“U.S. Unemployment Rates and FED/Central Bank Policy (Becker on “Becker-Posner” Blog)

22 12 2012

The Becker-Posner Blog (http://www.becker-posner-blog.com/) features the economic point-counter point discussions of Gary Becker and Richard A. Posner.

Gary Becker is University Professor Department of Economics and Sociology Professor, Graduate School of Business at the University of Chicago.  He was awarded the Nobel Memorial Prize in Economic Sciences in 1992 and received the United States Presidential Medal of Freedom in 2007. He is currently a Rose-Marie and Jack R. Anderson senior fellow at Stanford University’s Hoover Institution.  His homepage is found here.

Richard A. Posner is a legal scholar and Federal Judge on the United States Seventh Circuit Court of Appeals, and Senior Lecturer, University of Chicago Law School.  His home page is found here.


Following is and excerpt from Gary Becker’s latest post (12/16/2012) on “The Unemployment Rate and Central Bank Policy“, posted at the following web address:


The Unemployment Rate and Central Bank Policy-Becker

Low inflation and “full” employment have been statutory goals of the Federal Reserve for the past 35 years. Often, however, inflation received the most attention, as when former Fed chairman Paul Volcker in the early 1980s sharply raised interest rates and put the economy in recession in order to wring inflationary expectations out of the system.

On December 12th, Ben Bernanke, the chairman of the Fed, indicated that the Fed would pursue what one might think is simply a variant of the full employment target by keeping nominal interest rates close to zero until the US unemployment rate dips below 6.5%-it is currently 7.7%- or until inflation is forecast to exceed 2.5%. The challenge facing this proposal is that while an unemployment rate target may seem to be just the flip side of the full employment target, unemployment can be nudged by other government policies in ways that have little effect on employment.

The present high level of unemployment in the US in good measure reflects the slow rate of recovery of real GDP and employment from its recession levels. According to “Okun’s Law”, the recovery in employment from a recession is simply related to the recovery in real GDP (see the discussion of Okun’s Law in my blog post on 11/4/2012). Okun’s Law implies that a central bank can use the recovery in real GDP as a proxy for the recovery in employment toward a full employment goal.


The complication is that changes in unemployment rates during business cycles are not just mirror images of changes in employment rates. This has been especially the case during the Great Recession. By definition, the unemployed equals the difference between the number of persons in the labor force and the number of persons working. The unemployment rate is then defined as the number of individuals who are unemployed as a fraction of the labor force. It follows from the definition of unemployment that the unemployment rate equals one minus the employment rate (the ratio of the number of persons employed to the number of persons in the labor force). This relation shows that changes in the unemployment rate would be equal to but opposite in sign to changes in the employment rate only as long as the labor force remained fixed.

During business cycles, the employment rate and the unemployment rate do move in opposite directions, but the relation is far from one to one, especially during severe recessions. The reason is that the labor force also changes over the course of a business cycle. Especially during severe recessions, some workers get discouraged about finding jobs and leave the labor force. This would tend artificially to reduce the unemployment rate even when both employment and unemployment did not change. This is why the official unemployment rate is usually supplemented with measures of the “total” unemployment rate that include both individuals who got discouraged and withdraw from the labor force, as well as those working part time because they could not find full time jobs. This total unemployment rate now stands at 14.4%, much above the 7.7% official rate.


The unemployment rate is also affected by policies that affect eligibility for unemployment compensation, such as the extension of unemployment benefits during this recession to 99 weeks. Such an extension increases unemployment because it encourages individuals to become or remain unemployed in order to collect unemployment benefits for a longer time. The net effect of extensions in unemployment benefits is to increase the unemployment rate differently from any decline in the employment rate.


A major risk of trying to implement an unemployment target through present Fed policies is that the inflation rate could increase in a futile attempt to bring down further the unemployment rate to a targeted rate, as happened in the 1970s. To its credit, the Fed protected against this possibility by setting its target at a relatively high unemployment rate of 6.5%, even though the rate prior to the onset of the recession in 2007 was well under 5%. The Fed also directly faced the risk of creating excessive inflation by setting its target as no more than 6.5% unemployment only as long as the inflation rate does not rise about 2.5%, a modest rate of inflation.


KC Fed Financial Stress Index => Still low U.S. Financial Stress in October 2012

15 11 2012

The Kansas City Federal Reserve calculates a monthly Financial Stress Index (here).  See the following description to by the KC Fed of the KCFSI….


KC Fed – Financial Stress Index

The Kansas City Financial Stress Index (KCFSI) is a monthly measure of stress in the U.S. financial system based on 11 financial market variables.

A positive value indicates that financial stress is above the long-run average, while a negative value signifies that financial stress is below the long-run average. Another useful way to assess the current level of financial stress is to compare the index to its value during past, widely recognized episodes of financial stress.

How should the index be interpreted? The KCFSI is constructed to have a mean value of zero and a standard deviation of one. A positive value of the KCSFI indicates that financial stress is above the longrun average, while a negative value signifies that financial stress is below the long-run average. A useful way to assess the level of financial stress is to compare the index in the current month to the index during a previous episode of financial stress, such as October 2008.


The most recent KCFSI report for October is available at the following web address, with exerpts from the report to follow:


“The Kansas City Financial Stress Index (KCFSI) continues to indicate that financial stress remains low. The KCFSI measured -0.40 in October, a slight increase from September’s value but below its long-run average. This is the first increase in the KCFSI since May 2012.”

Comment by Daniel O’Brien – blog author:

These numbers seem to indicate that the U.S. economy is not in extreme financial stress in the fall of 2012 to the degree that it was in the fall of 2008.  These findings suggest that although serious financial issues are facing the U.S. economy and the U.S. consumer, at this time the U.S. is not experiencing a period of extreme financial stress.  If one political party in the U.S. was basing its 2012 election campaign on jobs and economic growth potential being lost, it may just be that some significant numbers of swing voters among the American public at large was not feeling or perceiving enough personal, kitchen table level economic stress to motivate them to change the party in presidential power.

Recognizing (my) government subsidies

25 04 2011

The list of government subsidies that I benefit from is pretty lengthly.  Here are just a few of the DIRECT government subsidies that I can think of…

1) Tax deduction for interest paid on my house loan

2) Government payments on the small amount of farmland that my wife and I own

3) Crop insurance subsidies for a proportion of our crop revenue coverage as a crop share land owner

4) Income tax deductions for each of my children

5) State matching support for my government employee retirement account

6) Tax deductions for my church / religious charitable giving

On the surface, all else being equal, my family and myself have benefited financially from each of these elements of tax support.  But in a macro economic, wholistic systems sense, this level of government support is unsustainable (with millions of U.S. citizens all involved in receiving similar tax subsidies).   In my desire to protect my own government subsidies, am I unwilling to recognize the that the broader U.S. economy and the economic livelihood of my children for decades to come is put at risk by this much government support? Am I myself a “tragedy of the commons” in regards to my lack of recognition of how my portion of the government “pie” is a significant part of the cumulative budget problem here in the U.S.?

My contention is that we in the U.S.  (me first) have to recognize that without the elimination or at least more effective targeting of these government subsidies (or changing them to a true safety net for the most needy instead of an entitlement program for all), the economic future of the country is at risk.  I want my children to have an opportunity to make an honest living in the future.  The subsidies for my house, my farmland, my crop insurance, my charitable giving, and yes, even my child tax credits likely need to go.  IF I had a lower tax rate with equitable application across the U.S. tax payer base, I may end up better off financially.  These subsidies from the government have made us weak, timid and fearful —- scared to independently take responsibility for our own finances apart from government support.

Of “loose money and credit generated by the Fed”

25 11 2008

Jeffrey A. Tucker, editor of Mises.org (http://mises.org/) has written an article titled “Business Cycles, Not Our Fault”  In this article, Tucker argues that the real cause of the current calamity in the U.S financial system is “loose money and credit generated by the Fed”.  It is an interestingly relevant and thought provoking article.  Some relevant exerpts are presented below.  The full article can be found at the following web address: http://mises.org/story/3226 

“Business Cycles, Not Our Fault”

By Jeffrey A. Tucker, November 21, 2008

“We are told that the economy has tanked because foreigners invested too much in the US, that foreigners saved too much money, that we all lived beyond our means, that greedy capitalists fed our materialist instincts until we popped, or any combination of the above. Or maybe business cycles are just like weather, cold one season and hot the next. Regardless, it is the government that must come to the rescue with the usual combination of cockamamie schemes.”

“Discovering the Austrian business cycle theory, then, is a revelation, because through it, you learn how the whole business traces to loose money and credit generated by the Fed. The money is pumped into the capital-goods fashion of the day, in this case housing. The whole sector becomes overbuilt and unsustainable and it turns, tanking many other affected sectors. The only answer to the problem is not more of the poison that caused the problem but a real liquidation.”


Source: Welker’s Wikinomics website (www.welkerswikinomics.com)

“Lord Lionel Robbins wrote in 1934. His book called The Great Depression, ….. (in it he) presents the Austrian theory in a very precise way, and documents how the Fed and the Bank of England inflated the money supply and loosened credit in the latter half of the 1920s, leading to the bust. His is a cautious treatise in some way.”

“After all, he was blaming the central bank — not exactly a position that was politically wise — and we aren’t just talking about the equivalent of a blogger today. He was Lionel Robbins, the most influential economist in Britain until Lord Keynes stole the show with his whiz-bang policy ideas. And why? Robbins counseled letting the bad investments wash out of the system. Keynes thought you could use the state to rev the bad back to life.”

“The Theory of Money and Credit” by Ludwig von Mises (First edition, 1912)

“As another example, and really the definitive one, Ludwig von Mises himself was writing all throughout the late twenties and early thirties about the business cycle. He nails it all in essay after essay: the credit expansion, the malinvestment, the folly of counter-cyclical policy, the dangers of protectionism and reflation, and so much more. These essays could all be written today, and what is also impressive is Mises’s focus on theory. He never makes empirical claims that aren’t backed up by an attempt to explain the theoretical apparatus behind the analysis.”

 Economist Ludwig von Mises (1881-1973)

“All of this leads up to Rothbard’s America’s Great Depression, the book that is often cited as the one to show that the episode was caused not by the market but by the central bank. It is getting all new attention today. But if you follow his citations, they lead right back to Garrett, Robbins, and Mises — three of the observers of the time who saw precisely what was happening. They had to be ignored by the New Dealers, for they utterly demolish the case for stabilization policy.”



For other information on economics that is running counter to the present stream of thought in regards to appropriate and needed government policy actions in response to current economic crises around the world, I encourage you to visit website for “The Ludwig von Mises Institute” (http://mises.org/).

Have a great Thanksgiving Holiday!  Here is an appropriate economic cartoon for your holiday meditations.









Source: Economist Stefan Karlsson’s Blog (here)

Mount Kilimanjaro, Tanzania, African Continent (19,340 feet in elevation)