How To Tell When There’s Structural Unemployment

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kocherlakota 1

I feel like the entire Minneapolis Fed take on structural unemployment and “skill mismatch” is a giant exercise in obfuscation. Of course the economy has many structural features and at any given time there are limits to growth. But there’s a very simple way to tell when additional monetary stimulus will no longer increase real output and that’s by looking at inflation. The powers that be would like you to believe that this is some enormously difficult technical question answerable only with sophisticated econometrics, but that’s largely a way to shield themselves from scrutiny and accountability for their actions.

Return to my parable of the counterfeiters. If a bunch of counterfeiters show up in a country where there’s full employment—for whatever you think full employment means for that country—then by definition the only impact that the arrival of their funny money will have is to raise the price level. There’s no ability for the economy to actually produce more goods and services, so when the counterfeiters show up existing goods and services are simply reallocated to new buyers and they become scarcer and more expensive. By contrast, if there are genuinely idle resources the impact on the price level will be modest and what you’ll mostly see is unemployed people getting jobs and producing new goods and services.

In the present day, is there any reason to think we’re near the “more money will just mean more inflation” point? I can’t see it. The current inflation rate is unusually low. Expectations for medium-term inflation are also unusually low. Inflation expectations have been falling. And the price level is way below its long-term trend.

Given the destructive impact the Dallas, Minneapolis, Richmond, and Kansas City Feds are having on national policy, it’s really time to revisit the absurd governance structure of these entities. The regional Fed presidents exercise important public policy authority, but they’re primarily selected by local for-profit business interests rather than by public officials. It would be as half the Supreme Court justices were selected by corporate law firms dispersed around the country. As long as the Fed seemed to be performing well, I suppose most people took an “if it ain’t broke don’t fix it” line. But the country is mired in tight money, and the regional feds seem to be behind it.