Wednesday, May 15, 2013

Economy Carberation

Nicely framed model describing why our economy has failed to bounce out of stagnancy.

"The analogy between our economy and a car engine holds in another important way. The power output of an engine is governed by controlling the airflow into the engine. A well-designed fuel injection system simply reacts to changes in airflow, spraying in the precise amount of gasoline required to match the mass of air moving through the combustion chambers. From the standpoint of power and efficiency, too much gasoline is just as bad as too little.

"In the case of an engine, the idea of an active, ad-hoc, discretionary "fuel policy" would be crazy. The engine would keep stalling, as it alternated between flooding and lean misfiring. Similarly, the very idea of a discretionary monetary policy is insane. Money cannot drive economic growth any more than gasoline input can determine the power output of an engine."

"As the months go by, it is becoming clear that the Federal Reserve's "QE3" program, which is supposed to be "doing something" about unemployment, is having the exact opposite effect. We can only wonder how long it will take Fed Chairman Ben Bernanke to realize this.

"Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) was really, really, really bad. The reported 0.1 percentage point decline in the "headline" unemployment rate (from 7.7% to 7.6%) fooled no one. Total employment actually fell by 206,000. The only reason that the reported unemployment rate went down was because 496,000 Americans gave up on looking for jobs.

"The most striking feature of President Obama's so-called "economic recovery" has been the exodus of Americans from the labor force. The unprecedented 2.5 percentage point decline in labor force participation under Obama amounts to 6.2 million Americans being pushed out of the job market."

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