Breaking Evan's Rule

I do no envy anyone who has to make the call that this economy is official recovered. but a little over a year ago the federal reserve announced plans to enact some extraordinary measures that would remain largely in place until either a falling unemployment rate hit 6.5% or a rising inflation rate hit 2.5%.

As of Today, Unemployment fell to 6.7%. 

I continue to be miffed by just how all over the place predictions on how this recovery is supposed to take place. I'm just as miffed by the fact that it is 2014, over 6 years when the economy started to topple in the twilight of 2007 and we are still referring to this economy as an economy in recovery. Today the Bureau of Labor Statistics gave us the kind of jobs report that reminds us just how out of whack everything can become so quickly.

Most of the predictions for the December jobs report expected another ho hum, move things at a snails pace back towards the total number of jobs that we had before the great recession began, but that's not what headlines this morning are reading.The headline number is bad, really bad. The BLS says the economy added 74,000 jobs in December, which would be the worst result in a good, long time. Last time numbers this bad came out, you where probably listening to 'Like a G6' on your iPhone 4.

And yet the household survey showed a very large drop in unemployment, all the way down to 6.7%, the lowest we have seen since we thought Tobey Maguire was a shoe-in for 'Spider-Man 4'. 

One way for unemployment to drop even as job growth stalls is for huge numbers of people to drop out of the labor force. And we have seen labor force departures all year and that continued their downhill slaloming this month. The lowest rates since Lou Ferrigno  appeared on television doused in Green Paint. The participation rate did actually jump a bit in November, but still appears to be on a downward trend. Divergences between the two surveys just sometimes happen and you usually need to wait a month or two for the revisions to straighten things out. 

Long story short, we are getting very close to the Federal Reserve’s 6.5%unemployment
threshold, and despite that the overall labor market looks weak. That means the distinction
some Fed officials have drawn between a automated 'trigger' to start tightening money as soon as we
reach 6.5% unemployment rate and a 'threshold', meaning nothing is automatic, is about to become very
relevant discussion. Because, if you add on the difference in the participation rate from now to pre-recession numbers (66% to 62.8%) to the unemployment rate, using the number of 9.9% may be a better indicator of the health of the jobs market in this economy. The threshold approach is a much better one for people with a lot vested in low interest rates, but at her impending first meeting and press conference Janet Yellen may find she needs to clarify exactly what the term 'threshold' means faster than she was hoping.

Keynesian Theory: Fighting a Splash with Water

I’m not a big fan of assigning hard to pronounce proper names to basic concepts. I can only pronounce or even begin to understand either Boson Particles or Schrodinger’s cat thanks to the Big Bang Theory. Theories such as Ekpyrotic Universe, I would be better off trying to properly pronounce after a heavy night of drinking and getting slugged in the jaw a few times. However, as I watch the debate about the role of government in dealing with the countries current economic hardships, I think having a decent understanding of Keynesian theory helps to understand the good intentions of this theories proponents. That way, we can better mock and ridicule them.

Image a pool of water, it could be a swimming pool, perhaps a small fishing pond, it could even be the Pacific Ocean as long as you scale up the other aspects of this analogy accordingly, it doesn't really matter, it just has to be relatively placid. The water represents all the factors of the economy, from jobs, to retail exchange, to investment. When the water is calm, everything is fine, moving along with subtleties and undercurrents. The occasional ripple in the water represents a small adjustment in the markets. Perhaps “Jim’s Liquor, Guns, and Ammo” went out of business when their core demographic met with a sudden spike in suicides. Overall, everything is calm.

Now picture a major disruption to the market. Take the 2007 recession for instance. Too much money getting dumped into retail investments created a huge bubble that finally popped, causing a huge loss of wealth. In our pool of water example, it would be the equivalent of taking a huge stone and tossing it in the middle of our pool. The more money and other factors involved in the disruption, the bigger the stone that is breaking the crest of the water. This water directly underneath the stone is displaced causing strong transfers of water around the stone and throughout the pool, just as the collapse of the retail market disrupted fortunes of people who had money directly tied in with property, then rippled through the rest of the economy.

Some ardent supporters may take offense and argue that true Keynesian would prevent the stone from being dropped in the first place, by establishing government organizations that oversees and regulates the mortgage industry and promotes proper housing development. To which I say, HUD already exists, it spends billions manipulating the market, and it arguably made my proverbial stone much bigger by artificially inflating the housing market with subsidies and tax incentives.

When the Housing market crashed, lots of people with money tied up in real estate, mortgage lenders, and the financial firms that held those mortgages got hit big time. Severe ripples and splashes emanated from the impact spot and hit the construction industry and developers quickly. These ripples continued to spread over the entire pond making the recession hurt with almost no regard to what industry or part of the pool you were in. What the Keynesian theory attempts to do at this point, is to fill the initial hole in such a way that there are no ripples caused by the splash of a stone being dropped in it. A Keynesian would do one of two things to make it better and to fight the splash, supplement the money flow (try to keep the water in our pool flowing the way it did before the rock hit) or refocus demand so that aggregate demand stays the same (pour in water to the pool at the same time it’s splashing out).

The problem with the former idea is that it would require so much interference to so many parts of the pool well before stone hit that the pool would no longer be recognized as a pool. The inherent freedom of the water would instead become a bed of metal pipes with hardly any water actually running through it. This is the communist economic system that if everything is planned and structured then it is impossible for the stone to disrupt anything.

The issue with the latter idea is that even if you replace the water in the hole created by the stones impact, the disruption to the pool is still going to be violent and affect everything and now you are adding another element that could just as easily prolong the effect of the waves since you have to pour the water in, and the water you are pouring in has to come from somewhere, probably scooped up from a quieter part of your pond wasn't being effected by the initial splash as badly to begin with. In short, you are messing up everything else in the pool to make the big splash seem less bad.

This is the approach we took in 2009. Spend a bunch of money that we got from god knows where and start pouring it in the hole that was made by the splash. Financial institutions got hit hard and fast but then were filled up, secondary industries still felt waves and waves of disruption, tons of water splashed out of the pool and will take some time to trickle back in and return things to normal. And the proponents of this approach, when asked why there is still such a mess and turbulence in our pool simply say, “We didn't use enough water.”

What is the alternative? The prominent counter is the Austrian Economic theory. This theory takes a “S#*% happens” approach. Stones will come and go, waves and ripples will be felt, as long as your water is well educated and free to pursue a new current you will have less of a manufactured swimming pool regulated by a bunch of idiots running around with buckets trying to change the tide as they lose track of splashes caused by a stone dropping by accident and when a bucket is dipped in on purpose. Rather, you would have a beautiful lake were a splash may instead be caused by a fish, revealing that over time our pool of water may bring more to offer then just a drink.

Reviewing Obama's Economic "Plan"

If you blinked Monday afternoon, you would have missed President Obama’s brief – very brief – comments on the deadly mass shooting unfolding just down the street from where he stood to give a previously scheduled speech that turned into a brutal attack on Republicans over the economy.

And later, a clueless Jay Carney came out to say that not only did the White House never once consider cancelling the president’s speech as people lay dead at the Navy Yard and a frantic man hunt was underway by every law enforcement agency in town, but he defended the president’s GOP bashing, complete with a backdrop of Americans who are hurting while Americans were being shot just down the road as "entirely appropriate today for the president to talk about.”

But then it was a pivot to the more important news for the Obama administration: the looming budget showdown with the GOP who are threatening a government shutdown. Using this forum as an opportunity to once again not rally support for his proposals within congress, but rather to raise support for his lack of a vision from the masses of the people by wagging his finger at Republicans. Below are some of the lines of attack and general confusion that Obama used;

"...And in our personal lives, I think a lot of us understand that people have tightened their belts, shed debt, refocused on the things that really matter..." Because that's what smart people do when times are tough.
"...we put in place tough new rules on big banks, rules that we need to finalize before the end of the year..." New rules put in place before they were finished?

"Because even though our businesses are creating new jobs and have broken record profits, the top 1 percent of Americans took home 20 percent of the nation’s income last year, while the average worker isn’t seeing a raise at all." Classic class warfare, implying that when rich people make money, it's not possible for you to better your own situation.

"...the trends that have taken hold over the past few decades of a winner-take-all economy, where a few do better and better and better, while everybody else just treads water or loses ground..." In case there was any doubt of the previous point. Does he really believe everyone else is stagnant because the wealthy are doing well? He already has the most progressive tax system in decades.

"And as Congress begins another budget debate, that’s what Congress should be focused on." Not Benghazi, Syria, Putin, the IRS, the NSA, but the budget.

"The problem is, at the moment, Republicans in Congress don’t seem to be focused on how to growth economy and build the middle class." Democrats questioning Syria and the NSA don't count.

"...I am still hoping that a light bulb goes off here." That's it, win them over with kind words.

"So far, their budget ideas revolve primarily around even deeper cuts to education, even deeper cuts that would gut America’s scientific research and development, even deeper cuts to America’s infrastructure investment -- our roads, our bridges, our schools our energy grid. These aren’t the policies that would grow the economy faster." The Republicans obviously didn't get the memo about the deceit magically stopping, so why are they still so worked up over reducing government spending when it's so obvious that all this spending is making everything so awesome?

"So I do believe we should cut our programs that we don’t need. We need to fix ones that aren’t working the way they’re supposed to or have outlived their initial mission. We’ve got to make government faster and more efficient." Interesting, that's the way some people would describe the Department of Education.

"But that’s not what is being proposed by the Republican budgets. Instead of making necessary changes with a scalpel, so far at least, Republicans have chosen to leave in place the so-called sequester cuts that have cost jobs, harmed growth, are hurting our military readiness." Again, way to win some friends and support, I also thought the only reversal of sequester cuts that passed was proposed by.... wait for it... Republicans!

And top independent economists say this has been a big drag on our recovery this year. Our economy’s not growing as fast as it should, and we’re not creating as many jobs as we should because the sequester’s in place." Are these the same economist that predicted the 'Recovery Summer' of 2010 with employment falling to 6%?

"So, if Republicans want the economy to grow faster, create more jobs faster, they should want to get rid of <the sequester>. It’s irresponsible to keep it in place." Everyone get that? Sequestor bad and it's the Republicans fault! Can we get to the 2014 election now?

"After all the progress that we’ve made over these past four-and- a-half years, the idea of reversing that progress because of an unwillingness to compromise or because of some ideological agenda is the height of irresponsibility" Translates to 'This economy will fail if we stop spending $4 Trillion dollars a year in Washington, and the only solution is to spend more.'

"These folks standing behind me, these are people who are small business owners; people who almost lost their home; young people trying to get a college education. And all of them went through some real tough times during the recession." And if you look behind them, you may see some of the slaughtered people that are dying just down the street as I speak.

"Having said that, I cannot remember a time when one faction of one party promises economic chaos if it can’t get 100 percent of what it wants. That’s never happened before. But that’s what’s happening right now." Says the guy that gets what he wants from congress over 97% of the time.

I could go through the entire speech and get really nit picky, but suffice to say the only plans he proposed are 1.) cancel the sequester and 2.) spend more on domestic initiatives, namely education and infrastructure. Basically get us back to the hay day to the Keynesian spending spree of 2009 that arguably made things 'not as bad as they could have been' because apparently 5 years of trying to climb out of this mess can be derailed as something as simple as a maxed out credit card. 

In case you missed the real intent of this speech, it was to lay the entire blame of all the countries problems at the feet of the Republicans in the ramp up to the 2014 election. The idea that the issues with this country are far exceeding funding for school lunch programs and budget deadlines seems to elude this President about as broadly as the Oscar for Lindsey Lohan.