Powell Says the True Unemployment Rate is Actually 10%

Mish

Fed Chair Jerome Powell gave a speech today on the labor force and jobs. Let's tune into the discussion.

Getting Back to a Strong Labor Market

Please consider Jerome Powell's speech today at the Economic Club of New York on Getting Back to a Strong Labor Market.

Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared. Employment in January of this year was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession's aftermath.

After rising to 14.8 percent in April of last year, the published unemployment rate has fallen relatively swiftly, reaching 6.3 percent in January. But published unemployment rates during COVID have dramatically understated the deterioration in the labor market. Most importantly, the pandemic has led to the largest 12-month decline in labor force participation since at least 1948.

Fear of the virus and the disappearance of employment opportunities in the sectors most affected by it, such as restaurants, hotels, and entertainment venues, have led many to withdraw from the workforce. At the same time, virtual schooling has forced many parents to leave the work force to provide all-day care for their children. All told, nearly 5 million people say the pandemic prevented them from looking for work in January. In addition, the Bureau of Labor Statistics reports that many unemployed individuals have been misclassified as employed. Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.

Unfortunately, even those grim statistics understate the decline in labor market conditions for the most economically vulnerable Americans. Aggregate employment has declined 6.5 percent since last February, but the decline in employment for workers in the top quartile of the wage distribution has been only 4 percent, while the decline for the bottom quartile has been a staggering 17 percent.

In the past few months, improvement in labor market conditions stalled as the rate of infections sharply increased. In particular, jobs in the leisure and hospitality sector dropped over 1/2 million in December and a further 61,000 in January. 

No Disagreement About Employment

I have no disagreement with any of the above. In fact, it mirrors what I have written many times. 

 Here's the key question: What to do about it?

Powell's Answer

To counter the adverse economic dynamics that could ensue from declines in inflation expectations in an environment where our main policy tool is more frequently constrained, we now explicitly seek to achieve inflation that averages 2 percent over time. This means that following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal.

Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy. It will require a society-wide commitment, with contributions from across government and the private sector. The potential benefits of investing in our nation's workforce are immense. Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families

Powell Q&A

Q1: How the heck does higher inflation lead to more jobs?
A1: It doesn't

Q2: Is the Fed interjecting itself into fiscal policy?
A2: Yes

Q3: Does the Fed like it when Congress comments on monetary policy?
A3: No it does not. It wants independence from Congressional oversight.

Question #1 is the most pertinent one.

More inflation does not promote jobs. If anything, it destroys jobs. Businesses have to pay higher prices and may not be able to pass them on.

Moreover, loose monetary policy leads to asset bubbles and it also severely damages those who do not find a job. 

Those who do not have a job have higher prices to pay, do they not?

Fed has Truly Lost It

The Fed has truly lost it. It does not have any idea how to measure inflation and is ignoring bubbles with a misguided focus on the CPI rather than inflation.

Powell accurately concludes the unemployment rate is understated but misses the equally obvious fact that inflation is understated as well.

Ignoring Inflation

Despite inflation and clear asset bubbles, the Fed says Monetary Policy Will Stay Accommodative For a Very Long Time.

Translated, that means forever or until a global currency crisis changes their tune.

Earlier today I noted As Reported, Consumer Price Inflation Is Lower Than Expected Once Again

It's a mirage.

Last year I wrote an open letter to Powell on the CPI. Please give Hello Jerome Powell, We Have Questions a read.

Mish

Comments (38)
No. 1-16
Quanta
Quanta

Capitalism is built to benefit the elite. Government is captured , it is impossible to get elected without a giant cash war chest. Citizens United is a free for all for the rich w/r to elections. As the Covid-19 pandemic illustrates - institutions get politicized even around issues that everyone benefits from. Half the electorate is dumb as rock and blames each other (dem vs reps) instead of focusing attention on the elite stealing their earnings and wages. A bit of a hopeless picture here.

WarpartySerf
WarpartySerf

Powell should move to China - where totalitarian issued economic statistics
like his command even more reverence than here.
This guy has been telling us we have 1% inflation and 4% unemployment for years.
What a liar. Why not move up to the big leagues ?

Quanta
Quanta

In other words, it is not surprising that the CPI is measured incorrectly, to benefit the gov't at the expense of the people. The megabanks get free money from the FED, aka they are inflation proof when in comes to real asset ownership.

Eddie_T
Eddie_T

If you drink enough champagne, you don’t notice bubbles that much after a while.

RonJ
RonJ

"...we now explicitly seek to achieve inflation that averages 2 percent over time."

In other words, they intend to ramp inflation above 2%, whatever it takes. This will be the start of an inflation wave. Draw a trend line across the rising lows. Once something gets set in motion, it takes on a life of its own. All one has to do is look at a chart of the last inflation wave and note that it didn't average out to 2% over time.

In 1975 Alan Greenspan came up with a handy little device intended to crimp rising inflation- the Whip Inflation Now lapel button. It famously failed.

Doug78
Doug78

The Fed can't create jobs. It can only flood the economy in cash. The problem is that the cash is inserted from the top so that cash doesn't increase consumption except in assets which are owned by the top slice of the population. This time that might change somewhat by sending money directly into people's bank accounts bypassing a lot of bureaucracy which just wastes it.

bluestone
bluestone

The problem the US has is that dollars leach out of the country due to the deficit, the stimulus checks are like stimulus checks for Spain in the eurozone, you may as well give the money to Germany. The chance of the deficit being corrected with a newly mandated minimum wage of 15 dollars seems low.
Personally, I see the main risk for the US as political. There is money printing, there is about to be what is basically a political show trial, the situation won't improve and the risk is that AOC and similar will successfully lead calls for a government led redivision of wealth i.e. the risk for the USA is not really inflation but Argentina.

Frilton Miedman
Frilton Miedman

"Q1: How the heck does higher inflation lead to more jobs?
A1: It doesn't"

Agree

"Q2: Is the Fed interjecting itself into fiscal policy?
A2: Yes

Q3: Does the Fed like it when Congress comments on monetary policy?
A3: No it does not. It wants independence from Congressional oversight."

The Fed is comprised of economists, Congress is comprised of economically illiterate individuals looking to win elections by appeasing wealthy campaign donors.

Notwithstanding the "inflation creates jobs" conundrum, at least we know one entity has a focus, credentials, less personal bias.

Members of the fed need no campaign donations, though they do have a bias for the banking sector....when an entity with a bias for banks suggests fiscal intervention vs cheaper debt, one might lend an ear.

njbr
njbr

Here's the key question: What to do about it?

What to do?

First, stomp the virus out.

Second, accept that the world has changed and the job mix is changing.

Third, solve the permanent unemployment compensation issue--some people will remain marginally attached to work for their lifetime. That is the key question that needs to be addressed and requires the biggest changes in outlook.

numike
numike

“Until you realize how easily it is for your mind to be manipulated, you remain the puppet of someone else's game.”
― Evita Ochel

Mish
Mish

Editor

Capitalism benefits everyone
Don't mistake what we have as capitalism

Call_me_Al
Call_me_Al

"Despite inflation and clear asset bubbles, the Fed says Monetary Policy Will Stay Accommodative For a Very Long Time."

No doubt that future policy will be accommodating, just understand that it isn't you whom they are trying to accommodate. The Fed hasn't lost it, their objective and raison d'etre are not what you think they should be.

WTFUSA
WTFUSA

"Powell Says the True Unemployment Rate is Actually 10%"

So one pathological liar calls out another (the Bureau of Liars and Sycophants) even as the BLS stays in lock step with Powell's lies regarding inflation. He and the other Fed governors must really fear that the American public is (glacially) becoming aware of the damage being imposed by the Fed's policies that are continually worsening the economics of those who are not members of the preferred class.

Six000mileyear
Six000mileyear

"Steady employment provides more than a regular paycheck. It also bestows a sense of purpose, improves mental health, increases lifespans, and benefits workers and their families"

Jerome Powell has officially given testimony against Universal Basic Income.

Tbremekamp
Tbremekamp

"The Fed has truly lost it. It does not have any idea how to measure inflation and is ignoring bubbles with a misguided focus on the CPI rather than inflation." I think you underestimate the FED, i think it knows EXACTLY how to measure inflation. What they post in CPI is an excuse for them to continue their QE policies without pushback from public. They know very well they are creating asset bubbles but they need to in order to inflate the debt away.


Global Economics

FEATURED
COMMUNITY