Argh.

  5. Gravatar of Major_Freedom Major_Freedom
    23. August 2014 at 15:52

    No no TallDave, it’s OK to “reason from interest rates” when the purpose of the use of that assumption is to make the conclusion that there should be more money printing.

    For example:

    Over the years Krugman and I have both bashed the ECB for their almost unbelievable incompetence. The ECB that has repeatedly raised interest rates in the midst of the biggest recession since the 1930s.

    See? It’s OK to believe higher interest rates means “tight money” and lower interest rates means “loose money” when you want to criticize a CB for not printing enough money.

    The rules of the game are to contradict oneself repeatedly.

  6. Gravatar of Don Geddis Don Geddis
    23. August 2014 at 16:39

    MF: “Raising relative interest rates causes tighter money than before”, is a logically different statement than “the absolute value of current interest rates does not tell you whether money is currently tight or loose”.

    I know how much you value “logic”, so surely you’ll shortly be thanking me for clearing up one of your many misconceptions.

  7. Gravatar of Bonnie Bonnie
    23. August 2014 at 19:49

    The $64M question is – just how much of the elevated amount of individuals not participating in the workforce is slack. We may never really know the answer to that question, but the implication of the title to this post is rather depressing.

  8. Gravatar of Vivian Darkbloom Vivian Darkbloom
    24. August 2014 at 01:23

    “The Fed can fix high unemployment; it can’t fix low employment” (I fixed the comma splice).

    I would venture that the Fed has about as much power to “fix” low employment as it does to “fix” high unemployment, if by “fix” we mean “eliminate” or, better, the degree to which the problem is eliminated.

    Bonnie has it right: (One of) the real question(s) is how much of that low employment is due to slack. But, that’s not the only problem with Scott’s overly broad conclusion.

    A Venn Diagram might be useful here. I presume that “employment” is defined as the percentage of persons who are employed in the total pool of employment-aged persons. Those who are not employed might be unemployed for a number of reasons: a job is not available to those looking due to “slack”, persons who can’t find a job because they don’t qualify persons have dropped out of the labor force due to discouragement, persons have dropped out due to other “incentives” such as the availability of unemployment insurance, “disability” benefits, etc.

    While it’s true that the Fed has no control over many of the factors that might lead to “low employment”, to the extent that it can influence the market for labor, it *does* have the ability to increase employment as normally defined. And, as Bonnie has pointed out, some of those (how many?) discouraged workers who are out of the labor force could theoretically be encouraged back in

  9. Gravatar of Vivian Darkbloom Vivian Darkbloom
    24. August 2014 at 01:41

    …to the work force by Fed policies.

    As far as the “unemployment rate” is concerned, the Fed can’t “fix” that either since much of that is beyond their control. In fact, this is one conclusion one should draw from the study that was the subject of Appelbaum’s review. Some of those “unemployed” are unemployed due to the lack of labor force fluidity caused by government regulation such as occupational licensing, health insurance laws, etc. Others are “unemployed” due to other government policies such as extended unemployment benefits, etc. Some are unemployed because they claim to be looking for work and are not. The Fed can’t “fix” those things.

    At best, one might conclude the Fed can marginally help alleviate the high unemployment rate more than it can the low employment rate; but, it’s clear to me it cannot “fix” either even though it might help alleviate both.

    Scott might complain here that I’m taking him too literally, but I’m simply following his dictum to not read anything into his posts other than what he’s written.

  10. Gravatar of Nick Nick
    24. August 2014 at 05:25

    This is one of those ‘holding all else equal’ questions in economics where the answer the science gives ‘move(s) from more or less plausible but really arbitrary assumptions, to elegantly demonstrated but irrelevant conclusions.’
    I was honestly surprised to read this post after prof sumner’s somewhat recent comments on abenomics having to overcome political obstacles. When we have a situation where the central bank is pursuing the wrong target, and when their observed reaction function doesn’t even symmetrically match that target, we are talking about needing a political solution!
    There’s not really a world where our fed switches to an ngpdlt regime but nothing else about our politics changes. Sure, we can cut the knock on effects out and say they weren’t RELLY the Fed’s choices … But that’s not very consequentialist is it? Whatever happens to fiscal policy in the years after we switch to ngdplt, the switch will be part of what caused them. If we switched over, and the nation rose up two years later angered at runaway inflation and put all kinds of crazy price controls in place, that would tend to color my perception of ngdplt in America.

  11. Gravatar of ssumner ssumner
    24. August 2014 at 05:58

    Vivian, A year from now the Fed will have reduced unemployment to roughly 5%, which is the level where the unemployment rate is no longer distort by a combination of low NGDP and wage stickiness. At that point the employment population ratio will still be relatively low, but there’s nothing the Fed can do about that.

    I suppose when I say the Fed will have reduced unemployment to 5%, it sounds like I am praising Fed policy. It might be more accurate to say policy during the 6 year recovery was less inept than ECB policy.

    Nick, NGDPLT will not lead to price controls.

  12. Gravatar of Vivian Darkbloom Vivian Darkbloom
    24. August 2014 at 06:15

    “Vivian, A year from now the Fed will have reduced unemployment to roughly 5%…”


    That’s a mighty big claim. Do you have any proof for the assertion that *the Fed* did that? All on its own?

    If the Fed has had a hand in any improvement, it has contributed both to the reduction of the unemployment and the increase in employment. It is simply disingenuous to claim that it has effect on only one measure (unemployment). I think the causes and effects of Fed action, if any, on the employment rate and the unemployment rate are simply too intertwined to make such pat distinctions.

    Perhaps you should write a more in-depth post on your thoughts about the Fed’s effect (or not) on each statistical measure.

  13. Gravatar of Nick Nick
    24. August 2014 at 11:46

    I should hope not. But monetary policy and politcal reality remain interdependent. You have argued that had the political climate happened to not offer as much fiscal stimulus in 2008 monetary policy might well have addressed the recession far better. We can take a step further back an say that ngdp targeting in 2006 could have dramatically altered the financial crisis and the legislative agenda it spawned.
    2006NGPDPLT America might not have featured that many bank failures in 2008. It might have featured 0% rgdp growth and 5% inflation. Even the healthcare policy agenda would likely have been altered, but certainly we can imagine a prices and incomes debate instead of housing and Dodd frank. The whole political landscape could be altered … I tend to agree that it would lead to better policy outcomes and not worse (like price controls) but the fact remains: different monetary policy leads to different politics, different legislative action on supply and fiscal issues, and different outcomes for the nation as a whole. I’m not saying monetary policy will drastically change the employment to population ratio, it certainly won’t make anyone any younger, but ‘no effect’ seems too limiting.

  14. Gravatar of ssumner ssumner
    25. August 2014 at 05:20

    Vivian, Yes, it will affect the employment ratio, but it won’t solve the problem of a low ratio.

    Regarding unemployment, I meant the Fed has reduced unemployment relative to a tighter policy, such as the ECB. And yes, my blog is full of 1000s of posts offering “proof.”

    Nick, Good points.

  15. Gravatar of TallDave TallDave
    25. August 2014 at 08:35

    If we switched over, and the nation rose up two years later angered at runaway inflation and put all kinds of crazy price controls in place, that would tend to color my perception of ngdplt in America.

    That’s a bit too much like saying “If America erupted into a frenzy of witch-burning, it would really color my perception of Wicca in America.” At some point you have to hold voters responsible for their irrational preferences.

    At any rate NGDPLT isn’t all that different from IT under most circumstances (i.e., when NGDP growth is stable). The only scenario that would lead to notably higher inflation would be another shock like in 2008, and if that happens people are almost certainly going to prefer the slightly higher inflation of NGDPLT to the much higher unemployment and lost RGDP of IT.

  16. Gravatar of ThomasH ThomasH
    26. August 2014 at 19:39

    But high unemployment definitely contributes to low employment. And the time to cut government spending that needs to be cut and to raise taxes that need to be raised is during a boom, not during a recession. And removing growth-impeding regulations is more valuable when there is more growth to be impeded. Good macroeconomic policies make good microeconomic policies easier.

  17. Gravatar of ssumner ssumner
    27. August 2014 at 05:49

    Thomas, You said:

    “Good macroeconomic policies make good microeconomic policies easier.”

    I completely agree.

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