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.

Economic Sector Bias at the Federal Reserve

In part one of this two-part posting, I looked at the gender bias at the Federal Reserve, showing how men vastly outnumber women in key posts at Federal Reserve Banks throughout the United States despite the Fed's Congressional mandate.  In part two of this posting, I want to take an additional look at the Fed's bias; its failure to represent the economic diversity of America.

For those of you that either didn't read part one or who are unaware of the Federal Reserve's organizational setup, here is a graphic from a report by the Center for Popular Democracy showing the link between the Federal Reserve and its Federal Open Market Committee (FOMC) and its district banks known as Federal Reserve Banks:

Here is a map showing the regions covered by each of the 12 district banks (Federal Reserve Banks) and the 24 branches within each district:

Note that Alaska and Hawaii are covered by the San Francisco district. 

If we start at the top of the organizational chart, the seven members of the Federal Reserve Board of Governors are appointed by the President and confirmed by the Senate for a 14-year term of office.  The President (and Senate) also confirm two members of the Board to be Chair (currently Janet Yellen) and Vice Chair for four year terms.  The FOMC consists of 12 members; the seven aforementioned Board members, the president of the Federal Reserve Bank of New York and four other regional Federal Reserve Bank presidents on a rotating, one-year term basis. The Federal Reserve Banks form an important link between the Federal Reserve and their local economy and help to dictate the Federal Reserve's monetary policies.  Each of the twelve district banks has their own president and boards of directors (nine directors in total for each bank); in addition, each of the 24 district branches has its own directors (seven directors in total for each branch).  The Board of Directors for each Reserve Bank are appointed in two ways; the majority are appointed by the Reserve Bank and the remainder are appointed by the Federal Reserve's Board of Governors.  The directors for each district bank then appoint their own president and vice president.  It all sounds rather nepotistic, doesn't it?  

By law, under the Federal Reserve Reform Act of 1977, the Boards of Directors of the Federal Reserve are to be 

"...elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor and consumers.".  

That is, each of the leaders/directors of the world's most influential central bank and its district banking system are to represent a wide variety of each of the economic sectors that make up the American economy.

The report by the Center for Popular Democracy compares the economic sector representation during the period from 2006 to 2010 when the Government Accountability Office examined the composition of the Federal Reserve Bank Boards and the present.  Here is a graphic showing the past and present composition:

In both 2006 to 2010 and 2016, directors from the banking sector filled over one-third of the board seats, growing by 3 percentage points over the timeframe of the study.  In combination, in 2016, representatives from the commercial and industrial sector and the banking sector filled 68 percent of seats, up from 63 percent in 2006 to 2010.   The service sector's representation fell from 26 percent of seats to 18 percent and agriculture and food processing saw their representation fall from 6 percent of seats to 3 percent.  Interestingly, even though they are relatively poorly represented compared to the other sectors, the number of directors affiliated with consumer and community organizations rose from 3 percent to 8 percent.

For your illumination, here are a few of the Directors for each of the Federal Reserve Banks that you can get a sense of who is dictating America's monetary policies:

If you are interested in who is on the boards of the other Federal Reserve Banks, please see the original report.

Interestingly, during the "financial crisis" of 2008, there was some question about directors' independence and actions taken by the Federal Reserve banks since there was at least the perception of conflicts of interest when director-affliated institutions took part in the Federal Reserve System's emergency programs.  With a preponderance of representation from the banking and commercial sectors, it certainly doesn't take a genius to figure out which sectors of the economy will likely be favoured by Federal Reserve policies should there be another "financial crisis", does it?  

The Federal Reserve: A Bunch of Old, White, Male Bankers

The United States Government Accountability Office recently released a report entitled "Federal Reserve Bank Governance - Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency".  This report was undertaken to study the composition of those who govern the 12 Federal Reserve Banks, in particular how the Bank's boards of directors involve themselves in activities that are related to supervision and regulation.  The study looked at the composition of the boards and whether they are diverse in both gender and race and whether the Bank's policies identify possible issues of conflict of interest between board members and industry.  The study looked at the composition of FRB boards for the years from 2006 to 2010, during the lead up to the Great Recession, during the Recession itself and during its aftermath.  For the purposes of this posting, I will be examining the gender and racial/ethnic composition of the various boards and will leave the GAO's examination of potential conflicts of interest for another posting for the sake of relative brevity.

Let's open with a map of the Federal Reserve Districts:

As background information, the Federal Reserve Act requires each of the 12 regional Federal Reserve Banks be governed by a nine member board with three Class A directors elected by the member commercial banks within the region to represent their interests, three Class B directors elected by member banks to represent the public and three Class C directors that are appointed by the Federal Reserve Board to represent the public.  See how nice the Federal Reserve is?  A full two-thirds of their Federal Reserve Banks' boards consist of members that, at first glance, appear to represent the sweaty masses!

Federal Reserve Bank directors have three main functions; they participate in the formation of national monetary and credit policies by providing input on their local economic conditions to the Reserve Bank President, they oversee the management of the Reserve Bank and the act as a link between the Federal Reserve Bank and the community.  It is so heartwarming to see that they are such a community-minded group!

Let's take a brief look at a few examples of just who it is that sits on the Federal Reserve Bank boards representing the public followed by their class of directorship where available:

Boston: John Fish, CEO, Suffolk Construction Company Inc (Class B)

Boston: Henri Termeer, Chairman, President and CEO Genzyme (Class C)

St. Louis: William E. Chappel, President and CEO, The First National Bank

St. Louis: Robert G. Jones, President and CEO, Old National Bancorp

Dallas: Herb Kelleher, Executive Chairman Emeritus, Southwest Airlines (Class C)

Dallas: Joe Kim King, CEO, Brady National Bank (Class A)

San Francisco: Blake W. Nordstrom, President, Nordstrom Inc. (Class B)

San Francisco:  Betsy Lawer, Vice Chair, First National Bank Alaska (Class A)

In looking through the lists for the members of the boards, there certainly do not appear to be too many of America's 99 percent represented, rather, it is a rather interesting collection of the who's who of America's corporate and banking elite.  This, despite the fact that according to the Federal Reserve Act, Class B and C directors are supposed to be elected with due consideration for balance between the interests of agriculture, commerce, industry, labour, services and consumers.  Here's a table showing the requirements for the selection of Federal Reserve Bank directors:

Before we discuss the detailed composition of the Federal Reserve Bank boards, let's look at racial and ethnic diversity in the United States. Between the years 2000 and 2010, the Asian population in the United States grew by the greatest amount of all racial groups and now accounts for about 5 percent of the total (14.7 million people).  The white population grew the slowest over the decade and accounts for 72 percent of the total (223.6 million people).  The African-American population accounts for 13 percent of the total (38.9 million people).  Over the decade, the Hispanic population grew by 43 percent to reach 16 percent of the total (50.5 million people).  With these statistics in mind, let's now take a look at the actual composition of Federal Reserve Bank boards.

In the period between 2006 and 2010, minorities and women accounted for a rather small portion of the overall Federal Reserve Bank membership.  In 2006, minorities comprised only 13 of 108 directorships (12 percent) and that had not improved by much in 2010 when minorities comprised only 15 of the 108 directorships (14 percent).  Here is a graphic showing the race and ethnic composition of the Federal Reserve Bank directorships from 2006 to 2010:

Over the 5 year period, women didn't fare all that well either with 39 female directors out of a total of 202 (19.3 percent), well below their proportion in the overall population.  In 2010, Federal Reserve Bank directors consisted of 78 white men, 15 white women, 12 minority men and 3 minority women.  Here is a figure showing the representation women and men on the Federal Reserve Bank boards over the period from 2006 to 2010:

When looking at the annual bar graphs, note that the gender situation is actually getting worse as the five year period passes with fewer women receiving one of the much coveted directorships for reasons that I will outline later.

Here is a graphic showing a more detailed look at the gender and race breakdown for each of the 12 Federal Reserve Bank branches:

As mentioned earlier in this posting, Federal Reserve Bank directors are supposed to reflect a broad industrial background.  Unfortunately, that is not the case.  More than half of the 2010 directors have experience in the finance industry.  Here is a graphic showing the over-representation of directors with connections to the finance industry, a ratio that is far in excess of their representation in the American economy as a whole:

As well, almost all of the Federal Reserve Bank directors serve on the boards of other for-profit corporations, universities and non-profit organizations, hardly a phenomenon shared with the general public.  Federal Reserve Bank officials stated that, in practice, they generally focussed their search for directors on senior executives, mainly CEOs and presidents.  In fact, in 2010, 72 of the 108 directors were either the CEO or president of their company with at least 23 being employed by Fortune 500 companies.  When asked whether board diversity would be increased if non-executives were included, the authors of the study were told that "...having senior executives on the board of directors helps elevate the stature of the board.  In addition, they said that the individuals working at the top of their organization may have a broader view of how their industry is being affected by the economy...".  Apparently, the 1 percent really do have us under their thumbs!

Surprisingly, compensation for directors is rather poor compared to the private sector; perhaps the power they wield is compensation enough.  The per diem for directors ranges from $100 to $300 depending on their position and head office directors receive annual retainers ranging from $2000 to $5000 again, depending on their position.  The Fed maintains that they are competing with the private sector for the relatively rare female and minority directors which makes it difficult for them to reduce the imbalance on their boards.  More's the pity for all of us, particularly since the Fed has backed itself into a corner by wishing only to recruit among America's white, male, corporate elite.

Perhaps the American economy is stuck in limbo largely because the policies used by the Federal Reserve stem from the great and imaginative minds of the powers that already control the U.S. financial industry, the same minds that largely were responsible for the issues that led directly to America's near collapse.  Perhaps the Fed's decision-making processes would be different if the diversity of their directors was more closely aligned with diversity in the country that they are supposed to represent.  One thing is quite apparent, whatever the current system, it is not working for reasons that may well be a reflection of the single-mindedness of America's white, male, banking elite.  

Apparently, we are caught in one gigantic case of clusterthink and we can't get out!  To complete the story, in a future posting, I'll take a look just how inbred the commercial banks and Federal Reserve Banks are and the implications for conflicts of interest among Federal Reserve Bank directors.