Last week’s headlines all carried a variant of "Economy Loses Jobs, Stock Market Soars." Is the Marxist parable of capitalist exploitation coming true? Are corporations and their investors really cheering that 116,000 private-sector workers were told to walk in May?
To an outsider who knew nothing about the way the Fed distorts both the economy and investors’ perceptions of the future, it might seem so. In reality, the Fed, in its Keynesian-style management of the money supply, has a knack for making the economy work exactly as the opponents of free markets say it does.
The reason stocks went up had nothing to do with job losses as such. A few weeks ago, the wisdom on the street was that Alan Greenspan was planning to increase interest rates further in order to combat inflation. In turn, inflation was considered a threat because the economy was growing "too fast," and this is supposed to kick off price increases. Job losses signal a slowing economy, which signals the Fed that it doesn’t need to raise interest rates. That in turn suggests that there will be no more Fed-driven attempts to crack down on inflated market valuations.
This Rube Goldberg rationale is fatally flawed in many ways. Problem one: the Fed doesn’t combat inflation; its loose policies and nothing else are the source of inflation. Raising interest rates is merely an attempt to avoid the consequences of a previously profligate monetary policy. Problem two: economic growth doesn’t cause inflation; if anything, it produces downward pressure on prices. Keynesians like to claim that this is only true if the growth is a result of increased aggregate supply, and not aggregate demand. Problem three: there’s no such identifiable thing as aggregate demand or supply, so it’s impossible to know which is what.
Stranger still is the probable source of the job losses in this particular case. In May, the Census Department hired hundreds of thousands of people to help in collecting Census data, and they hired them at $8 to $18 per hour. If you count all these people in the job loss/job gain ratio, you end up with an increase of overall jobs of 231,000 (compared with the 110,000 losses that hit the private sector). It is entirely possible that these Census workers left lower paying private-sector jobs to go to work for the government at higher pay (yet another crime of the Census!). But if they hadn’t been working for the Census, they would have stayed employed in real jobs. There’s no question that the job losses hit the lower end of the pay scale the hardest.
Not that there’s any stability to the statistics themselves. At the same time the Labor Department announced job losses, it released revisions in previous months’ data, most of them in an upward direction. How can we know May’s data won’t be revised? This data comes from surveys of business, so it is sometimes useful to cross-check with a survey of households. However, this survey for May was so wildly implausible (showing the largest one-month job loss since 1948) that the Labor Department statisticians immediately dismissed it as a quirk having to do with seasonal adjustments.
If that’s not confusing enough, here’s an additional irony. Greenspan’s increases in interest rates were only partly motivated by the desire to dampen the prospect of rising prices in the future. As he has said many times, he thinks that the stock market is overvaluing the worth of many companies. He would like to use his power over interest rates to put a damper on irrational exuberance. But with a slower economy leading investors to believe rates won’t increase again, the stock market is soaring again, making possible new spending which will be reflected in growth rates. In other words, the mere perception that the economy is slowing may cause it to grow even faster.
There’s some evidence that Greenspan understands this. It is widely noted, for example, that Greenspan has made no reference to slower growth rates in his recent speeches. He may understand that the slightest mention of this will cause the stock market to soar on the expectation that he believes Fed intervention is no longer necessary. A soaring stock market is what he wants to avoid.
Regardless of the underlying rationale, the job loss/stock market dynamic we are witnessing is not something endemic to the market economy. It is a drama scripted by the Federal Reserve, an agency of the government that stands as far outside the real economy as any regulator does. It just so happens that when you regulate the money supply, your actions have a broader impact than the guy at the FDA in charge of regulating the operation of bologna slicers.
What’s striking is how everyone takes it for granted that the Fed should have so much power. Even when it does nothing at all, traders are left to speculate what it may or may not do in the future, and when events cause those speculations to change, investor psychology can take a dramatic turn. The result is a wholly unnecessary volatility stemming from artificial uncertainty, an inevitable consequence of the discretionary monetary policy administered under the dictatorship of Alan Greenspan.
All this psycho-statistical gameplaying underscores a few central lessons, and it doesn’t take a degree in economics to understand them. It is clear that the economy is far too complicated, and the data collectors of the federal government far too dim-witted, to make central planning viable on any scale at all. If the government can’t tell us with any certainty whether the economy is growing or shrinking, or whether there are more or fewer jobs than in previous months, there is no hope it can manage the macroeconomy. The attempt only generates confusion.
And yet what is the Federal Reserve other than a glorified central planning agency? It fixes the price of credit, it doles out money in dribs and drabs to sectors it likes, it tries to steer the value of the dollar on international exchange, and it targets the stock market for increases and declines. It has been spectacularly unsuccessful in every instance. Greenspan’s convoluted speeches, and his white marble palace, can’t mask the fact that he and the Fed create nothing but uncertainty and confusion for the market.
In a just and sane world, traders on Wall Street would be thinking about balance sheets and consumer preferences, not guessing at what factors will influence the next decree of Greenspan the Great. But so long as the Fed hangs on to its unwarranted power as the nation’s money manager, they will have to continue to guess what it is going to do next.