Advancing a Free Society

Let the Fed Stay Off to One Side

Wednesday, June 15, 2011

There is nothing more common today than the suggestion that the Federal Reserve should do something to deal with the employment problem through its power to regulate the money supply.  Advocates of this position should at least reflect on the sober proposition that all forms of interest rate reduction and quantitative easement have the employment picture running in reverse.  At most the Fed’s contribution is a modest negative of clouding the current economic picture, which only adds a new level of unwanted uncertainty to labor markets.

But the larger message to Ben Bernanke is that he should retire from this fruitless question.  The view that the Fed can really deal with employment issue is one that favors remote over proximate causes.  The direct causes in this instance are the endless set of government signals that add new burdens to employment contracts. These burdens sap the life out of private contracts.  Where the new burdens exceed the gains from trade, the market shuts down.

The best thing that could happen therefore is to forswear the use of monetary measures to deal with unemployment.  In its stead try this:  cut the minimum wage, which now bites at the bottom of the employment ladder; make it clear that the unions are no longer the favored clientele of the Obama Administration, so that new jobs can form without this threat lurking in the distance;  relax the enforcement of the antidiscrimination laws so that new hires of individuals from group A are no longer sufficient to provoke litigation from group B; allow firms like Boeing to open up new plants when and where they want to, on the theory that even people in Washington state are better off with new jobs in South Carolina (to which they could even move, if they chose) than they are with no jobs in either state; shorten the period for unemployment insurance to remove the gains from sitting out of the workforce;  reduce the tax on corporate profits and capital gains, so that there is now a return from hiring labor.

This list could go on.  But the message is simple.  Monetary policy necessarily effects lots of things in different ways.  But the use of buckshot will not fix labor markets. A few targeted initiatives at labor markets could do wonders.  But so long as deregulation remains a dirty word in the Obama Administration, look for labor markets to limp along as they have for more than two years.

(photo credit: International Monetary Fund)