Blame the Fed for Stubborn Unemployment Rate

By @CarFreeStpdty

Last week the Federal Reserve met at an economic summit held at the decidedly elitist Jackson Hole Resort where Fed Chairman Ben Bernanke said he, “will do all that it can,” to right the economy. He’s correct… he’s doing everything thing he can – from holding the Federal Funds Rate at a historic low at or below .25% to Quantitative Easing (QE) in which the Fed buys Treasury Bills – for the BANKS! Fed policy is being used to SUSTAIN RECORD FINANCIAL SECTOR PROFITS even while the rest of the economy languishes and unemployment hovers at just under 10%. This is corporate rape and pillage… bait and switch… whatever you want to call it the rich are getting richer and the middle class is disappearing.

Why is Fed policy hurting you and me? Hit the jump for my take. And for more great insight into misguided economics check out Prophets Without Profit… my new favorite blog.

While I might not be an economist – though I did stay at a Holiday Inn last night – its not hard to understand how ultra-low interest rates meant to help the overall economy are actually hurting the average American worker and causing prolonged unemployment by encouraging US firms to not hire.

The Federal Reserve has been following standard Keynesian Operating Procedure (KOP). Keynesian theory calls for the government to shill out as much spending as possible to take up slack demand during a recession and hope for the best. Thats exactly what Helicopter Ben is doing with Fed policy… pumping as many billions into the American economy as possible to the point that the Fed is now funding the government. Of course most of those billions are failing to reach you and me… rather the banks are doing something about like this…

In an ordinary type recession this might work. Lower interest rates are supposed to encourage firms to invest money and thus hire new workers. But we are not in any ordinary recession… instead they are providing private firms with a perverse incentive to continue to cut costs – read employees – in search of greater profits. Why you ask? By holding interest rate at near zero the Fed is creating a situation in which credit is extremely cheap… let me rephrase that… extremely cheap for large banks and multinational corporations. This is certainly encouraging investment, but obviously employers aren’t investing in new employees.

Cheap credit distorts the relative attractiveness of different investment options and thus the return-on-investment (ROI) of these options. Ultra low interest rates makes refinancing old debt and investing in new capital extremely attractive… especially when technological advancement translates capital investment into more productivity with less labor. Both these options have the potential to cut short-term and long-term operating costs while increasing profit for businesses without requiring the hiring of new employees. In addition, the interest on corporate debt can often be tax-deductible and capital goods depreciated further incentivizing borrowing for capital investment. Are employee wages tax-deductible? Can employees be depreciated as they age? NO!

Compare this to investing in new employees that require healthcare, sick leave, maternity leave, pensions, FICA, FIT, SIT, etc. It’s a no-brainer for managers… fuck employees. We have a system that encourages investment and penalizes work. This isn’t going to change anytime soon, especially when even highly skilled people are so desperate that they are taking huge pay cuts just for the privilege of being employed. This is an economy where big business is in total control and they are no longer afraid to hide it either. So while workers are chomping at each others’ throats for the few jobs that actual exist the business elite are sitting back, laughing, and enjoying the rewards of all their great cost-cutting ventures.

Of course just raising the Fed Funds Rate would be just as disastrous as our current policy… and is out of the question with the Fed operating to only keep the financial system healthy… read banks. But something like normal interest rates charged to banks and big business would shift the balance of ROI back toward labor. The essential problem is that labor is too damned expensive… but how do you go about lowering labor costs without lowering American living standards? The standard practice has been to export our jobs to India and China… rather we should get rid of all taxes on income from labor and replace it with consumption taxes. This would lower the cost of labor and give people a lot more disposable income to spend while penalizing people for conspicuous consumption. Add in some new financial regulations with real teeth in combination with more sensible monetary policy would have been a start… but we all know we aren’t getting any such thing from the Corporatist Obama Administration.

  1. Lizard

    great post, cfs.

    • agreed.

      i call our economy corporate communism. the big pigs slashing jobs and posting record profits are lined up at the trough just waiting for another pailful of slop from our corrupt congress.

      meanwhile, main street businesses and the “little people” like us no longer have a say in our national government.

  2. Lizard

    absolutely a must read from zerohedge about the possibility of hyperinflation in the us.

  3. Pogo Possum

    I noticed a few other reasons quoted by “A Prophet Without Profit” for the reasons businesses are not hiring and the anemic economic recovery – Obama Care and Unions:

    “Expensive Social Programs – Ignoring high levels of unemployment and economic stagnation the Obama Administration pushed ahead to pass health care reform. The law does not apply to businesses with less than 50 employees. The perverse effect is obvious:
    …potential tax penalties for employers with more than 50 workers could cause many smaller businesses to rethink any hiring or expansion plans.

    “It could have a negative effect on hiring as businesses figure out just how much the new law and offering health benefits will actually cost them,” many … small business clients have kept their staffs below 50 workers to avoid the complicated compliance requirements of laws such as the Family and Medical Leave Act.

    “The new tax penalties for businesses with more than 50 employees will certainly make many business owners think twice about expanding and hiring more people….” See Small Businesses Ponder Impact of Health Care Reform

    Add in the threatened expansion of unions through the Employee Free Choice Act and no wonder large and small businesses are reluctant to hire.”

    ” After trillions of dollars of stimulus and guarantees and a zero interest rate policy, all we have to show for the effort is zero, or negative, job growth.”

    Your favorite economist seems to be agreeing with the Tea Party on some issues.

    • carfreestupidity

      I would say it’s just plain common sense rather than him agreeing with the Tea Party. You increase the price of one thing – jobs – you get less of it and companies have more of an incentive to replace their workforce with technology or foreign labor.

      So yes… Obama has essential shot himself in the foot by enacting policies that are preventing private businesses from hiring new employees.

  4. Pogo Possum

    I wonder how many small businesses laid off workers to get under the Obama Care 50 employee cutoff. Those are probably jobs that will never come back regardless of how much the economy improves.

    • carfreestupidity

      Just another example of how employer provided healthcare is holding back private business in this country and another reason for why we needed true healthcare reform.

  5. Singlepayer canadian health care for everyone would have solved it.

    Instead we have byzantine systems of laws with a parasitic insurance industry making record profits.

    • carfreestupidity

      Our hard earned money going to pad the profits of ___________ (insert big business interest here) instead of actually solving problems.

  1. 1 Not Out of the Woods Yet… « 4&20 blackbirds

    […] I argued in an earlier post, America has built a system by which investment in out-sourcing and labor-saving capital […]

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