Time for QE3

Forget the happy jobs report—the Federal Reserve needs to boost the economy again.

PIMCO chief Bill Gross

Jed Jacobsohn

Three and a half years into the Great Depression, just-inaugurated President Franklin D. Roosevelt urged Americans to believe that “the only thing we have to fear is fear itself.” Three and a half years into the worst recession since then, America is more threatened by complacency than fear.

One reason for complacency is the batch of recent good news. In late January, the Bureau of Labor Statistics announced that the economy added 200,000 jobs in December on a seasonally adjusted basis. Then last week came the news that January job growth, which the vast majority of analysts had expected to be weaker than December, was actually stronger—about 250,000 jobs were added. What’s more, the latest report revised the December numbers up slightly and the November jobs figures up more. Suddenly, it appears the economy has turned a corner. (This should have been no surprise to Slate readers, who read it here in December.)

The problem is that policymakers may reach misguided conclusions from the good news. With millions of workers still unemployed, factories operating below capacity, and office and mall space vacant, the overall volume of spending in the United States is, by definition, too low. We have the capacity—the workers and the machines and the buildings—to produce more goods and services, but we don’t have the spending to call those goods into being.

In normal times, the solution to a lack of demand is monetary easing—lowering short-term interest rates. But short-term interest rates are already close to zero, and can’t fall further. In theory, a solution to this problem is to raise inflation expectations, which will push the real interest rate lower. In reality, the Federal Reserve refuses to raise inflation expectations for reasons it’s never really explained, but which are probably related to the strangely persistent anxiety over our last real bout of inflation in the 1970s.

Still, as population growth and depreciation take their toll on America’s stock of houses, cars, stoves, and furniture, spending on durable goods naturally moves upward. That means the gap between what the Fed is doing and what it needs to do to create full employment naturally shrinks and the economy improves.

Unless, that is, the Fed screws up and makes the gap bigger again.

That’s what Bill Gross, CEO of the largest bond fund in the world, pushed for when he published an op-ed Monday morning lambasting ultra-low interest rates. At its most recent meeting, the Federal Reserve’s Open Market Committee strongly hinted it would consider an additional round of so-called “quantitative easing” in which the Fed boosts the economy by purchasing assets from banks and companies. But the president of the St. Louis Fed is now touting the good jobs data as a reason for the Fed to hold off.

We have had two good months, but this is crazy talk. If we keep adding jobs at roughly the pace we added them in December and January, then the United States will return to full employment some time in 2024. That’s unacceptable. To get back to full employment by 2017—a pathetic goal, by the way—job growth would have to further accelerate so that we add an average of 321,000 jobs per month, each and every month, for more than 50 months in a row. We should be aiming to do even better than that, but we’re doomed to do much worse if every single month that employment grows faster than the labor force, we get new chatter about the need to pull back from easy money.

What the Fed governors ought to be doing is trying to clarify whether or not they really want a recovery. Do they want to see hundreds of thousands of people newly joining the ranks of the employed month after month? If it happens, after all, there will be some downsides. A jobs boom will mean a lot of new cars on the road, and gasoline prices may go up. Electricity bills may even rise as idle factories are put back to work, and vacant retail spaces turn into restaurants that need heat, air conditioning, and lights. Rents might spike in a few cities as people move out of their parents’ basement faster than new apartments get finished. That would be a small price to pay for a real recovery, especially when you consider that discouraged workers keep leaving the labor force even as the economy adds jobs. A sluggish recovery causes not only short-term pain, but long-term harm as the long-term unemployed see their skills deteriorate and end up gravitating toward low-productivity informal sectors rather than proper jobs. To get our economy back to capacity, the central bank has to tolerate a little bit of price inflation here or there as long as it doesn’t become embedded in a dangerous spiral.

Under the circumstances, the best thing the Fed could do for economic confidence is to not be complacent. It’s great that the unemployment rate has fallen from over 10 percent to 8.3 percent, but, really, shouldn’t we consider even a single month of unemployment above 8 percent as evidence of catastrophic failure? If the Fed launched another round of QE just when people think it’s not needed, it would send exactly the right signal to the economy. The alternative of waiting for bad news to strike before delivering another boost only tells people that we’re aiming for mediocrity. What the jobs numbers are telling us, however, is that the doubters are wrong. The American economy still has the capacity to add jobs and American workers have the capacity to do them. What the economy needs most of all right now is a clear signal that the powers that be aren’t satisfied yet.