Tuesday, April 8, 2014

Federal employment policy exploits labor

This has been submitted to the ABQ Journal as a Letter to the Editor. We'll see if it flies.

Recently, people like to find fault with the Federal Reserve Bank (Fed) for Quantitative Easing and related issues. Of the actions the Fed takes, none is more startling than its exploitation of labor.

In a growing economy, it is possible for a shortage of labor to occur and for employers to bid up the price of labor, which might lead to inflation. In response to the threat of inflation, the Fed will take action to increase unemployment to a rate usually above 5%.

Thats right, our government has a policy to increase unemployment to forestall inflation. As this policy also preserves the value of the US dollar, it is considered a reasonable price to pay. This is just another way that people get the shaft when they don’t understand the game.

There is always work to be done. There is no need for unemployment

To initiate this policy the Fed increases the cost of borrowing to cool the economic expansion and increase unemployment. When unemployment is too high, the Fed lowers the interest rate to encourage borrowing that normally stimulates the economy to employ more people.

Currently, this policy is not working well. The Fed has lowered rates to almost zero and many businesses still can't or won't borrow to invest and hire, which is necessary for economic growth when Congress limits federal deficits.

Even though unemployment is high and decreasing very slowly, investors are anticipating increased interest rates that will keep unemployment at a noninflationary level. These unemployed, whom the Fed use to guard against inflation and maintain the value of the dollar, suffer like all the unemployed. Children go hungry; crime, including domestic violence, increases; and opportunities for education are lost. 

Such is the price of this policy. Adding insult to injury, some members of our Congress will denigrate the involuntarily unemployed as lazy ne’er-do-wells.

There is an alternative to this terrible policy. Instead of a labor pool of the unemployed to manage inflation, we can have a labor pool of the employed. The pool will naturally expand or contract as private industry fires or hires, respectively. 

Every unemployed person, who is willing and able to work, can be employed by the federal government at a minimum living wage. Such a program is often called a Job Guarantee (JG).

The JG would set the minimum wage at which employers could find employees from the labor pool of people, who are already working every day. It would minimize unemployment and continue to allow employers to reduce staff when necessary. The negative social consequences of unemployment would be greatly reduced, and the Fed would be able to meet its dual mandate. While the productivity of JG employees might be less than optimal, it would be much greater than for unemployed people.

The cost of such a program would be offset by reductions in unemployment insurance, food stamps, and minimal loss to the economy of reduced consumption by households. Most importantly, it makes good sense for the government to minimize the ravages of unemployment on good people when there is a viable alternative to existing policy.

Fundamentally the JG, which requires real production, seems to be superior to the Swiss idea of an Unconditional Basic Income that was featured on PBS recently.


  1. Sounds like a great idea for the federal government to simply hire those looking for a job who can't find one, and then slot them into federal works projects. That would take some organization and oversight, though, and those skills aren't much in evidence on Capital Hill.

    1. It was done by FRDs crew; we can do it too. Federally funded, locally administered projects for every thing from cleaning streets to building schools.