This post is one in a series entitled Posthumous Refutations. Previously in this series: Cash for Cranks.
Here is a statement release from Christina Roemer, quick to take today’s employment report as…
…the most hopeful sign yet that the stabilization of financial markets and the recovery in economic growth may be leading to improvements in the labor market. (…)
There are many bumps in the road ahead. The monthly employment and unemployment numbers are volatile and subject to substantial revision. Therefore, it is important not to read too much into any one monthly report, positive or negative. But, it is clear we are moving in the right direction.
I’ve done a lot of driving today, so I’ve heard a lot of coverage of the employment report on the radio, and the only misgivings about it that I heard was that it might be a “blip”. There was nary a whisper that just perhaps the specific jobs created in the specific industries they were created in might be unsustainable. Even some mainstream commentators admit that the easy credit policies of the Fed at least contributed to the bubble in the first place. Yet, with Bernanke having doubled the Fed’s balance sheet in order to keep interest rates around 0%, is it such a hard connection to make that an even more extreme easy credit policy just might induce a false-recovery bubble?
In fact, this rebound in employment, following a “jobless recovery” in capital markets (as evidenced in the bull market we’ve been having) strikes me as perfectly fitting the Austrian Business Cycle Theory’s characterization of an economic bubble.
In Economic Depressions: Their Cause and Cure, Murray N. Rothbard considers:
…what happens when the rate of interest falls… from government interference that promotes the expansion of bank credit? In other words, if the rate of interest falls artificially, due to intervention, rather than naturally, as a result of changes in the valuations and preferences of the consuming public?
What happens is trouble. For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers’ goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.
..which would explain the recent run-up in the housing market (durable goods) and the stock markets (capital goods). It is only later that
…eventually this money gets paid out in … higher wages to workers in the capital goods industries.
…higher wages being, of course, a function of an increased demand for labor: thus today’s labor market rebound.
What comes next in the narrative should put quite a damper on Roemer’s upbeat view of today’s jobs report and the labor market upswing it may represent:
The problem comes as soon as the workers and landlords–largely the former, since most gross business income is paid out in wages–begin to spend the new bank money that they have received in the form of higher wages. For the time-preferences of the public have not really gotten lower; the public doesn’t want to save more than it has. So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don’t save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression…
Now that doesn’t sound like a “right direction” to me.
What Christina Roemer does not understand is that, for society as a whole, jobs are not ends in and of themselves. For society, they are only a boon insofar as they produce goods and services without consuming capital. For society, they are liabilities insofar as they are allocated toward unsustainable projects, as they will tend to be under artificial credit expansion. The consequences of Bernanke’s mind-boggling credit expansion will eventually catch up to us. Far from being a sign of better days to come, the job report everybody’s so excited about today may very well be a harbinger of those consequences.
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{ 11 comments }
Your comment resonates perfectly with Polish socialist experience. In the 60s and 70s one of the Party’s main goals was full employment and indeed it was practically achieved. And oh, what a liability these jobs were! The scale of waste and immorality was mind-boggling. It was normal for a laborer to be drunk on his duty, even if it was construction work that required some cautiousness. A saying was coined: “they pretend to pay us, we pretend to do the job”. I wonder how many of these freshly created jobs in the US are actually of the “we pretend to” type. I guess many, and I believe it’s not limited to the government sector. After all, when one in ten people in Las Vegas has a real estate agent license, it’s technically not possible for all of them to do useful work if they choose to (re)start their RE businesses, fuelled by a fresh dose of credit-induced optimism.
Capital detoriation continues.
“I wonder how many of these freshly created jobs in the US are actually of the “we pretend to” type.”
95% of jobs are like that. Even the Mises Institute produces nothing useful if you think about it (it’s only that the government artificially makes it seem that way).
Another thing worth noting is that official unemployment does not include anyone who’s been out of work for more than 6 months or those who have looked in the past 12 months but have not in the past four weeks. This is how the BLS can report that the number of unemployed people has risen at the same time that their unemployment rate is falling. Can’t control the numerator? Just fix the denominator.
The BLS reports there are currently 2.1 million people, including myself, who are “Others Marginally Attached to the Labor Force.”
If one includes these people in the calculation, the unemployment rate is above 11%.
The phony leftist “recovery” may have hit GDP, but it hasn’t hit unemployment yet. Perhaps that’s a good thing, as fewer people will be wasting their time acquiring the “skills” of swimming through bureaucracy.
It’s sad how much joy the unemployment report has created. They seem to think one month of data equals a trend. Probably what happened is that more people got discouraged and quit looking for a job. But it could also be that the cash for clunkers and other wasteful spending boosted employment temporarily. What many mainstream economists are afraid of is that once people become optimistic that the economy is actually turning around, people who had given up on finding a job (and therefore weren’t counted as unemployed) will decide to go out and find a job and will suddenly be counted again as unemployed. That will cause a huge surge in the reported unemployment rate.
Lest someone get the wrong idea, no one here takes pleasure in the pain from unemployment of others. We would like to see employment turn around rapidly. In fact, we would all like to see an end to the boom/bust cycles that cause so much pain. We are merely pointing out the falsehoods of mainstream economics which has caused all of the pain and suffering.
Questions/Comments –
Most of the stimulus money has not been spent. The vast expansion of the supply of reserves at the Fed has not been lent out. We have not seen general price increases (in fact they had fallen a bit). I’m not aware of any direct tax increases (nationally).
Though the economic outlook is bleak still, isn’t the economy always trying to recover and to right itself? Is it not consistent with Austrian theory that the economy can indeed recover under such conditions (yes it will be thwarted by specific governmental actions as they are implemented). Ron Paul made the claim last year that if we did nothing the economy would be bad (really bad) for a year then things would stabilize. Is it possible that could happen despite all the smoke and mirrors by Govt & Fed? True many banks should have been allowed to go under by now and watch out if and when all those excess reserves get loaned out, but is it not possible that good economic news has nothing to do with Govt efforts?
Actually yeah, I just figured LvMI is kinda Las Vegas RE – type useless. Just think about it: if there was no cartelization of banking, nationalization of money, boom-bust policies and other types of economy miscontrol – there would practically be no market for LvMI to sell to
Of course, if the feds mandated that no one can work more than four hours a day, we’d have full employment overnight! Brilliant!
Following up on JL Bryan’s comment:
A friend runs a business that has an office in Ontario. He put his employees on a 4-day week. The HR person there, who attends various HR society meetings, gets the impression that the 4-day week in Ontario is endemic.
Another friend who works for a US company with offices in the US and Canada, was put on a 1 week ‘furlough’ this year along with all of the other employees. That’s a 1 week unpaid ‘vacation’.
How many weeks will she serve in 2010?
These Are Good Unemployment Numbers!
Christina Romer, who chairs the Council of Economic Advisers, has a vested interest in painting a rosy picture. Here is the desperation in her voice as she commands the empiricists to ‘earn their keep”: “Look around and twist and turn the numbers. There’s got to be something we can use to keep the spirits of the American people up!”
The economic advisors are the ego-driven interventionists who whisper in the ears of the ego-driven interventionists (politicians) and who resort to ego-driven interpretation of the data to come up with the next line of propaganda to feed the victims of the economic terrorism of the unConstitutional coup.
Such is life in the Dark Ages of Economics.
There were still jobs lost last month.
There were more people that had been working that are now not working.
That’s not accounting for those working at lower productivity jobs than before, or those who have part-time work who were previously full-time.
That there was a nominal change in the Govt reported statistics (which isn’t even statistically significant for how marginal it is) means zilch, yet the media constantly sell it as a positive, even if cautiously.
The economy hasn’t shown any signs of recovery, the current situation is analogous to blowing a tire on a Ferrari and flooring it to maintain speed instead of pulling over and fixing the problem. The driver is loosing control, the car is suffering more and more permanent and devastating damage, but the pit-crew insists that their advice to floor it has been the major factor in keeping speed up.
It doesn’t matter what our speed is, or what unemployment is. There’s a blown tire, and if it doesn’t get fixed, no fuel-injection increases will be able to outpace the disintegration of the structural integrity of our vehicle.
I’ve made predictions in the past about how the current situation is merely prelude to a wider societal economic bust that wont be measured in unemployment, but in lives. Govt redistribution allowed our car to make the next checkpoint, but at a cost of being able to compete in the long-term race.
How can GDP grow if not as many people are producing things? GDP only tells you how much money shuffling there is.
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