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!
Endogenization
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…
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