Central banks

Don’t give up

Central banks cannot substitute for incompetent politicians. But they can do more to support weak economies

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Readers' comments



Poorly done fiscal policy from politicians is to blame as well. Central bankers couldnt effectively raise interest rates to high during good times because of high government debt loads due to rampant spending and low taxes. This meant rates started off relatively low to begin the recession so CBs couldnt lower rates to much and were forced to try less conventional methods like QE. The CBs are just running out of weapons to combat this fight because their most effective weapons have been disabled by the inability to control government spending and government debt.

Mickey Mountain

quant easing has done nothing but create an illusion of wealth..real growth comes from little to no government intervention in the economy..why do you think US unemployment is still over 8%? why do you think spain's unemployment is over 20%? not because central banks have done too little but because of huge government bureacracies that inhibit growth and job creation..we need to slash all government bureacracies and go with a flat income tax system..unemployment may rise initially but it's the only medicine..5 years down the road you would see employment gains everywhere

Paul Marks

"lower interest rates" more "quantative easing".

More money created from NOTHING by Central Banks and handed out in the form of sweetheart (low interest) loans to banks and the rest of the corporate welfare world.

This is what the Economist magazine had demanded again and again over the years - and every time you have reflected the corporate welfare thingking of the establishment, for it has been done (indeed was being done even as you demanded it - as you knew perfectly well).

Again and again more money created from NOTHING and handed out to the politically connected.

The monetary crank "demand" fallacy of "economics" (not really economics at all) - covering what is, at its heart, simply corruption.

This system is comming to an end.

The end will be terrible (that can not be avoided now), but at least the world will finanally be rid of all this.

Yankee Kid in reply to Paul Marks

Yes, but The Economist is right. If it gets out of kilture it has to be fixed. Paper money will do the job if you can get it into circulation. It is just a little harder some times because of the complicated and size of today's globalization. We have the means and it will get done. It always has. It just takes longer for lack of control of so many people that have to be involved.

Paul Marks in reply to Yankee Kid

I respectfully disagree - respectfully as you have been polite (and I am all too used to hate filled, rather than polite, responses).

I do not believe that increasing the money supply (either by printing money or by more "modern" methods) is a good idea.

However, there is little need for us to debate this as the choice has already been made (indeed it was made years ago). Again and again in the current crises (indeed for a very long period of time BEFORE the current crises) Central Banks have rushed in to increase the money supply - in order to prop the credit bubble (in technical langauge they have "expanded M0 in order to maintain the expanded M3") we will soon see if this has been the correct policy.

My fear is not of collapse (that, in my view, is inevitable now - so it is useless to fear it), my fear is that the Economist magazine (and the rest of the establishment) will deny responsbility for the economic and social collapse when it occurs.

They will pretend that their policy was not followed.

Yankee Kid in reply to Paul Marks

Paul, Think of it as buying and selling things, not printing money. That is what makes the economy go round and round. But you are right, you have to have honest people doing it and no corruption. You have to have the means for selecting honest people in your government. Most people are honest but not all are. You have to have the means for sellecting both capable and honest people. If it fails you will have to try again and again until it works. Keep your eyes and ears open and do whatever you can to help.

Paul Marks in reply to Yankee Kid

Yankee Kid - again I, respectfully, disagree.

I do not think it would make a difference if saints came down from the sky and were put in charge of the policy.

It is the policy (the policy of corporate welfare) that is wrong.


The core problem of current malaise is excessive level of debt and asset valuations in relation to global GDP. Debt levels and asset valuations have been in mutually self-reinforcing upward spiral for last 3 decades. It finally came to a point where it can't be sustained by new debt and anemic GDP growth rate. Debt-laden economies of the West and Japan have hit the wall of structural problems and bear the brunt of increasingly costly welfare systems. QEs and other LTROs are desperate measures to prevent debt destruction and asset deflation. Now central bankers follow the steps of a frantic gambler who stubbornly doubles the stake after each lost spin. For now they are able to postpone the crash but their balance sheets are too small to make a difference. And they can't expand them idenfinitely - there could be no way to go back. Even relatively small rise in interest rate could sink them. They will probably get stuck with swollen balance sheets and economy will not move because its problems with demand are structural. The debt/assets situatuion got out of hand and is very likely to be finally resolved by series on uncontrollable events.

Jasiek w japonii

As for my previous comment, one might question, then, what monetary policy to form to tackle the present predicament:

Keynes elaborates how the trade cycle takes place, and says that “the essential character of the trade cycle and, especially, the regularity of time-sequence and of duration which justifies us in calling it a cycle, is mainly due to the way in which the marginal efficiency of capital fluctuates” (The General Theory of Employment, Interest and Money, p.313). He goes on to point out “another characteristic of what we call the trade cycle which our explanation must cover if it is to be adequate; namely, the phenomenon of the crisis - the fact that the substitution of a downward for an upward tendency often takes place suddenly and violently, whereas there is, as a rule, no such sharp turning-point when an upward is substituted for a downward tendency” (p. 314). This is because, as I have already quoted above, purchasers in organised investment markets, as widely seen today, are “largely ignorant of what they are buying” and speculators in the same markets are “more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets” (p. 316). It is when “optimistic expectations as to the future yield of capital-goods” are no more “sufficiently strong to offset their growing abundance and their rising costs of production and, probably, a rise in the rate of interest also” (p. 315) that “disillusion falls upon an over-optimistic and over-bought market” with “sudden and even catastrophic force” (p. 315). Thus a collapse in the marginal efficiency of capital takes place to trigger a crisis.

“Moreover, the dismay and uncertainty as to the future which accompanies a collapse in the marginal efficiency of capital naturally precipitates a sharp increase in liquidity-preference (or rise in the schedule of liquidity preference) – and hence a rise in the (long-term market) rate of interest. Thus the fact that a collapse in (the schedule of) the marginal efficiency of capital tends to be associated with a rise in the (long-term market) rate of interest may seriously aggravate the decline in investment” (p. 316: parentheses mine), because the schedule of the marginal efficiency of capital is a rectangular hyperbola around the y-axis whereas the (long-term market) rate of interest is a horizontal straight line (or something like an electron cloud) the intersection of which represents the rate of aggregate new investment. (We should strictly tell the fundamental difference between rate of interest and benchmark rate of interest.) Still, “the essence of the situation is to be found, nevertheless, in the collapse in the marginal efficiency of capital, particularly in the case of those types of capital which have been contributing most to the previous phase of heavy new investment. Liquidity-preference, except those manifestations of it which are associated with increasing trade and speculation, does not increase until after the collapse in the marginal efficiency of capital.” (p. 316)

Keynes makes the point in question: “Later on, a decline in the rate of interest will be a great aid to recovery and, probably, a necessary condition of it. But, for the moment, the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough. If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority. But, in fact, this is not usually the case; and it is not so easy to revive the marginal efficiency of capital, determined, as it is, by the uncontrollable and disobedient psychology of the business world. It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. This is the aspect of the slump which bankers and business men have been right in emphasising, and which the economists who have put their faith in a ‘purely monetary’ remedy have underestimated.” Are you reading, Author? This by itself has nothing to do with the question whether the economy is open or closed.

Keynes thus finds the time-element as extremely important in the trade cycle. When a crisis has broken out, the effective demand has fallen sharply and large-scale involuntary unemployment has emerged, and the economy has begun stagnating, a recovery of the marginal efficiency of capital requires a certain length of time. The length of the recovery time depends partly on the durability of capital equipment and partly on the carrying-costs of surplus stocks. In the early phase of the slump, working capital decreases but is offset by an increase in investment in increasing stocks, i.e. stock investment, to some extent. In the next phase, both stock and working capital decreases, and disinvestment in stocks continues even after the bottom has passed to offset reinvestment in working-capital. And, “after the recovery is on its way both factors will be simultaneously favourable to investment” (p. 317-319). Keynes thus emphasises that equipment investment, stock investment and working-capital investment take different roles. Speaking of the importance of the time-element, he harshly criticises the ‘New Deal’ of the United States, saying that the policy package was implemented when “stocks of all kinds – and particularly of agricultural products – still stood at a very high level.” (p. 331-332) Try and read the pages, and you will find Keynes’s point is fundamentally the same as Richard Koo’s ‘Balance Sheet Recession’. Only is it that Koo added financial assets to Keynes’s thought which was viewed, as I said above, from those who produce finished output. (Keynes didn’t deal with the banking sector intensely in The General Theory of Employment, Interest and Money which was published in 1936, but in his later pieces of writing he deals with this issue.)

He points out that the collapse in the marginal efficiency of capital affects the propensity to consume through a collapse in stock prices and, as I pointed out earlier, that a collapse in stock prices affects the marginal efficiency of capital. (p. 319)

“During the downward phase, when both fixed capital and stocks of materials are for the time being redundant and working-capital is being reduced the schedule of the marginal efficiency of capital (i.e. the rectangular hyperbola around the y-axis, which I have explained above) may fall so low that it can scarcely be corrected, so as to secure a satisfactory rate of new investment, by any practical reduction in the rate of interest (i.e. the horizontal line).” (p. 320, parentheses mine)


“In conditions of leissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no reason to expect.” Keynes concludes that “the duty of ordering the current volume of investment cannot safely be left in private hands.” (p. 320)


Jasiek w japonii

The Author of the article insists that the central banks should be listening to the academics. I am, however, deeply sceptical of what the academics the author is thinking of are asserting on the issue in question, because they are modern mainstream economists who apply loanable funds theory of interest to long-run determinants of rates of interest while they seem to apply liquidity preference theory of interest to short-run determinants of rates of interest. They have in common a serious fundamental, theoretical, terminological problem.

The problem is that they don’t really understand the difference between short-term expectation and long-term expectation. Take Keynes first of all and see how he explains the difference between the two types of expectation:

“All production is for the purpose of ultimately satisfying a consumer. Time usually elapses, however – and sometimes much time – between the incurring of costs by the producer (with the consumer in view) and the purchase of the output by the ultimate consumer. Meanwhile the entrepreneur (including both the producer and the investor in this description) has to form the best expectations he can as to what the consumers will be prepared to pay when he is ready to supply them (directly or indirectly) after the elapse of what may be a lengthy period; and he has no choice but to be guided by these expectations, if he is to produce at all by processes which occupy time.
“These expectations, upon which business decisions depend, fall into two groups, certain individuals of firms being specialised in the business of framing the first type of expectation and others in the business of framing the second. The first type is concerned with the price which a manufacturer can expect to get for his ‘finished’ output at the time when he commits himself to starting the process which will produce it; output being ‘finished’ (from the point of view of the manufacturer) when it is ready to be used or to be sold to a second party. The second type is concerned with what the entrepreneur can hope to earn in the shape of future returns if he purchases (or, perhaps, manufactures) ‘finished’ output as an addition to his capital equipment. We may call the former short-term expectation and the later long-term expectation.” (The General Theory of Employment, Interest and Money, p. 46-47, bold emphasis mine)

A very important point is that when Keynes says ‘consumers’ they belong to the household sector and not to the non-household sector. Agents in the household sector (i.e. households) consume and save, and don’t produce goods or services. Agents in the non-household sector (e.g. business corporations and governmental offices) produce tradable goods (and services) in the form of consumer goods (and services) and capital goods (and services), and neither consume nor save. One might be surprised to read it, because it appears that agents in the non-household sector also save. But, in macroeconomic analysis savings means different from what microeconomic analysis calls savings.

But, the point I am most emphasising this time is that the above two forms of expectation are about ‘producing finished output’, and not about earning capital gains. This is deeply in relation with the banking system as the mediator between savings, which households do, and investment (i.e. production), which agents who belong to the non-household sector do. To avoid confusion, Joan Robinson used to distinguish between investment and placement the latter of which means purchasing securities.
Keynes says that purchasers in organised investment markets, as widely seen today, are “largely ignorant of what they are buying” and speculators in the same markets are “more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of the future yield of capital-assets” (p. 316). Following the above definition of short-term expectation and long-term expectation, the activity of forecasting the next shift of market sentiment in organised investment markets mainly belongs not really to short-term expectation but mainly to long-term expectation in view of producers who produce finished output. Purchasers in organised investment markets behave based on ‘short-run’, speculative expectation (on capital gains that they expect to be materialised), but according to Keynes’s definition this expectation is not really short-term but mainly long-term.
In the famous Chapter 12 Keynes explains how people have come to transact elements of long-term expectation by short-run, speculative expectation as investment markets have been increasingly organised. I find this the core point as to how financial markets are constructed. The forms of monetary policy inherently work on this channel, i.e. transaction of elements of long-term expectation by short-run, speculative expectation, and hence monetary policy is inherently short-run. The more highly investment markets are organised the more short-run, speculative expectation becomes dominant in forming the long-term expectation of the economy as a whole. The long-term expectation of the economy as a whole is represented in what Keynes names marginal efficiency of capital and its schedule by different rates of aggregate new investment.
(Read my later comment if you have the time, where I explain what the central bankers and the other policymakers should hold in mind.)


I would like to attract attention to Per Jacobsson Lecture by Dr. Reddy dated 24th June, Professor Ross Levine’s seminal paper on lack of independence of the financial regulatory authority and Robert Schiller’s allusion to the Code of Ethics for financial innovation in providing stewardship to the society’s assets.


In this state of regulatory capture, we can hardly expect the lofty outcomes as proposed in this article.

Procyon Mukherjee

Concerned Radical

The Federal Reserve and the European Central Bank are private institutions dedicated to keeping money flowing up, from the poor to the rich. This suggestion that they are "energetic paramedics to their sickly economies" is laughable. While the common man suffers, big business thrives, making record profits. They are much more akin to a doctor prescribing drugs to cover the symptoms of the last drugs prescribed.


A disposition, the indie, spiralling pit of depression. That's the soloution - give up. There is no hope.


You either print more money (QE) or print more food stamps (FS).
That seems to be the choice. Unfortunately, the central banks or the government cannot just "print" more jobs.
Come to think of it, why not? Hitler built Autobahnen!
Central Public Works is what countries need more than Central Banks.

Yukon Dave in reply to tocharian

The fact is Germany was making stuff other people wanted and not printing food stamps, jobs or anything else like that.The Autobahn did not turn the German economy around. Take a look at the massive exports Germany was doing before the war. This in part drove him to want to expand his position in the resource market which tied nicely to his other ideas.

tocharian in reply to Yukon Dave

There are also no "food banks" in Germany. lol
By the way, Public Works wasn't "invented" by the Germans. FDR also used that strategy.
The problem in the US (more generally in Anglo-Saxon countries) is that they believe in "Financial Markets and Rating Agencies" or Rentier-Capitalism as I call it. Germans (not just Merkel) are very wary about such "short-term-cheap-shots" (like QE) and they trust more in a solid well-trained (and well-paid) "Mittelstand" that can manufacture high quality products instead of outsourcing all those middle-class jobs away to China or India. Making a quick buck (using Chinese labour?) might be good for Wall Street and the Corporations but hurts Main Street (the 99%)

Yukon Dave in reply to tocharian

I agree. In the end economic prosperity is about creating and making stuff other people want to buy. Without it everything else is a losing game. It is sad that the environmental movement pushed out so many jobs from the US. Like making things in Asia does not pollute the same air and oceans that we all share except at a higher velocity. Asia will only agree to per capita and that means all that chasing manufacturing out of the US will only result in more pollution for the planet.

Or that those same environmentalist allow those polluting cheaper products to compete on the same shelves as cleaner made US products which has artificially kept inflation down. Working with industry and not just attacking it is the solution that Germany has done so well with. Automation of course is taking its toll or we would not have the same number of workers in the US since the year 2000 while GDP grew almost 50%.


So the politicians failed ,and now Westerners leave their hopes on quantitative easing.What does this so-called QE mean? Printing more money of course.This means that many countries,which have saved huge quantity of foreign exchange(mainly in US dollar and Euro)will lose a lot.That is to say that wealthy countries plunder poor ones.


“maximize employment - whatever the politicians get up to.….” that is a pretty tall order.

Central bankers cannot be held responsible for a high unemployment rate – 8.2 per cent in America and more in several European countries. Much of the unemployment is due to unwanted immigration, i.e. an influx of people without skills. Here in Europe we have hundreds of thousands of immigrants who are happy to be unemployed because they live better off our welfare than they do working in their home countries. Besides, many of them are quite simply un-employable.

But should The Economist blame Central bankers for that…?

Bozaya in reply to Swedane

you cannot blame the situation on immigrants... talk about a scape goat!They did not lay down policies did they? they did not get there without the government's approval... did they? ...at least the legal ones. Give me another reason.

Swedane in reply to Bozaya

No, I blame it on the politicians who let too many in in the first place. The Economist seems to blame central bankers for not doing enough to combat unemployment, and my point was that many immigrants are simply un-employable so the blame should be placed where it belongs – not on central bankers.

sbvm in reply to Swedane

Blaming immigrants for high unemployment in Europe is just ignoring the reality. There are not enough immigrants in Europe to make unemployment so high anyway. It's just incredible to be so ignorant, and for that, you can only blame yourself.

Swedane in reply to sbvm

Again, I do not blame immigrants per se. I blame the politicians who let too many in. Take, for instance, France and Sweden, two countries I know well, and you will find that more than forty (40) per cent of immigrant youngsters are unemployed. Quite simply because they do not have the necessary mind set or skills. In Germany a very high proportion of immigrants are on Hartz-IV (welfare). Same in Denmark and Belgium.

sbvm in reply to Swedane

OK I agree that among immigrants, the unemployment rate is high (more because they are victims of discrimination than because they don't have "the necessary mind set or skills", and most of the time they don't really look for a qualified job but for a job that pays enough to live, that's why in France, for example, many security guards, cleaners and so on are not French). However, their "contribution" to the national unemployment rate (let's say in France, a country that I also know pretty well) is just close to almost nothing. Blaming immigrants, or the politicians who let too many in, is just ignoring the real causes of unemployment in Europe and thus doesn't help fighting it. You have exactly the same reaction than the politicians you are blaming: when they don't know how to solve a problem, they put the responsability on others, most of the time immigrants (or muslims, or Europe citizens with foreign backgrounds...).

Swedane in reply to sbvm

There is a contradiction in your message: first you say that you agree that unemployment is high among immigrants and later you say that their “ "contribution" to the national unemployment rate (let's say in France, a country that I also know pretty well) is just close to almost nothing.”

But let’s try to understand each other; my initial reaction was that central bankers should not be blamed for not being able to tackle high unemployment indirectly created by politicians. The reasons why immigrant unemployment ranks high is another matter – one on which we apparently disagree.

sbvm in reply to Swedane

There is no contradiction: it's not because 40 percent of immigrant youngsters are unemployed that they contribute to 40 percent to the national unemployment rate. Yes unemployment rate among them is high but since they represent a small proportion of the all population their contribution on a national or european level is small. It's statistically cristal clear actualy. Anyway, I agree that we cannot blame everything on Central Banks, especially in Europe. Regarding immigrant unemployment rate, I think we are both right to a certain extent

Yankee Kid in reply to sbvm

This is an interesting conversation. It must be more dificult for Europe than here in the US. Does Europe have any control and different problems between countries? I would like to know if this is affecting anything between the uniting of the countries in Europe? For instance The Netherlands had their major cities taken over when I was last there and seemed to have welcomed them. The French are quite different, or were when I was there.


Does your grandmother keep her savings in cash? Wonderful! Perhaps she can
save the economies of the west, despite the fact that they are producing a
smaller and smaller share of the world's goods and consuming about the same
old gigantic slice of its resources.

Then again, perhaps granny is about tapped out at this point. And even
if she does chip in, why should we imagine that her contributions will
end up as paychecks? Its pretty obvious at this point that financiers
have figured other ways to capture the new money besides the old-fashioned
hiring-people-to-make-things approach. The US economy is simply not one in
which they truly wish to invest at the moment, and no amount of additional
money seems likely to change that.


2) The argument that leaving interest rates at zero for long periods of time will lead to bubbles is misleading. First, insofar as low rates represent loose money, we have the experience of the seventies to teach us that excessively expansionary monetary policy, whilst jeopardizing inflation stability does not necessarily lead to asset price spikes. It is dangerous to attempt to set policy in a way specifically designed to head off bubbles in any case, as it is very hard to predict whether a boom is in fact a bubble (in retrospect we know that Irving Fisher was in fact correct about 1929, and that the Federal Reserve's tightening of policy at the time to puncture what it perceived as a bubble was a key trigger of the Great Depression); and also because policy "cannot serve two masters". Either you set policy at the level that brings aggregate demand and supply into equilibrium, or you deliberately set out to asphyxiate the entire economy from time to time purely to deprive those whom you the central planners regard as "irrational" speculators in a particular market of access to credit.

But the bigger problem with this reasoning lies in the assumption that prolonged low interest rates represent easy money. As Milton Friedman repeatedly pointed out, persistently low rates represent tight money, not easy - as in the Great Depression. As soon as the economy is expected to recover, those very expectations of future recovery will drive up present interest rates. The low rates indicate that the demand for credit is low precisely because the economy is doing poorly, and if the Federal Reserve announces that it will maintain rates low ten years from now then that is largely a sign that the economy will still not yet have recovered by then. In addition, in the discussion of the Federal Reserve's inflated balance sheet it is frequently overlooked that their original purpose in expanding its balance sheet was not to increase the quantity of money in circulation but rather to provide liquidity to the banking system, in line with Chairman Bernanke's "credit-view" of recessions. That is why they paid the banks a rate of interest on holding excess reseves which was greater than the returns on the alternative uses of those reserves - and they continue to do so. It is absurd to contemplate either the ineffectiveness or the inflationarism of monetary injections whilst they are still being deliberately neutralised.

3) But the worst error perhaps lies in the Economist's reiteration of the conventional wisdom that the Federal Reserve has taken extraordinary measures to stabilise demand. In fact the truth is the opposite - the Federal Reserve has utterly failed to maintain total demand, or nominal GDP, on a steady trajectory since 2008. They failed to cut the policy rate in September 08 even as the markets were forecasting (correctly, as it turns out) years of disinflation, and thus implicitly recession as well. Since then, the continued low rates have been a sign that policy was expected to fail (including fiscal policy), and thus the only way quantitative easing might have had an effect was - by increasing the quantity of money in circulation. This would not have occured even without interest on reserves, as the injections were all closed-ended and temporary, with a promise to pull out as soon as inflation started to rise above the two percent target. In fact, as Matt O'Brien of the Atlantic suggests, it is a joke to say that the Federal Reserve's 2% inflation target is symmetrical, with equal risk of over or undershooting - their own forecasts belie this. The Federal Reserve behaves more as if it were targeting 1.5 percent inflation, with no weight given to the unemployment side of its mandate. This despite the fact that all Taylor-rule formulas suggest that the equilibrium interest rate can only be attained with much higher inflation, and despite the fact that prices have fallen well below trend thanks to deflation in 09 and disinflation thereafter. If one didn't know better, one might almost suggest that the Fed didn't want the economy to recover. (With the ECB there is practically no doubt.)

gdpbull in reply to Saturos

All the cause and effect theories just don't hold. Economics cannot be a science because people react differently at different times and locations under the exact same economic conditions for a lot of complicated reasons. Historically, central banks have made things worse. Why do so many mainstream economists understand that trying to manage an entire economy Soviet Union style is folly, but believe the financial part of the economy can and should be centrally planned?

Demand may not increase until debt is paid down and savings increased. Best thing is to allow the imbalances to be corrected. That means allowing the recession to run its course. Too many unintended consequences can and do happen because of central banks fiddling with the economic control dials.

Monster to big to fail banks could not exist without central banks. Just that one change would be a huge benefit to the stability of economies.


I am pleased to see that the Economist's editorial line is finally coming around to support the need to reverse the world's contractionary monetary policies. Regrettably however, I must point out a number of flaws in this article:
1) "Maximise employment" is a terrible choice of words, which is not going to win you over any conservative or hawkish supporters. Monetary policy is supposed to be used to maintain employment at the NAIRU level, or the highest level that can be sustained without continuing to accelerate inflation. However it is always possible to exceed this level, even when the economy is healthy, by repeatedly producing unexpected inflation. This gives us the "short-run" maximum level of employment, which does not do much to raise welfare but rather requires inflation getting out of control. This is what occurred in the 60's and 70's in the US. It is this latter scenario which conservatives fear - some because they think we are already at the NAIRU level of unemployment, and the mass unemployment is all due to supply-side factors, some because they fear that although more spending will boost employment to a healthier level the rise in spending will go too far in order to raise employment as far as it can go (a fear which the article alludes to), and some who are simply confused.
The term "potential output" is highly confusing - one should distinguish between the NAIRU level, the "natural" level which is trend output in the absence of supply-side problems, and the "maximum" level which can be obtained through irresponsible inflation. Failing to distinguish between responsible and irresponsible demand-side increases in employment or output is what gives conservatives a lot of ammunition in their arguments. In fact, it is the current policy which is irresponsible, as spending continues to be depressed below its trend path in both the US and Europe, leading to a decline in nominal income which could worsen the debt crisis by plunging the economy back into recession, as nominal income represents the resources that people, businesses and governments have to repay nominal debts.
Furthermore, when rates are above normal the Federal Reserve is able to use its preferred policy instrument (the fed funds target) combined with the Taylor Rule to deliver stable nominal growth. But ever since we have moved into the recent spate of contractionary monetary policy, interest rates have fallen to the zero rate bound. There are other tools that would work, but the Federal Reserve is not comfortable with using them. This makes it less likely that they will hit their macroeconomic policy objectives. This is not to say that they have stopped doing policy, as they still try things like quantitative easing and interest rate guidance, rather it means that they have introduced more macroeconomic risk. That is why volatility in the equity markets increased in the period after 2007, just as stock market volatility more than doubled in the 1930s.

e ddog

"...overhauling pension and health-care promises." There's a thought for you, probably the key things to get the rich world out of its sorry mess. My generation are stealing from our children, wait for the day that they realise that there is nothing left for them because all their money is going towards pampering a bunch of senile old people. Raising pensionable age to, say, 70 or 75 with immediate effect will be simple, but impossibly hard, but necessary.

I doubt whether the Fed can do more to maximise employment within the current environment. I would add shrinking government to CCH08's liberalising markets and reforming labour practices.


Stonehearted Moneylenders are not Social Workers.Clever Politicians love to have Bank Accounts,here and there,pious bandits in disguise....


How about the politicians' jobs of liberalizing markets and reforming labour practices? Surely a country's economics policies cannot consist only of printing more money. Central banks have done plenty of printing in the past few years; it is definitely time for the rest of the governments to do their parts to promote growth without adding too much to their debt burdens.



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