Thursday, March 20, 2014

Fed Reveals the Truth About So-Called Recovery

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.

No comments:

Post a Comment