Analysis of Bernanke’s “Labor Weakness” Statements

Unfortunately, Bernanke’s statements offer surprisingly little economic insight.

For example, please consider the Fed’s estimate that the “unemployment rate will average 8.2 percent to 8.5 percent in the fourth quarter”.

Perfectly Useless Projection

Let’s assume Bernanke is correct. Is that a meaningful projection?

The short answer is the projection, even if totally accurate, is perfectly useless. Let’s analyze “why? in light of Bernanke’s estimate that it takes 125,000 jobs a month to keep up with demographics (birthrate plus immigration).

Three Cases In Which Unemployment Rate Stays Flat

1. Is the Fed projecting 125,000 per month in line with expected demographics?
2. Is the Fed expecting 200,000 jobs a month with a rising participation rate that holds the unemployment rate steady?
3. Is the Fed expecting 50,000 jobs a month with a falling participation rate that holds the unemployment rate steady?

It would be more useful (assuming there is any use to Bernanke’s statements which is certainly debatable) to know just what he is thinking because those three scenarios are vastly different in terms of economic significance, even though they all project the same 8.2 percent to 8.5 percent unemployment rate prediction.

In other words, the Fed’s projection, even if accurate, is totally useless, not that anyone should be paying any attention to what he says in the first place.

via Mish’s Global Economic Trend Analysis: Bernanke Finally Says Something That Seems to Make Sense “8.3% Unemployment Understates Labor Weakness”; Critique of Bernanke’s 2014 Pledge; Perfectly Useless Projections.

Let’s imagine the following event: You are walking down the street with your purse on your arm or, if you are a man, you have your wallet in your hand–say you left a note in it and you needed to read it to remind yourself what it said.

Fill in your own details.

So there you are minding your own business and not minding anyone else’s, or aware of much else.

Suddenly a hand reaches out and grabs your purse/wallet. You look up to see a man running away with your money. You yell in panic…

…and hear the gratifying reply of a police whistle!

One of the city’s finest races past you and overtakes the robber. Within seconds the robber is lying prone on the ground handcuffed. The cop has retrieved your wallet. He turns and doffs his hat to you. “No need to thank me. Just doing my job.”

Then he puts your wallet in his pocket and walks away.

I think of this scenario often. For example, when I heard this in an interview:

I would like to see capitalism in America prevail, but capitalism with a human face. And not a capitalism in which some speculators in the financial world nowadays make 325 times more money than the average wage of an average American. And we have created an extremely unfair capitalistic system. These things have to be addressed…

Beyond that we do have this wave of increasing — mindlessly increasing executive compensation irrespective of executive performance. I think both more regulation and a fairer tax system would go a long, long way in addressing these problems. And actually Romney is beginning to talk about that, in part because I think he realizes that the amount of wealth he himself has should not be affected by one of the lowest tax levels that you can have when it comes to income.

via Zbigniew Brzezinski: “Strategic Vision: America and the Crisis of Global Power” | The Diane Rehm Show from WAMU and NPR.

I’m completely open to the possibility that executive compensation is the result of a misallocation of resources. I would love to see an investigation that searched out the causes what is happening and proved the case.

But the idea that the “crime” (if it be one or should be one) of taking away money out of the economy should be addressed by confiscating that money to give to politicians calls out for the proverb, “two wrongs don’t make a right.”

If people are draining the economy we need to fix it. Pretending that hiking up the tax code on such people really addresses the issue just replaces one parasite with two.

On what grounds of justice can anyone claim that an “unfair” income on the part of one person or corporation is fixed when matched by distributing that income to another person or corporation? And the US Federal Government is only different from a normal corporation in that it is permitted to use guns in its operations.

Of course, I doubt the “injustice” of CEO pay is as egregious as that of the robber in my story. That is why it is all the more unjust for the state to match one questionable injustice by committing an undoubted one of its own.

In fact, this idea is doubly perverse since the state would be gaining revenue from an injustice and would have even less incentive to fix the problem.

Fix it; don’t just add real robbery to possible robbery.

So the other day I was wasting time looking at Facebook profiles (I’m giving that up, by the way) and I saw a discussion about whether workers were “free” in a free market.

The answer was no. Workers are not free because they cannot get paid as much as they want.

This is a delusional way to think about the question. We all wish we could get paid more than we are. That is human nature.

Look at it this way, What company would stay in business if it announced it was cutting wages in half tomorrow?

Both owners and workers have to face economic realities. The owners cannot pay anyone more than they can afford. Otherwise they go out of business. They cannot afford to pay workers less than those workers can get elsewhere, or else they go out of business.

Wages, like all prices, fluctuate. The idea that wages as measured in currency should always go up is a fantasy.

And even talking about wages that way distracts from an important way that workers, as consumers, are constantly giving themselves raises. In fact, it looks like a new clothing allowance is on the horizon:

Penney’s slashing prices on all merchandise – USATODAY.com.

Penney is permanently marking down all of its merchandise by at least 40% so shoppers will no longer have to wait for a sale to get the lowest prices in its stores.

So, what used to cost a hundred dollars to buy, normally, may soon only cost sixty dollars. I suspect other companies will be “forced” (!) to follow Penney’s lead. That is a raise. For everyone. And it is the result of the real and true “collective bargaining”–the market.

But then we get this wisdom from Robert Reich:

Modern technologies allow us to shop in real time, often worldwide, for the lowest prices, highest quality, and best returns. Through the internet we can now get relevant information instantaneously, compare deals and move our money at the speed of electronic impulses. Consumers and investors have never been so empowered.

Yet these great deals come at the expense of our jobs and wages, and widening inequality. The goods we want or the returns we seek can often be produced more efficiently elsewhere by companies offering lower pay and fewer benefits. They come at the expense of main streets, the hubs of our communities.

First, of all, there is a lot more in Reich’s column about pollution and the environment. He makes assertions without evidence so I don’t feel the need to respond. I just bring it up to point out that it is there too, and it is a different argument.

Above, his argument is that buying cheaper products is an economic problem. It is absolutely true that a “main street” that has been dependent on an inefficient factory that employed most of the people is going to have to close. It should. The people should find work elsewhere. Chaining consumers to such people is slavery.

In what world do factories never close? In what world does the way things are made never change, never get improved, never get supplied by a new producer?

A lifeless world. A dead planet.

In this living world we are all, everyone of us, are trying to produce and consume as best we can. In this living world there is constant change and we have to learn and help and adapt and enjoy.

The idea that this process–the mere living of a society–must result in widening inequality is theoretically illogical and historically false. We know why inequality is beginning to widen: because of the omnivorous, ever-hungry state. It has corrupted currencies all over the world in order to fund a ruling regime, a finance-political complex. In this environment, we have been slowly losing ground for decades as saving has been discouraged and debt has been encouraged. Reich pining for higher prices is just another attempt to keep the status quo going.

The efficiency of trade is impossible if the medium of exchange can be tampered with by politicians/state-bankers.

Look at what Reich is actually saying. Information should be hampered. Transportation should be slowed. Prices should rise. Ignorance, geographical barriers, and higher prices are what we should all want. We would all be better off.

In a way I think Reich is telling us the truth. He is telling us what the political establishment can and will “provide” for us–and is trying to make a case that it is a social good.

Bastiat had it right:

Which is preferable for man and for society, abundance or scarcity?

“What!” people may exclaim. “How can there be any question about it? Has anyone ever suggested, or is it possible to maintain, that scarcity is the basis of man’s well-being?”

Yes, this has been suggested; yes, this has been maintained and is maintained every day, and I do not hesitate to say that the theory of scarcity is by far the most popular of all theories. It is the burden of conversations, newspaper articles, books, and political speeches; and, strange as it may seem, it is certain that political economy will not have a completed its task and performed its practical function until it has popularized and established as indisputable this very simple proposition: “Wealth consists in an abundance of commodities.”

Do we not hear it said every day: “Foreigners are going to flood us with their products”? Thus, people fear abundance.

Has not M. de Saint-Cricq said: “There is overproduction”? Thus, he was afraid of abundance.

Do not the workers wreck machines? Thus, they are afraid of overproduction, or—in other words—of abundance.

Has not M. Bugeaud uttered these words: “Let bread be dear, and the farmer will be rich”? Now, bread can be dear only because it is scarce. Thus, M. Bugeaud was extolling scarcity.

Has not M. d’Argout based his argument against the sugar industry on its very productivity? Has he not said again and again: “The sugar beet has no future, and its cultivation cannot be extended, because just a few hectares of sugar beets in each department would be enough to supply all the consumers in France”? Thus, as he sees things, good consists in barrenness and scarcity; and evil, in fertility and abundance.

Do not La Presse, Le Commerce, and the majority of the daily newspapers publish one or more articles every morning to prove to the Chambers and to the government that it is sound policy to legislate higher prices for everything through manipulation of the tariff? Do not the Chambers and the government every day comply with this injunction from the press? But tariffs raise the prices of things only because they reduce their supply in the market! Thus, the newspapers, the Chambers, and the government put the theory of scarcity into practice, and I was right to say that this theory is by far the most popular of all theories.

Contra Reich, I assert that the economy will, if allowed to do so by the politico-finance complex, provide more for all if prices are allowed to fall (and rise) under market forces. Since Reich provides no evidence or arguments that free exchange causes poverty and widening inequality, I won’t burden myself with doing more than stating the obvious.

The one who loves pleasure will be a poor person;
whoever loves wine and anointing oil will not be rich. — Proverbs 21.17

This is not just about private behavior. People do make themselves poor but, often enough, they learn in time from failures or from others that they need to save.

But what if we constructed a nation that diverted all proposed savings into consumption? What happens when the government claims that their bonds are a form of savings?

So we “save” by loaning the government money. We have security knowing that it will come back with interest.

But why is interest possible? Because people find productive uses with the money.They do profitable things with it so they can pay back the creditors/savers.

Does the government do that? Has the government been using all its debt for investment? Are we doing just fine with all the government’s infrastructure responsibilities?

Or has the government really borrowed money for the purpose of immediate consumption? Is there anything behind the promise of repayment with interest other than simply the ability to tax people at a later date?

Think of all the changes that happened in the nineteenth century: buildings, bridges, factories, roads…

Where did all that investment come from? Someone had to save money and then loan it for needed projects that were believed to be a way to satisfy future wants.

Now, in the twentieth century, the government developed 1.) new ways to directly confiscate people’s wealth and 2) new ways of diverting people’s savings into immediate consumption rather than investment.

All those trillions of dollars that could have been invested in the formation of capital for future use got sent to overthrow Noriega prop up corn prices and get people to walk on the moon.

And, just to add delusions to damage, we developed financial tricks to pretend we were not impoverishing ourselves.

Now the time is up and everyone wonders what is happening.

What happened is that the we’ve consumed for a century rather than produce.

The vague notion of security which the welfare doctrinaires have in mind when complaining about insecurity refers to something like a warrant by means of which society guarantees to everybody, irrespective of his achievements, a standard of living which he considers satisfactory.Security in this sense, contend the eulogists of times gone by, was provided under the social regime of the Middle Ages. There is, however, no need to enter into an examination of these claims. Real conditions even in the much-glorified thirteenth century were different from the ideal picture painted by scholastic philosophy; these schemes were meant as a description of conditions not as they were but as they ought to be. But even these Utopias of the philosophers and theologians allow for the existence of a numerous class of destitute beggars, entirely dependent on alms given by the wealthy. This is not precisely the idea of security which the modern usage of the term suggests.

The concept of security is the wage earners’ and small farmers’ pendant to the concept of stability held by the capitalists. In the same way in which capitalists want to enjoy permanently an income which is not subject to the vicissitudes of changing human conditions, wage earners and small farmers want to make their revenues independent of the market. Both groups are eager to withdraw from the flux of historical events. No further occurrence should impair their own position; on the other hand, of course, they do not expressly object to an improvement of their material well-being. That structure of the market to which they have in the past adjusted their activities should never be altered in such a way as to force them to a new adjustment. The farmer in a European mountain valley waxes indignant upon encountering the competition of Canadian farmers producing at lower costs. The house painter boils over with rage when the introduction of a new appliance affects conditions in his sector of the labor market. It is obvious that the wishes of these people could be fulfilled only in a perfectly stagnant world.

A characteristic feature of the unhampered market society is that it is no respecter of vested interests. Past achievements do not count if they are obstacles to further improvement. The advocates of security are therefore quite correct in blaming capitalism for insecurity. But they distort the facts in implying that the selfish interests of capitalists and entrepreneurs are responsible. What harms the vested interests is the urge of the consumers for the best possible satisfaction of their needs. Not the greed of the wealthy few, but the propensity of everyone to take advantage of any opportunity offered for an improvement of his own well-being makes for producer insecurity. What makes the house painter indignant is the fact that his fellow citizens prefer cheaper houses to more expensive ones. And the house painter himself, in preferring cheaper commodities to dearer ones, contributes his share to the emergence of insecurity in other sectors of the labor market.

COMMENT:

Mises makes no claim here about the origin of social unrest and the anti-capitalist mentality that he critiques here. But it is hard for me, once I recognize the association he points to, not to think that we have here the true source of market interventionism.

Rich people hate capitalism. If they got rich through capitalism, that is beside the point. Capitalism makes no promises that they will stay rich. It becomes a threat. They pursue security by means of politics. Since political change requires “the consent of the governed,” they manufacture false promises for members of other social classes. If there are revolutionaries who sometimes (rarely) arise from those classes, they find and support them.

Socialism and/or the “mixed” economy, as ideas, “trickle down” from above.