Janet Yellen's circuitous prattle before the congressional
committees this week is a reminder that the Humphrey-Hawkins Act is
an obsolete relic and should be repealed. It arose out of the
Keynesian heyday in the 1970s and is predicated on a closed US
economy. That is, it presumes the macro-economy is a giant bathtub
in which demand can be filled to the brim through "monetary
accommodation", and that a full tub will float jobs, GDP and public
well-being to their optimum state.
Likewise, the other part of the "dual mandate" is also
purportedly easy. Under the closed economy model, "price stability"
can be readily assured--so long as the wise men and women who
operate the FOMC don't become too enthusiastic and cause the tub to
overflow with inflation-fueling "excess demand".
But this is horse and buggy era economics. Today the US economy
functions within an open $80 trillion global GDP-which washes vast
flows of goods, services, capital and finance through its every
nook and cranny. There is not a domestic price, wage rate or rate
of return on capital assets that is not impacted directly or
indirectly by global considerations.
Accordingly, aggregate measures like GDP are nothing more
than the sum of billions of domestic wages, prices and
transactions that have been touched, shaped and bent by global
In this context, demand injected into the Keynesian's domestic
bathtub leaks into the global economy and the Fed's targets for
inflation and unemployment are whip-sawed by forces arising from
outside the domestic tub. The price of labor, for example, is
especially internationalized because at the end of the day nearly
everything can be off-shored--from widget manufacturing to bill
collection and remotely performed surgery. So filling the US
bathtub with more "demand" does not automatically float more
domestic jobs to the surface. An "easy-money" auto loan can just as
readily pull more labor hours through an assembly plant in Korea to
build an American destined import than tap an extra 28 hours of UAW
labor to make a car in Detriot.
The internationalization of wages, prices and production
obviously makes a mockery of the Keynesian's closed economic
bathtub model. But beyond that it makes a positive laughing stock
of the primitive quantitative targets that have been used to
translate the dual mandate into operational policy. Yesterday, for
instance, Yellen averred that the maximum employment objective
could be quantified as an unemployment rate in the range of 5.5% to
5.2% on the BLS' U-3 measure.
Well, now, why would the monetary central planners stop filling
the tub at 5.2%? After all, that would still leave 8 million
Americans unemployed according the U-3 metric. In truth, however,
it would also mean that 102 million adult citizens (over 16 years)
would not have jobs-of which only 43 million are retired and on
social security OASI.
Beyond that, the Fed's U-3 target is way too simplistic and
primitive because it measures payroll slots, not labor hours as
they are managed to the minute in today's world by employers from
Wal-Mart to Hooters Inc. Were the Fed's U-3 target to be achieved,
for example, there would be about 147 million workers counted as
"employed". Yet our monetary politburo would have no way of
differentiating as to whether such workers supplied 4 hours or 40
hours of labor per week to the US economy.
Nevertheless, the Keynesian monetary central planners embrace
the blunt instrument of the U-3 unemployment rate as one prong of
their dual mandate because that purportedly marks the boundary
where all the "slack" in the labor market is used up. At the
precise point of 5.2% unemployment, therefore, the bathtub is
allegedly full to the brim and further injections of monetary
stimulus could adversely impinge on the price stability
Needless to say, this amounts to mindless, paint-by-the-numbers
ritualization of economic analysis. The Fed has no way to
meaningfully measure something called labor market "slack" because
in today's world there is always massive "slack" in the global
labor market--regardless of where the U-3 unemployment rate stands
at any given point in the US business cycle. So injecting monetary
demand into the domestic economy does not automatically pull more
labor into production at 6.1% unemployment, nor does it push
inflationary pressures onto domestic retail shelves at 5.1%.
Moreover, there is now also massive "slack" in the internal US
labor market that is not captured by the U-3 metric, either. That
is because payroll positions are not a meaningful proxy for
available labor hours in an economy that essentially rents labor by
the hour-from contract coders to peak hour parking attendants.
Indeed, here's where the rubber meets the road on the maximum
Notwithstanding the Fed's misguided belief that it has
twice driven down the unemployment rate toward 5% during this
century, there has actually been no sustained growth whatsoever
in labor hours employed during the entirety of the last 14
Zero growth in labor hours on a trend basis constitutes
overwhelming empirical evidence that hitting the monetary stimulus
dials does not push domestic labor into production on a sustainable
Indeed, notwithstanding the massive monetary stimulus
since the late 1990s, the true labor utilization rate in the US
economy has sharply deteriorated.
Stated differently, the Fed's obsession with its full employment
mandate amounts to tilting at windmills. When it believes itself to
be driving the U-3 rate lower it is not necessarily adding
permanent labor hours to the economy's supply side. And when it
proposes to stop stimulating at it arbitrarily chosen
full-employment marker on the U-3 scale-that has virtually nothing
to do with the full absorption of the actual "slack" labor in the
US economy measured by adult labor hours available.
As shown below, actual hours worked in the US economy today
stand at about 230 billion annually--the identical figure that was
recorded in the year 2000. Yet during the interim the adult
population adjusted for the gain in the OASI retirement rolls has
grown by 28 million persons or about 55 billion potential labor
hours annually. Moreover, the modest 2% fluctuation in labor hours
utilized as between high and low years over that period- tracks
exactly the business downturns and recoveries that were caused by
the Fed created dot-com and housing boom and bust cycles.
So while no sustained employment gains floated to the top of the
macro economy since the turn of the century, it cannot be gainsaid
that the Fed did inject massive stimulus into the bathtub. To be
precise, the Fed's balance sheet was $500 billion as the new
century opened and stands at $4.4 trillion today. That 9X gain
reflected relentless tinkering of the monetary dials by the FOMC
and long periods of absurdly low interest rates pegged by these
actions, but it accomplished nothing on the sustainable employment
So like lab rats on a treadmill, the Fed chases the U-3 rate up
and down the fluctuations of the business cycle that its own
policies exacerbate. Worse still, it obsesses on a clunky
unemployment metric that is self-evidently not measuring the same
thing over time. This is in part due to the sharp decline in the
labor force participation rate from 67% to 62.8% over this period,
which alone takes 10 million workers out of the U-3 denominator,
and thereby converts the current 12% unemployment rate measured
against the year 2000 participation rate to the 6.1% rate reported
But the distortion owing to the Fed's U-3 obessions is
especially due to the internationalization of the labor market, and
the atomization of jobs slots into variable labor hours
domestically. Self-evidently, the rate of unemployed labor hours
has been steady rising for a decade and one-half.
When labor hours are viewed for just the private economy (i.e.
less the government sector), the same picture emerges. At about 196
billion annual hours, there has been no gain since the year
That the bathtub economics of the Humphrey-Hawkins Act is
totally obsolete is further underscored by a longer-term look at
labor hours employed by domestic private industry.
As shown below, the annual compound growth rate between
1960 and 1999 was about 2.0% per year. Since then, however, the
trend growth rate has been a big fat zero!
In short, the American economy is not generating labor hour
growth and that baleful condition has nothing to do with the level
of so-called aggregate demand being injected into the Keynesian
bathtub by the Fed. Instead, part of the problem is that American
workers are way over-priced relative to the vast amounts of "slack"
labor that have been brought into the world's economy since the
China/EM boom was triggered by global central banks in the
When the rice paddies of Asia were drained into the mercantilist
export factories of China, Korea, Taiwan etc., the price of
American labor needed to go down- if the quantity of labor demanded
by the domestic economy was to keep going up. Obviously, that
didn't happen. And this kind of structural adjustment can't
possibly be accomplished by means of pegging interest rates and
ballooning the balance sheet of the central bank. Its a job for the
At the same time, it is also evident that after peak debt was
reached in 2007 that the Fed's monetary stimulus did not generate
any incremental spending on main street, anyway. That's because the
credit transmission channel by which higher leverage ratios had
historically added credit based spending to income-derived
consumption was no longer operative at peak debt.
Stated differently, American households tapped out their
leverage ratio at 220% of wage and salary income in 2007, and have
been deleveraging ever since. Accordingly, since the financial
crisis, household spending has been limited to income growth--which
is to say, it has returned to the natural, sustainable path that it
was on before that massive upward ratchet in leverage ratios
commenced in the 1970s. Accoridngly, the Fed's massive money
pumping has done nothing to expand household spending.
At the end of the day, therefore, the Fed's paint-by-the-numbers
pursuit of its alleged Humphrey-Hawkins mandate amounts to a double
failure. It can no longer pump aggregate demand into the domestic
economy despite massive monetary expansion-owing to the reality of
peak debt; and its machinations have manifestly not generated
employment growth--properly measured as labor hour utilization--for
this entire century to date.
Moreover, the quality and productivity of the static level of
labor hours since the turn of the century has definitely taken a
turn for the worse. As shown below, labor hours in the HES complex
(health, education and social welfare) have soared by 33% since
2000. By contrast, labor hours in domestic manufacturing have
plummeted by 30% during the same period.
So the bottom line is this: The U-3 obsessed Keynesian central
bankers ensconced in the Eccles Building have thrown historical
monetary prudence and wisdom to the winds by increasing the Feds
balance sheet by 9X since the turn of the century, yet all of that
insane monetary pumping has resulted in no gain in the quantity of
labor employed by the US economy and a serious decline in the
quality mix within this static total.
As shown below, there are now 4 million fewer breadwinner
jobs-in construction, manufacturing, energy and mining, the white
collar professions, FIRE, trade and transportation, business
management and services and core government-- than there were in
the year 2000. These jobs are overwhelmingly full-time and full-pay
jobs that generate upwards of $50k per year in pre-tax income. Yet
the paint-by-the-numbers money printers at the Fed have never
betrayed even a hint of recognition that these essential
"breadwinner" jobs have been slipping away.
By the same token, the monetary politburo has also never noted
that the cyclical up-welling of "jobs" they claim so much credit
for are actually part-time jobs in bars, restaurants, retail
emporiums and temp agency sweat shops that pay on average hardly
$20k on an annualized basis.
These dismal trends in the quantity and quality of labor
employed by the US economy are also a thundering indictment of the
second prong of the Fed's dual mandate. Namely, its obdurate
insistence that "price stability" should be defined as 2% inflation
on the PCE deflator-a flawed measure that easily understates actual
cost-of-living increases by 1-3% annually. Still, the very last
thing the US economy needs, given its uncompetitive position in the
global economy, is any inflation at all. In fact, the nominal cost
of domestic production and wages needs fall in order to reduce
imports and off-shoring and to improve the price competitiveness of
So in pursuit of its senseless Keynesian campaign to cause
consumer goods and services inflation to rise, the Fed is
perversely undermining the employment prong of its so-called dual
mandate. Rather than freaking-out about "deflation" on the grounds
that it will reduce that Keynesian ether called "aggregate demand",
the Fed should actually welcome deflation because only through a
downward adjustment of billons of domestic prices and wages will it
be possible to regain international competitiveness, and, on the
margin, shift output and jobs back into the domestic economy.
These considerations point to a larger issue. Namely, that
Keynesian demand management and central bank targeting of arbitrary
unemployment and consumer inflation rates is a futile and
counter-productive undertaking in the context of an open,
integrated $80 trillion world economy. This means that the
domestically focused dual mandate of the Humphrey-Hawkins Act
should be repealed forewith, but also much more.
The dual mandate targets are just clunky expressions of an
obsolete idea that was inherently mistaken from the get-go. That
is, that the aggregate GDP and all its leading indicators--jobs,
consumer spending, housing starts, business investment, industrial
production etc.--can be central managed by the monetary authority.
Two decades of failure, however, says it can't be.
So the real import of repealing Humphrey-Hawkins is not to
merely substitute another set of arbitrary targets for monetary
central planning-such as professor John Taylor's foolish "rule"
based on unmeasurable "potential" GDP and arbitrary inflation and
unemployment gauges. Rather, what should be abolished is the very
central planning mechanism that requires such macro targets--which
is to say, the Fed's open market committee (FOMC) itself.
More than anything else, the financial markets need to be
liberated from the current destructive regime of monetary central
planning. Let the money market determine the market-clearing price
for speculative borrowing to fund the carry trades. Let price
discovery determine the price of long-term debt based on the supply
of real savings versus the demand for honestly priced debt capital.
Let two-way markets re-establish themselves in the risk asset
sectors by removing the Fed's "put" under the stock market and its
systematic undermining of fear and short interest in the Wall
At the end of the day, the Fed can only do one useful thing-and
that is to passively provide standby liquidity at a penalty spread
on top of market driven interest rates; and in so doing, to only
accept sound collateral consisting of short-term treasury bills and
blue chip business paper against inventory and receivables. Indeed,
just put the penalty spread for discount loans at 300 basis points,
at least. That change alone would eliminate the ability of Wall
Street gamblers to fund their carry trades by arbitraging the yield
curve at the Fed's discount window.
Needless to say, such a post Humphrey-Hawkins regime would end
the massive inflation of financial assets which have been harvested
by the Wall Street gamblers. And it would also end the practice of
monetizing the Federal debt by the FOMC. Consequently, Uncle Sam's
voracious borrowing would once again crowd-out other borrowers and
drive long-term interest rates to higher, market clearing levels.
Under that scenario, the beltway's bipartisan posse of fiscal
sleepwalkers might actually be stirred from their slumber.
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