At the Senate Subcommittee on Domestic Monetary Policy hearing this morning, Ben Bernanke is taking questions from the Federal Reserve oversight board. The question of the day is, of course, whether the Fed can do anything that will actually help the economy, or if all of the Fed’s manipulation of the money supply are for harm.
A panel of three witnesses fields nuanced questions getting to the heart of that broad analysis. Dr. Thomas J. DiLorenzo is a profession of economics at Loyola’s Sellinger School of Business in Baltimore. Dr. Richard Vedder is an economics professor at Ohio University, and Dr. Josh Bivens represents the Economic Policy Institute in Washington, D.C.
Mr. Mulvaney asks the panel: What is the target unemployment rate?
Hovering between 9 and 10 percent, unemployment is a sensitive subject and a complicated one. Unemployment numbers published by the Bureau of Labor Statistics take into account who’s looking for employment and who is currently employed. BLS compares those numbers to the number of people taking government unemployment benefits in lieu of an actual paycheck.
The panel responds: A 5-6% unemployment rate would be more normal. Dr. Bivens cautions that the Fed cannot do anything to force that normalized unemployment rate.
What’s interesting about that response is the idea that the Fed exists to normalize. Charged with setting interest rates that in turn determine the value of money, the Federal Reserve is supposed to keep things at some par.
Booms and busts are normal to human nature, goes the theory, but bad for long-term economic growth. Yet many monetary policy scholars quibble about the effects of economic lag time, and how long that lag stays in place.
Austrian economist Ron Paul, head of the Fed oversight board, believes in auditing or ending the Fed precisely because trigger-happy politicians eager to respond to economic events probably create more booms and busts than they avoid.
