Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

For More Jobs and Stability, Set the Economy Free

Economics / Economic Theory Apr 10, 2014 - 04:53 PM GMT

By: MISES

Economics

John P. Cochran writes: The headline in the print edition of theDenver Postof an associated press story on the nominationof Janet Yellen highlights a quote from President Obama, “She understands the human cost when people can’t find a job.” This statement about then-new Fed Chair Yellen, which emphasizes Yellen’s Keynesian-based commitment to the unemployment prong of the Fed’s dual mandate, underlies why some economists feared that no matter how bad policy might have been during Bernanke’s tenure, policy is likely to get worse rather than get better from a sound money perspective during a Yellen reign. Her empathy for the unemployed was clearly present in her remarks following her first official policy meeting which as reported by the Wall Street Journal “were a notable affirmation of her commitment to low rates until the economy is much stronger.” She emphasized, “The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics.” She then chose to support her remarks not with usual econ jargon and statistics, but“Ms. Yellen instead exhibited a personal touch ... by coloring her comments with experiences of three people who had struggled to gain full-time work.”


Unfortunately Yellen’s strong compassion for the plight of the unemployed comes tied to a faulty understanding of the cause of unemployment. With Yellen’s ascendency to the Chair of the Fed, the Wall Street Journal notes the “Tobin Keynesians are back in charge at the Federal Reserve.” The last time this group’s Phillips Curve-based ideas dominated Fed policy, the Fed engineered the stagflation of the 1970s. Exhibiting a lack of historical understanding, sympathetic cheerleaders such as Justin Wolfers see Yellen’s commitment to the dual mandate as a plus.

Yellen’s appointment should be viewed as an investment in the Fed’s dual mandate, which emphasizes the central bank’s role in taming both unemployment and inflation. The unemployed should rejoice that they have a powerful advocate willing to battle the hard-money types willing to consign them to the economic scrap heap.

Wolfers goes so far as to argue that failure to heed savior Yellen’s advice has left Fed policy less effective and the “recovery” weaker than it might have been. He claims, “If Yellen had been in charge of the Fed over the past few years, millions fewer would be jobless, and we would be less concerned about the danger of deflation.”

This return of the Keynesian understanding of unemployment, accompanied as it is too often and uncritically by an even more fallacious doctrine, the Foster-Catchingsunderconsumption theory of depression, and its high-wage theory of prosperity,[1] is misguided. The best one can hope for from a policy driven by this worldview is it will leave the crippled economy hobbling forward. Continuing the policy has the potential to run a significant risk of trading slightly more employment now for a significant risk of greater instability and higher unemployment later, as recognized by Kevin Warsh (“Finding Out Where Janet Yellen Stands”):

The most pronounced risk of QE is not an outbreak of hyperinflation. Rather, long periods of free money and subsidized credit are associated with significant capital misallocation and malinvestment — which do not augur well for long-term growth or financial stability.

Failure, which is highly likely, to unwind the massive increase in the Fed’s balance sheet, runs a risk of hyperinflation or a crack-up boom.

Better policy and a genuine recovery require, not a faulty understanding of labor markets, but must be built on a Misesian-classical view of labor markets.[2] Gallaway and Vedder explain (and provide empirical support):

Von Mises, and others like him, were correct in rejecting the “progressive” view that the level of money wage rates does not matter [the view of Keynesian and Foster-Catchings theories]. Not only is it important but, in conjunction with the levels of prices and productivity, it is the key to understanding patterns of variation in aggregate levels of employment and output. With the aid of the von Misesian-classical analysis, such disparate phenomena as high unemployment rates, low unemployment rates, high unemployment accompanied by inflation (stagflation), low unemployment in unison with inflation, swift economic recoveries, and aborted economic recoveries can be understood in an intelligent fashion. No special economics are needed for each situation. What other theoretical apparatus can make the same claim?

Hayek explains further this “true theory of unemployment”:

The true, though untestable, explanation for extensive unemployment ascribes it to a discrepancy between the distribution of labor (and other factors of production) among industries (and localities) and the distribution of demand among their products. This discrepancy is caused by a distortion of the system of relative prices and wages. And it can be corrected only [emphasis added] by a change in these relations ...[3]

Earlier in the work,[4] Hayek provided a warning, recently echoed by Warsh (above), “a new inflationary push may temporarily succeed and make the eventual breakdown worse.”

A first step to better policy is found in the conclusion of Gallaway’s and Vedder’s important but too-often-neglected — not only by mainstream economists but also by Austrians — The Fraud of Macroeconomic Stabilization Policy:

To place these technical conclusions in perspective, we point out that the overall interpretation of short-run economic phenomena presented here is quite consistent with the Austrian conception of a world that is seeking to attain an underlying equilibrium state but is being buffeted continually by exogenous shocks of an unpredictable nature. As a consequence, entrepreneurs and workers continuously must adjust their behavior to take into account these changing circumstances. The best they can hope for from government policymakers is, in the spirit of Hippocrates advising future doctors, that they do no harm. Given that the phenomena that policymakers confront in the short-run are essentially unpredictable and given that even their best efforts are the equivalent of medieval doctors bleeding their patients, the most appropriate short-run macroeconomic stabilization policy is to give the aforementioned entrepreneurs and workers maximum freedom to adjust to potentially discoordinating shocks to the macroeconomy. Clearly, the conventional wisdom proposition suggested by Galbraith that there is endemic instability in a market-based economy that can be remedied only by government policy interventions is inappropriate. Also, it is clear that Mises’s vision of the nature of the macroeconomy is substantiated by our findings. The notion that deliberate contracyclical macroeconomic policy can stabilize the economy is a fiction. [emphasis added][5]

Notes
[1] See Gallaway’s and Vedder’s “Wages, Prices, and Unemployment: Von Mises and the Progressives,” Review of Austrian Economics 1, no. 1 (1987).
[2] Ibid., pp. 66-67. Salerno uses the framework in a devastating critique of Krugman.
[3] See Unemployment and Monetary Policy: Government as Generator of the “Business Cycle”. San Francisco: Cato Institute, p. 8. PDF on request.
[4] Ibid., p. 3
[5] Printed in the Quarterly Journal of Austrian Economics 3, no. 3 (Fall 2000): 32

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran's article archives.

© 2014 Copyright John P. Cochran - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in