Safnerism

“Economists” and cable TV commentators have been tossing around the idea that we are experiencing what they have termed a “jobless recovery.”  Under this theory, we are able to experience economic growth (defined as an increase in real GDP) yet have no growth in jobs.  I wonder what else we can expect to accompany this phenomenon, perhaps more irrational logic and noble lies from these  soulless priests on such educational television.  This oxymoronic concept defies all rational economic theory: how can you have a recovery without job creation – or even more fundamentally (and relevant), how can you possibly have a recovery with additional job loss?

Although additional reasons abound, the fact that we continue to lose 100,000s of jobs each month and the unemployment level continues to increase should be enough to close the question as to whether or not we are “in recovery” and/or have already “hit the bottom.”  Here are the facts.

Figure 1 – GDP

Figure 2 – GDP Growth

Figure 3 – Unemployment (U-6 Measure)

Figure 1 shows the real GDP, and Figure 2 shows the growth rate of real GDP over the years of 2006 – 2009.  According to the data, the economy has contracted for a several quarters 2008-2009, then has “bottomed out” by the 2nd Quarter of 2009 to start a recovery and return to growth.  In contrast, view the unemployment rate in Figure 3, which has steadily increased and shows no sign of decreasing anytime soon.[1]

So How Does an Economy Grow?

There are two ways that an economy grows – one is through stable (real) job creation, and the other is through increased productivity.

Since the first option isn’t applicable, then obviously the only alternative explanation for a “jobless recovery” would be a massive increase in productivity. In order for productivity to increase – one of two things must have occurred.  Either (a) our technical knowledge has increased substantially, or (b) our savings grew so that there was a large gross investment in capital goods.  Again, it is extremely unlikely that in the past few quarters, we have discovered cold fusion or quantum computing to propel productivity, so we can rule out option (a).

Now, in the time since the recession began (officially in Dec 2007), have we largely increased our savings?

Figure 4 – The Personal Saving Rate[2]

Figure 4 shows the Personal Savings Rate – the percentage of one’s net income that one does not spend or consume, but saves (and perhaps invests with) – from 2004-2009.  Both in good times (the bubble 2004-2006) and in bad (2007+) the personal savings rate is a pitiful amount, anywhere from 1-5% of income.  It is clear that people are not saving and investing (even in good economic times).  Saving and investing of course is the only way to increase productivity and create jobs, the ways in which an economy grows.

So Where’s the “Investment” Coming From?

Figure 5 – The Federal Funds Rate[3]

Figure 5 shows the Federal Funds Rate – the interest rate at which banks charge each other for overnight loans – a good indicator for general interest rates on loans (a quick way to raise capital).  The rate has been cut repetitively by the Federal Reserve to nearly 0%.  Money is nearly free to get and lend (well, if you’re a Fed-member bank).

Now, the real reasons behind these curious economic facts can be fully explained by the Austrian Theory of the Business Cycle, which would require a paper in itself to adequately explain.  However, many things are intuitive – if people are not saving their money, but still continue to spend like crazy beyond their income, and business grows unsustainably in a “bubble” until it “bursts”, and on top of that, money is nearly free…where is this all coming from? Simple – The Fed is printing ridiculous amounts of money. The Fed, printing massive quantities of money makes credit cheap for both consumers and businesses (interest rates are forced well below what they would be in the markets) so that consumers pile on massive debt, the government runs on deficits, and businesses make stupid investment decisions that will end up failing.  All of this because of the phony “funny money” that the Fed pumps into the economy.

And of course, the Fed’s policy to solve the problems of having too much debt and not enough savings due to cheap money, are simply to keep printing more cheap money. Alan Greenspan did this to “recover” from the recession in the earlier part of the decade after the “Dot-Com Bubble” collapsed; he just slashed interest rates to record lows to “stimulate” investment.  Bernanke now is repeating the mistake, which can only continue for so long before massive inflation sets in.

Alright, Well Let’s Just Make Some More Jobs!

This solution is the fools gold of economics.  The followers of John Maynard Keynes proposed that in times of economic recession, the government ought to “prime the pump” and “stimulate” economic activity.[4]  These Keynesians appeal to the government to create a multitude of jobs in the “public sector.”  Memories of the Great Depression public works programs may come to mind, as these are the epitome of this concept.

That’s great right?  Adding more jobs to the economy will certainly increase economic activity because then people will have more money to spend on things – which is the basis of our economy, right?  WRONG! (There are many reasons why this belief is a fallacy, but they must be dealt with elsewhere.)

Jobs, in and of themselves, have nothing to do with economic growth.  What is relevant to economic growth is the valuable production and wealth creation that results from those jobs.

The classic Keynesian example – that “government ought to pay people to dig holes and fill them up again,” suffers greatly from this fallacy.  What wealth, what value, does a hole in the ground provide for society?  Absolutely nothing, of course; digging holes produces nothing of value, and is in fact, a waste of scarce resources and jobs.

In contrast, real jobs in the private sector – subject to market forces and tests of efficiency – create wealth for the economy.  However, again, we must realize that it is not the jobs themselves, but the act of production.  It is theoretically conceivable that economies with high unemployment could still conceivably produce more wealth than economies with low unemployment.  The difference lies in the amount of capital available per worker, which increases the marginal productivity of each laborer.  And of course, the only way to create capital goods is through saving and investment.  Thus, while there is a strong correlation between the number of jobs and economic output (and thus growth), they are not the direct cause of economic output.

All else being equal, human beings are averse to laborious tasks, they prefer leisure to labor.  Jobs are not the goal, but a means to that goal.  The ultimate goal is consumption, and the means to acquiring consumer goods are capital and labor (in some combination).  Economists and government officials wrongly focus on the amount of jobs and the central problem in economics of unemployment, but of course:

“[T]here is no unemployment problem per se. For if what a man wants is simply a “job,” he could work for zero wages, or even pay his “employer” to work for him. In other words, he could earn a “negative wage.” Now this could never happen, for the good reason that labor is a disutility, especially as compared to leisure or “play.” Yet all the worry about “full employment” makes it appear that the “job,” and not the income from the job, is the great desideratum. If that were really the case, then there would be negative wages, and there would be no unemployment problem either. The fact that no one will work for zero or negative wages implies that in addition to whatever enjoyment he receives, the laborer requires a monetary income from his work. So what the worker wants is not just “employment” (which he could always get in the last resort by paying for it) but employment at a wage.[5]

Therefore, the Keynesian appeal to the “problem of unemployment” or “full employment,” is a mere straw man argument for government intervention (and resulting distortion) in the market economy.  Jobs and employment mean relatively little – everyone in the Soviet Union had jobs!  All the American slaves had jobs! But they contributed very little because they were so inefficient.  It’s their production, and production alone that matters.

Making Sense of the Numbers

So GDP is growing, and jobs continue to be slashed.  The government has merely attempted to “stimulate” the economy by adding more jobs in bogus public works projects – ones that inefficiently squander resources just to provide a talking point that we are “creating more jobs!”  Thus, the economy still is truly in a deep recession, but is kept on “life support” with fake stimulus projects.  The economic stimuli and Cash for Clunkers are the only reason we have GDP growth at all.  Once the stimulus efforts wear off, we’ll realize how deep in the hole we really are.  [Article forthcoming on stimulus projects]

The important thing is – these jobs are gone, and they are never coming back. What is needed is a return to economic health and sanity: a higher rate of savings and investment, higher interest rates, liquidation of inefficient businesses, a cease and desist from government interventions, and a return to sound business practices.  Otherwise, GDP may rise slightly for another quarter, but soon it will begin to plummet to match the plummeting employment rate.

Thus, we can easily conclude that there is no such thing as a “jobless recovery.”

EDIT: Ironically, the new official unemployment rate was announced today at 10.2%, a new 26yr record high.  I may update the graphs above, however I think the numbers are salient enough…

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Notes:

[1] The U-6 Measure of Unemployment, published by the BLS, is the truest measure of unemployment (in comparison to the politically manipulated “official” rate), taking into account “total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.”  It is significantly higher than the official rate, which was last reported as 9.8% for September ’09, whereas U-6, the true rate, was 17% for September ’09.  In addition, I apologize for the inaccuracy of the graph: for some strange reason, MS Excel shifted the entire line slightly to the left (it should end on September 09, not several units before it) and wouldn’t let me fix it…

[2] Bureau of Economic Analysis.  Personal Saving Rate.  Accessed: 5 November 2009.  <http://www.bea.gov/BRIEFRM/SAVING.HTM>

[3] <http://www.safehaven.com/article-14156.htm>

[4] After careful research, it should be noted that much of what is known as “Keynesian” or “Neo-Keynesian” economic theory does NOT accurately reflect JM Keynes’ theories.  Much of his original contributions have been perversely interpreted by his “followers,” who share much more of the blame than Keynes himself.

[5] Rothbard, Murray.  Man, Economy, and State.  2nd Edition. p.583