In any given month, a large number of workers are being hired or are leaving their current jobs, illustrating the dynamism of the U.S. labor market. For example, between 2001 and 2007, private employers hired nearly 5 million people, on average, each month. Total separations, on average, were only slightly smaller. Taking the difference between gross hires and separations, the net monthly change in payrolls during this period was, on average, less than 100,000 jobs per month--a small figure compared to the gross flows.

The recent history of these flows suggests that further improvement in the labor market will likely need to come from a shift to a more robust pace of hiring. As figure 7 shows, the declines in aggregate payrolls during the recession stemmed from both a reduction in hiring and a large increase in layoffs. In contrast, the increase in employment since the end of 2009 has been due to a significant decline in layoffs but only a moderate improvement in hiring. To achieve a more rapid recovery in the job market, hiring rates will need to return to more normal levels.

The Change in Unemployment and Economic Growth: A Puzzle?

What will lead to more hiring and, consequently, further declines in unemployment? The short answer is more-rapid economic growth. Indeed, the improvement in the labor market over the past year--especially the decline in the unemployment rate--has been faster than might have been expected, given that the economy during that time appears to have grown at a relatively modest pace. About 50 years ago, the economist and presidential adviser Arthur Okun identified a rule of thumb that has come to be known as Okun's law. That rule of thumb describes the observed relationship between changes in the unemployment rate and the growth rate of real gross domestic product (GDP). Okun noted that, because of ongoing increases in the size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its potential is normally required just to hold the unemployment rate steady. To reduce the unemployment rate, therefore, the economy must grow at a pace above its potential. More specifically, according to currently accepted versions of Okun's law, to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2 percentage points faster than the rate of growth of potential GDP over that period. So, for illustration, if the potential rate of GDP growth is 2 percent, Okun's law says that GDP must grow at about a 4 percent rate for one year to achieve a 1 percentage point reduction in the rate of unemployment.

In light of this historical regularity, the combination of relatively modest GDP growth with the more substantial improvement in the labor market over the past year is something of a puzzle. Resolving this puzzle could give us important insight into how the economy is likely to evolve. Okun's Law is Useless

There is no puzzle. Rather, Bernanke fails to see the obvious.

... cyclical rather than structural factors are likely the primary source of its substantial increase [in long-term unemployment] during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well. We must watch long-term unemployment especially carefully, however. Even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.

If this hypothesis is wrong and structural factors are in fact explaining much of the increase in long-term unemployment, then the scope for countercyclical policies to address this problem will be more limited. Even if that proves to be the case, however, we should not conclude that nothing can be done. If structural factors are the predominant explanation for the increase in long-term unemployment, it will become even more important to take the steps needed to ensure that workers are able to obtain the skills needed to meet the demands of our rapidly changing economy. Cyclical or Structural Problem?

Bernanke thinks the problem is cyclical. Moreover, his structural thesis involves training. Good grief. He is clueless on both counts.

Instead of his cyclical theory, I propose Fundamental and Mathematical Case for Structurally High Unemployment for a Decade; Shrinking Job Opportunities and the Jobs Gap; The Real Employment Situation.

The problem is debt and deleveraging, not retaining. Bernanke wants consumers to spend more. However, boomers are up to their eyeballs in debt, facing retirement with insufficient income, and a need to downsize lifestyles. These are not the typical cyclical forces, this is a massive demographic shift. Factor in global wage arbitrage and student debt, and the problems are massive.

Middle-Aged Borrowers Pile on Student Debt

Speaking of student debt, Bernanke also missed the fact that Middle-Aged Borrowers piled on student debt hoping to get a better job.

Such debt has a negative payback. For a discussion, please see Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit

People going back to school and staying in school longer explains a significant part of the decline in the participation rate.

Disability Fraud

Looking for another reason for an artificially low unemployment rate?

Consider disability fraud, people claiming disabilities they do not have such as mental illness. Prior to the great recession 33% of applicants claimed mental illness. The number is 43% now.

There was fraud before, of course. There is even more fraud now.

Please see Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January for further discussion.

Is Bernanke Angry With Bond Market?

MarketWatch proclaims Bernanke getting angry at the bond market

There are lots of ways to interpret the Federal Reserve’s continual talking down of the U.S. economy, but the comments from Ben Bernanke on Monday have a clear target: the bond market.

Ben has commanded: “Thou shalt take risk.” He also has commanded from Mount Jackson Hole, and other venues: “Bond rates shall stay low.”

But Wall Street traders were starting to disobey. The yield on the 10-year note 10_YEAR +1.70% has been heading the other way. UBS economists have declared the three-decade long bull rally in government bonds is set to end.

Bernanke is fearful that an increase in yields will kill off the recent gains seen in the U.S. economy. That’s why the Fed has started quarterly press conferences and revealing the interest rate forecasts of Federal Open Market Committee members — all to keep a better grip on interest rates.

But that grip is loosening, and probably not helped by the hawks on the Fed who have been on the warpath saying the central bank really isn’t committed to low rates, after all. Just an hour before Bernanke spoke, Philadelphia Fed President Charles Plosser was in Paris, warning an audience of a central bank without boundaries.

Bernanke is willing to tolerate the likes of Plosser and Dallas Fed Chief Richard Fisher in the name of academic diversity so long as no one actually believes them. But confronted with evidence the hawks are making inroads, Bernanke went to Arlington, Va. to say who’s boss. The U.S. economy needs low interest rates and the Fed’s bond purchases, Bernanke saidIs Bernanke commanding the bond market or is Bernanke simply clueless?

Six Things Bernanke is Clueless About

With apologies to the Columbia Business School students who came up with this one:

Every breath you take
Every change of rate
Jobs you don’t create
While we still stagflate
I’ll be watching you

Every single day
Bernanke takes my pay
When growth goes away
Inflation will stay
I’ll be watching you

Oh can’t you see?
The Fed’s where I should be
How my poor heart aches
With each of your mistakes

First you move your lips
Hike a few more BPS
When demand then dips
And the yield curve flips
I’ll be watching you

Since you came supply’s lost without a trace
I dream at night that I punch you in the face
Your interest policies I cannot embrace
I feel so wronged and I long for Greenspan’s place
I keep cryin’: Benny! Benny! Please...

Oh can’t you see?
The Fed Chair should be me
How my poor heart aches
When prices escalate

Every move you make
Every oath you take
Hope your models break
Bet that beard is fake
I’ll be watching you

CBS is great
Wouldn’t change my fate
But we’ll be watching you
We’ll be watching you

PERMANENT LINK | MARCH 26, 2012

George Selgin on "The Bernank"

David Henderson

Why Haven't They Been Fired?...

If the Mind Is a Muscle...

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George Selgin has an excellent commentary on Ben Bernanke's maiden lecture on monetary policy at George Washington University. Not only does George dispel myths that most people believe, but also he dispels myths that I believed.

An incomplete list of myths that most people believe and George's dispelling of them:

He [Bernanke] thus attributes the greater frequency of banking crises in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England. Hearing Bernanke you would never guess that U.S. banks were generally denied the ability to branch, or that state chartered banks were prevented by a prohibitive federal tax from issuing their own notes, or that National banks found it increasingly difficult to issue their own notes owing to the high cost of government securities required (originally for fiscal reasons) as backing for their notes. Certainly you would not realize that economic historians have long recognized (see, for starters, here and here) how these regulations played a crucial part in pre-Fed U.S. financial instability.

In particular, he never mentions the fact that Canada had no bank failures at all during the 1930s, despite having had no central bank until 1935, and no deposit insurance until many decades later. Nor does he acknowledge research by George Kaufman, among others, showing that bank run "contagions" have actually been rare even in the relatively fragile U.S. banking system.

Bernanke's claim that output was more volatile under the gold standard than it has been in recent decades is equally unsound. True: some old statistics support it; but those have been overturned by Christina Romer's more recent estimates, which show the standard deviation of real GNP since World War II to be only slightly greater than that for the pre-Fed period. (For a detailed and up-to-date comparison of pre-1914 and post-1945 U.S. economic volatility see my, Bill Lastrapes, and Larry White's forthcoming Journal of Macroeconomics paper, "Has the Fed Been a Failure?").

Finally, Bernanke repeats the tired old claim that the gold standard is no good because gold supply shocks will cause the value of money to fluctuate. It is of course easy to show that gold will be inferior on this score to an ideally managed fiat standard. But so what? The question is, how do the price movements under gold compare to those under actual fiat standards? Has Bernanke compared the post-Sutter's Mill inflation to that of, say, the Fed's first five years, or the 1970s?

Now to the ones that were news to me:

Bernanke, in typical central-bank-apologist fashion, refers to [Walter] Bagehot's work, but only to recite Bagehot's rules for last-resort lending. He thus allows all those innocent GWU students to suppose (as was surely his intent) that Bagehot considered central banking a jolly good thing. In fact, as anyone who actually reads Bagehot will see, he emphatically considered central banking--or what he called England's "one-reserve system" of banking--a very bad thing, best avoided in favor of a "natural" system, like Scotland's, in which numerous competing banks of issue are each responsible for maintaining their own cash reserves.

Because he entirely overlooks the role played by legal restrictions in destabilizing the pre-1914 U.S. financial system, Bernanke is bound to overlook as well the historically important "asset currency" reform movement that anticipated the post-1907 turn toward a central-bank based monetary reform. Instead of calling for yet more government intervention in the monetary system the earlier movement proposed a number of deregulatory solutions to periodic financial crises, including the repeal of Civil-War era currency-backing requirements and the dismantlement of barriers to nationwide branch banking. Canada's experience suggested that this deregulatory program might have worked very well. Unfortunately concerted opposition to branch banking, by both established "independent" bankers and Wall Street (which gained lots of correspondent business thanks to other banks' inability to have branches there) blocked this avenue of reform.

Finally, Bernanke suggests that the Fed, acting in accordance with his theory, only offers last-resort aid to solvent ("Jimmy Stewart") banks, leaving others to fail, whereas in fact the record shows that, after the sorry experience of the Great Depression (when it let poor Jimmy fend for himself), the Fed went on to employ its last resort lending powers, not to rescue solvent banks (which for the most part no longer needed any help from it), but to bail out manifestly insolvent ones.

Rather less amusing was his quotation of that "famous statement by Andrew Mellon" about liquidating stocks etc.: poor Mellon never said it, in fact: the words were Hoover's, and were intended as parody.

And, most shocking to me--it shows how even I had drunk the Fed Kool-Aid--is this one:

Although he admits later in his lecture (in his sole acknowledgement of central bankers' capacity to do harm) that the Federal Reserve was itself to blame for the excessive monetary tightening of the early 1930s, in his discussion of the gold standard Bernanke repeats the canard that the Fed's hands were tied by that standard. The facts show otherwise: Federal Reserve rules required 40% gold backing of outstanding Federal Reserve notes. But the Fed wasn't constrained by this requirement, which it had statutory authority to suspend at any time for an indefinite period. More importantly, during the first stages of the Great (monetary) Contraction, the Fed had plenty of gold and was actually accumulating more of it. By August 1931, it's gold holdings had risen to $3.5 billion (from $3.1 billion in 1929), which was 81% of its then-outstanding notes, or more than twice its required holdings. And although Fed gold holdings then started to decline, by March 1933, which is to say the very nadir of the monetary contraction, the Fed still held over than $1 billion in excess gold reserves. In short, at no point of the Great Contraction was the Fed prevented from further expanding the monetary base by a lack of required gold cover.

I've excerpted about half of Selgin's excellent piece, but the whole thing is worth reading. He also supplies links to his most-important factual claims.

HT to Alex Tabarrok and Jeffrey Rogers Hummel. class=s

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