Friday, January 8, 2010

A Romer Update

The BLS has just issued its December unemployment rate at 10% which is unchanged. As they state:

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs. In December, both the number of unemployed persons, at 15.3 million, and the unemployment rate, at 10.0 percent, were unchanged. At the start of the recession in December 2007, the number of unemployed persons was 7.7 million, and the unemployment rate was 5.0 percent.

The Romer curve is shown below.

The following is the absolute error curve in percent.

The following is the relative curve for the same data:

It has been a year since she published her rather optimistic and baseless plan. Unemployment still hangs at 10% and true unemployment is still higher. The major causes now are the uncertainty in the health care, tax, business environment and other factors. Employers are frozen in place. Banks are holding back because it is better to borrow from the FED at 0% and put the money in a FED account at a positive value and just make money and take no risk.

As Hoenig of the KC Fed stated yesterday:

"In the case of monetary policy, the challenges are no less daunting. The Federal Reserve must curtail its emergency credit and financial market support programs, raise the federal funds rate target from zero to a more normal level, probably between 3.5 to 4.5 percent, and restore its balance sheet to pre-crisis size and configuration."

This means that banks will loan and at market rates. This may also put downward pressure on inflation if employment re-expands.