Federal Reserve Board & Unemployment: FRB Approach to Unemployment Is Too Academic, Indirect and Unjust; Direct, Immediate Action Is Needed

It may be time to remove unemployment from the jurisdiction of the Federal Reserve (Fed); the institution is not well suited to handle unemployment applicable to demonstrable programs but rather academic theories and insular debate. Narrow, esoteric research is relied upon as the sole justification in making policy decisions in an area as vital as unemployment; it does not seem to be the right approach.

The Fed only performs theoretical and high-level monetary policy and banking supervision, making the agency unable to deal with an issue like unemployment in a concrete fashion. Perhaps another agency–for example, the Labor Department–would be much better suited to this role. It would be far more helpful to perform research simultaneously with the initiation with direct programs to help correct unemployment in order to get people back to work and earning money to sustain themselves and their families.

In general, economists cite each other’s work, leaving their research vulnerable to being refuted and dismissed when noneconomist arguments are presented against it. Also, tremendous assumptions are made in these academic works with no presentation of reasons for such assumptions, except the writer’s own thoughts, which may contain unexamined and unacknowledged biases. An example of this point is contained in a paper authored by Alan Krueger, Judd Cramer, and David Cho (KCC) titled “Are the Long-Term Unemployed on the Margins of the Labor Market?”

For example, on pages 40-41 of the KCC paper, the authors conclusion of “It appears that re-employment does not fully reset the clock for the long-term unemployed,” is based on the observation of one chart of data from one survey. Because of the huge ramifications of such a conclusion, more explanation of it is absolutely necessary or a qualification that the observation is solely based on their observation from one survey, period. The survey questions asking the long-term unemployed about their situation are leading; the paper just reports the option most selected. (See page 43 of the KCC paper.)

The paper’s authors also state a curious juxtaposition (carryover paragraph on page 54 of the KCC paper).

A stronger macroeconomy helps the long-term unemployed in part because it raises demand in their previous sectors. But even in good times, the long-term unemployed are often on the margins of the labor market, with diminished employment prospects and relatively high labor force withdrawal rates.

Well, if there were a stronger macroeconomy, most of the unemployed would be working. The paper is convoluting two themes: the long-term unemployed frozen from the job market due to stubbornness and those long-term unemployed persons who are frozen out of the job market because the jobs in their sector disappeared. Yet, the result for both situations would show as the same in the survey used in this paper.

If the Fed is to continue with unemployment, there must be immediate activity (not just more academic research) to generate programs to directly assist with getting people back to work. The current state of affairs is an injustice to taxpayers in need of real assistance.

[Note: I think the critique of the Federal Reserve (Fed) and its responsibility is valid; simply viewing the issue as academic alone does not produce real-world programs to address the problems. However, it seems that the new Chair of the Fed, Janet Yellen, seems to recognize this critique and is attempting to address it (although the Fed’s action at best is indirect–to make moves to try to coax the financial markets to act on the economy. This indirectness is problematic at a time where the market signals an economic recovery and the public still sees recessionary effects. It is time for direct action; action that seems to be beyond the ability of the Fed to produce).]