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Academics challenge Fed to create real jobs this time around

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The House Subcommittee on Domestic Monetary Policy & Technology heard testimony from three academics Wednesday on whether or not the Federal Reserve's response to the financial crisis has created jobs. In the run up to the Great Recession, the low interest rate environment helped create jobs that were unsustainable in a bust cycle, they say. This time around, job creation needs to be stabilized and permanent. According to the Labor Department's Bureau of Labor Statistics, unemployment fell to 9% in January, though many critics point out that number does not include the amount of workers who have had pay scaled back or even those who have given up looking. Two of the economists, Thomas DiLorenzo of Loyola University and Richard Vedder of Ohio University agree that that Fed has merely achieved a "mismatch" of unemployment and charged it to limit monetary growth in order to stabilize the ups and downs of employment figures. This mismatch refers to the recession's effect of shedding jobs that were artificially created in a time of low interest rate policies. But the final witness, Josh Bivens of the Economic Policy Institute in Washington, said in his testimony that the Fed still has the tools to cut the unemployment rate by up to three percentage points. DiLorenzo said in his testimony that the Fed's expansionary monetary policy leading up to the bust of the housing bubble enticed businesses to invest more. But because the lower interest rates stem from the Fed's policy, businesses soon discover there is not enough consumer demand to justify these investments, DiLorenzo said. "Many Americans who obtained jobs and pursued careers in housing construction and related industries realized that those jobs and careers were not sustainable after all; they were fooled by the Fed’s low interest rate policies," DiLorenzo said. "Thus, the Fed was not only responsible for causing the massive unemployment that we endure today, but also a great amount of what economists call 'mismatch' unemployment." Vedder, in his testimony, acknowledged the Fed's reaction to the financial crisis that averted a wider meltdown, signs that the economy is currently in recovery, and that inflation from the quantitative easing measures taken by the central bank have not yet occurred. But, he said, relying on these feelings alone is too optimistic. Between December 2007 and December 2010, employment fell by over 7 million in the U.S., Vedder said. "The Fed pushed real interest rates into the negative territory in an attempt to provide monetary stimulus. Yet job formation was persistently negative, and we had the worst downturn in post-war history," Vedder said. He added that the combined easy money monetary policy and "wildly expansionist fiscal policy scared the heck out of business persons and investors" and recommended Congress put more constraints on governmental fiscal policies. "In the short run," Vedder said, "you can start holding the Fed’s feet to the fire; perhaps, for starters, you should establish price stability as the single monetary mandate for the Fed." But Bivens disagreed that the expansionary monetary policy caused the bubble. Employment growth in the early 2000's was slow following the 2001 recession, in fact, the slowest coming out of a recession since the Great Depression. Bivens went to say the Fed's policies have helped employment, and even urged it to do more. If exchange-rate policy was put to use with the same urgency as monetary policy, he said, unemployment could fall between two and three percentage points. "We remain today at intolerably high levels of unemployment. However, blaming the Fed for this is quite odd – they have been by far the policymaking institution that has responded most forcefully and in the timeliest manner to the crisis. Arguments that the Fed actions have been in the wrong direction are even odder." Write to Jon Prior. Follow him on Twitter: @JonAPrior

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