The Fed Always Thinks That Unemployment’s Not a Problem

A little behind here, but I wanted to post this eye-opener from Mike Konczal:

Their model is obviously telling them that whatever (non-)actions they’re taking at the moment will solve the problem.

And their model is obviously, consistently, and wildly wrong — and always wrong in the same direction.

Altering that model to accurately predict unemployment, of course, would require that they allow more inflation in order to address both of their mandates.

And higher inflation utterly slams the real wealth of creditors.

And the Fed is run by creditors.

Comparing the Federal Reserve’s Reaction to the Financial Crisis Versus the Unemployment Crisis | Rortybomb.






20 responses to “The Fed Always Thinks That Unemployment’s Not a Problem”

  1. The Arthurian Avatar

    Great graph.

    “And the Fed is run by creditors.”

    I always have my doubts when explanations are based on assumptions about other people’s motives. (Limbaugh does that a lot.)

    From the Rorty link:

    “You can see the FRB trying to revise how bad unemployment is, but they don’t revise it anywhere near enough to where the economy actually is.”

    I interpret that to mean the fed IS TRYING to do the right things. But it seems they just don’t know what to do or how to do it.

    From the Rorty link:

    “Only Charles Evans has the courage to say that we should let inflation go to 3% while unemployment is over 7% to catch up to trend growth.”

    Looks like Rorty sees inflation as a solution to the unemployment problem.

    There is some chance that inflation could fix the problem. But inflation is NOT a solution and inflation should NEVER be a policy. Inflation is what people suggest when they don’t know what to do.

    Except the people at the Fed, I guess.

  2. Asymptosis Avatar

    “There is some chance that inflation could fix the problem. But inflation is NOT a solution and inflation should NEVER be a policy. Inflation is what people suggest when they don’t know what to do.”

    Lower unemployment is and should be the policy. *Allowing* a bit more inflation in pursuit of that is nto a problem — except for bondholders like those running the Fed.

  3. The Arthurian Avatar

    not clear to me, the current status of the phillips curve. it won’t go away despite milton friedman’s apparent spectacular victory over it so many years ago.

    i don’t think it should go away. but i think friedman’s victory must be dealt with and his errors shown. if this is not done, simply re-adopting the phillips curve can carry no weight.

    this is still… this struggle between inflation and unemployment, this is still the stagflation problem, still unresolved. Unresolved for 40 years.

    why… why is there sometimes a tradeoff between inflation and unemployment? and why is there sometimes not? if economists could adequately explain why I&U sometimes both rise, and why they sometimes trade off, then they might be able to create policy that reduces both.

  4. Mike Kimel Avatar

    I suspect a big part of the problem is that the Fed has tied itself to ways of changing the money supply that are purely supply oriented… and the problem is lack of demand (which might explain why the Phillips curve comes and goes – it goes away when the problem is aggregate demand). I’m sure they could find a legal way to send every American a menu of choices – pick $10K worth of stuff and we’ll pay for it. That’s a very different thing from simply buying the equivalent amount of bonds from primary dealers.

  5. Asymptosis Avatar

    @The Arthurian “this is still the stagflation problem”

    Stagflation without inflation hardly deserves the moniker, does it? Unless you’re saying that’s the fear — which it certainly is in certain quarters. But the notion that an extra percent of inflation would result in runaway inflation seeks kooky to me.

    @Mike Kimel “pick $10K worth of stuff and we’ll pay for it”

    There’s the difference between the Fed trading $10K in cash for $10K financial assets — which it can trade back in the future — and simply giving away $10K in cash.

    If 1. you view the Fed/Treasury as a consolidated entity (which we should in this thinking, I think), 2. Treasury effectively issues extra bonds to cover what the Fed has purchased (the causation is tricky), and 3. the treasury bonds are never to be redeemed (which U.S. and English history, at least, suggests is the case), then you could say that the Fed issuing reserves in return for bonds is the same as “giving” money (the $10K) to the primary dealers. But it’s not at all clear in my mind that the two transfers are direct equivalents but to different groups.

    I do have the strong and decidedly heterodox sense that government bond issuance by a sovereign-currency nation, period, is a gift to bondholders, because it’s paying interest on risk-free savings. They should charge for that security! Or, they should just issue interest-free dollar bills (or their electronic equivalent), not treasury bills/bonds. Very MMT. But still in the current system: paying interest on the $10K is very different from giving away the $10K.

    L’il help with this?

  6. The Arthurian Avatar

    The stagflation problem was not that inflation was really high. The stagflation problem was that we had both inflation and unemployment, because the trade-off between inflation and unemployment quit working. Or the fulcrum moved upward to a less satisfactory level.

    Rather than accepting greater inflation and hoping the Phillips curve lets unemployment come down, I think the solution is to lower the fulcrum so that unemployment can fall without pushing inflation up. My solution is to discover why the fulcrum moved up in the first place, and fix that problem… the stagflation problem.

    MK: “I’m sure they could find a legal way to send every American a menu of choices – pick $10K worth of stuff and we’ll pay for it.”

    Yeah. Waldman has suggested “good will” as have I, to balance the Fed’s balance sheet.

    Personally, I still say let the Fed print money and use it to make the monthly payments on private sector debt: bad mortgages, good mortgages, student loans, credit cards, whatever. ‘Twould free up people’s incomes so people could buy their own $10k worth of stuff.

  7. beowulf Avatar

    The trouble is there are two kinds of inflation, demand-pull and cost-push. Per the oracle of wiki…
    “Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve.”
    “Cost-push inflation is a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available.”

    Demand-pull inflation can be tackled by tax policy, with adjustable tax rates or credits pegged to unemployment rate. Cost-push inflation can likewise by targeted by tax policy, namely by an excess profits taxes (I read somewhere that during WWII a third of tax revenue came from excess profits taxes, which is a sick amount of revenue. With current tax burden that’d be $700 billion a year) or some kind of cap and trade market. Since gasoline prices is our biggest growth constraint (and a huge factor in 1970s stagflation) Marty Feldstein’s “Tradeable Gasoline Rights” cap and trade plan is a very good idea.

    Neither fish nor fowl, I was thinking the other day that one worthwhile tax reform would be to link monetary policy to tax policy– a financial transactions tax with the rate pegged to, say, 1/10h the Fed Funds rate (or better yet, the 3 month T-bill rate, then you can blame “the market” instead of the Fed). It’d basically be zero at current rates, but as interest rates go up (and the tax rate adjusted weekly), more tax revenue is drained from economy even as speculators in oil and other commodities face higher transaction costs. If nothing else, throwing an anchor on interest rates would sharply reduce debt service costs.

    ‘(a) Imposition of Tax- There is hereby imposed a tax on each covered securities transaction an amount equal to the applicable percentage of the value of the security involved in such transaction.
    ‘(b) By Whom Paid- The tax imposed by this section shall be paid by the trading facility on which the transaction occurs.
    ‘(c) Applicable Percentage- For purposes of this section, the term ‘applicable percentage’ means one-tenth the average bond equivalent rate of 91-day Treasury bills auctioned at the most recent auction of such bills prior to the date of covered securities transaction.
    ‘(d) Covered Securities Transaction- The term ‘covered securities transaction’ means–
    ‘(1) any transaction to which subsection (b), (c), or (d) of section 31 of the Securities Exchange Act of 1934 applies, and
    ‘(2) any transaction subject to the exclusive jurisdiction of the Commodity Futures Trading Commission.

  8. Asymptosis Avatar


    I started a post a while back that I’ve been poking at. Haven’t posted it cause I haven’t felt confident enough. Love to hear thoughts:

    Inflation is Always and Everywhere a Demand-Driven Phenomenon.

    Why do prices (including wages) go up? One reason: producers (including workers) think/find that they can make more money by raising prices. Why do they think that, and in what circumstance do they find it to be true? When there’s lots of demand for what they have to sell.

    But what about “cost-push inflation”? Say, oil producers think they can make more money (price x quantity minus production costs) if they charge more for their oil, and find that they can. Other producers have to pay more for that oil, so they’d like to raise their prices to maintain their profit levels. Do they think they can make more money by doing so? If they try, do they find that they can? Not necessarily. It depends on the demand for their stuff.

    They may find that they have to keep prices the same and make do with a smaller profit than they had — but it’s the best they can do.

    Different goods have different elasticities of demand. A rise in the price of one commodity doesn’t change the demand for another. …


    I really like the automatic stabilizer notion in your financial transaction tax idea, think that monetary/macro policy should probably be algorithmic, to produce truly stable expectations and get around the impossibilities/agent problems of discretionary macro policy.

    I proposed here:

    That fiscal automatic stabilizers be used, giving the Fed the resulting flexibility to manage its discretionary duties more effectively. But your suggestion (and others similar) may be even better — simply forcing monetary policy to respond automatically to economic conditions.

    But: do we feel confident that we can write an algorithm that will suffice? That discretion will no longer be needed?

    I think the guaranteed employment scheme seems the most promising in this regard, since it directly targets what’s arguably the most important variable. (EITC and payroll taxes could also be effective, at a slightly more distant remove…)

    This also makes me wonder whether interest rates, as in your system, are the best trigger/indicator. I’ll have to think about it more.

  9. beowulf Avatar

    The Market Anti-inflation Plan proposed by Abba Lerner and David Colander (endorsed and modified by William Vickrey) is an example of a cap and trade market targeting prices (per Vickrey, value added markups).
    Colander has written a fair amount since then about so-called Incentives-based Incomes Policy. Bear in mind that just as a cap and trade carbon market has a near-equivalent a carbon tax, a cap and trade anti-inflation market could be replaced with an anti-inflation tax. If the carbon market bill fiasco is any guide (with energy companies and other stakeholders carving up exemptions and free credits), its probably easier to enact a tax-based system than a market-based system (Henry Waxman’s 1200 page carbon market bill vs Bob Inglis’s 16 page revenue-neutral carbon tax bill).

    The excess profits tax (used in WWI, WWII and Korean Wars) is a type of anti-inflation tax, Vickrey’s idea of targeting “value added” suggests targeting gross profits would more directly target the Lerner Index (measures classical market power directly by subtracting a firm’s marginal cost from its price, and then dividing the result by the firm’s price).
    My idea of cost-push inflation (and perhaps I’m wrong) is its root cause is a producer’s excessive market power. Cutting into excess profits (whether net or gross) thus cuts inflation. And yes “Lerner Index” refers to Abba Lerner. To that end, Colander mentions that he and Colander had devised a fourth rule of functional finance:
    “To integrate the necessity of dealing with the institutional problem of sellers’
    inflation by changing institutions rather than accepting whatever unemployment was
    required to stop inflation, Lerner and I arrived at a modification of the rules of functional
    finance. Specifically, we added a fourth rule: ‘The government must establish policies
    which stabilize the price level and coordinate both the money supply rule and the
    aggregate total spending rule with this stable price level at the unemployment level it
    pdf p. 13

    My idea is that setting up automatically adjusting tax systems would be like bumpers added to bowling alley lanes at children’s parties. It would allow for subsequent Fed or congressional finetuning but keeps baseline policy going too far in either direction.

  10. The Arthurian Avatar

    “I was thinking the other day that one worthwhile tax reform would be to link monetary policy to tax policy– a financial transactions tax with the rate pegged to, say, 1/10h the Fed Funds rate…”

    “I really like the automatic stabilizer notion in your financial transaction tax idea…”

    I too am all in favor of this sort of thing. We *always* use monetary policy to fight inflation, and we *always* use fiscal policy to encourage growth, and the rigid adherence to these applications of policy has grossly distorted the natural forces in our economy.

    Create a tax that varies with a borrower’s indebtedness and it will act like an increase of interest rates — but custom-fitted for each borrower. Design the tax to encourage repayment of debt, design it to *help* people pay off debt (by creating tax credits for accelerated debt repayment), and excessive debt accumulation could become a thing of the past.

    The Fed’s new role then would be to fine-tune the anti-inflation effort, and in general to keep interest rates low forever so as to encourage growth.

  11. nanute Avatar

    @Aysmptosis: I’ve been thinking about the question of producers/manufacturers raising prices when demand doesn’t justify the increase. I’ve recently been told by the bean counters at my company that raising prices by 10% can raise profits 100%. This would assume no loss in sales, and I suspect a very inelastic product. No? Well, in our particular product, I would say the goods are elastic. This raises the question: Where is the break even point, if prices rise by 10%? (How much would sales have to decline to maintain the same level of profit as before the increase?)
    @Beowulf: Nice to see you giving some recognition to the late Bill Vickrey. I’ve been referencing him in multiple places over the past year or more. In his 1996 working papers from Columbia entitled the 15 Fatal Fallacies of Financial Fundamentalism, he argues, I think, that inflation can actually be utilized as a means of financing increased employment levels. He seemed to think that the additional cost to society(and government), from high unemployment were much more “expensive” than added inflation levels. IIRC, this was in Fallacy #6.

  12. Asymptosis Avatar

    @nanute “producers/manufacturers raising prices when demand doesn’t justify the increase”

    This is a question that I as a businessman (and I’m thinking most other businesspeople) think about almost every day. Cause a price increase with no loss of sales is pure, unadulterated profit. Filthy lucre, for free. Incredibly alluring.

    That’s why I talk about producers “thinking” or “finding” that they can make more money by raising prices. It’s almost impossible to know without trying. (And even if you try, you’re comparing to a counterfactual — what would have happened if I hadn’t raised prices?) We’re always trying to guess. The #1, utterly dominating piece of evidence is current sales — the closest thing we have to revealed demand. But even that tells us nothing about elasticity, competition, substitution. We’re forever holding up our thumbs and squinting.

    Not sure all that is of any use. (Could certainly be translated into econo-speak…) Just sharing my experience.

  13. Asymptosis Avatar

    Just to add: in direct marketing, the (seemingly true) truism is that these are the four factors to consider, in (rapidly) decreasing order of importance:

    The offer — whaddaya got, and what does it cost?

    The list — who are you targeting?

    The copy — how are you describing the offer?

    The design — what does your marketing piece look like? (Of course, people tend to fixate on this cause they can just say “I like it” or “I don’t like it.” Silly.)

    The biggest leverage you’ve got, given some thing you’re offering, is the price. There’s no more important business decision. And in most businesses, there’s no way to find the “right” answer via split testing, as you can do with #s 2, 3, and 4.

  14. nanute Avatar

    @Aysmptosis: “cause a price increase with no loss of sales is pure, unadulterated profit…..
    This is assuming no additional cost of production, right? Interestingly, raw material costs in some domestic manufacturing markets have been on the rise, while demand for product (finished goods), have stagnated, or declined. Are we really comparing to a counter factual? If we raise prices, can’t we measure sales against the previous year totals? Granted, there may be other factors that may effect the outcome. If we assume that nothing changes except sales totals, for experiment purposes, we should be able to measure the outcome. No?
    Thanks for the reply.

  15. Asymptosis Avatar

    @nanute “Granted, there may be other factors that may effect the outcome.”

    That’s why it’s comparing to a counterfactual. Sales might have gone up or down cause the economy improved/declined, or a zillion other reasons. Given those inevitable changes, what would have happened if we’d left prices the same? ‘sais pas…

  16. nanute Avatar

    sais pas..? “I don’t know much, but this much I do know: I don’t know much.” Or, put another way: ” I used to be indecisive, now I’m not so sure.”

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