Tuesday, June 5, 2012

May 2012 Abysmal Jobs Report: Keynesianism and How It Would be Different This Time.

Regarding the May jobs report released Friday 06/01/2012, yet another abysmal jobs report, making three straight jobs reports of subaqueous nature, the headline unemployment rate ticked up to 8.2%.

Even more ominous is the anemic 69,000 jobs created in May were mostly part-time positions. The bright spot being that the labor participation rate increased slightly as 642,000 people entered or re-entered the labor force seeking employment. (1)

Although more are seeking work there remains a vast reservoir of discouraged workers estimated at upwards of 4 million that remain outside the labor force. That is, if the labor force participation rate was at its historic average then headline unemployment would be well into double digits.

A politically framed argument coming from the Obama Administration is that the Great Recession is such a vast and deep recession that the recession in and of itself is yielding the poor jobs number. Conversely, the same administration advertises yet another argument that the jobs created or “saved” by the same administration numbers in the millions during the same vast and deep recession. Which makes one wonder which argument is one to believe as the two arguments are divergent? -Or- is neither argument valid?

Regarding the Keynesian deficit spending plan also known as “the stimulus plan”, one must keep in mind that a so called stimulus plan is designed, as Keynesians depict it, as a “jump start”. That is, the stimulus plan is not in and of itself suppose to cause a recovery in employment rather the stimulus is supposedly going to cause the private sector to begin producing and hence employing. Stated alternatively, the stimulus supposedly creates the environment for the private sector to recover and it’s the private sector recovery that then drives employment.

In Friedman and Schwartz's book the Great Contraction 1929-1933 there is a compelling if not empirical argument of the Federal Reserve being way too tight in 1929, followed by the Fed's ongoing contribution [or failure to alleviate] the massive decline in the money stock leading to fractional banking in reverse.... and these items contributed to the Great Depression as well as lengthening and deepening the depression.

Fast forward to The Great Recession. Bernanke deploys Friedman and Schwartz’s prescription and does not allow the money stock to contract. However, according to F.A. Hayek monetary policy has limitations. Hence with the money stock in a non-contraction phase and reverse fractional banking avoided, monetary policy has been deployed successfully and to count on monetary policy to do much more is pushing monetary policy limits.

Given the above, in both instances, Great Depression and Great Recession, Keynesian deficit spending plans were deployed. Keep in mind that the two items that receive the most attention regarding economic argument, debate, research, etc. regarding the Great Depression are Keynesian deficit spending and Federal Reserve policy. One must then consider the monetary policy was successfully deployed during the Great Recession via lessons learned from the Great Depression. This leaves only the other major component to discuss which is Keynesian deficit spending.

If, as the argument goes, as well as empirical evidence points to, the Great Depression was deepened and lengthened by both Federal Reserve policy AND Keynesian deficit spending plans aka stimulus.....and in the Great Recession the Federal Reserve policy was corrected via Friedman and Schwartz through Bernanke ....then the deepening and lengthening of the Great Recession only has the other policy component in common with the Great Depression: Keynesian deficit spending.

Whereas the monetary component of the Great Depression was empirically studied by Friedman and Schwartz and a policy prescription was developed and subsequently deployed during the Great Recession with resulting success, what about the deployment of Keynesian deficit spending during the Great Recession? Was Keynesian deficit spending deployed due to empirical work showing a policy prescription leading to success -or- was Keynesian deficit spending deployed based on the notional position of “it will be different this time”?

There is a mountain of empirical evidence that Keynesian deficit spending plans do not jump start anything. The track record of Keynesian deficit spending plans appear to lengthen recessions which was predicted by F.A. Hayek during the Great Depression [Hayek predicted the lengthening of the Great Depression via Keynesian deficit spending and did so in the mist of the Great Depression i.e. predicted in real time during the Great Depression].

Below are three observation regarding Keynesian deficit spending plans and Keynesianism itself that may shed some insight:

“Keynes was exceedingly effective in persuading a broad group—economists, policymakers, government officials, and interested citizens—of the two concepts implicit in his letter to Hayek: first, the public interest concept of government; second, the benevolent dictatorship concept that all will be well if only good men are in power. Clearly, Keynes’s agreement with “virtually the whole” of the Road to Serfdom did not extend to the chapter titled “Why the Worst Get on Top.”

Keynes believed that economists (and others) could best contribute to the improvement of society by investigating how to manipulate the levers actually or potentially under control of the political authorities so as to achieve desirable ends, and then persuading benevolent civil servants and elected officials to follow their advice. The role of voters is to elect persons with the right moral values to office and then let them run the country. -
Milton Friedman (2)

For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, none economists. - Lucas and Sargent (3)

This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. - F.A. Hayek (4)

One must consider that Keynesian deficit spending and Keynesianism itself is more akin to a political science proposition than an economic proposition. That is, the basic premise is that politicos can manipulate an economy. That somehow politico intervention distorting market forces makes for good economics. That the proposition itself, Keynesianism, has little empirical economic basis and is more akin to political notion.

Returning to the beginning regarding the abysmal jobs reports, high persistent headline unemployment and with an army of discouraged workers, one has consider that Keynesian deficit spending plans, regarding the notional proposition “that it will be different this time”, in reality was: “that it will be the same this time” i.e. another failure of the political proposition known as Keynesian deficit spending.


(1) America's Transition To A Part-Time Worker Society Accelerates As Part-Time Jobs Hit Record, 06/02/2012, Zero Hedge


(2) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.

(3) After Keynesian Economics aka After the Phillips Curve: Persistence of High Inflation and High Unemployment, page 57, Lucas and Sargent.


(4) F.A. Hayek, from the essay The Pretense of Knowledge

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