Last Friday, the Labor Department delivered disappointing news. According to their figures, only 74,000 jobs were created in December, far below the anticipated 200,000. The perspective from experts was clearly misguided.
This represents the smallest increase since January 2011. Remarkably, despite this lackluster job growth, the unemployment rate declined by 0.3 percentage points to 6.7 percent. This marks the lowest rate since October 2008, coinciding with the economic downturn.
To the untrained eye, it may seem like conditions are improving. A 6.7 percent unemployment rate is certainly an improvement, but a closer examination reveals that this decline is primarily due to discouraged workers leaving the workforce.
In reality, the labor participation rate—the percentage of working-age Americans either employed or seeking employment—dropped by 0.2 percent to 62.8 percent in December, reaching a 35-year low. This decline indicates that numerous capable individuals have simply given up on finding work.
But where do these individuals go when they exit the labor force? Do they vanish from urban life, or do they retreat to remote areas?
Containing Radioactive Wastewater with Duct Tape
No one can be sure, but we can speculate that they essentially become someone else’s burden. They might rely on unearned income for essentials and some may even become dependents of state assistance.
At this stage of the economic recovery, do people still genuinely care about job creation and unemployment rates?
The Federal Reserve appears indifferent. Last month, despite previously stating they would raise the federal funds rate once unemployment hit 6.5 percent, they backtracked and now intend to maintain nearly zero interest rates for “well beyond” that benchmark.
At the Economic Prism, we’re left wondering what prompted this change in the Fed’s stance. One possibility relates to reports of workers at Fukushima, tasked with controlling radioactive wastewater, resorting to using duct tape to address leaks. Allow us to elaborate…
While duct tape is quite effective for sealing air ducts and managing minor repairs, it is woefully inadequate for halting radioactive wastewater spills into the ocean.
This analogy serves as a metaphor for relying on monetary policy to steer an economy—it simply fails to succeed. The effort to manage economic dynamics through such means is equally futile.
Duct Tape Economics
The economy functions as a complex organism, and quantifying its myriad components is impossible. Approaches aimed at aggregating measures of demand or calculating GDP, or even assessing unemployment rates, are fundamentally flawed.
What do these figures truly reveal? How are they manipulated or distorted? How accurately do they portray the individuals they aim to quantify?
Yet, economists and academics are enamored with the prestige these statistics afford them. They cling to these numbers as if drowning in a swamp, preparing graphs and charts to illustrate their findings.
They plug figures into spreadsheets to build models, striving to represent consumption patterns and lower unemployment. Politicians join the fray, often spinning figures to secure votes.
But how can you truly enhance the human experience?
Some individuals are driven to invent new technologies, while others demonstrate a strong work ethic, laboring in factories for decades for modest wages. Meanwhile, there are those who simply wish to enjoy leisure beneath the ancient oak trees.
Despite these diverse motivations, the Federal Reserve attempts to aggregate all these individual behaviors and preferences into a cohesive framework. But what real options do they have?
They can inflate or deflate the currency, set federal funds rates, and create money from thin air to lend to the treasury and major banks.
There is no doubt these actions significantly impact financial markets, alter asset values, and influence the overall economy.
However, the outcomes are often unpredictable, leading to disruptive repercussions. Asset bubbles form, spawning jobs to service these inflated prices. When these bubbles burst, and the employment vanishes, the Fed simply prints more money to reinflate the situation.
Does this not illustrate the absurdity? It’s akin to using duct tape to contain radioactive waste—and the result is a never-ending cycle of chaos and confusion.
Sincerely,
MN Gordon
for Economic Prism
