"Kee" Points with Jim Kee, Ph.D.

US: Payrolls increased by 142,000 (less than expected) in September, and the unemployment rate was unchanged at 5.1%. Job gains occurred primarily in the Health Care and Technology sectors, while employment fell, not surprisingly, in mining employment (that’s the energy sector). I am seeing a variety of relevant US numbers come down, from the ISM Non-Manufacturing Survey to the Atlanta Fed’s GDPnow 3rd quarter forecast (latest reading .8%). It looks like the economy is growing, but not strongly. Stock markets seem to be responding positively to this (in the short run anyway), and that is apparently because weak data moves Fed interest rate hikes further into the future. There is no real pressure on the Fed to act because core inflation is still below target, and also because (I know you know this) the falling labor force participation rate is making the measured unemployment rate less meaningful.

 

I’ll reiterate that monetary policy probably reached its maximum effectiveness some time ago, a point made pretty clearly by former Fed Chairman Ben Bernanke in today’s Wall Street Journal (i.e. “How the Fed Saved the Economy”). Bernanke states that low economic growth is due to subpar gains in productivity (output per unit of input), and that these “aren’t problems that the Fed has the power to alleviate.” He argues that Congress needs to step up and address the supply side of the economy with policies that “improve worker skills, foster capital investment, and support research and development.” As an aside, I think Bernanke’s bold title is in response to those who have been criticizing the Fed ever since it first became clear that things were probably going to be okay following the 2007-09 financial crisis. There were a few weeks/months during the 2007-09 crisis when all of the Fed’s critics went “radio silent” as the Fed rushed to provide liquidity (acting as a lender of last resort) to save the banking system. No one knew if things would be okay. Once credit markets started functioning again, that’s when the criticisms started in earnest.

 

Emerging markets: To go off a bit on some of the global commentary on the Fed, I think little of the view that the Fed is to blame for problems in emerging markets. Most emerging market economies have made little headway at increasing economic transparency, establishing defined and enforceable property rights, and controlling corruption. Many of the commodity-based economies have squandered tremendous windfalls from the “commodity super-cycle.” They have not made the institutional reforms necessary for the development of more diversified and viable economies. To lay their problems at the feet of the US Fed is a little off-base. To be sure, those kinds of reforms are difficult, and the whole world is struggling with them.

 

The European Union has had a few windfalls lately as well with the weaker euro (down 20% over the past 17 months) and, to a lesser extent (because of price distortions), cheaper energy. This, combined with the European Central Bank’s announcement of its own quantitative easing (asset purchase) program last December, has helped Europe generate at least positive growth (something Japan has been struggling with for some time). However, the impact on Europe of the Syrian refugee crisis is not so straightforward. IMF head Christine Lagarde has argued that it will be a positive for Europe, as countries like Germany have a desperate need for young workers to fill a big demographic hole in their populations (Huffington Post). For an economist’s take (Ms. Legarde is alawyer by training), Victor Canto at La Jolla economics has argued that the refugees will result in an increase in the supply of labor in Europe. But wage rigidities there make it very hard for the market to clear (i.e. more employment at lower wages), which translates in practical terms into higher unemployment. That, in turn, leads to more stress on already-stretched social services. This could lead, in the end, to an increase in radical politics in Europe (La Jolla Economics).