You really do have to wonder if the United States will ever get out of the economic problems it is now in if this presentation by Janet Yellen, the Vice Chair of the Federal Reserve, is an example of the best that economic analysis can provide. Depressing beyond words but let me take you to a couple of the lowlights just to get some idea of just how off the mark those in charge of policy can be. First this, on monetary policy:

The Federal Reserve typically plays a large role in promoting recoveries by reducing the federal funds rate and keeping it low until the economy is again on a solid footing.

Reducing the federal funds rate tends to reduce other interest rates and boost asset prices, thus encouraging spending and investment throughout the economy.

As it has before, the Federal Open Market Committee (FOMC) in 2007 started reducing the federal funds rate at the first signs of economic weakness and made sharper rate cuts as the recession deepened. As in some past recoveries that were disappointingly slow, the FOMC has kept rates low well after the end of the recession.

But unlike the past, by December 2008 the Committee had reduced the federal funds rate effectively to zero.

And to their astonishment, but not mine, this did not bring recovery with it so they have had to resort to other means such as flooding the economy with liquidity which again to their surprise, but not to mine, has also not brought on recovery. But why wreck only one arm of policy when you can wreck two. So here she is, musing about what has gone wrong in the American economy:

The greater amount of permanent job loss seen in the recent recession also suggests that there might have been an increase in the degree of mismatch between the skills possessed by the unemployed and those demanded by employers. This possibility and the unprecedented level and persistence of long-term unemployment in this recovery have prompted some to ask whether a significant share of unemployment since the recession is due to structural problems in labor markets and not simply a cyclical shortfall in aggregate demand.

Good question, is the problem structural – which it always is – or a shortage of aggregate demand – which it never is? Guess which answer she picks.

This question is frequently discussed by the FOMC. I cannot speak for the Committee or my colleagues, some of whom have publicly related their own conclusions on this topic. However, I see the evidence as consistent with the view that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural. . . .

This and related research suggests to me that a broad-based cyclical shortage of demand is the main cause of today’s elevated unemployment rate.

Such hopeless ignorance and baseboard stupidity! When do you give up on a policy that has clearly not worked? When do you start wondering whether the theory you have been basing your policies on might just not be up to the task?

If the Federal Reserve were a business it would have looked to innovate or it would have died. But these people can outlast you and everyone else with their economic theories and whether they work or they don’t, on they will go and never stop expecting things to improve just around the corner. She can see that they are in the midst of the worst recovery since the Great Depression but cannot even begin to imagine that the Keynesian theory she learned as a young student might be completely wrong.

Well it is wrong, and the longer they persist with attempts to stimulate demand rather than with attempts to stimulate supply the longer the recession will run on. Not knowing the difference between the two and how policy would then be different if it’s a problem on the supply side of the economy, is inexcusable bordering on criminal negligence.

[My thanks to JA for sending me the Yellen speech.]