Unemployment: Keynesians and Warmists Are Identical

Unemployment: Keynesians and Warmists Are Identical

By Louis Woodhill

Science consists of theories that can be falsified (proved wrong) by evidence. In fact, a single inconsistent data point will (and should) invalidate even the most cherished and long-standing scientific theory. By this standard, both the current computer-model-based theory of global warming and Keynesian economics fall into the domain of religion, not science. The adherents of these theories cling to them, even though they have both been disproved by evidence.

Friday's "Employment Situation" report from the Bureau of Labor Statistics (BLS) and the most recent GDP report from the Bureau of Economic Analysis (BEA) drove more nails into the coffin of Keynesian economics.

Keynesians believe that GDP growth and jobs growth are driven by "demand," and that demand is driven by fiscal and monetary "stimulus." So, to Keynesians, the answer to almost any economic problem is for the federal government to run bigger deficits, and for the Federal Reserve to print more money. For the Keynesians, as for the global warming crowd, the data has not been cooperating lately.

Fiscal stimulus is created by growing government deficits, while increasing the size of the monetary base generates monetary stimulus. Let's look at the data.

 During the 12 months ending with November 2014, the economy created 2.8 million FTE* (full-time-equivalent) jobs, with the "help" of $571 billion in total stimulus ($425 billion fiscal and $146 billion monetary). During the prior 12 months, $1,875 billion in total stimulus ($837 billion fiscal and $1,038 billion monetary) yielded only 1.2 million new FTE jobs. In other words, the evidence says, "less stimulus = more jobs."

The same appears to hold true for GDP (specifically, nominal GDP, or NGDP). Fiscal and monetary stimulus is supposed to boost NGDP, but the data from the most recent two fiscal years (FYs, which run 4Q to 3Q) suggests an inverse correlation between stimulus and economic growth.

During FY2013, $1,573 billion in total stimulus ($486 billion fiscal and $563 billion monetary) produced a $603.4 billion increase in annualized NGDP. For FY2014, $1,049 billion in total stimulus ($680 billion fiscal and $893 billion monetary) produced a $682.9 billion increase in annualized NGDP.

The data over the past 6 years has left Keynesians with no way to defend their theories other than to create imaginary "counterfactuals," compared against which the observed results are consistent with their models. In other words, they run their models in reverse, back-calculate "what would have happened in the absence of our stimulus policies," and then declare that this circular exercise supports Keynesianism. This gambit would be laughed off the stage in any true science.

The sad fact is that the economics profession has failed the nation on an epic scale. Nobel prizes are awarded in economics every year, but mainstream economic theory has been of no help toward getting America back on the road to prosperity.

The reported 321,000 rise in payroll employment for November seemed to get a lot of commentators excited, but the BLS Household Survey numbers were lackluster at best. Calculated to two decimal places, the unemployment rate actually increased, and the total number of FTE jobs fell by 25,000.

November's numbers left us 14.4 million FTE jobs short of full employment, which is actually 71,000 greater than when the current economic recovery started. In the meantime, our working age population has increased by 13.2 million.

A strong jobs market would reverse the alarming decline in labor force participation (LFP) that has occurred under President Obama. At 62.85%, November's LFP continued to bounce along at 36-year lows.

The financial markets were heartened by the sweeping Republican victory in the recent elections. From the end of June to the end of November, the Dow increased by 6.04%. However, because the real value of the dollar rose strongly during this period, this number greatly understates the market's assessment of the prospects for the economy.

Commodity prices are the only valid measure of the real value of the dollar. In a world populated by fiat currencies floating against each other, exchange rates tell us nothing about the real value of our currency. Neither do interest rates, which actually represent the rental price of capital, not the value of money. Price indexes like the CPI and the GDP deflator are useful, but they are based upon market baskets that are constantly changing qualitatively, and so do not provide a good indication of the real value of the dollar over time.

Over the most recent 5 months, the Gold Dow (the Dow divided by the COMEX price of gold) rose by 20.44%. At 15.26, the Gold Dow ended November at the highest level that it has seen since December 2007, although it was still a shocking 63.13% below its all-time high, which was reached in October 2000.

Interestingly enough, unlike the Gold Dow, the CRB Dow (the Dow divided by the CRB Index**) did end November at an all-time high. At 70.09, the CRB Dow was 40.08% above the level of October 2000.

Of course, the "real Dow" (whether measured against gold or the CRB Index) should increase with time, as the economy grows and businesses become more capital intensive. Recent government policies (especially our unstable dollar) have suppressed investment, and therefore the growth of GDP, jobs, and equity values.

The large recent increases in the Gold Dow and the CRB Dow reflect market hopes for improved government policies from the Republican-controlled 114th Congress. To deliver those improved policies, the Republicans will have to ignore the pleadings of Keynesians for more government spending, and thwart the efforts of global warming alarmists to cripple the economy with new regulations on energy production and use.

Meanwhile, it would help if the Federal Reserve would stop obsessing over interest rates, and simply stabilize the value of the dollar in terms of the CRB Index.