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Why Economists Don’t Have A Clue About Jobs

Written by admin | Jun, 12, 2013

employment-population-071111Not us though. We have been talking about the “real” weakness of the economy for months now and had it not been for $5.1 Trillion is stimulus over the last two years alone the economy would be in far worse shape than it is today.  

However, in an article posted at CNBC, Jeff Cox finally brings to a point that we have been making for several months now: “If you’re confused over high unemployment, you’re not alone. The people who are best supposed to understand this issue don’t have much of a clue either. That became readily apparent following the government’s release Friday of the June jobs report, a dismal report with virtually no redeeming factors. More than that, though, the report blindsided Wall Street and Washington economists, who expected about 100,000 jobs created last month, not the 18,000 that showed up in the Bureau of Labor Statistics compilation.”

Of course, this is not the first time that the economists’ have missed their predictions – in fact, other than December of last year, they have pretty much been wrong on average every month. However, this time was so closely watched that it spurred an abundance of excuses with most of them just outright blaming the government.

The reality of the problem is that the economy continues to show a renewed faltering in business activity as shown by the recent ISM reports and there is nothing new about ongoing economic troubles.  However, the main stream economists, for some reason, continue to ignore the weak data hoping that it will just somehow magically go away.   The data, which is now rattling the markets and consensus expectations, reflect the extremely poor quality of economic reporting in recent months and the distortions that have been caused by the seasonal factor adjustments.

The economic downturn in the markets is very real as shown by our composite economic output index that has now rolled over with the end of QE 2.  

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Here is what these economists are missing.   Classical economics says that production leads to consumption which leads to expenditures. This cycle ultimately creates growth.  

However, today, for the first time since the depression, the economy is caught literally in a virtual spiral between production and consumption.  As the consumer battles with the process of deleveraging their balance sheet they also have to deal with lower levels of disposable personal income.

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As the consumption is constrained and high unemployment makes consumers nervous about their future; businesses are reluctant to hire because they see no final demand from consumers. This is witnessed by the NFIB Small Business Survey which rates “poor sales” as some of their biggest concerns.   Therefore, small businesses aren’t creating jobs, increasing production or expanding their business (only 5% of those survey think it is a good time to expand).
 

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This process is one which has dangerous implications for the current economists that are hoping for better days ahead of employment, sustained economic growth and a return to a more stable economy as a whole.

The last 30 years has been a tribute to a flaw in monetary policy which led to excess consumption, leverage and an unprecedented rise in the supply of money which in turn led to the “Austrian Conclusion.”  That conclusion states that: “The inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies will cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.”

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That is the “End Game” that we are viewing today.   Want to create “Jobs, Jobs, Jobs…” the answer does not lay with normal monetary or fiscal policies.   Raising taxes will only lower economic growth exacerbating the problem.   Continuing with low interest rates and flawed monetary policies – that won’t work either. The only solution is time to finish the deleveraging process, extract excesses from the system and provide policies that clear the way for increases in production.

There is no pain-free solution to the problem.   It is one that will take time, effort and a realization that you “having the cake and eating it to” for the last three decades has left us all with one heck of a stomach ache.

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