Should Bernanke Maintain The Status Quo?

The sluggishness in the jobs market is neither a fiscal responsibility nor a monetary responsibility of the Federal Reserve, rather it’s about responsibility in the short run versus responsibility in the long run, says Edward Lazear, former economic adviser to President George W. Bush and a professor at the Stanford University.

The best policies to grow jobs are not the ones that are going to work in the next month or two, he noted, adding earlier measures (like quantitative easing) to grow jobs have not been particularly effective. In order to grow job, the economy needs to get back on the growth path as there’s nothing special about the job market right now.

The problem is that the recovery has not been strong enough and if we look at past data, growth has been about 2.2 percent annually since the economy came out of recession in the spring of 2009, he said. Looking at the number of jobs created since then, it becomes clear that the job market has done reasonably well, and we are close to historical averages. It’s not that jobs are not growing or the labor market is stuck, but the real problem is that the economy is stuck.

The Federal Reserve has limited tools remaining to nudge the unemployment rate down. Agencies typically use the tools first that are most effective to fight crises and the Fed has already used the tools that it thought would be most effective in stimulating the economy. That doesn’t mean the Fed has run out of gas completely, but the options are limited, he noted.

Asked if the Fed should do nothing, he said that’ll be a heavy statement but probably we are thinking heavily about the benefits and not factoring in the costs. We are getting to the point where the costs are too high while the benefits are marginal, and it is better the Fed continues to do what it has been doing and not be particularly aggressive.

Is fiscal stimulus a viable option to boost growth since Bernanke himself has indicated that before? Not really, says Ed, pointing at Japan which has built up a debt-to-GDP ratio of 200 percent due to two decades of stimulus activity and yet the economy is stuck in the rut.

So there’s not much evidence that fiscal stimulus works. What effectively works is the long run, which means low and effective tax rates, good trade policy, a cautious side of regulation and most importantly, getting the fiscal situation under control.

You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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