How the Jobless Rate Underestimates the Economy’s Problems

New York (Oct 2)   Here's a riddle for you: How many economists does it take to figure out the extent of slack in the economy?  Sorry, I don't have a punch line. (Hey, I'm an economist. Assume a funny punch line!) But that was the question put before a bunch of us at a conference held by the Peterson Institute for International Economics last week.

The answer, broadly speaking — as you'd expect, there was a fair bit of "on-the-one-hand-on-the-other-hand" — was that there's considerable slack, in terms of underutilized resources, in the American economy in general and the labor market in particular.

I'll get into some details in a moment, but first, why is it important to gauge the amount of slack in the economy? For one thing, it's a critical input into the thinking of the Federal Reserve. They've been providing extensive monetary stimulus to the lagging economy for years now, and as the recovery has slowly taken hold, they need to gauge when it would be safe to start pulling back on their support.

Second, businesses, governments, employers and investors all need to know how the near-term economy is doing in order to plan for the future, including hiring, sales and budget outlays and receipts.

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Third, Congress, functional or not, needs to know the level of slack to calibrate temporary policy measures, like extended unemployment insurance benefits or a job-creating infrastructure program — to offset the slack until the private market is once again firing on all cylinders.

So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it's within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent (I think that's too high, but that's a different argument).

Source: New York Times