Tuesday, March 31, 2015

Employment During a Federal Reserve Induced Boom

Murray Sabrin emails as a follow up to my post, The US is Experiencing One of its Best Job Gain Streaks in 20 Years, where I write,"The Fed manipulated boom is in full gear.":
Re the recent post about employment since the bust, how can we discern what jobs are "real" and which ones are boom induced?  Is it only after the bubble bursts do we know the answer or is there any tool in the Austrian tool kit to know this a priori?

First, I want to clarify a point that I see some make in the comments from time to time, before I get to Murray's question.

There is some debate in the comments as to whether better employment numbers are a signal of a new Fed created boom. I would argue: no/.

My view is that outside of individuals spending time to find a job after being laid off, there would be no unemployment in a free market. Government creates extended  unemployment via minimum wage laws and unemployment insurance. Thus, improving unemployment in and of itself has little to signal with regard to a Fed induced boom. It could also occur in a purely free market, where the Fed isn't printing money.

My emphasis on the improvement in the current employment numbers is to contrast my views on the  economic situation with those Austrian school economists who tend to be perennial doom and gloomers and who think the economy is always in bad shape everywhere.

My view is that they don't call it a business cycle for nothing. There are periods when parts of the economy can look extremely rosy, such as the current stock market:

And the unemployment situation:

While I believe it is possible for the unemployment situation to improve on its own without Federal Reserve meddling, I recognize that the current improvement in unemployment is a distorted "improvement" because of Federal Reserve money printing. That's why I always refer to a Fed induced boom and a Fed created boom in employment to signal that this is far from the type of improvements we would see if the Federal Reserve wasn't printing massive amounts of new money into the system.

If the Fed wasn't printing money, we would still see improvements in unemployment and an improving economy but they would be of a different more stable nature.

The current Fed induced boom has a structure that will collapse when the inevitable slowdown in money supply printing occurs.(To understand how Fed money printing creates teh boom-bust cycle see; Austrian School Business Cycle Theory)

As for Murray's question with regard to how we can tell which jobs are the result of Fed money printing and which are "real," I would say it is a difficult task. We can't know for sure, it is certainly not possible a priori, but in some areas we can have pretty good guesses. For example, the current strong stock market and boom in Silicon Valley appear to be fueled by a considerable degree by Fed money printing. Thus, these sectors are very vulnerable during a the bear phase of the business cycle---and are likely to result in significant job layoffs and turmoil. Jobs that are far away from the boom are less likely to experience a problem, but this is even tricky determine.  It is not always recognizable by the job itself. A hot dog vendor in Times Square in New York City may experience little in the way of a slowdown during a crash period,  but a hot dog vendor serving Wall Street messengers and clerks could see a major collapse in business during a downturn.

I would imagine that if someone attempted to look at money flows in different sectors over the period of a bull phase, he could make some pretty good guesses as to where the most serious  unemployment problems will develop in the down phase. That said, it is a complex world and such empirical studies may not be entirely accurate forecasters. The difficulties come if there are sectors where there are non business cycle trend advances but rather secular advances, that have little or nothing to do with the business cycle. It may be difficult to understand these and detect them. One may think they are just part of the boom phase, but they may have underlying strength that will allow them to survive a downturn relatively unscathed,

Bottom line: My view is that we can have rough guesses as to where the unemployment problems will be greatest, but guesses that will not be entirely accurate.




  1. Food for thought:

    Much of the inflation around the world has been funneled into government. So what happens to government employment when the punch bowl is taken away? :p

    Latvia finished up with this a few years ago:


    "One-third of the civil servants were laid off; half the state agencies were closed, which prompted deregulation; the average public wage was cut by 26 percent in one year."

    It has been almost the only country in the eurozone to consistently improve since, rather than being stuck in a quagmire of 0% GDP prints or outright contraction.

    Gee, where are the Keynesians to explain away that one?

    1. Gov't jobs and transfer payments are the economy right now. A large portion of the economy has, in effect, been "militarized." This is consistent with John T. Flynn's description of a fascist economy in his book As We Go Marching. Interesting, the two case studies he presents, Italy and Germany in the 20s and 30s, had economies closely resembling the U.S. economy today. One detail that sticks out in my memory is both countries' economic data became very opaque, unreliable, and suspect as the unsustainability of such systems started to become apparent. This makes me take any of these "FRED" charts with a grain of salt.