Thursday, February 2, 2012

Issue #1: Unemployment in America, Pt. III

The recipe for a lower unemployment rate, then, is lower interest rates. Why isn't the US government delivering? Well, the Federal Reserve, the central bank of the United States,  which is responsible for setting interest rate policy, lowered its policy rate to essentially zero in late 2008, in response to the bottom falling out of the US economy. But why didn't it lower it some more? Why didn't the Fed go negative?

Suppose you have cash on hand. Your decision is whether to lend it to others or not. The Fed has pushed interest rates below zero. What do you do? I dunno about you, but I'd hang onto my cash. Why? Simple--cash earns (nominal) interest at a rate of precisely 0% per year. Zero sounds pretty bad, but I'd prefer zero to, say, negative three. Thus, if the Fed tries to push its policy rate into negative territory, folks will just hoard their cash, which does nothing for the unemployed.

What, in that case, can the Fed do for the unemployed under these circumstances? The Fed may no longer be able to lower interest rates today, but don't forget about tomorrow. Interest rates won't remain at zero forever, so there is surely a time at which the Fed is expected to raise interest rates. What the Fed can do today is to convince the public that it will not raise interest rates until there is enough aggregate demand to fully employ America's labor force.

Here is a picture of aggregate demand, as measured by nominal gross domestic product (NGDP) over the last decade:


Notice that when NGDP plunged, so did employment. Notice also that even though it has stopped plunging, we never caught up with the pre-crisis trend. That's why unemployment has remained so stubbornly high.

What the Fed ought to do is to make a commitment to keep interest rates near 0% until NGDP recovers to its pre-crisis trend level. In short, the solution to high unemployment is NGDP targeting. Think I'm pulling this out of my ass? Here's Goldman motherfucking Sachs. (Note that I was totally on this first--Jan Hatzius, bow to your sensai.)

That, my fellow Americans, is what I would do to put you back to work. Just hang in there for 13 years.

Next up: fossil fuels, deforestation, global warming, etc...

[Earlier posts in this series:

Announcing my bid for the US presidency

Issue #1: Unemployment in America

Issue #1: Unemployment in America, Pt. II



  1. So, since the Fed hasn't placed interest rates below 0, what should I do with my gobs and gobs of cash?