How the Fed Makes Unemployment a Good Thing

This article was originally published at Valuesandcapitalism.com on December 3, 2013.

Imagine a world where unemployment is good—where fewer people working means more prosperity. Both time and resources would be infinitely abundant. Consumer goods would invent themselves. The standard of living would improve most swiftly when human beings stay out of the way.

This world, of course, is a fantasy. Until someone invents a self-improving robot fueled by human indolence, unemployment only hampers economic growth.

That is, until November 2013.

If history is any guide, the Labor Department’s announcement earlier this month that the U.S. economy added 204,000 jobs in October—twice what most economists expected—should have sparked excitement across Wall Street and the nation. But while markets did gain on the day, early-morning futures turned quickly negative after gaining before the report’s release. The talk of the town was anything but positive.

Explanations for this twist of events were quick and forthright: Indications of economic progress sparked fear that the Federal Reserve would taper its bond-buying program.

Since 2009, the Federal Reserve has created money to funnel into the economy via bond-buying and bailouts (a.k.a. “quantitative easing”). This policy was designed to lower interest rates, create credit, and stimulate demand with the ultimate goal of lowering unemployment. The result has been significant growth in stock prices and apparent economic recovery evidenced by a slow and steady drop in unemployment.

Understandably, investors have come to love quantitative easing. Though many voice concerns about the long-term effects of this policy, few deny that quantitative easing mitigated the immediate effects of the 2008 financial crisis. Even fewer would deny that quantitative easing is now vital to the health of many major financial institutions.

But of course, such a policy cannot continue forever. Quantitative easing must eventually come to an end—a fact even Fed officials often note. It is this ominous thought that sparked last month’s scare. Lower unemployment signals economic recovery. Economic recovery signals a sooner end to the Fed’s bond-buying and bailouts.

A similar episode occurred earlier this year when Federal Reserve Chairman Ben Bernanke hinted that quantitative easing may taper off if inflation remains steady and unemployment continues to drop. The stock market lost 4.3 percent over the three trading days following his comments.

U.S. Treasury Securities

This last episode was different, though, because no announcement was needed. The strong jobs report alone was enough to spook investors even before the Fed could announce changes to quantitative easing. What is good news at almost any other time and in any other place is bad news on Wall Street today.

This spells disaster for the American economy. The same quantitative easing policy designed to decrease unemployment is itself the cause of investors’ fear of strong jobs reports and other positive economic news in general. The fact that lower unemployment hurts the stock market means the Fed has created a lose-lose situation whereby lowering unemployment creates a simultaneous collapse in stock prices. They have kept up their money-printing too long. The Fed has become its own worst enemy.

But even worse, the Federal Reserve has pitted Wall Street against the American people by inadvertently linking lower unemployment with lower stock prices. Big banks now have reason to want high unemployment in order to extend the life of quantitative easing. While bankers themselves do not make economic policy, they do control the flow of money into and out of their vaults. They can tighten and expand credit. Conspiracy theories aside, banks do have considerable power over the rate of economic growth, and knowing that investors at-large fear a slow-down to quantitative easing does anything but encourage them to help speed up the recovery process.

While high unemployment will never be good news for the real economy, that doesn’t mean that financial institutions and the economic powers that be will always feel the same crunch. When economic stimulus is directly linked to the unemployment rate, like the Fed has done with quantitative easing, those depending on stimulus for their profits should only be expected to react negatively to news of job growth.

Placing Blame Where Blame is Due

This article was originally published at Valuesandcapitalism.com on November 29, 2013.

In his book “Life at the Bottom,” Dr. Theodore Dalrymple describes the common behaviors that he observes in many of his lower-class patients. Among the most apparent of these is an attitude of “dishonest fatalism”—a consistent unwillingness to accept blame.

“The knife went in,” said one patient awaiting his trial for first-degree murder. Another blamed his thieving ways on an insatiable addiction to the thrill of stealing—an addiction he expects the doctor to treat. A third insists his “head just went,” to explain away his assaulting a companion.

While Dalrymple beats me in time spent with lower-class criminals, I know just the attitude he describes. I see it all the time, and not just among the poor.

It goes like this: As human beings find themselves in dire financial, medical, social or emotional circumstances, they often cope with guilt by shifting blame from themselves to others, or even to objects. Whether the discomfort is or is not their own fault, they explain their situation in terms of how their environment is responsible for it. Unemployment is caused by greedy managers; obesity by the availability of fatty foods; divorce by unreasonable spouses; laziness by clinical depression. Whatever the problem, its cause (and solution, for that matter) is fate—someone or something beyond the victim’s control.

Dalrymple is hardly alone in noting the implications of this attitude on poverty and working-class crime. In fact, entire studies exist on the psychology of the lower class as it pertains to control over their financial future and their motivation to escape the poverty cycle.

But fatalistic thinking is not unique to the poor. In some way or another, we all pass the blame for our problems to avoid the pain of recognizing our own deficiencies. And in our era of big government, politicians are the most common scapegoat. Whether to explain unemployment, failing schools and even obesity, liberals and conservatives alike target bad policy as the prime mover behind the nation’s biggest economic and social problems.

Of course, much of this blame is deserved. Governments at every level are generally poorly-managed and financially insolvent. Officials are often short-sighted—motivated by special interests more than by their constituents’ well-being.

But blaming government can also be dangerous, as it often masks underlying personal deficiencies that only contribute to the problem at hand.

Take, for example, America’s student loan crisis. According to the Federal Reserve, Americans now own more than $1.2 trillion of student loan debt, prompting some economists to call the program “unsustainable.” Only 40 percent of student loan borrowers make their scheduled payments, and almost 10 percent of all loans in repayment are delinquent.

Without a doubt, government policy has only exacerbated this problem. For decades, politicians wooed young voters with lenient, low-interest student loan policies, enticing young adults to take on massive debt long before they have any stable income. Now, some even propose laws that make student loan forgiveness easier for struggling borrowers, further encouraging young adults to finance their education with borrowed cash.

But the decision to borrow money is not made by government agents, admissions counselors or the increasingly competitive job market. Yes, college tuition can be prohibitively expensive and many jobs require a degree, but acquiring debt is the sole decision of the borrower. Inability to repay indicates poor financial decisions—ones from which borrowers should learn lessons to apply to their choices in the future.

Similar examples include debates about poverty, abortion and gun control. Even as concerned citizens, we too often forget our own role in encouraging unwise choices and instead blame politicians. Like Dalrymple’s patients, we are often blind to our own faults and quick to point out the problems with everything around us, and with government most of all.

Until we shuck this habit, consider any and all government policy ineffective. There is little politicians can do to counteract bad choices on the part of their constituents. Likewise, there is always something we can do to improve our own lives, no matter how difficult the current environment.

Bad laws make life harder, but so do vanity, sloth and even a poor diet. Taking the blame when it’s yours to take is the easy first step toward improving poor circumstances—economic, political and personal alike.