THE GROWTH GAME: US UNEMPLOYMENT AND FEDERAL RESERVE POLICIES (c) Leo Haviland September 10, 2012

Nevertheless, compare the first several years of the US Treasury yield curve relative to current and forecast inflation statistics from the CBO. Real returns look negative. The two year UST note is about .25pc, with the five year UST .65pc (under one percent). So although US inflation has been low, the Fed’s yield repression interest rate policy (whatever its merits), which probably will extend at least through end 2014, tends to cheat savers in UST (and assist the US government debtor- “We, the people”, in a representative government). Lower interest rates for the UST benchmark help to slash yields for (lower real costs for) and thus benefit other debtors/borrowers (state, local, corporate, household). Creditors/lenders correspondingly suffer via reduced real return relative to inflation. Admittedly, marketplace gardeners can argue that the Fed’s current interest rate agenda benefits “all of us” over the long run.

The Fed’s ongoing worries about unemployment in particular (and economic strength in general) underline (reflect) its willingness to suppress policy rates.

Perspectives on the output gap intertwine with analysis of and opinions regarding appropriate employment and unemployment levels. Sustained high unemployment levels may reflect a large output gap, if the economy’s productive potential remains as substantial as most economic wizards believe. However, sustained high unemployment in the face of determined longstanding Federal Reserve easing (and political deficit spending) argues that the output gap (long run productive potential) is significantly less than the IMF and Federal Reserve contend. Suppose the output gap is less than the widespread faith. Then allegedly “normal” (long run) unemployment may be greater than the Fed asserts.

So suppose unemployment unfortunately will tend to remain historically high (above current theories regarding “normal” levels) in part due to the reduction in productive potential (GDP). If so, the Fed’s well-intentioned highly accommodative policies eventually run a noteworthy risk of helping greater than desirable inflation to blossom, even if this takes an extended time to develop.

Current high unemployment levels, as well as trends in some employment measures going back to calendar 2000 (and thus preceding the economic disaster that emerged in 2007), suggest that “normal” unemployment levels probably are quite a bit higher than the Fed and many others believe. If so, America’s productive potential and its output gap also probably are less than the Fed argues.

Dig into some other key employment statistics (from the BLS; Labor Force Statistics from the Current Population Survey). Again look further backward in time than the dawn of the economic crisis in 2007. Like the official and U-6 unemployment data, both the employment-population ratio and the civilian labor force participation rate suggest that there has been a secular decline in America’s “employability potential” and productive capacity.

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The Growth Game- US Unemployment and Federal Reserve Policies (9-10-12)