EC The Fed’s Paint-By-The-Numbers Insanity: Why Humphrey-Hawkins Should Be Repealed Now

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the congressional committees this week is a reminder that the Humphrey-Hawkins Act is an obsolete relic and should be repealed.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 forces.

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 9 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 145 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 objective.

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%.