Dubious Claims from the Federal Reserve

May 15, 2014

Federal Reserve Chair Janet Yellen's testimony in front of the Joint Economic Committee contained a number of questionable assertions, says Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute.

Last week, Yellen testified in front of Congress about the current state of the economy. Some of her claims, says Furchtgott-Roth, made no economic sense:

  • Yellen testified that the Fed would be able to keep inflation in check. But as Carnegie Mellon professor Allan Meltzer explains, no country in history has been able to finance big budget deficits with central bank money and avoid inflation. The United States, he says, has been printing money recklessly for years.
  • Yellen told the Committee that inequality was slowing down the economy, because the poor spend larger portions of their income than do the rich. The idea is that raising taxes on the rich and redistributing the dollars to the poor would raise growth. Furchtgott-Roth explains that high-income individuals aid the economy through job creation. Taxing high earners means less spending in the sectors that employ low-wage workers, such as household services and entertainment.
  • The U.S. GDP growth rate was 0.1 percent in the first quarter of 2014. According to Yellen, the weak growth was due to the weather. But in fact, personal consumption expenditures grew at 3 percent, while exports dropped by 12 percent, indicating that the slow Asian and European economies might have impacted the U.S. growth rate. If the weather is not the reason for the slow growth, Furchtgott-Roth explains, America's economic problems are more serious than the Federal Reserve realizes.
  • Yellen attributed the current labor force participation rate (at 62.8 percent) to retirements, despite the fact that more young and middle-aged Americans -- far from retirement age -- are working less. The participation rate for Americans ages 25 to 54 is 80.8 percent, down from its 1999 peak of 84.6 percent. Were Americans working at the same rate as in 1999, 4.7 million more people would be in the workforce.

Chair Yellen's testimony revealed a lack of concern about inflation, asset bubbles, GDP growth, and labor force participation. Other than identifying inequality as a problem, the Federal Reserve seems relatively unconcerned about the economy, says Furchtgott-Roth.

Source: Diana Furchtgott-Roth, "6 dubious Yellenisms from the Fed chair's testimony," MarketWatch, May 8, 2014. 

 

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