This post is one in a series entitled Posthumous Refutations. Previously in this series: Cash for Cranks.
Here is a statement release from Christina Roemer, quick to take today’s employment report as...
...the most hopeful sign yet that the stabilization of financial markets and the recovery in economic growth may be leading to improvements in the labor market. (...)
There are many bumps in the road ahead. The monthly employment and unemployment numbers are volatile and subject to substantial revision. Therefore, it is important not to read too much into any one monthly report, positive or negative. But, it is clear we are moving in the right direction.
I’ve done a lot of driving today, so I’ve heard a lot of coverage of the employment report on the radio, and the only misgivings about it that I heard was that it might be a “blip”. There was nary a whisper that just perhaps the specific jobs created in the specific industries they were created in might be unsustainable. Even some mainstream commentators admit that the easy credit policies of the Fed at least contributed to the bubble in the first place. Yet, with Bernanke having doubled the Fed’s balance sheet in order to keep interest rates around 0%, is it such a hard connection to make that an even more extreme easy credit policy just might induce a false-recovery bubble?
In fact, this rebound in employment, following a “jobless recovery” in capital markets (as evidenced in the bull market we’ve been having) strikes me as perfectly fitting the Austrian Business Cycle Theory’s characterization of an economic bubble.
In Economic Depressions: Their Cause and Cure, Murray N. Rothbard considers:
...what happens when the rate of interest falls... from government interference that promotes the expansion of bank credit? In other words, if the rate of interest falls artificially, due to intervention, rather than naturally, as a result of changes in the valuations and preferences of the consuming public?
What happens is trouble. For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers’ goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.
..which would explain the recent run-up in the housing market (durable goods) and the stock markets (capital goods). It is only later that
...eventually this money gets paid out in ... higher wages to workers in the capital goods industries.
...higher wages being, of course, a function of an increased demand for labor: thus today’s labor market rebound.
What comes next in the narrative should put quite a damper on Roemer’s upbeat view of today’s jobs report and the labor market upswing it may represent:
The problem comes as soon as the workers and landlords--largely the former, since most gross business income is paid out in wages--begin to spend the new bank money that they have received in the form of higher wages. For the time-preferences of the public have not really gotten lower; the public doesn’t want to save more than it has. So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don’t save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression...
Now that doesn’t sound like a “right direction” to me.
What Christina Roemer does not understand is that, for society as a whole, jobs are not ends in and of themselves. For society, they are only a boon insofar as they produce goods and services without consuming capital. For society, they are liabilities insofar as they are allocated toward unsustainable projects, as they will tend to be under artificial credit expansion. The consequences of Bernanke’s mind-boggling credit expansion will eventually catch up to us. Far from being a sign of better days to come, the job report everybody’s so excited about today may very well be a harbinger of those consequences.
