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The Federal Reserve policy-making committee, the FOMC, has stated that it will continue on its current monetary policy course until there is "substantial improvement" in labor market conditions. So Cleveland Fed researchers Mark Schweitzer and Murat Tasci took a little time to look into what improvement might look like. Here's an excerpt: In our model scenario projection, we estimate the trend and cyclical components of the labor force participation rate over time by projecting the historical behavior of the variables in the model forward. Since historical participation rate movements have been only mildly cyclical, the model predicts a very small cyclical component for the participation rate in the future. But this prediction might not be very reliable if the current episode represents a breakdown in this historical pattern—which seems a possibility, given that the response of the labor force participation rate in this recession has been exceptionally drastic relative to past recessions. Ultimately, the degree to which the labor force participation rate recovers will depend on how much of the recent decline in the rate is cyclical and how much is trend. This is hard to forecast, and there is evidence on both sides. It is very clear, for example, that demographic trends that are not related to cyclical factors have driven the participation rate up and down substantially over time. Since the 1950s, two key demographic trends have significantly altered the participation trend. First, from 1950 until around 2000, more women continuously joined the labor force, driving a strong secular increase in the overall participation rate (figure 1). Second, from the 1970s until the late 1990s, a large baby boom generation drove up the share of the population that was in its prime working years, which also served to boost the participation rate. Neither of these factors has boosted participation recently, and models which account for the demographic structure of the population have been projecting declines in participation for some time, for example, Fallick and Pingle 2007. Read What Constitutes Substantial Employment Gains in Today’s Labor Market? here .

A lot of people--in fact, much of the public at large--don't trust economists. And that makes sense to The Atlantic 's Noah Smith . There are many reasons to be skeptical about two similar-looking white guys with beards trotting out what looks like the same data but coming to two very different conclusions. And yet, Smith argues, we still need to pay attention to them, "as long as you don't expect them to predict the future." So when you listen to economists, the key is to try to understand why they think what they think. For example, Paul Krugman thinks that monetary policy doesn't work well in a depression, because nominal interest rates can't go below zero, and because the Fed is not always good at convincing people that it will allow inflation in the future. Robert Barro thinks that fiscal policy doesn't work, because people anticipate the future taxes needed to pay for today's stimulus, and reduce their consumption today in order to save up to pay those future taxes. Most people can understand these basic ideas, and decide for themselves which they think are plausible, and which they think are unrealistic. Economists have another virtue, in that they're very good at pointing out each other's logical errors. On the whole, economists are very smart, perceptive people. Like everyone else, they are liable to overstate their confidence and rely too much on their own unproven theories (not everyone is as skeptical and self-questioning as Greg Mankiw). But when they do this, other economists usually catch them! So in order to avoid believing too much in the confident-sounding pontifications of one economist, you should listen to economists on the other side of the issue. Finally, though mainstream economists may not have it all figured out, they are far better than most of the groups who lurk outside the mainstream. For example, spend an afternoon reading the ideas of so-called "Austrian" economists, who believe that we only need logic to understand how the economy works, and that data and evidence are useless. Absurd. But that's the kind of alternative that's out there, and some people really believe that stuff. No matter how much we might wish they were, economists are not go-to experts who know just how the world works or how to fine tune it. They are not car mechanics. And if they act like they are car mechanics, you should instantly be suspicious. But they do have a lot of interesting things to say. They might help you clarify or re-evaluate your own beliefs about how the economy functions. They can also help you spot the flaws in each other's arguments. Read Should We Trust Economists? here .

With the CPI release last week showing prices in the U.S. have risen just 1.1 percent over the last year, The Washington Post 's Neil Irwin notes that there is an inflation problem in developed economies around the globe. Inflation, Irwin writes, "is too low." The below-trend inflation is partly attributable to falling commodities prices, and just as policy shouldn’t overreact when a short-term commodity blip causes inflation, it shouldn’t make the same mistake in reverse. But even excluding food and energy, U.S. CPI was up only 1.7 percent, still below the level of inflation the Federal Reserve is aiming for. And the situation in Europe is particularly worrisome; if the euro zone is going to have any hope of rebalancing its economy without a prolonged depression, it will need higher inflation in core European countries like Germany and France, offset by lower inflation in countries like Greece and Spain. Instead, prices are rising too slowly even in the core, and there is deflation, or falling prices, in Greece. The biggest conclusion to draw from all of this is that warnings that massive quantitative easing efforts would spark explosive inflation are turning out to be as wrongheaded as can be. In the United States and Japan, central banks now have open-ended policies of printing money to buy assets. But while the money seems to be finding its way into asset markets, such as for stocks and corporate debt, it isn’t being circulated so widely as to drive up prices for consumers. This is the opposite of what the currency war alarmists have warned about. Instead of creating rounds of vicious inflation while trying to expand the money supply in a race to the bottom, central banks are all trying to get inflation up to their target and coming up short. Deflation is looking like a greater risk that inflation, despite the extensive hand-wringing over the latter in the last several years. It’s a currency war in which almost every country is losing. Read Surprise! Inflation is too low almost everywhere on earth here .

With the Federal Reserve turning 100, San Francisco Fed economists Early Elias and Òscar Jordà take a moment to look at the impact of their parent institution on crisis mitigation. They point to fewer crises over the last 100 years than in the previous century, and the less severe results of the Great Recession compared to the Panic of 1907 as evidence of the Fed's relative success. Here is an excerpt from their Economic Letter: Recessions originating from a financial event were common in the late 19th and early 20th centuries. Many stemmed from banking panics. Figure 1 provides a global historical perspective. We calculate by decade the number of countries that experienced financial crises among a sample of 17 industrialized economies representing more than half of global GDP during the past 140 years (for details, see Jordà, Schularick, and Taylor 2012). Figure 1 shows a notable downward global trend in the incidence of these highly disruptive events, with the conspicuous exceptions of the Great Depression and the Great Recession of 2007–09. In the United States, the rate of banking crises declined markedly after the 1913 creation of the Federal Reserve System. Other than the Great Depression and Great Recession, the only significant banking crisis of the past century was the savings and loan crisis. By contrast, ten significant banking crises occurred in the 19th century. The panic of 1907 and the resulting recession are generally credited with providing the catalyst for the creation of the Federal Reserve System. When the Federal Reserve was chartered, the United States had been without a central bank for about 70 years. Congress chartered The First Bank of the United States in 1791 during the Washington presidency, under the guiding hand of Secretary of Treasury Alexander Hamilton. However, its 20-year charter was allowed to expire in 1811. Then, under President Madison, the Second Bank of the United States was created in 1817 for another 20-year period. Once again, the charter was allowed to expire amid President Jackson’s strong opposition to the central bank. Read the full letter here .

The latest Planet Money podcast features an interview with Thomas Herndon . Herndon attracted a lot of attention last week . He's the University of Massachusetts graduate student who discovered an error in Carmen Reinhart and Kenneth Rogoff 's influential paper on government debt. The error prompted the Planet Money team to ask, "How much should we trust economics?" Take a listen:

At Project Syndicate , Barry Eichengreen argues that the Federal Reserve and the European Central Bank are guilty of too much analogical reasoning. Or at least of focusing their reasoning too much on a particular analogy. In evaluating potential economic dangers, the Fed focuses too much on the Great Depression and is "hyperactive" in its response. The ECB, meanwhile, remembers the hyperinflation of the post WWI period, and "is unflappable." Eichengreen: The Fed might also consider policy in 1924-1927, when low interest rates fueled stock-market and real-estate bubbles, or 2003-2005, when interest rates were held down in the face of serious financial imbalances. At a minimum, the Fed might develop a “portfolio” of analogies, test them for fitness, and distill their lessons, as President John F. Kennedy famously did when weighing his options during the Cuban missile crisis in 1962. Similarly, the ECB might consider not only how monetary accommodation allowed governments to run large budget deficits in the 1920’s, but also how central bankers’ failure to respond to the financial crisis of the 1930’s fed political extremism and undermined support for responsible government. Again, rigorous analysis requires testing these historical analogies for fitness with current circumstances. Anyone who does so will find it hard to defend the ECB and its stubborn inaction in the face of events. There is exactly zero evidence in Europe today that inflation is just around the corner. And, if current European governments are not committed to austerity and fiscal consolidation, then which governments are? When I consider the European economy, the ECB’s failure to provide more monetary support for economic growth appears to be directly analogous to Europe’s disastrous monetary policies in the 1930’s. The political consequences could be similarly devastating. Europeans should ponder why the inflationary 1920’s, rather than the politically catastrophic 1930’s, have become the historical lodestar for current monetary policy. On the other hand, when I contemplate the US economy, I conclude that recovery from the Great Depression, and not 1924-1927 or 2003-2005, is the episode that most closely resembles current circumstances. Only in the 1930’s were interest rates near zero. Only in the 1930’s was the economy digging itself out from a major financial crisis. Read The Use an Abuse of Monetary History here .

In his Financial Page column for The New Yorker , James Surowiecki addresses the charge that Ben Bernanke and the Federal Reserve are conducting a "war on savers" by holding tight to their zero bound interest rate policy. Surowiecki tries to steer the debate away from the political arena to look at what the impact of a change would be. Certainly, it’s not the easiest time to live off interest income. The average rate on a savings account is less than 0.25 per cent. Long-term certificates of deposit offer rates well below inflation, and even a ten-year government bond yields less than two per cent. No wonder people with lots of savings want the Fed to start tightening—to stop buying bonds, and to raise interest rates. But most Americans depend on wages and salaries for their livelihood, not on interest income, and higher interest rates would hurt the job market, which is still weak, with unemployment near eight per cent and wages barely rising. Also, most Americans have more debt than savings, which means that they benefit directly from lower interest rates. Only an estimated seven per cent of all financial assets nationally are directly held in interest-bearing assets (like CDs or savings bonds). Even seniors, one of the groups most obviously hurt by low interest rates, get only ten per cent of their income from interest payments. Bernanke has been accused of waging class warfare and forcing senior citizens to eat cat food, but the simple fact is that people who are net savers are, on average, wealthier than those who aren’t. And what if the Fed did raise interest rates? It’s unlikely that savers would be better off in the long run, since the move would slow down the economy as a whole and perhaps even tip us back into recession. Most savers aren’t just savers, after all: they are also workers or homeowners or stock-market investors—groups that need a growing economy to prosper. Even people who live entirely off interest rely on economic growth. “There’s this myth that monetary policy is a zero-sum game,” Scott Sumner, an economist at Bentley University who has become an influential advocate for a more expansionary Fed policy, says. “But it’s perfectly possible that looser monetary policy could make both savers and borrowers better off. When the economy is weak, tight money makes the whole pie smaller. When the economy is robust, we get more output, which means more real income, and that usually means higher rates of return for investors.” Indeed, the biggest culprit when it comes to low interest rates isn’t the Fed: it’s the weak economy, which has held down the demand for credit and made us all risk-averse. That’s why interest rates are low across most of the developed world—even in countries where central bankers haven’t been buying up assets the way the Fed has. Read Shut Up, Savers! here .

In a speech at the London School of Economics yesterday, Fed Chair Ben Bernanke discussed lessons from the financial crisis. Bernanke said the recent crisis was a "classic financial panic," and he gave a brief history lesson on exchange rates and developed economies moving away from the gold standard. The uncoordinated abandonment of the gold standard in the early 1930s gave rise to the idea of "beggar-thy-neighbor" policies. According to this analysis, as put forth by important contemporary economists like Joan Robinson, exchange rate depreciations helped the economy whose currency had weakened by making the country more competitive internationally.5 Indeed, the decline in the value of the pound after 1931 was associated with a relatively early recovery from the Depression by the United Kingdom, in part because of some rebound in exports. However, according to this view, the gains to the depreciating country were equaled or exceeded by the losses to its trading partners, which became less internationally competitive--hence, "beggar thy neighbor." Over time, so-called competitive depreciations became associated in the minds of historians with the tariff wars that followed the passage of the Smoot-Hawley tariff in the United States. Both types of policies were decried--and in some textbooks, still are--as having prolonged the Depression by disrupting trade patterns while leading to an ultimately fruitless and destructive battle over shrinking international markets. Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression. However, modern research on the Depression, beginning with the seminal 1985 paper by Barry Eichengreen and Jeffrey Sachs, has changed our view of the effects of the abandonment of the gold standard.6 Although it is true that leaving the gold standard and the resulting currency depreciation conferred a temporary competitive advantage in some cases, modern research shows that the primary benefit of leaving gold was that it freed countries to use appropriately expansionary monetary policies. By 1935 or 1936, when essentially all major countries had left the gold standard and exchange rates were market-determined, the net trade effects of the changes in currency values were certainly small. Yet the global economy as a whole was much stronger than it had been in 1931. The reason was that, in shedding the strait jacket of the gold standard, each country became free to use monetary policy in a way that was more commensurate with achieving full employment at home. Moreover, and critically, countries also benefited from stronger growth in trading partners that purchased their exports. In sharp contrast to the tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits came mainly from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates. The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions. Read the full speech here .