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Wistful Thinking...

(Reposted from www.wentworthanderson.blogspot.com)

 

"...do not believe in the collective wisdom of individual ignorance." -Thomas Carlyle

"...never expect to see a perfect work from an imperfect man." -Alexander Hamilton

One of the many titles I considered for this article was something along the lines of “All I want for Christmas is my 6% back…” hoping, in this environment, that prospective readers would think of stock, bond, or general portfolio returns.  What I really want is something different, something of a cultural-academic revival.  I want a return to the days of economic antiquity (when I was at university ;-).  I want a return to the days when 6% was considered the *natural* level of unemployment (not that long ago really).  Through history, theories have varied (and semantics with them) but in the late 1980s early 1990’s there seemed to develop a consensus (based on all records to date) that roughly 6% was the level at which a normal or fluid amount of exit and entry into and out of the labor force occurred and by which unwanted amounts of inflation were not induced (more commonly known today as NAIRU, Non-Accelerating Inflation Rate of Unemployment).  A consortium of far more gifted sociologists, psychologists, and economists would have to explain why it seems that 6% is the natural level of “transition” in this country (some have argued that the natural level can be different among countries based on social and structural differences – that’s well above my pay grade).  Nonetheless, the premise may be never more valid given our current experience.  In order for our country and the world to effectively recover in any lasting manner, we need to return to and endeavor to maintain that mysterious 6% unemployment.  To that end, and in an effort to preempt those who would accuse us of trying to arbitrarily “keep some number of people impoverished”, I’ll continue while talking in terms of maintaining 94% *employment*. 

Before too many dismiss this view as too simplistic, please understand that I recognize the employment level as being an effect in and of itself and not a cause without conspirators.  As counterintuitive as this statement may seem given the above thesis, I fall squarely into the very same camp as those reading this who twitch and shift uneasily wanting to shout, “what about the Community Reinvestment Act, Financial Industry Deregulation, the absence of oversight of Fannie Mae and Freddie Mac, unproductive federal spending, the allowance and/or encouragement of predatory and/or irresponsible lending/borrowing…”  The bottom line is that all of these actions and activities affect the level of employment and the grand scheme of things cannot be addressed in a matter of sound bites as Washington so often tries. 

From 1948 onward, seemingly with the single exception of the early ‘80s recession/recovery deliberately engineered by Paul Volker and Ronald Reagan, every time that employment rose above 94%, some varying period of time later, a recession of differing lengths and depths ensued, usually commensurate with how far above and for how long we employed too many in the labor force.  But for some reason, with the advent of the recovery from the c1991 recession, we started to believe that things were different.  Our economy was suddenly better, faster, stronger and could sustain employment levels well above previously acknowledged norms or limits.

Today’s economic condition is another data point highlighting our collective hubris.  On a positive note, the natural challenge we have in maintaining roughly 94% employment (and not too much more), is that we are a country of aspiring doers, seekers, makers, and contributors…  We use phrases like “why not” and “follow me”. More people here than anywhere else in the world want to get ahead, want their children to get ahead, and have absolutely no doubt in the possibility.  If there is any “special sauce” in the grand experiment called the United States it’s that this country provides an environment in which people have a collective faith in the ability to create a brighter future.  This is the greatest renewable resource our economy has and it is understandably what cajoles us to keep pushing the bounds of “full employment”.  

Today, we are clearly in difficult times.  Regardless of how many people refused educate themselves on mortgages and personal finance, and gleefully bought the snake oil that Congress began drilling with the Community Reinvestment Act and the addictive cheap money they pimped through FannyMae & Freddy Mac, people innocent and otherwise, are feeling great pain as a result of lost homes, jobs, and businesses.  Not terribly unlike the S&L crisis, the country is reeling from a hangover caused by many consecutive nights of self induced drunken binging on easy credit (no matter how well intentioned the source may have been).

Efforts to buoy the economy, namely the economic stimulus package, seem to suffer from some serious inconsistencies and shortcomings.  In one sense I commend the stimulus package for purporting to create 3.5million+ jobs.  From the 8.1% unemployment level (roughly 12.5million unemployed at the signing of the bill) an increase of this number of jobs would get us pretty close to the magic level.  The unfortunate side of the calculation is that many of those jobs “created” by the stimulus are simply jobs that won’t be cut, offering no benefit to those currently unemployed.  It also doesn’t seem to consider the fact that unemployment, at the moment, is still rising.  That means that we wouldn’t hit the magic 6% even if the “new” jobs were true additions.  The only extenuating circumstance that might offer reprieve from my condemnation is the possibility that the monetary stimulus is intended to make up the difference.  We’ll have to wait and see since none of this has been touted as the intended course of action.  On the contrary, public officials and pundits again have noted the likelihood of the employment situation getting much worse before it gets better (speculation being unemployment could reach 10-15%).

Given that current rhetoric from both sides of the isle suggests job creation is priority #1, shouldn’t every effort be made to *create jobs*?  If so, then why, according to the Congressional Budget Office, is only 23% of the $800+ billion stimulus being spent in fiscal 2009.  Furthermore, if it’s realistic to believe that the economy (OTC:GDP) is going to grow 3-5% in 2010 as projected by the Obama budget currently under consideration, why are we spending any of this money at all.  If the economy does happen to recover at the same time the other 77% of the stimulus kicks in, the level of potential inflation could rival that of 1920s Germany and 2000s Zimbabwe.

 

The hypocrisy apparent in the rhetoric from Washington is deafening.  That said, I do think we’ve seen the lowest lows in the stock market (666 as reflected in the Dow Jones Industrial Average) and we’re now on the mend.  Being anticipatory in nature, if we have seen the bottom, the market would be suggesting better times for the coming 6-12 months (meaning greater employment levels).  Per usual, this recovery seems to be happening in spite of our political leaders.  If we can only find some manner of national ‘head-restraint’ we might avoid the specter of economic whiplash (inflation) looming on the horizon…  Had the President not offended the Special Olympics Committee maybe they’d have lent a hand…