Dog Catches FrisbeeAll this week, people have been very hopeful about today's jobs report. It was gonna be good—green shoots, turning corners, whatever handy platitude that was available. And then the jobs report came out and it was bad: the economy added only 169,000 jobs. Neil Irwin did a great job of putting this in perspective. For the last three months, the economy averaged 148,000 new jobs per month. For the last six months it is 160,000 jobs. For the last year it is 184,000 jobs. In other words, far from our economy taking off, it is stalling out. Similarly, the employment to population ratio is exactly the same today as it was six months ago. Go team!

But what should we do about this terrible situation? I say we all go out and play Frisbee! Look: playing Frisbee won't help the economy at all, but it is fun. What all the economic reporters are calling for is more Quantitative Easing (QE), which also won't help, but isn't fun at all. QE is the process by which the Federal Reserve buys financial assets from private businesses. It is the weakest of tea. In general, I've been for it because it isn't hurting anything and it perhaps helps around the edges. But for the last several months, Bernanke and company have been talking about reversing course because of the supposed economic recovery.

We didn't need this bad jobs report to know that this was nonsense. For one thing, as minor a thing as QE is, when the Fed talked about stopping it, the markets flipped out. They saw it as an indication that the Fed was going to tighten up the money supply and start raising interest rates. So bond rates went up. From my perspective, the Fed can do very little in the current situation to make things better. But it has almost unlimited power to harm the economy.

Everyone writing about the jobs report this morning is pointing out that it should prove to the Fed that it needs to reverse course on reversing course on QE. Okay, fine. But that's not the source of our economic woes. This year, we've had two changes in federal government policies that are doing great harm to the economy. The first was the Fiscal Cliff deal that raised taxes. That took money away from people who would spend at least part of it and gave it to the government. That would have been fine if the government spent the money. But it didn't! It just sat on it in the name of lowering the budget deficit. So that's money that could have gone to employing people that isn't. The second was even more important: the Sequester. That took money that the government was spending and again just sat on it in the name of lowering the budget deficit. That's lots more money that could have gone to employing people that isn't.[1]

The problem we have now is that the Federal Reserve can do very little about our poor economy. What we need is fiscal stimulus. Last week, Paul Krugman wrote about what it would mean to our national debt to have gotten us back to full employment. It would have meant raising our current debt by 4 percentage points. That's what we needed to do and that is what we still need to do. But most economic observers have become so disillusioned that they don't even talk about us doing something that would work because it is politically impossible (at least right now). So instead, they focus on extremely marginal Federal Reserve policy.

Anyone up for a nice bit of Frisbee?



[1] In a good economy, this policy would be fine. The money the government sat on would be loaned out to businesses that would invest it. But now there is way more money than people want to borrow. So the money just sits around doing nothing and millions of people are forced to do the same.