By Karl Smith
I didn’t think Jessie Eisinger's original post was that bad, and I am glad that the follow-up makes things even more clear. Jessie writes:
What was my main point? We are four years into the One Percent's recovery. Now, we are in Round 3 of quantitative easing, the formal term for the Fed injecting hundreds of billions of dollars into the economy by purchasing longer-term assets like Treasury bonds and Fannie Mae and Freddie Mac paper. What's that giving us? Overvalued stocks. Private equity firms racing to buy up Arizona real estate. Junk bond yields at record lows. Ratings shopping on structured financial products.
These are dangerous signs of pre-bubble activity.
But, much more important, quantitative easing is not giving us a self-sustaining recovery and job creation.
The point is well taken. A couple of things: First off, it's not entirely true. Here is private sector job creation over the last 15 years or so:
To beat a dead horse for just a second, there is a good chance that the notch you see just after 2012 will be straightened out after the benchmark revision and total employment in the U.S. will be revised higher. More importantly, this nearly V-shaped recovery in jobs is a heck of a lot better than what you saw after the dot-com bust. The problem is threefold:
- This recession was just really bad. So, even a sharp recovery doesn't make everything feel OK.
- The private sector barely recovered from the dot-com bust before it got whacked. So part of what you feel is the pain of going on 12 years of sub-par job growth.
- The public sector is a total different story. Yes, everyone knows this, but let's go to the charts to remind ourselves of just how different it is this time.
From 1998 to 2002, the U.S. government added a little over 1.5 million employees. From 2002 to today, the U.S. government has added in total around 300,000. That actually may be revised downward in the new benchmark. Zero public sector job growth over the last decade is not an implausible estimate for the end of 2013.
If the public sector had grown at its late-1990s rate, then it would have added 6 million jobs by now. That's roughly half of the total unemployment population. An unemployment rate that was cut in half from 7.5% to 3.75% would be a rocking labor market by anyone's standard. The point is that much of the reason why things have seemed so gloomy for workers over the last decade is that the public sector is no longer hiring.
Now, to Eisinger's more substantive point that the Fed should be doing more than just blowing bubbles. I think it helps to make this point: It would be great if the Fed was doing more than just blowing bubbles. It would also be great if we cured cancer and brokered an everlasting peace between Israel and Palestine. When you have an actionable plan, let us know.
Which is to say, the world is facing serious macroeconomic constraints that makes it very hard to sustain demand and very hard to suppress bubbles. Even worse, we are not completely clear on which of the constraints is most important. Is it natural resources in the face of surging industrialization? Is it a shrinking workforce and rapidly falling fertility, which diminish the natural rate of return on capital? Is it an industrial policy from China that seems to be deliberately generating overcapacity in an attempt to sustain urbanization and offset an impending demographic implosion? Is it the revolution in computational technology -- an exponential trend that has been going on for a while, but is now zooming through that small window in our intuitive scale? (You can easily tell a centimeter from a meter from a kilometer. But picometers from nanometers, or gigameters from exameters -- not so easy. This has little to do with the intrinsic nature of the scales, but instead with our observational faculties.)
We don't know. However, there is little reason to think simply clamping down on speculation will change anything fundamental. Nor is it likely that changes in portfolio structure or pressure on rating agencies will have any positive effect. And we should always be wary of implementing policies that are cumbersome and unlikely to work, because they will likely have some effect and then we have to deal with the fallout. Indeed, Eisinger's core sentiment is more or less parallel to this. The difference is that in the case of monetary stimulus, we have very strong reasons to think that it works, is working, and that central banks -- which have been more timid -- are wreaking unimaginable suffering on their people.