Pirate economics at the Fed

April 5, 2012

Avast ye swabs! Maybe the disconnect between improving labor markets and sluggish economic growth that  has Federal Reserve policymakers scratching their heads makes sense if viewed through a pirate’s spyglass – with a lot of latitude, according to a top Fed official.

St. Louis Fed President James Bullard sees the 8.3 unemployment rate continuing to fall at a sprightly pace. That’s even though Fed Chairman Ben Bernanke has fretted the jobless rate’s precipitous tumble since August, when it was 9. 1 percent, doesn’t square with the relatively modest pace of growth.

Bernanke has explained that according to a rule of thumb that has currency among economists, Okun’s Law, the jobless rate shouldn’t  fall much if growth doesn’t exceed the economy’s long-run average. So he and others at the Fed find it hard to be confident a growth rate of around 2 percent – the forecast for the first three months of the year – can do much to boost hiring.

Asked to explain his optimism regarding labor markets despite this discrepancy, Bullard offered a swashbuckling interpretation.

“Okun’s Law – it’s like Pirates of the Caribbean – it’s more of a guideline,” he told reporters after a speech,  referring to the Hollywood blockbuster movie series. “I don’t think it’s that reliable of a rule of thumb.”

Okun’s Law is more accurate in explaining what happens during a recession, when growth is slowing or the economy is contracting and employers are cutting back their workforces, he said. In a recovery, the relationship between growth and how fast unemployment will decline is “a lot more mushy,” he said.

Perhaps the Fed has stumbled upon a treasure map for the economic recovery after all.

One comment

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I don’t think we will continue to see this kind of employment activity for long. I think that the Employment numbers have been good due to a warm winter in the USA and that it is also a trailing economic indicator. The bottom fell out of the US Economy back in late 2007 but the horror did not hit until late 2008 early 2009 as far as jobs went.

I do not think jobs will be horrible however, they should settle in at around 150,000 to 175,000 a month. I did not expect March to be at the 200,000 mark. Figured it should be closer to 185k – 195k…

Finally I actually think the Fed has managed to do more to aid the recovery then the Congress/White House has managed. So while I dislike the Central Bank in general and am still on the fence as to whether the help/exacerbate the real monetary issues we face I must admit that they have been inventive and bold while at the same time showing restraint and not allowing the addiction to any one course of action continue for too long.

Posted by Innocentious | Report as abusive