The Federal Reserve Genuflects Again to ‘Sustainable” 4.7% Unemployment Rates, and 1.8% Real GDP Growth Rates. Investor Beware.

The US Federal Reserve wants a higher rate of unemployment, at least from reading missives from the San Francisco branch.  And slower economic growth.

In its May 10 “Fed Views”, the San Francisco branch posits that 4.7% is the lowest “sustainable” unemployment rate, and 1.8% the maximum “sustainable” real GDP growth rate.

“We estimate 2.8% GDP growth in 2018, a full percentage point above our estimate of the long-run sustainable growth rate,” reports the SF Fed.

They add, “We expect unemployment to decline further this year and through 2019, and remain below our estimate of the long-run rate of 4.7% for some time.”

At 4.7% unemployment, there are about 1.3 to 1.4 people actively looking for work for every job opening. Thus the US central bank believes only when supply of labor exceeds demand is the labor situation “sustainable.”

Fed’s View Obsolete?

Of course, if there is such a thing as a “sustainable” rate of unemployment (and by whose metric?), it certainly must be highly variable, depending on culture, time and nation. In Japan, there are 159 job openings for every person seeking work at latest count, yet the problem in Japan remains a central bank that cannot hit its inflation target of 2%.

Evidently, the Fed does not brook the idea that perhaps recent decades have changed what is “sustainable” unemployment, or maybe even that the idea is weak to begin with, relying on an increasingly dubious “Phillips Curve” that posits lower unemployment leads to higher inflation.

And are Americans really to believe that US GDP must move into the slow lane, and permanently, to proceed with “sustainable” growth?

The SF Fed Solution

Fear not. The SF Fed posits the one solution to the permanently anemic economy that it forecasts and believes must bring about is…higher labor participation rates, but only for women. That is, women with children.

“Over the past two decades,” says the SF Fed, “participation rates for Canadian women with a college degree have increased, and rates for Canadian women with a high school diploma have stayed the same. American women of both levels of educational attainment instead have reduced their rates of participation in the labor force over the same period.”

The SF Bank adds, “However, one likely key to the story is the mix of policies in Canada aimed at providing employment protection for parents, and expansions of parental leave with income support.”

Conclusion—Investor Beware

Yes, increased (mandated?) unemployment leave for parents is the ticket to more-robust US economic growth. Even as the Fed tightens the screws en route to a higher, 4.7% unemployment rate and slower, 1.8% real GDP growth.  Or so says the SF Fed.

Macroeconomics in the US, as practiced, more and more resembles politics in drag. The SF Fed missive is exemplary not for macroeconomic insights, but for marrying SF-PC with Fed-PC.

Funny, I thought higher wages (perish the thought), or lower taxes on wages might encourage labor force participation, on the carrot side. On the stick side, lower unemployment benefits, or delayed Social Security retirement benefits.  A phase-out of Veteran’s Administration pensions and disability payments is another worthy option.

I have even fantasized that higher wages and strong aggregate demand might spur greater investment in plant and equipment, raising productivity. You know, like the 1990s.

Unzoning property along the West Coast, to enable workers to live near job creation, is another worthy idea.

Investor beware. The central bank wants more unemployment and slower economic growth. And mandated parental leave benefits.


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