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Fed’s Low Interests Depressing Employment

Posted by Steve Markowitz on January 8, 2015

One perk of being a politician or government bureaucrat is the lack of accountability.  Sure politicians can be voted out of office, but in many cases this is a small penalty since they have already obtained power and wealth potential.

One example of low accountability is the results of the Stimulus Package promoted by Barack Obama in 2008 and his allies who controlled the Democratic Congress.  The President promised that the $800 billion spending binge would keep the total unemployment below 8%.  Not only did unemployment significantly that level after the spending, but the jobs growth has been tepid, the slowest recovery since the Great Depression.

The Obama Stimulus Package failed to stimulate job growth, the purpose for the spending.  What is less understood is that this boondoggle played a role in stagnant wages since.

The New Austrian School of Economics published an article titled “Artificially Lowered Interest Rates Cause Stagnating Wages and Unemployment” that offers the compelling argument that low interest rates promoted the Federal Reserve, a Keynesian partner to the Stimulus spending, has significantly depressed jobs and wage growth.  It references the work of Professor Antal E. Fekete who concluded that drastically lowered interest rates have not expanded credit that was supposed to stimulate activity.  Instead, these policies pitted the cost of capital goods against those of labor to the benefit of capital and detriment of the latter.

The artificially low interest rates significantly decreased the cost of borrowing used by companies to purchase of capital goods.  For manufacturers this often means advanced production equipment.  At the same time the cost of labor does not decreased, or at least not quickly.  This increases incentive for employers to replace relatively expensive labor with capital equipment that is now less expensive due to cheap credit.  This leads to:

  1. Increased layoffs for marginal employees.
  2. Newer companies do not have access to debt and therefor are at a competitive disadvantage compared to establish firms that now have access to low-cost debt.
  3. Large companies use debt to fund high tech manufacturing of technology products, a mainstay in today’s consumer market. They then need fewer employees.
  4. As the new capital equipment funded by low-cost debt is installed and utilized, this further increases the cost discrepancy to the benefit of capital goods. This then puts downward pressure on wages.
  5. In addition, the middle class nearing retirement find their accumulated funds not large to create the required income for retirement due to lower interest paid on safer investments. They then delay retirement, further depressing wages, especially for younger workers. This then leads to falling consumption, further depressing economic activity and future wage growth potential.

It is likely that Pres. Obama and the Federal Reserve did not mislead the public when they the promised benefits from the Stimulus Package and low interest rate policies.  However, there are always consequences to governmental and central bank interventions, which history teaches.  Often policymakers that focus on only a few variables and the short term do not foresee the consequences of interventions.  However, that does not relieve them of responsibility for the long-term damage to the economy caused by the ill-conceived policies.

When Pres. Obama officially leaves Washington in two years he and his family will enjoy the wealth and benefits of being an ex-president.  He will leave with a huge pension and wealth creation capabilities.  Similarly, those in the Federal Reserve who have been responsible for their misguided policies will have a positive economic experience after leaving the Fed and returning to the private sector.  The lack of accountability and responsibility for failed programs are perhaps the primary reasons why governmental policies fail to accomplish the promised goals.  This reality is a major driver of the long-term failure of many (most) governmental programs.

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