Fed Believes Opioid Crisis Is Reason Why Men Aren't Working

Bill Polacek runs a manufacturing company in Western Pennsylvania. Even though a glut in new construction projects has dried up work for tradesmen, Polacek said he struggled to find qualified welders a few years back when he had a large number of jobs to fill. Polacek interviewed 350 people to fill openings for 50 welders and machinists at his Johnstown, Pennsylvania-based manufacturing company. But he quickly found the number of qualified candidates dwindling to the point where the number of open jobs was higher than the applicants qualified to fill them. The reason? Too many of Polacek’s interviewees either had criminal histories, or couldn’t pass a drug test.

“"We weren’t attracting the right people," Polacek says of the episode, which prompted him to invest in extensive outreach to local high schools to build up a pipeline of workers.”

America’s worsening opioid crisis has helped create a generation of men whose struggles with addiction are preventing them from finding, and holding, steady jobs. Indeed, the type of hard-to-hire Americans Polacek encountered pose a growing problem for many employers, as a deepening opioid crisis plagues American communities just as the jobless rate hovers near a 16-year low. Polacek’s situation is hardly unique; the Fed’s Beige Book, a collection of anecdotes about the business climate collected by the 12 regional Fed banks, has included many testimonials about the difficulty that some employers, particularly manufacturing firms, are having in finding qualified workers, like this one from a manufacturing firm in St. Louis.

“Manufacturing contacts in Louisville and Memphis reported difficulties finding experienced or qualified employees, with some citing candidates’ inability to pass drug tests,” the St. Louis Fed reported in the July 12 Beige Book, a survey of regional economic conditions. Businesses have also raised the issue as a barrier to finding workers in conversations with Philadelphia Fed President Patrick Harker.

According to Bloomberg, the Federal Reserve has stumbled on an explanation for the phenomenon that Polacek experienced when he tried to hire those welders - a question that has stumped central bankers, policy wonks and academics: Why are so many working-age men are dropping out of the labor force?

Even though this trend started 40 years ago, the Fed says the opioid crisis is now contributing to the problem of shrinking prime-age labor-force participation. The seeds of the opioid crisis were planted in the 1990s as doctors liberally prescribed dangerous painkillers like Vicodin and Oxycontin. Today, 15%, or one in seven, men between 25 and 54 are inexplicably missing from the workforce, despite the unemployment rate purportedly declining to 4.4% in June.

The opioid crisis began in earnest around the beginning of Obama’s first term in office, as deaths from drug overdoses started to climb. Now, after recording nearly 60,000 drug-related deaths last year, drugs are the biggest killer of prime-age Americans. America has more drug overdose deaths than any other developed country. Many of these deaths are caused by dangerous synthetic opioid analogues like fentanyl and carfentanil, the latter of which is 100% stronger than morphine.

And it’s not just Fed Chairwoman Janet Yellen, who was asked several questions about opioids during her testimony before the Senate Banking Committee last week, who’s trying to connect the dots between opioids and the surfeit of unemployable, shiftless young men: At the Cleveland Fed’s summit, talk about the crisis wasn’t reserved for the opioid-specific panel: it came up throughout the other sessions, according to Bloomberg.

“It’s an economic issue. It has economic implications, but it’s a whole lot more than that,” Petrus said. “It’s cross-cutting.”

Many other notable academics, including Nobel Laureate Angus Deaton, have published economic research about opioids.

The Boston Fed published research in September on the link between local economic despair and opioid use in New England. Princeton University economists Anne Case and Angus Deaton suggested in their work on rising middle-age mortality among the white working class that the breakdown of traditional economic and social structures have probably contributed to a step up in overdose, alcoholism and suicide.

During her Senate testimony, Yellen explained that opioids were one cause of the drop in prime-age labor force participation, along with increasing automation and outsourcing by manufacturers. However, Yellen says she doesn’t understand whether widespread opioid abuse is a symptom of the “long running maladies” these workers have faced, or the cause.

“There seems to be a clear indication or a clear connection between this and the ability to go to a job,” said Senator Joe Donnelly, to which Yellen agreed.

Nebraska Sen. Ben Sasse asked Yellen whether mid-career job retraining opportunities might alleviate the problem, as technological innovation forces Americans in certain industries to acquire new skills or be replaced by a machine.

“The individuals who’ve lost those jobs have found it difficult to acquire the skills necessary to re-enter the labor market and many individuals who don’t have the education are struggling to find jobs,” Yellen said, in response.

But while mid-career job retraining sounds plausible – it is a concrete, if wonkish, policy, there’s a broader problem with the labor force that narrowly applicable, resource-intensive “solutions” like these are missing. And that’s the fact that, fundamentally, the number of well-paying jobs available for everyone except the supremely well-educated is shrinking rapidly. Meanwhile, the financial circumstances for the average millennial are much more precarious. Indeed, failure to launch a career during the early years can leave a negative impact for years to come.

While it’s nice to think about, the “everybody should just learn to code” policy won’t fix any of these deeply entrenched problems in the US labor market – and it certainly won’t convince anyone to stop using drugs.
 

Meet The 22 Economists That Want To Kill Your Purchasing Power

After the Fed failed to spark any notable increase in aggregate demand despite keeping interest rates at zero for seven years, a group of economists is pressuring the central bank to rethink one of its most closely held-policy parameters.

The group of 22 economists, which includes Nobel laureate Joseph Stiglitz and former Minneapolis Fed President Narayana Kocherlakota, delivered a letter to the Fed on Friday pressuring it to appoint a blue-ribbon commission to reevaluate its policy targets in a way that’s transparent and also involves officials with a diversity of viewpoints. Ultimately, the group hopes the central bank will reevaluate its inflation target, which has stood at just below 2% since 2012.

Borrowing the reasoning from a paper published by the San Francisco Fed earlier this year called “Monetary Policy in a Low R-Star World,” the group argued that structural shifts in the US economy appear to have shifted the real rate of interest permanently lower – and that the US economy can now tolerate higher inflation as a form of compensation.

Here"s a passage from the letter:

“Even if a 2 percent inflation target set an appropriate balance a decade ago, it is increasingly clear that the underlying changes in the economy would mean that, whatever the correct rate was then, it would be higher today. To ensure the future effectiveness of monetary policy in stabilizing the economy after negative shocks – specifically, to avoid the zero lower bound on the funds rate – this fall in the neutral rate may well need to be met with an increase in the long-run inflation target set by the Fed.”

Such a reassessment would be particularly appropriate now, the economists argue, because “the lack of evidence that moderately higher inflation would harm Americans’ standard of living is juxtaposed with the tremendous evidence that a tighter labor market would improve Americans’ standards of living.”

Some Fed officials have already expressed tentative support for raising the inflation target, or at least changing the system by which the central bank’s parameters are set.

Williams noted the need for the Fed “to adapt policy to changing economic circumstances” in his paper, and Boston Fed President Eric Rosengren has said that the Fed should adapt policy to changing circumstances. Vice Fed Chairman Stanley Fischer has praised the system adopted by the Bank of Canada, where policy targets are reviewed every five years, then re-set with the participation of the legislature.

The argument for why a central bank should aim to push consumer prices even higher might seem obtuse to some readers - so Kocherlakota explained his reasoning for signing the letter in a column published by Bloomberg.

Raising the inflation target would give the Fed more room to maneuver during the next slowdown by allowing it to focus on reining in inflation if benchmark rates are already low, Kocherlakota said. “If, for example, people expect inflation to be 3 percent, then a zero nominal rate translates into a negative 3 percent real rate -- a full percentage point lower than the Fed could achieve if expected inflation were 2 percent.”

Experience suggests the Fed could use the support. During the most recent period of near-zero interest rates, the U.S. unemployment rate remained above 5 percent for nearly seven and a half years. And Yellen has suggested that, if another recession takes the Fed to the zero lower bound, the unemployment rate might stay above 5 percent for close to five years.

But while the Bureau of Labor Statistic’s seasonally adjusted CPI slumped to a 19-month low in April, other measures, like a gauge of consumer prices from PriceStat, have consistently recorded higher levels of inflation.

And regardless of what the rate of price growth is right now, the hard truth of the situation for many American workers is that real average wage growth is mired in the red while average household debt levels have climbed to record highs.

While many would welcome higher wages and better jobs, the relationship between inflation and employment – as Janet Yellen herself admitted – has seemingly broken down. Whether the central bank can successfully push inflation higher is up for debate; it has struggled in recent years – despite pumping trillions of dollars into the economy. But regardless, higher consumer prices are not what Americans need right now.

In addition to Stiglitz and Kocherlakota, the letter a signed by Dean Baker from the Center of Economic and Policy Research, Heather Boushey, from Washington Center for Equitable Growth, Brad DeLong, University of California, Berkeley, Joseph Gagnon, Peterson Institute, Lawrence Mishel, Economic Policy Institute, William Spriggs, Howard University, Valerie Wilson, Economic Policy Institute, Gene Sperling, Obama Administration Economist, Jared Furman, Peterson Institute, Marc Jarsulic, Center for American Progress, Lawrence Bell, Johns Hopkins University, Josh Bivens, Economic Policy Institute, Tim Duy, University of Oregon, Manuel Pastor, University of Southern California, Mark Thoma, University of Oregon, Justin Wolfers, University of Michigan, David Blanchflower, Dartmouth College, Mike Konczal, Roosevelt Institute, Michael Madowitz, Center for American Progress.

*****

Read the full text of the letter below:

Dear Chair Yellen and the Board of Governors,

The end of this year will mark ten years since the beginning of the Great Recession. This recession and the slow recovery that followed was extraordinarily damaging to the livelihoods and financial security of tens of millions of American households. Accordingly, it should provoke a serious reappraisal of the key parameters governing macroeconomic policy.

One of these key parameters is the rate of inflation targeted by the Federal Reserve. In years past, a 2 percent inflation target seemed to give ample leverage with which the Fed could lower real interest rates. But given the evidence that the equilibrium interest rate had fallen substantially even prior to the financial crisis, and that the Fed’s short-term policy rate remained at zero for seven years without sparking any large acceleration of aggregate demand growth, a reassessment of this target seems warranted. Such a reassessment is particularly appropriate when the lack of evidence that moderately higher inflation would harm Americans’ standard of living is juxtaposed with the tremendous evidence that a tighter labor market would improve Americans’ standards of living.

Some Federal Reserve policymakers have acknowledged these shifting realities and indicated their willingness to reconsider the appropriate target level. For example, San Francisco Federal Reserve President John Williams noted the need for central banks to “adapt policy to changing economic circumstances,” in suggesting a higher inflation target, and Boston Federal Reserve President Eric Rosengren cited the different context in which the inflation target was set in emphasizing the need for debate about the right target. In May, Vice Chair Stanley Fischer highlighted the Canadian system of reconsidering the inflation target every five years, saying, “I can envisage – say, in the case of inflation targeting – a procedure in which you change the target or you change the other variables that are involved on some regular basis and through some regular participation.”

The comments made by Fischer, Rosengren, and Williams all underscore the ample evidence that the long-term neutral rate of interest may have fallen. Even if a 2 percent inflation target set an appropriate balance a decade ago, it is increasingly clear that the underlying changes in the economy would mean that, whatever the correct rate was then, it would be higher today. To ensure the future effectiveness of monetary policy in stabilizing the economy after negative shocks – specifically, to avoid the zero lower bound on the funds rate – this fall in the neutral rate may well need to be met with an increase in the long-run inflation target set by the Fed.

More immediately, new, post-crisis economic conditions suggest that a reiteration of the meaning of the Fed’s current target is in order. In its 2016 statement of long-run goals and strategy, the Federal Open Market Committee wrote: “The Committee would be concerned if inflation were running persistently above or below this objective.” Some FOMC participants, however, appear to instead consider 2 percent a hard ceiling that should never be breached, and justify their decision-making on that basis. It is important that the Federal Reserve makes clear – and operates policy based on – its stated goal that it aims to avoid inflation being either below or above its target.

Economies change over time. Recent decades have seen growing evidence that developed economies have harder times generating faster growth in aggregate demand than in decades past. Policymakers must be willing to rigorously assess the costs and benefits of previously-accepted policy parameters in response to economic changes. One of these key parameters that should be rigorously reassessed is the very low inflation targets that have guided monetary policy in recent decades. We believe that the Fed should appoint a diverse and representative blue ribbon commission with expertise, integrity, and transparency to evaluate and expeditiously recommend a path forward on these questions. We believe such a process will strengthen the Fed as an institution and its conduct of monetary policy, and help ensure wise policymaking for the years and decades to come.

The endgame, of course, is to pay off the old "expensive" dollars with new "cheap" dollars... quietly taxing the citizenry to death...

Fed's Rosengren: "Quite Likely" The Fed's Balance Sheet Will Be Used In The Next Recession

The Fed has not even announced the framework of what its balance sheet "normalization" would look like, and already Boston Fed president Rosengren is talking about the next Fed QE program. 

In a speech titled “The Federal Reserve Balance Sheet and Monetary Policy” delivered to Bard College on Wednesday afternoon, Rosengren said that structural changes in the macroeconomy "may necessitate more frequent use of large-scale asset purchases during recessions" and he said it is "quite likely" that the use of central bank balance sheets will be necessary in future economic downturns.

The reason?  A combination of low inflation, low rates of productivity growth, and slow population growth may imply an economy "where equilibrium short-term interest rates remain relatively low" by historical standards. In other words, the natural rate, or r-star, is so low, the Fed will only be able to hike rates a handful of times before it tip the economy over into contraction, requiring a new easing regime.

As a result, reductions in short-term rates to combat recessions will encounter the zero boundary and "will not be sufficient," Rosengren said – so "it is likely to be more common for central banks to engage in asset purchases to stimulate the economy by reducing longer-term rates."

"So balance-sheet expansions – and exits – are likely to become more standard monetary policy tools around the world."

As a quick reminder, for all the talk of tightening, central banks are currently creating just under $200 billion in new money every month...

... and the total size of the big 6 central banks is now over $18 trillion.

Still, to avoid spooking the market too much - after all the Fed"s balance sheet should shrink before it expands again - Rosengren noted that the Federal Reserve should adopt balance sheet exit strategies "that reinforce the primacy of interest rate policy." The Boston Fed president said that while the FOMC is still carefully considering its balance sheet exit strategy, his ideal policy "would take a very gradual approach to balance sheet reduction."

"In my view that process could begin relatively soon, and should not significantly alter the FOMC"s continuing gradual normalization of short-term interest rates," he said.

Rosengren added that by initially retiring only a small percentage of maturing securities, and then very gradually shrinking the volume of the securities being reinvested, "the tightening of short-term interest rates should not need to be much different than it would be in the absence of shrinking the balance sheet."

"Starting to shrink the balance sheet earlier – and doing so in a very gradual fashion – implies very little reduction in the degree of monetary stimulus coming from the U.S. central bank"s balance sheet," Rosengren said.

"This, in turn, will allow policymakers to focus on gradual increases in the federal funds rate target as the primary mechanism for normalizing monetary policy and calibrating the economy."

But while Fed presidents warning about balance sheet reduction has been the norm in recent months, Rosengren"s unexpected suggestion that a new QE is only a matter of time appears to have spooked stocks, which moments after he spoke, slumped to new intraday lows despite what was an otherwise cheerful speech.

Full speech can be found here.