Sunday, June 5, 2016

The Irrelevancy Paradigm

The Spin Cycle is not just a setting on your washer…
In the wake of a very weak payroll and hours-worked report with very mild wage inflation and a shrinking breadth of job creation we are now being inundated with the latest and greatest spin by the greatest spin-meisters and practitioners of Voodoo economics of our age. Please pay attention and enjoy the performance!

For the most part these spinners of nonfactoids align with one party or another or one ideology or another (more or less the same thing) and proceed to ‘dis’ (disparage) the things in the report that they do not like or do not want to deal with. Or they simply fabricate a scenario to frame it, control it, and portray it as part of their own long-lost paradigm and as such completely understandable.   

Masters at work…
I am particularly in the thralls of analysis that portrays the weak payroll report Vs the dropping unemployment rate (household report) as the logical paradigm of an economy at full employment (true believers must genuflect, here).

A spin cycle… on the dryer?
As always spin must have some fact behind it and this combination does. But as for most items that are spun these particular ‘facts’ do not apply to this ‘case.’         

Law Vs Economics
Lawyers are taught early on that if the facts are on your side you argue the facts. If they are not, you argue the law. In other words if you are defending ‘the accused’ and can prove he did not do it and has a rock-solid alibi you present that case. If you cannot, you try to make the prosecutor’s case seem flimsy by challenging his expert witnesses, the applicability of the law under which your guy is being charged or the provenance of evidence being offered.

Economists are doing more or less these same things.

The Bait-
This notion that the recent unemployment rate drop and job slowdown is a natural phenomenon that occurs as an economy reaches full employment (genuflect again please) is a near religious belief in economics. Yes, it is true, but its application to THESE FACTS is wrong: hence ‘the spin.’ 

The Switch
The ISM surveys one for manufacturing and another for non-manufacturing have been showing progressively less activity (‘less’ as in not more). Each of them is lower than their respective May readings less than 40% of the time and YET –AND YET- Los PhD’s de Spin-o-nomics- are arguing that this is a full employment effect we are witnessing! It is actually hilarious.  I don’t think I have ever witnessed a more bare-faced lie in all my time as a professional economist (PhD circa 1977) so that is saying something.

ISM 101
Now you may know a thing or two about ISMs but chance are you only know a thing or two about them so let me round out your education on ISMs. MOST PEOPLE treat them as though they are BINARY in nature- really. The most frequently said thing I hear from people when I tell them that the ISMs are (both) slowing and are stronger more than 60% of the time is this: that they are above ‘50.’ Well they are. That’s true. And since these are diffusion indices, a value about 50 means more respondents to the survey see things expanding than contracting. But, consider this: if you are on your death bed and your pulse is dropping and your breath is labored it is reassuring for the doctor to say well, you are still breathing? I think not.  In real life The ISM’s take on a spectrum of values from 100 to zero- these signals are weakening! While they still each speak of growth in each sector for manufacturing and nonmanufacturing they also speak of sectors that usually are growing faster, in fact much faster. And one of them is deteriorating fast. The non-manufacturing gauge for May fell in May relative to April so fast in one month that it has only done so faster 5% of the time historically…Nothing says no problem-o like that? Right? The economy is still breathing-gasping but breathing!

Rule number one of Spin-o-nomics: Hey, when you want to ‘reassure people’ set the hurdle low.

Truth or disaster?
There is nothing reassuring here. There is something odd in the unemployment rate that’s for sure and everyone knows it but pretends it isn’t true. For example if the unemployment rate is so low why is wage growth so tepid? If it is so hard to find workers - and IF demand is solid- why are hours-worked so weak and falling? Why aren’t hours expanding to use existing (allegedly-scarce) labor more thoroughly? Try arguing those facts to a sensible conclusion.

E-Pop goes the weasel!
The employment population ratio is low and falling. Adam Smith wrote in the first chapter of his famous book ‘Wealth of Nations’ that one of the characteristics of a wealthy nation was being one with a large proportion of its population at work. Oops…

Man overboard? Optimism overboard!
We have people leaving the job market like rats jumping off a sinking ship and these economists want you to take a cruise on the Good Ship rat-trap!  Really everything is fine!

Always some confusion
There are always some plus and minus data. Yes, several recent housing reports have been strong (a very weather-dependent, volatile sector). Yes PCE (personal consumption expenditures, a large part of GDP) rose sharply in April. But in May vehicle sales went flat again. We are in a span of having two very weak quarters of GDP growth back-to-back. Some ‘rebound’ in GDP may still leave the US in a ‘hole’ relative to trend. The broad weakness in manufacturing and in services sets a poor tone for economic prospects overall. 

Context: Global mess!
The global economy is a mess with monetary policy overused and impotent (not to be confused with ‘important’) fiscal policy held hostage just about everywhere. And international trade is being used as the lever of choice to pry growth out of its torpor. The only problem is that everyone is trying to use this lever against everyone else.

About the US slowdown and labor ‘shortage’
In the US, growth is slowing and it is not because we hit ‘full employment.’ People have left the workforce and perceived labor markets ‘tightness’ is a supply thing not an excess demand thing. Some workers are aging. Some are unskilled and unsuited for the jobs of this century.  Some are just being priced-out of the market by cheaper labor abroad. And the economic mechanism to stop this and to reignite growth in the US is broken-broken and not being fixed.  But consider this… we have a low-skill dependent economy and lots of people dropping out of the labor force- how do you explain that? What I mean by that is that most of the US job growth has been in low-skill jobs. So with the employment population ratio so low how can we say there is a labor supply problem? Our main jobs are in bedpans, burgers and shelf re-stocking. Really? We are running out of people to do those things? God help us… (genuflect for real here)  Oh, we are running out of people that want to do those things or that want to do them at the prevailing wage rate. Yes. And still wages are barely rising.

Crunch time
We have very unbalanced very unhealthy growth and have had it for some time. I keep repeating that the US has run nothing but current account deficits since the early 1980s. We do NOT have a competitive economy. So when the international crunch comes we get crunched.  

Paradigm confusion And technology dislocation
The economy is NOT best understood as being in a typical economic paradigm. We are still in a transitional global economy where the international adjustment mechanisms are not working-AND ARE NOT BEING FIXED.  We have a disequilibrium situation. We also are drowning under Schumpeterian waves of ‘creative destruction.’ In addition to weak demand and cheaper sources of foreign supply we have technology putting the screws to everyone. Just last week there was an article about how Foxconn the Taiwanese firm that operates in China and assembles phones for Apple and Samsung (among other things) has just displaced a large block of Chinese workers (60,000) with robots.  

Well what do you THINK happens in a world where CHINESE labor is not cheap enough?         

Riddle me that?

Falling behind
The US is simply falling behind. Yet, most US corporations are doing ‘fine’ because they have put their best and newest technologies to work in ASIA! Of course, labor is cheaper there! Why invest in the US where costs are so high? No wonder US wages CAN’T rise. The push to hike minimum wages in the US is the most misguided public policy since the mandate to replace all vehicles with square wheels (OK I made that one up…). But it is a dumb move given our circumstance and almost as stupid as the fake policy I cite.   

Clueless in Washington (regardless of the party)
US government and Fed policies continue to err by not realizing the constraint the global economy places on the US economy. By putting on blinders and resorting to old tired and irrelevant policy paradigms US policy-makers continue to come up with the wrong analysis and the wrong remedies.

Irrelevant Paradigms -Speed bumps on the road to truth
The May employment report analysis is just one the most recent and of the most glaring examples of this. Here it is in a nutshell I (don’t) think therefore I am (wrong).   I spin, therefore I get consulting work and affect policy and I am employed. I am useful when I Spin because I have a paradigm to blame the other party. But in fact what I am when I do this is a speed bump on the road to truth or a long detour in the wrong direction. And the US economy is running out of time. And time is one thing you cannot spin, beg, borrow or steal. It simply is.  We Americans have work to do and no one to lead us. No direction to go. No clue about what to do. And we are being misled about what is wrong. What’s worse is  that we are being divided along ideological lines when that ideology does not address the real problem! It’s no wonder that the American public smells a rat and has been supporting ‘out of the money’ candidates. Maybe a long shot will come in in November. Something has to give…