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.


Notes:


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


http://www.zerohedge.com/news/americas-transition-part-time-worker-society-accelerates-part-time-jobs-hit-record


(2) Milton Friedman, Richmond Federal Reserve Economic Quarterly, volume 83/2 Spring 1997.
http://www.richmondfed.org/publications/research/economic_quarterly/1997/spring/pdf/friedman.pdf


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

http://www.bos.frb.org/economic/conf/conf19/conf19d.pdf


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

The 1933 Implication: Citi, SunTrust, Ally and MetLife Bank Fail Fed‘s “Doomsday” Bank Stress Test

“The Fed tested the banks to see if they had enough reserves to handle an economic shock in which unemployment would increase to 13 percent, the Dow Jones industrial average would lose half its value and housing prices would fall an additional 21 percent.” (1)  



The above stress test was dubbed by the media as the “doomsday” stress test. Doomsday in that the parameters are highly unlikely, yet probable and if the parameters were all exactly in place, the economy would be in some stage of depression and hence “doomsday”. (2) (3) (4) 


　

The failure of Citi, SunTrust, Ally and MetLife Bank can surely be viewed in many ways regarding such a highly unlikely yet probable scenario. However, the implication and consequential perception of naming-names regarding “failure” was discussed by Milton Friedman and Anna Schwartz in the book The Great Contraction 1929-1933. One might consider the following:


The Banking Panic of 1933

“This time the availability of RFC [Reconstruction Finance Corporation] loans did not stem the rising tide of bank failures, partly because a provision of an act passed in July 1932 was interpreted as requiring publication of the names of banks to which the RFC had made loans in the preceding month, and such publication began in August. The inclusion of a bank’s name on the list was correctly interpreted as a sign of weakness, and hence frequently lead to runs on the bank. In consequence, banks were fearful of borrowing from the RFC. The damage was further increased in January 1933 when, pursuant to a House resolution, the RFC made public all loans extended before August 1932.” (5)


And the immediate results of naming names?

“The banks that failed the test were in rough shape: Citi fell 2.3% after-hours, SunTrust 3.7% and MetLife 2.9%. Ally is not publicly traded and still substantially owned by the U.S. Treasury.”(6)



Notes:
(1) Citi, Ally, SunTrust fail Fed stress tests

http://www.newsobserver.com/2012/03/13/1929121/citi-ally-suntrust-fail-fed-stress.html#storylink=cpy


(2) Citi, Ally, Suntrust, MetLife fail stress tests, Yahoo News, 03/13/2012

http://en-maktoob.news.yahoo.com/citi-ally-suntrust-metlife-fail-stress-tests-205652463.html

(3) Citi among banks that fail Fed stress test, Market Watch, The Wall Street Journal, 03/13/2012

http://www.marketwatch.com/story/citi-among-banks-that-fail-fed-stress-test-2012-03-13?reflink=djm_HAMWRSSCommentedH

(4) Citi, Ally, SunTrust fail Fed stress tests

http://www.newsobserver.com/2012/03/13/1929121/citi-ally-suntrust-fail-fed-stress.html#storylink=cpy


(5) The Great Contraction 1929-1933, Milton Friedman and Anna Schwartz, Princeton University Press, 2008 edition, page 52.

(6) Citi, Ally, SunTrust And MetLife Flunk Fed's Stress Test, Forbes, 03/13/2013.

http://www.forbes.com/sites/steveschaefer/2012/03/13/citi-among-four-banks-to-fail-feds-stress-test/







　

Friedman and Schwartz vs. Today’s Talking Heads: The 88 vs. The Gazillion

Talking heads, pundits, and media types speak/talk/write volumes-upon-volumes about the recent housing boom-bust and subsequent financial crisis. Specifically they commentate that the subsequent deep economic recession, shallow recovery, and subsequent economic malaise has a common thread of risk aversion and the quest for liquidity. They elude to, poke about, show charts and graphs, and otherwise attempt to explain in 100 gazillion words that risk adverse and liquidity is the revealed preference after a cataclysmic economic event.


Consider the following excerpt, specifically the eighty eight words within the following passage that concisely and compactly economize on the 100 gazillion plus words of today's talking heads, pundits, and media types:

“Partly, no doubt, the stock market crash was a symptom of the underlying forces making for a severe contraction in economic activity. But partly also, its occurrence must have helped to deepen the contraction. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes of a new era had prevailed. It is commonly believed that it reduced the willingness of both consumers and business enterprises to spend ; (6) or, more precisely, that it decreased the amount they desired to spend on goods and services at any given levels of interest rates, prices, and income, which has, as its counterpart, that it increased the amount they wanted to add to their money balances. Such effects on desired flows were presumably accompanied by a corresponding effect on desired balance sheets, namely, a shift away from stocks and toward bonds, away from securities of all kinds and toward money holdings.” - Friedman and Schwartz, The Great Contraction 1929-1933, pp 10-11.



Note: the footnote referenced by Friedman and Schwartz appears below:

(6) See A. H. Hansen, Economic Stabilization in an Unbalanced World, Harcourt, Brace. 1932, pp. 111-112; J. A. Schumpeter. Business Cycles, McGraw-Hill 1939, Vol. II pp. 679-680; R. A. Gordon. Business Fluctuaions, Harper, 1952, pp. 377-379, 388; J. K. Gaibraith. The Great Crash, 1929, Boston. Houghton Mifflin, 1955, pp. 191-192. See also Federal Reserve Board, Annual Report for 1929, p. 12.

Government Spending Arguments based on 1937 and 1938?

In the last couple days you may have run into media reports and pundits making the following argument: "Reducing government spending will throw us in a double dip recession just like 1937 - 1938 (recession within the depression)".

Nay, nay! It was a monetary phenomena that caused the 1937-1938 recession aka recession within a depression. The Fed increased reserve requirement several times, engaged in other policy that caused treasury yields to rise, etc., etc.. Milton Friedman has explained the case plenty of times. Friedman explains the situatation in the book A Monetary History of the United States, 1867-1960 and again in chapter three of the book Capitalism and Freedom. (1) (2)

However, the debaters are putting forth a main debate point of the reduction in spending in 1937 as being the major trigger of the recession as they point to the government spending figures in 1937 vs. 1936. The debate point is used to defend current or even further government spending during the current recession.

In Jim Powell's book FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression he addressed this very debate point. Powell clearly points to Friedman's explanation of the recession within a depression (1937- 1938) being a Fed induced recession based on monetary policy. However, Powell examines and explains that in 1936 FDR and the Democrat party purposely increased spending over the 1935 level as a campaign strategy [buy votes with spending]. They won in a land slide. Go figure!  Hence they purposely ramped up 1936 spending over 1935 spending then purposely ramped down as the election was won. Hence the debaters purposely compare 1936 with 1937 yet leave out 1935 and the "why" regarding the spike in spending in 1936. (3)

Please see the link below and you will see the actual spending numbers [1936 being clearly a spike in spending].

http://www.presidency.ucsb.edu/data/budget.php

Notes:

(1)  A Monetary History of the United States, 1867-1960, Princeton University Press, Milton Friedman , Anna Jacobson Schwartz

(2) Capitalism and Freedom, University of Chicago Press, Milton Friedman

(3) FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression, Crown Publishing Group, Jim Powell