Unemployment is 7.6% and it's Bernanke's perception that maybe 5.6% is frictional or structural unemployment and about 2% is cyclical, something that could be cured with fiscal or monetary stimulus.
Because Congress refuses to help him, the economy is growing about half as much as it should be. He provides monetary stimulus while Congress puts on the fiscal brakes. GDP growth is about 2% but should be about 3.5%. The sequester - the automatic mix of spending cuts and tax hikes that are the product of Congress's inability to reach an agreement - makes up that difference. What does this 1.5% mean?
- About 750,000 full-time equivalent jobs. (Roughly 600,000 of those were lost directly to layoffs in the government sector. Bernanke rightfully pointed out that past recoveries did not have to contend with job losses in the public sector as the economy recovered.)
- Unemployment would be down about 7 or 8 tenths from where it is now. (To about 6.8% to 6.9%.)
- 1.5% of GDP equates to about $225 billion of lost economic activity.
Bernanke made the point that while Congress is cutting near term spending and thus slowing the recovery, it is still failing to address the structural problems (baby boomers beginning to collect social security checks en masse, for instance) that will drive big deficits in the future. So, Congress is getting the worse of both worlds: it's extending the recession but still not addressing long-term debt. It's no wonder that Congress has the lowest approval rating of any institution measured by Gallup.
He also corrected the impression that he'd ease monetary policy BEFORE the economy recovered. About a month ago, the market had a big sell-off when he said that if the economy continued to recover, he would ease up on stimulating it. First, there is a piece of this correction that is rational: if interest rates go up, the value of future earnings goes down and it makes sense that the market would fall in anticipation of such a move. But to think that this would make the market fall beyond this one-time correction is to think that he was going to take measures that would contract the economy early. He's not.
A number of congresspeople - Republicans and Democrats - said that they were more interested in Main Street than Wall Street. At least one wondered aloud about why the market is doing so well when the economy is doing so poorly. Those points are related and deserve to be addressed because they suggest a confusion about cause and effect.
One, financial markets move more quickly than labor markets. You can move a billion in capital from money market accounts into stocks in nano-seconds. By contrast, it takes months to hire people. And hiring is not something you reverse as easily or as quickly as you do investments. Main Street lags Wall Street for at least two reasons: it takes more confidence and more time to hire than it does to invest. Main Street lagged Wall Street on the way down in this recession and it is - rather fittingly - lagging it on the way back up.
Two, everybody now depends on Wall Street. We're all capitalists now. You say that you are a government employee who has a pension? Your pension is at least partly invested in Wall Street. If Wall Street falls - as it did years ago - your pension fund will be smaller than you had expected and your government will have to cut spending in places like salaries or projects to cover the gap - as it did years ago. Anyone who has to borrow money to buy a car or house or even lunch with a credit card - or anyone who hopes to someday retire - is dependent on Wall Street. And as Bernanke said today, "We are using financial tools to stimulate the economy because that is what we have at our disposal. It is through these that we are changing things on Main Street." Wall Street and Main Street are really like those roads in your town that are Maple except for that two mile stretch where it has been named Martin Luther King Drive. They are just different segments of the same stretch of economy, connected in spite of the lags between them.
Finally, a quick little rule of thumb from the Federal Reserve Chairman. Long-term, interest rates = inflation plus economic growth he said. I must have slept through that lecture. I thought that the price of capital was determined by some more complex formula. But that is the power of being Fed Chairman: if he believes this about interest rates, than it is true. And I guess it means that low interest rates are not so much a present as an assessment of our slow growth. Interesting.