The Federal Reserve has confirmed what the Obama
administration has denied – we are still in an economic crisis. But it should
be obvious to most observers of the US economy that we are far from
experiencing any kind of “recovery”.
The latest retail indication is the closing of 1,100 Radio Shack stores
throughout the United States. Then there is the persistent labor misery
reflected in the unemployment rate and stagnant wages.
This brings me to Tuesday’s Federal Reserve Bank announcement
that they would no longer use the 6.5% unemployment rate threshold as the basis
for discontinuing the near-zero interest rates and mortgage/government bond-buying
binge. These were Fed policies designed to remedy an ailing economy. The
decision to continue these policies is an acknowledgement that the economy is
still ailing and the official unemployment rate is meaningless.
Despite the employment rate approaching 6.5%, the
Fed is well aware this is hardly an accurate measure of the true state of the
economy. This is because the official unemployment rate is a bogus measure of
economic well-being. In the official calculation, designation of “unemployed”
is based on whether one is unemployed and also currently seeking
employment in the labor force. If one is
unemployed, but “discouraged” and, therefore, no longer looking for a job, they
are not included as unemployed or in the labor force.
With the unemployment rate calculated as the
percent of the labor force unemployed, there are two ways this rate can
decrease. One is when the numerator (unemployed) decreases in relation to the
denominator (number actively seeking work) due to a shift from unemployed to
employed job status. This would be the
most positive sign for the economy.
The second way the unemployment rate can decrease
is when the number of the unemployed decreases due to a decision to no longer
seek work. This is the “discouraged worker” or “missing worker” problem that now
plagues the US economy. The recently reported declining unemployment rates,
which the Obama administration celebrates as a “recovery”, are largely a result
of this missing worker phenomenon.
The Economic Policy Institute estimates that there
are 5.6 million missing workers who, if actually included in the unemployment
calculations, would raise the unemployment rate to 10.0%.
Further, contrary to those who claim that these
missing workers are primarily those nearing retirement age, roughly half of
these missing workers are of prime working age (25-54 years of age).
It is interesting that the unemployment reality
check comes from the Fed. There was a time when the Federal Reserve was the
more conservative institution, consistently pursuing contractionary monetary
policy based on a fear of inflation. Now it is the federal government that is
pursuing the more contractionary policy through fiscal austerity based on a
fear of deficits.
Today it would seems the Federal Reserve has a
better grasp of the dire economic reality.
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