The Scariest Labor Market Chart You've Ever Seen

… But seriously …

Right now, legislators are making a big mistake.

Congress warns that the Federal Reserve's monetary policy is upending financial stability and setting the country up for another recession, yet Ben Bernanke & Co. is doing all that it can (by its Congressional mandate, mind you), while Congress itself wastes a golden opportunity and does nothing on fiscal policy. Let's break down that sentence to understand why Congress is so wrong, and millennials should be more upset with how our lawmakers are handling the economy.

The Federal Reserve has lowered short-term interest rates to zero, and is engaged in a bond buying program, or Quantitative Easing (“QE”), to lower borrowing costs to companies (see corporate yields) and households (see mortgage rates). The Fed is engaged in QE because it is trying to lower the unemployment rate by lowering the cost of debt, which incentivizes investment and hiring, while maintaining a stable inflation rate of 2%. However, Congress sees the Fed print money — which the Fed does to buy the bonds — and assumes that this will LEAD TO HYPERINFLATION!!! This assumption is rooted in a Macro 101 equation that argues that an increase in the money supply will lead to a proportional increase in the price level (inflation). The Fed is currently printing a lot of money — $85 billion each month — and Congress worries that this will LEAD TO HYPERINFLATION!!!

If you do not believe me when I say that Congress is very worried about monetary policy, watch Ben Bernanke's recent testimony to Congress, and notice how many people ask him about inflationary concerns. Inflation is definitely on their minds.

The reason why Congress is so wrong about inflation is that the Macro 101 equation mentioned above reaches its conclusion by assuming that the velocity of money, or how fast money exchanges hands, and real growth are constant in the long-run. Fine assumptions for the long-run, but not necessarily the case in the short-term. And policymakers have a short-term problem: the long-term unemployed, which include many millennials.

Let’s take the above chart. At first glance, it might look colorful and pretty, but you should be scared as hell for several reasons:

1. The blue line is the inflation rate as measure by annual change in the PCE Index, the Fed's preferred inflation measure. The inflation rate is under the 2 percent target rate, and is falling. Yet, Congressmen still speak of QE as inflationary, even after three rounds of bond purchases.

2. The red line is the unemployment rate. At 7.5 percent, this number is too high. But it has been falling for the last 45 months, and that is an encouraging sign. The question is, however, how much farther will the unemployment rate fall on its own?

3. And that is where the green line comes in: the average duration (in weeks) of unemployment. The number currently is 36.5 weeks, and has not fallen much from its high of just over 40 weeks, and is nowhere close to the pre-crisis level of 17.7. The average unemployed person has been out of work for more than half of one year. Recent research argues that when an individual is out of work for more than six months, companies are not likely to consider them for hiring. Couple that problem with the fact that if a person is out of work for six months or more, they have not been building much experience or job skills, which in turn makes the labor market as a whole less competitive on a global level. The longer this problem goes on, the worse it becomes. In other words, a very vicious cycle.

So after all this bad news, what is the golden opportunity? Congress can engage in public investment and fiscal reform on a large-scale to help put Americans back to work. I have argued on this blog before that infrastructure is a good place to start. But do not take my word for it, read Larry Summers argue the same thing before the Senate Budget Committee yesterday.

Hate the idea of Congress spending more money? Edward Luce of the Financial Times suggests reforming the corporate tax code in a way that brings back profits held abroad with a tax holiday so long as companies invest in infrastructure projects and hire the unemployed. Congress spends nothing, Americans are back to work, and companies invest in the country's future. Think that is stupid? Martin Wolf, also at the Financial Times, argues swapping out labor taxes in favor of other policies (such as environmental concerns). He writes that aligning incentives this way can help with short-term problems (unemployment) while working to address long-term issues (global warming).

The point is that there are ideas out there already to begin a serious discussion about how to fix unemployment. Congress just needs to act. But seemingly, all they can think about is the imaginary inflation monster, while real, suffering Americans (including millennials) are out of work. Begs the questions, why did we elect these people in the first place ... and when is the next election season?