Effectiveness of Fed Policy

Kathleen Madigan at the Wall Street Journal on Wednesday:

Although the Fed is tasked with promoting full employment, there isn’t much the central bank can do at this point to push private businesses to hire….

….Fed policy’s main lever for growth is to prompt people to borrow money. But after the financial implosion, businesses and consumers have little appetite for credit. Indeed, as boomers approach retirement, the U.S. household sector needs to borrow less and save more

Kathleen Madigan on Thursday:

April’s news on trade was quite good, and U.S. manufacturers can thank the Federal Reserve. But improving growth falls far short of solving all the economy’s problems, especially with job growth…

…the Fed has made a mighty contribution to this situation. “By dramatically increasing the supply of U.S. dollars under its [quantitative easing] programs, the Fed has effectively (and perhaps explicitly) been engaged in a weak dollar policy,” says Millan Mulraine, chief macro strategist at TD Securities. “When combined with the recovery in global demand, the weak dollar has contributed significantly to the enhanced competitiveness of U.S. exports.”

So there is nothing the Fed can do to stimulate the economy on Wednesday, but on Thursday we learn there is another channel by which monetary policy operates, exchange rates.  Madigan still insists there is no way for stronger demand to turn into job growth:

That’s because, in order to be price competitive on global markets, U.S. exporters can’t rely solely on a cheaper dollar. They have to reduce the cost of labor going into production….

….Even with rising foreign demand, the increase in output won’t be followed with a corresponding addition of jobs. Exporters will hire a smaller increase in high-skilled workers who can run high-efficiency machinery or understand complex processing systems.

Here again is the idea that rising productivity is a bad thing.  Not sure why, as productivity growth has supported rising living standards for something like hundreds of years.   The challenge in the current environment is that we are not meeting accelerating productivity growth simply with a sufficient increase in demand.  And that is something policymakers should be able to address.

That said, Madigan starts to get closer:

Such proficiency will command better pay — but bigger wages will be covered by the worker’s better productivity.

I really don’t understand what reason for the “but.”  Higher productivity should generate higher real wages.  Madigan finishes:

High value-added jobs are the type the U.S. needs to maintain its standard of living while competing in world. But the actual number of new hires may not make much of a dent in the unemployment rate.

If some workers have better jobs, and more to spend, doesn’t this then create demand for additional labor in lower productivity growth sectors?

I sense Madigan wants to tell supply and demand side stories at the same time – and the story gets muddled, as can often happen when, graphically, we start shifting two curves at once.  I think it is fair to simply say that productivity growth moves the target for demand growth to accomplish the goal of closing the output gap.  This does not mean that policy is powerless or that productivity growth is bad.  It simply means that demand needs to accelerate at a faster pace to adequately address the unemployment problem.