Stunted Growth

   "Fiscal policy is restraining economic growth" and there are still "downside risks to the economic outlook," the Federal Reserve Board says, so it will continue pumping some $85 billion a month into the nation's financial system "to support a stronger economic recovery."
   The statement, by the Fed's Open Market Committee and released May 1, said its monetary policy should keep interest rates down as the Fed buys up mortgage-backed securities at $40 billion a month, and Treasury securities at $45 billion a month.
   The economy "has been expanding at a moderate pace," the Fed said, but not as well as it could because of "fiscal policy." This is a more than subtle hint to the government that increased spending, not austerity, is needed to spur employment, even as the unemployment rate "remains elevated."

   For years, policy makers have focused on lowering the unemployment rate, on the assumption that its colleague data point, employment, or actual jobs, would follow. One does not, however, beget the other. Each figure is determined by a different method, so that pushing down on one (the unemployment rate), will not necessarily drive up the other (total employment).
   Counting the number of people actually working is a lot easier, as companies submit payroll figures. Calculating the unemployment rate, however, is harder, because it's based on a telephone survey and estimated, using statistical techniques. This figure counts only those ready, willing, able and actively seeking work. The survey does not count students, those in prison, in hospitals or in the military, because they are not considered part of the workforce. Also not included are discouraged workers, or those who are not "actively seeking work."
   So the jobless rate calculates the percentage of those available for work and actively seeking work, compared to the total workforce. And since the rate is compiled from separate data sets -- the telephone survey and the estimate of total workers -- it is at best a guesstimate. Nevertheless, the unemployment rate is useful, especially in spotting trends, but it is variable in a monthly survey. It may be a poor set of numbers, but meanwhile, it's the only set we've got, so policy makers have to work with it until something better comes along.
   One big theory touted by opponents of government intervention is that government bond sales, or borrowing money to fund projects, will "crowd out" private investment for economic growth.
   True enough, as far as it goes. But, as with so many other things, it doesn't always go very far. In theory, competition in the bond market provides a safer haven in government bonds than in private corporations, and often also provides a higher return. So if the government can offer more safety, less risk and higher returns than the private sector, given the choice, bond buyers would surely go to government securities.
   During economic downturns, however, investors don't always have that choice, since there are fewer corporate bonds available, and at lower returns. Consequently, government cannot "crowd out" something that isn't there. Rather, government is offering product to satisfy demand, because the normal supply has diminished.

   In effect, that's what the Fed is doing now -- buying bonds to put more cash into circulation because private sector investors are not. Buying mortgage-backed securities will free up that cash for more home building, and purchasing Treasury securities will provide the Administration with the cash needed to start projects and kickstart job growth. That's what they mean by fiscal policy "restraining economic growth."

   Taken as a whole, it seems the emphasis is changing from simply lowering the unemployment rate and letting job growth take care of itself, to generating more jobs, and this will encourage those out of work to return to looking. And while the jobs numbers are not great, they do provide some information to help guide policy makers in deciding how to help those who need help.