Thursday, September 13, 2012

Will the fed action create jobs?

Big news today: the Federal Reserve is buying some $40 billion in mortgage backed securities a month to stimulate the economy.

From the Associated Press story:

The Fed said it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home buying more affordable. It plans to keep short-term interest rates at record lows through mid-2015 — six months longer than previously planned. And it's ready to try other stimulative measures if hiring doesn't pick up.

"The idea is to quicken the recovery," Chairman Ben Bernanke said at a news conference. But Bernanke made clear that he thinks the economy will need the Fed's help even after the recovery strengthens.

The good news is that this activity will likely keep home mortgage rates at their historic low, keep interest rates on other things low and hopefully bolster the stock market, which is back to its pre-2008 recession highs but still off its all time high of 14,000 by about 700 points.

If interest rates are low, it's easier to buy a home, which we know is key to household formation of consumer units (families) who spend a bunch of money on things like refrigerators, furniture and other durable goods, demand for which creates a lot of good jobs.

Fed Chairman Ben Bernanke said part of the aim is to boost the stock market because people feel richer, more likely to spend. And I suppose that is partly true for SOME of the people.

But I was thinking of the Fed action while reading another story on why lots of baby boomers have put off retirement: their retirement earnings have been hammered by stock market but also low interest rates.

So they remain in the workforce.

Here's a telling fact from a good story in the Kansas City Star:

"In 1991, just one in 10 workers told the Employee Benefit Research Institute that they planned to wait to retire until they were older than 65. By 2007, three in 10 said that.
This year? More than four in 10."

And another:

"The number of older workers has grown more rapidly than any other age group in the last few years. This year, 18.6 percent of those 65 and older were participating in the labor force, compared with 13 percent in 2002."

And when you think of our main economic problem right now - too many people are unemployed - you can see how this is impacting those job numbers.

If seniors stay working past 65, we don't have the normal fill in from younger workers. The jobs from retirees are no longer opening up at the rate they once did.

This is helping in part to create higher unemployment and for a longer period of time.

The bigger question then is: Will any jobs program short of getting those 65 year olds to retire going to work?

We'd be better to work on incentives to get them to retire. Maybe a one-time exemption from taxes that go with lump sum withdrawals of retirement money. Maybe make medicare eligibility at 62 instead of 65.

Our job problem may be more related to demographics than structural issues in the private sector.

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