Duct Tape Economics

The Labor Department laid a sulfurous egg last Friday.  By their calculations, just 74,000 jobs were created in December.  The pros thought it would be 200,000.  What do they know?

This marks the slightest increase since January 2011.  Somehow, even with the feeble increase in jobs, the unemployment rate fell 0.3 percent to 6.7 percent.  This is the lowest it has been since October 2008, when the economy slipped.

To the casual observer things appear to be getting better.  Certainly, on the surface, a 6.7 percent unemployment rate is an improvement.  But a scratch below the surface reveals the decline in the unemployment rate is the result of discouraged workers leaving the labor force.

In fact, the labor participation rate, the percentage of working-age Americans who have a job or are looking for one, fell 0.2 percent to 62.8 percent in December.  That marks a 35-year low.  Moreover, it means there are plenty of intelligent and capable people out there who’ve given up on the daily grind.

Where do these people go when they drop out of the labor force?  Do they disappear from the city?  Do they flee to the mountains?

Containing Radioactive Wastewater with Duct Tape

No one really knows for certain, but we’ll venture a guess…they become someone else’s liability.  They buy food with money they didn’t earn.  They live off the expense of others.  Some become dependents of the state.

Yet at this point in the economic recovery does anyone still give a rip about jobs and unemployment?

The Fed no longer does.  Last month, after having told everyone for a year – or more – that when the unemployment rate hits 6.5 percent they’d raise the federal funds rate, they reversed course.  Now they plan to keep their key interest rate at practically zero for “well past” that time.

Here at the Economic Prism we’re not exactly sure what prompted the Fed’s about face.  But we think it may have something to do with the revelation that workers tasked with containing radioactive wastewater at Fukushima have resorted to using duct tape.  Here’s what we mean…

Obviously, duct tape works remarkably well for taping air ducts together.  On top of that, it works reasonably well as a temporary surfboard ding repair.  As for precluding radioactive wastewater from leaking into the Pacific Ocean…duct tape fails miserably.

So, too, using monetary policy to regulate an economy is just as absurd.  It simply doesn’t work.  Trying to do so is hopeless.

Duct Tape Economics

An economy is a multifarious organism.  It’s impossible to add up the sum of all of its parts.  Attempting to count up the beans of aggregate demand or gross domestic product, or to calculate the unemployment rate, is a misguided thing to do in the first place.

For what do the numbers really tell?  How are they fiddled or fabricated?  How do they characterize the humans they are supposed to be quantifying?

Yet economists and academics love the vanity these numbers afford them.  They glom onto the statistics like swamp moss in a summer algae bloom.  They prepare line grids and bar graphs…sometimes they even make pie charts.

They input the numbers into spreadsheets and create models and demand curves.  They squint their eyes and point to their diagrams and contemplate how to improve them…how to lower unemployment and increase consumption.  Politicians get into the game too.  They play around with the numbers to get reelected.

But how do you improve upon mankind?

One fellow is motivated to create new gismos and gadgets.  Another has an industrious work ethic; he’ll bang away in the factory for 40 years for a meager paycheck and union mandated coffee breaks.  A third only wants to down tipples of sweet moon hooch yonder the mighty oak groves.

Nonetheless, the Federal Reserve tries to aggregate all these individual people, and their individual preferences and actions, and meld them more to their liking.  Yet what can they really do?

They can inflate and deflate the currency.  They can fix the price of the federal funds rate.  They can print money from nothing and loan it to the treasury and the big banks.

Clearly, this has an incredible effect on financial markets.  Certainly, this has a dramatic effect on asset prices.  Unquestionably, this impacts the economy.

But it does so in ways the Fed could never anticipate and has consequences that are extremely disruptive.  Asset bubbles inflate.  Bubble jobs appear to service the rise in asset prices.  When the bubble invariable pops, and the jobs vanish, the Fed prints more money to inflate things up again.

Do you get the absurdity?  It’s like trying to control radioactive wastewater with duct tape…and it creates one sticky mess after another.

Sincerely,

MN Gordon
for Economic Prism

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