The Federal Reserve - Blaming the Unemployed For Their Unemployment

A key part of the Fed's two-part mandate is to ensure maximum employment.  That said, it is interesting to see who takes the blame for the Fed's failures, particularly looking back five years when unemployment was not heading down as quickly as the Fed expected/hoped.

Thanks to the Federal Reserve's five year waiting period to release the minutes from their Federal Open Market Committee meetings, the transcript from the November 1st and 2nd, 2011 meeting has been made public.  You will recall that Ben Bernanke was Chairman of the Fed when this meeting took place and that Janet Yellen was an attendee.  In this edition, we get a glimpse inside the Fed braintrust and see who they blame for this:

After wading through the mind-numbingly boring discussion about the Taylor Rule, liquidity traps and a very lengthy discussion about inflation and price level targeting, one aspect of the Fed's two part mandate, the discussion turned to the regional reports from each of the Federal Reserve's Districts.  To help you put the comments that you will read into context, here is a map showing the twelve Federal Reserve Districts:

For further context, each Reserve Bank has its own executive team, led by each bank's president who acts as the banks chief executive officer.  The president is appointed by the board of directors of each bank for a term of five years, ending on the last day of February in each year numbered 1 and 6 (i.e. 2001, 2006, 2011 and 2016).  The Reserve Bank president may be reappointed after serving their full or partial term but are subject to mandatory retirement upon turning 65 years of age unless they are initially appointed after the age of 55 when they can serve until they achieve the 10 year service mark or reach the age of 75.

Let's now look at part of the regional update given by Dennis Lockhart, President and CEO of the Federal Reserve Bank of Atlanta, who was first appointed to office in March 2007:

"To be more specific, I have a strong sense that the labor market involves much more in the way of inchoate rigidities, inefficiencies, and behavioral impediments than fully appreciated. Now, admittedly, I am basing this sense on a lot of anecdotal input, but here is some of what we’re picking up. With respect to the relatively slow pace at which reported job openings are being filled, we are in fact told that some vacancies are so-called purple squirrel openings: If a purple squirrel shows up, the company will hire; otherwise, the company waits. [Laughter] My sense is that this employer attitude will change if confidence increases and demand picks up. But we are also consistently told of many skills mismatches. These mismatches are related to hard skills in specific industries and job types, but we hear much more broadly of issues related to soft skills, such as basic work habits, attitudes, and expectations. I frequently hear of jobs going unfilled because a large number of applicants have difficulty passing basic requirements like drug tests or simply demonstrating the requisite work ethic. As an example, one contact in the staffing industry told us that during their pretesting process, a majority—actually, 60 percent of applicants—failed to answer “0” to the question of how many days a week it’s acceptable to miss work. [Laughter] Now, I am not suggesting that these are necessarily new phenomena. But for a variety of reasons, employers seem to be paying much more attention to the quality of prospective hires than pre-recession. We also hear that job requirements have been updated to combine a wider spectrum of performance competencies, such as those that are required for receipt of the ACT’s National Career Readiness Certificate." (my bold)

I guess it was pretty funny that unemployed Americans were unable to find employment, at least to the elites sitting around the Federal Reserve conference table in November of 2011, particularly given that 13.302 million Americans were forced to avail themselves of whatever government-supplied unemployment income they qualified for.  

Now, let's look at the regional update from Jeffrey Lacker, President and CEO of the Federal Reserve Bank of Richmond, a post that he's held since August 2004:

 "The only thing I will add is that we continue to hear new anecdotal reports related to these impediments, and I’m going to share two with you. One is from an employment agency in West Virginia saying that unquestionably the biggest problem in hiring skilled and unskilled workers was the inability to pass a drug test. Other firms in the area have reported the same thing. We’ve gotten some reports, not quite as prevalent, outside of West Virginia. Many say that the problem has gotten worse recently. I asked someone to look into this to try to get a sense of whether this has become a bigger problem recently. Apparently the big increase in the prevalence among firms of drug screening was in the late 1980s and early 1990s in response to new, low-cost screening tests and some new federal regulations that were related to safety. So it doesn’t look as if we’ve had a technology shock or rapid decline in the cost of drug screening or anything like that. Now, illicit drug use, though, is more prevalent among the unemployed. Of those who are unemployed or not working, 17.3 percent are drug users, compared with 7.9 percent of full-time workers. So forget the worries about full-time workers. The increased incidence of unemployment by itself would increase the frequency of bad drug tests. One suspects that usage increases the longer one is unemployed. You also expect the other causality—that usage would cause a lower exit rate from unemployment, but I’m not aware of any data on that, so I can’t really say I’ve been able to document that. There also may be a regional component to this. Industries in which screening is more prevalent are mining, utilities, and transportation, and they’re much more prevalent in the West Virginia economy. That might be why it’s more of a problem in West Virginia. Now, usage doesn’t appear to be higher than the national norm in West Virginia—we checked that. But we do hear widespread reports about hard drug use, OxyContin and methamphetamine, in Appalachia and other rural parts of our District—in particular, Appalachia. And there could be a demographic angle to this. Some of our contacts say that drug use is more of a problem with the younger generation, versus alcohol being the predominant problem among older workers. Obviously, demographic characteristics associated with higher drug use are also associated with higher unemployment. Drug abuse and the hardship involved in unemployment aren’t really laughing matters; it’s hard to pin this down quantitatively, but it strikes me that there could be something meaningful there as a contributor to impediments to labor market functioning." (my bold)

Just for fun, let's look at when then Federal Reserve Board Chairman, Ben Bernanke, had to say about the "unemployed drug problem" after Mr. Lacker told him that some of the economic ailments, particularly the stubbornly high unemployment rate, were "largely beyond the power of monetary policy to correct":

CHAIRMAN BERNANKE. Well, it sounds as though your drug use anecdote could argue either way. It could argue for more stimulus to get more people off the streets, right?

MR. LACKER. Get them off the street?


CHAIRMAN BERNANKE. Well, off their drug use.


MR. LACKER. I think a lot of people use in their homes.

CHAIRMAN BERNANKE. Okay.

Nice, flippant exchange given the seriousness of the employment crisis, isn't it?

Lastly, let's look at the regional update from Charles Plosser, the former President and CEO of the Federal Reserve Bank of Philadelphia until his retirement in 2015:

"Contacts with directors and the business community echoed many of President Lockhart’s comments about jobs and challenges. It’s not just mismatch; it’s also the problems that—whether it be drug testing, which is a very common theme I hear. The other common theme I heard is work ethic. An employer in the Third District who owns, I think, 60-some-odd McDonald’s restaurants in southeastern Pennsylvania and New Jersey says passing drug tests, passing literacy tests, and work ethic are the primary problems he has in hiring people, as far as he’s concerned. It’s also true in the city. I have an anecdote from my wife, who attended a meeting in the city of Philadelphia of a group that was engaged in trying to encourage both the city and businesses in Philadelphia to hire more people. Unemployment in Philadelphia is quite high, obviously, and our mayor, Mayor Nutter, in responding to this group, said, interestingly, “We have over 1,000 job openings in the city of Philadelphia, and the problem is not that there are not people hiring. One report is that we can’t find enough people who understand that literacy, work ethic,”—again—“and drug testing are a big impediment to this city actually hiring people.” He made a very impassioned plea about that, and of course, it turned into a discussion of education and other things. So I think that’s not an uncommon thing to hear these days among employers." (my bold)

From these comments by three of the most influential central bankers in the United States, you can clearly see that the elites were blaming the then stubbornly high unemployment levels on the unemployed and their use of recreational drugs and general laziness rather than blaming it on the failure of their then nearly four-year-old monetary policy experiment.  I guess when you are one of the elite, it's always best to deflect the blame for your own failures onto those who actually used to break a sweat for their paycheque.  They can't defend themselves, particularly when they aren't given the opportunity to do so.