Promoting economic growth and employment is one of the Fed’s core missions, assigned to it by Congress in (I believe) 1974.
It was a triumph of Keynesian thought over Hayek’s beliefs; and despite all evidence to the contrary, most market participants still think that monetary policy is the magic that drives the business cycle.
Policy is supposed to moderate the boom-and-bust cycle and lift the economy out of recessions within a reasonable period. On that point, monetary policy has failed miserably.
We’re seven years out of a recession and have yet to see GDP growth break above 3%.
The Fed’s answer in this week’s episode was to throw in the towel: Expect more of the same.
Economic growth is not sufficient
Here’s actual growth since 2011 and the FOMC’s projections through 2019. Notice that the top end of the range of growth is barely more than 2%.
You can see that 2013 was a “good” year. Ben Bernanke was confident enough to start talking about “tapering” down from quantitative easing. Staying on that path another year or two might have changed everything.
But it didn’t.
There was a global taper tantrum; Growth fell back again; and now even the most optimistic FOMC participants see little chance that it will climb much above 2% through 2019.
(One caveat—and it’s one that I feel the need to keep repeating: GDP is a deeply flawed statistical measure that doesn’t fully capture the way today’s economy works. We use it because we have nothing better.)
Former Treasury Secretary Larry Summers, who desperately wanted to star in the show Janet Yellen now headlines, famously called the current trend “secular stagnation.”
He thinks we should all get used to it because its structural causes are impossible to change. Yellen and her crew might not use language that strong, but they appear to mostly agree with Larry.
Are they right? Maybe, but I think we can escape this dreary fate if we play our cards right.
Jobs, jobs, jobs
The unemployment trend is looking better. The rate has fallen pretty steadily and is now below 5%. The FOMC expects it to stay there, too.
The problem is that not all jobs are equal. The wealthy law firm partner and the student-debt-plagued law degree holder who is instead driving for Uber both count as “employed,” even though their situations are vastly different.
Also problematic: The unemployment rate is down in part because so many workers have left the labor force—or, increasingly, never entered it. Roughly 10 million American males of prime working age have literally dropped out of the workforce. And we wonder why productivity is low.
Again, this problem has been building steadily since the 1960s. The trend has held steady through boom periods and recessions, and the Clinton/Gingrich welfare reforms didn’t affect it.
France and Greece have significantly higher labor force participation rates than the US does. And no, these dropouts are not Trump voters, and it’s not just the labor force they don’t participate in.
This is a major and very troubling social trend.
The problem is that we have a mismatch between the skills of jobless people and the kinds of work employers need done. That is not something lower interest rates can solve.
John Mauldin is the chairman of Mauldin Economics, which publishes a growing number of investing resources, including both free and paid publications aimed at helping investors do better in today's challenging economy. Mauldin uncovers the truth behind, and beyond, the financial headlines.
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