Articles
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The Bernanke difference
The mild May jobs report should serve as yet another reminder to President Obama and Congress that the U.S. labor market is suffering a Long Emergency. A smaller share of the adult male population has a job than at any time since the Great Depression. And there’s still a job shortfall of nearly 12 million between current employment levels and the pre-Great Recession job-growth trend. It’s long past time for Washington to launch a full-spectrum response - including cutting investment tax rates and modifying unemployment insurance to support work sharing and relocation to areas of lower unemployment.
But things could be so much worse. For instance: The euro zone is suffering a double-dip recession. The region’s economy has contracted for six straight quarters through the first three months of this year. And euro zone unemployment has risen for 24 straight months and stands at 12.2 percent. “It still looks highly probable that the [jobless] rate will reach 12.5 percent in the latter months of 2013, and there is a grave danger that it could continue rising into 2014,” consultancy IHS Global Insight predicts.
So we have an intriguing natural economic experiment. Two large, advanced economies are both undergoing fiscal austerity from spending cuts and tax increases. But one is recovering, though glacially, from a previous downturn; the other is deteriorating.
The likely difference: monetary policy. Not only did the Federal Reserve slash short-term interest rates to nearly zero way back in 2008, but it has also embarked upon a massive bond-buying program known as quantitative easing. The European Central Bank, however, only last month cut its key interest rate to 0.5 percent, still higher than the Fed-funds rate. And the ECB’s “unconventional” monetary policy has been far more modest, with bond purchases less than a tenth the size of the Fed’s. Its goals have also been more limited: stabilizing southern Europe’s debt markets and avoiding a financial crisis. At a recent speech in Frankfurt, Germany, St. Louis Fed president James Bullard said that unless Europe adopts an aggressive bond-buying program, it risks an extended period of low growth and deflation like what Japan has experienced since the 1980s.
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