The current economic situation is unique in that it has not followed historical norms. As a result the Federal Reserve System, or the Fed has sought unconventional ways to combat the current economic slump. The qualitative easing that the fed has pursued, buying long term assets to push interest rates down further and increase liquidity, has helped to an extent, but the benefits cannot be fully appreciated without changes to fiscal policy. I believe that the Fed should continue qualitative easing, and seek to make their zero interest policy permanent, while the government cuts taxes and increases spending.
To outline the current economic condition, unemployment is currently 7.0% as of November, according to the Bureau of Labor Statistics, well above the Fed’s long term goal of 5.0%. Current inflation is 1.0%, below the Fed’s goal of 2.0%. GDP growth for Q3 of 2013 was 3.6%, above the Fed’s predictions. The current economic recovery has been much more sluggish than other recoveries. It has been more than six years since the recession and we have yet to recover all the jobs we lost. According to the Pew Research Center, it has taken on average less than 10 months from the start of recovery to return to the previous jobs peak in every recession from 1948 to 1982. The 1990 recovery took 21 months and recovery from 2001 took 18 months. A growing concern of economists is the growing length of recoveries and its effects. The current recovery has been going on for more than three and a half years, and we have still not reclaimed all lost jobs. As the Fed struggles to combat the recession with fiscal policy, policy makers argue over what exactly causes unemployment.
The term hysteresis was coined in 1986 by economists Blanchard and Summers to describe the economic stagnation of Western Europe after the recession of the 80s. The term is very pertinent to today’s recovery as unemployment is still higher than pre-recession and growth hovers at a meager 2-3 percent. As the economic situation drags on a concern is the large portion of long-term unemployed. Studies by the Urban Institute have shown that the longer one is unemployed, the harder it becomes to get a job, “discouraged workers are also more likely to retire and claim disability, a change that is usually permanent and increases government costs.” The government should take into account the very real effects of hysteresis in our current economic situation, taking special measures to reemploy the chronically unemployed, perhaps offering incentives to businesses hiring long-term unemployed or hire them themselves.
An exit by the Fed from its purchase of assets would need to be well timed. The repercussion of the Fed exiting too soon would make the current recovery even slower than it is now. The effort the Fed put into stimulating the economy would be wasted if this happened. When the Fed decides to exit and sell assets it must be careful. With over $3 trillion in assets, selling assets too fast...