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Monday, October 24, 2016

The economy is not yet strong enough to cope with tighter monetary policy, but fiscal policy is what’s really missing from this recovery.

The weak employment report out today reinforces the view that the Federal Reserve should not ease up on monetary policy soon. The strength of this economic recovery is not yet clear, and the Fed is the only game in town due to sequestration of government funds.

Waiting another three or four months to tighten policy and reduce quantitative easing will not change the course of America’s destiny. But moving now, as they have done ever so slightly, could easily pull the rug out from under this modest recovery.

The sharp fall in the unemployment rate to 6.7 percent was just about entirely accounted for by people dropping out of the workforce. The employment-to-population rate is roughly at its lowest level in more than 30 years. Too many people are not working in America. For all the economic weakness in Europe, they have higher participation rates than the U.S. does.

The drumbeat of optimism emanating from most economists recently will now be muted until the next set of data. The jobs numbers are the most telling indicator of economic strength. Economists turn on a dime when they are issued, but only because they can, given the computerized models that shift modestly with every piece of economic news. They should have a stronger analytical thesis than to depend on one month’s data.

The path forward is clear. We should keep in mind that the economy is not doing badly. On average, there has been moderate job growth over the last three months, just not nearly enough to justify an end to monetary stimulus now. We should wait at least a few months to make sure this recovery and expansion is truly solid.

The good news is that the disappointing employment data will reduce pressure on the Fed as Janet Yellen takes over the reins. The bad news is that it will unleash the anti-Obama forces who blame the slow economy on Dodd-Frank’s costs to the financial community, future fears of inflation, and of course the federal budget deficit. Tune in to Fox News after the employment data release and you’ll find them saying “Obama did it.”

Larry Summers offers the best advice: we have to turn on the fiscal jets. The first words out of anyone’s mouth about the economy should be that sequestration did it. Fiscal de-stimulus was huge in 2013. Government spending fell sharply. The deficit is no longer an issue, given unemployment around the current level.

Summers is being criticized by economists and commentators from across the political spectrum for claiming the nation may be in a period of secular stagnation. Summers noted that the economy was disappointing even before 2007. How could that be, ask some, if the unemployment rate got down to roughly 4.5 percent?

John Taylor of Stanford is especially vociferous about how good the economy was under George W. Bush. Of course, he worked for Bush. But even apart from that, it is hard to take his claims seriously.

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  • paulyz

    I see there aren’t any answers to the facts listed in this report. Obama keeps saying we are turning the corner on the economy, when it has gotten even worse. The unemployed not counted just to make it look like Obama’s disastrous policies are working isn’t much believed anymore and Millions of Americans getting hit with Obamacare costs, with less coverage and no say in their Doctors or care. And this report was during the very busy Christmas season yet!!!

    p.s. Meanwhile, BO wants to give “another” Amnesty to MILLIONS of Illegals while MILLIONS of Americans are out of work. And when these Illegals get FREE Obamacare, expect to pay even more.

  • iDonald

    Good clarification of the economic picture.

  • daniel bostdorf

    This topic is that that we need to invest in America and avoid a disasterous fiscal austerity false permise.

    From the article:

    “capital investment was weak before 2007, never even close to returning
    to the levels of the second half of the 1990s. The right wing loves to
    blame lack of business confidence on low levels of capital investment
    today, but how do they explain the Bush era?

    on a side note that I hpe NM editors and moderators will see:
    Mandinka the social media troll with his usual rant based in no facts
    and bullying statements that are off topic and have no positive value

    A social media troll as someone who seeks to lure or
    bait people into negative, disruptive rhetoric for their own edification
    or to commandeer an otherwise free-flowing discussion among colleagues.
    They don’t recognize anyone that may be interested in discussing
    something that bores them and opt to criticize or yell “boring” instead
    of engaging in the discussion. They choose to belittle those who seek
    the information and discourse as well as those who try to provide it.
    They simply have no interest in anything that is not self-serving.
    Trolls will defend their focus on expressing contrary opinions as an
    honorable attempt to rid the online community of fake-experts, get to
    the truth of a matter or enlighten their followers; however, their
    intent has nothing to do with community building or public

  • CommonSense

    Clearly, Jeff is a Keynesian theorist. But wow!!! Inflation is not an issue right now? Really? If he sits in his cube at the Institute and ponders over government supplied figures on inflation, then he is totally naive. I run a small business and buy supplies. The wife does the grocery shopping. So here’s a snap shot (outside) the beltway and what is happening in the (real) world. First, main street inflation is running more like 9-12% a year. Everything we buy, from light bulbs, screen doors, paint, to water heaters has risen in price 15-20% in the last two years. I look at real life product purchases that come out of my real life wallet. Not some government report that says inflation is about 2%. Furthermore, with the declining value of the dollar, and more and more products we purchase from abroad only amplifies the problem. It is common knowledge that since the 1970’s the data used to generate popular reports such as unemployment, GDP, or inflation has been manipulated so much in order to make things for politicians look better than it really is…..the data is no longer valid information for main street America. The most popular examples are GDP, the value of goods and services produced. The matrix of data compromising those figures has recently been manipulated such that GDP reported is about .5 to .7% higher than before. Unemployment is another. If the data matrix used in the 1970’s were used to today….unemployment would actually be reported as between 10-15%. So excuse me, if I don’t buy the theory of someone inside the beltway using non-real world experience to tell the American public all is well when in fact the data is cooked in order to present an agenda and rosy picture, when in reality, those of us in the real world of running small business’s see it differently.

  • Oarboar

    Hey, everybody, here’s something you should do the next time you see a talking head or anyone else preach austerity:

    Ask them if they’re willing to take the austerity medicine they’re prescribing for everyone else by giving up their own jobs. (I’ll help you out and give you the answer: No.)

    As an economic strategy, unemployment isn’t working.