Monetary Policy and Structural Unemployment

The general or macroeconomic policies of the federal government are essential tools for encouraging the steady economic growth that produces more and better jobs in the economy. We recommend that the fiscal and monetary policies of the nation, such as federal spending, tax, and interest rate policies, should be coordinated so as to achieve the goal of full employment. Economic Justice 156, US Bishops

Come now, you rich, weep and wail over your impending miseries. Your wealth has rotted away, your clothes have become moth-eaten, your gold and silver have corroded, and that corrosion will be a testimony against you; it will devour your flesh like a fire. You have stored up treasure for the last days. Behold, the wages you withheld from the workers who harvested your fields are crying aloud, and the cries of the harvesters have reached the ears of the Lord of hosts. James 5:1-4

Structures of Sin Index

The Federal Reserve System is responsible for the monetary policy of the US, a very arcane process that seems to be governed by intuition, trial, and error as much as economic science. A particular problem for the poor is the tendency of the Federal Reserve to raise interest rates when personal income and wages start rising and when the unemployment rate gets "too low" (Daily Oklahoman 3-26-97 "Fed Nudges").

But this policy is built on a fallacy -- that full employment and rising wages are bad for the economy. Further, it is founded on an incorrect statistic -- the unemployment rate -- which only includes those who are "looking for work," and does not include those who have given up looking and are not actively involved with job searches. Thus, the unemployment rate does not indicate the true unemployment rate of the nation, but only the "recent unemployment", or "unemployment among certain classes in society." It is an artificial statistic whose manipulation favors those with power and influence and punishes those without such access.

It is suggested that the Fed's actions are market operations, but this is hardly an example of classical liberal economic theory. Since the effect is to increase unemployment (one of its measures of success), and depress wages or wage increases, it is a structure by which those with power increase their ability to manipulate those without power, by helping businesses keep their costs low by lowering wages, destroying jobs, and increasing unemployment. Curiously, when stock prices increase, the fed takes no action, but when wages increase, the fed raises interest rates. Why aren't stock prices considered an inflation indicator? Why concentrate on workers' wages?

Perhaps part of the problem with unemployment, particularly the hard-core long-term unemployed, is that wages are not high enough -- that they need to be rise (particularly on the low end of the scale) to more just levels. Classical economic theory would suggest that if you want someone to do something (in this case, get a job), but they resist your advice (and remain unemployed), part of the message they may be sending you is, "You aren't offering enough pay" (economists note this factor as driving unemployment among the poor, Phelps 57) The current rhetoric replies, "That's tough, work at low wages or starve," but are these low wages really a function of the free interplay of workers and employers, or are they being deliberately lowered by government economic policy (that is, by the use of coercion, the government's monopoly on legitimized violence) in order to tilt the scales of justice in favor of the employer and away from the employee?

There is no doubt that inflation is a great evil, but if it was really the great evil that the Federal Reserve seems to think, then the obvious solution is to return to the gold and silver standard, where money is not just the printing of mystical designs on specially prepared papers (or even more often, bytes of electronic information stored within computer systems), but actually has value in and of itself that can be measured, counted, and saved. This would seem to be more just to the poor, who can be seriously hurt by inflation, than creating a system of fiat cash which is then juggled at the whim of wealthy market bureaucrats in order to favor their friends and disadvantage the poor and working classes. The system, as it is currently managed, has no guarantees that inflation will not return, and this paper asks for some empirical evidence that destroying jobs and depressing wages helps reduce or stop inflation. Americans tend to think of inflation as an increase in wages and price, but in fact, inflation relates to the amount of money circulating within a society, and increasing prices merely report the existence of more money to chase a given amount of goods for sale.

It should be a matter of particular concern that, as the welfare reform is being implemented across the country (thereby increasing the need for new jobs), the Federal Reserve in March 1997 raised the interest rate, and more such increases are expected. Since when did killing the messenger change the nature of the news? If anything, interfering with market signals such as lower unemployment sets up further distortions that may in the end contribute to the deterioration of the economic situation by further distorting the feedback (that is, the accurate reporting of indicators of what is happening in the economy). Such feedback is critical and one limit of the market system is the ability of those with political power to suppress important market signals, especially when they benefit the poor and working classes and signal higher payrolls for business.

Before we decide that people are poor because they lack opportunity, we should discern what responsibility the government has for acting regularly to destroy jobs and depress wages. If Charles Murray's advice to completely abolish welfare is followed, this will require government policies that facilitate full employment, which is going to require some changes over at the local Federal Reserve Bank.