We live in an inauthentic world, yet people perceived to be telling the truth are demonized and shunned by the establishment. The fact that it took everybody so long to figure out that mainstream media promoted “fake news” to support their own political agenda is testimony to the fact that we claim to seek authenticity but settle for insincerity, falsehood and duplicity in our personal, business and civic relationships. Those of us who refuse to settle are considered “difficult.”
The question I keep asking (because I am decidedly “difficult”) is whether these people are wrong because they are stupid or because they are lying. I’ve come to conclude that the two alternatives are not mutually exclusive though one of the worst sins our society commits against itself is confusing educational achievement and wealth for intelligence or good intentions.
The U.S. government is a major promoter of fake news. It lies to its citizens about virtually everything, but one of its specialties is the publication of phony economic statistics to justify failed economic policies. Whether this will change under the new administration remains to be seen (I’m not holding my breath and neither should you), but the last eight years were characterized by one false narrative after another bolstered by phony government statistics.
These two outright lies should concern you the most.
Lie #1: Our Unemployment Numbers Are Spectacularly Low
One of our government’s most baldfaced lies is the headline unemployment number that claims that less than 5% of the working population is out of work. This is utter nonsense.
This figure, known as U3, only includes people actively looking for work within four weeks of the survey. U3 declined from 10% in 2009 to 4.6% in November 2016 because many unemployed people stopped looking for work in America. U6, which includes only short-term discouraged workers, is 9.7%; were we to include both long-term and short-term discouraged workers, the figure would be over 20%. With a labor participation rate of only 62.7%, close to the 40-year low reached in September 2015, there are roughly 95 million able-bodied people out of the work force. There are many reasons for this, among them technological changes that are replacing many workers with machines, the culture of dependency promoted by Obama administration policies that lowered the eligibility requirements for many government benefits and eliminated welfare work requirements adopted during the 1990s, and the job- killing effects of Obamacare.
A recent paper by Harvard economist Lawrence Katz and Princeton economist (and former head of Obama’s Council of Economic Advisors) Alan Krueger describes the changing nature of American employment. Nine-to-five jobs are a thing of the past for an increasing number of Americans, which means that the stability that this type of employment provided is gone, with enormous consequences for families, communities and the psychological well-being of breadwinners. In a word (two words actually), part-time and temporary employment are the “new normal” for many Americans. Quoting from the report, “A striking implication of these estimates is that all of the net employment growth in the U.S. economy from 005 to 2015 appears to have occurred in alternative work arrangements.” (italics in original) The authors add that “it appears that as of late 2015, the labor market had not yet fully recovered from the huge loss of traditional jobs from the Great Recession.” Among the consequences of this is that an increasing percentage of the work force is not entitled to healthcare and other benefits provided by traditional employers. The percentage of workers in this category increased from 10.1% in 2005 to 15.8% in late 2015, an acceleration from the prior ten years when the percentage remained steady.
The last eight years saw a perfect storm of job-killing and incentive killing policies from the Obama administration coincide with accelerating technological change that severely damaged American workers and requires creative and forceful policy initiatives to reverse. As I’ve pointed out repeatedly, but the mainstream press never mentions, were the labor participation rate the same today as it was when Barack Obama took office in January 2009, U3 would be roughly 10%. Janet Yellen is aware of this data, which is one likely reason why she has been so reluctant to raise interest rates. Unfortunately, the level of interest rates isn’t the cause of this problem, but when you are a hammer, every problem looks like a nail. Sadly, American workers are the one getting slammed on the head.
One last point about employment was made by David Rosenberg in a recent interview with Kate Welling in Kate’s always fascinating and invaluable publication Welling on Wall St. When Donald Trump complains about jobs being exported to other countries, he is fighting the wrong battle. The main reason Americans are losing jobs is not foreign competition or currency manipulation; it is technology that is changing the nature of work and eliminating many traditional American jobs. Jobs policy needs to focus on educating workers for the new jobs market and making America a better environment for businesses through lower taxes and less regulation, not by imposing tariffs on foreign goods.
The second lie attempts to paper over an even more egregious discrepancy between reality and what American workers are actually experiencing.
Lie #2: Inflation Keeps Getting Lower And Lower
Maybe it’s because I am not a trained economist (which I consider a badge of honor), but I can’t accept the arguments that we are in a low inflation environment. Economists are trained to measure inflation in a manner that is disconnected from real world prices. Leaving aside commodity prices, which are lower than at the beginning of 2014 but higher than a year ago, the prices of the goods and services needed by ordinary citizens to live their daily lives keep rising. In some cases, such as technology products, they may be getting more for their money (so-called “digital deflation”), but the fact remains that their expenses are rising. This is most apparent in healthcare, education, and government services, but I am hard pressed to think of a single important product that costs less today than it did a few years ago. There was some food deflation in the last year, but recovering energy prices compensated for that. Overall, life simply gets more expensive every year and there is little prospect that will change.
The fact that prices rose during a period when the cost of money was virtually zero is problematic since if we are indeed at the end of zero and negative interest rates, official inflation statistics will start to show increases (and are already doing so). I do not believe that interest rates were low for the last decade due to a lack of inflation; they were low because central banks lowered the cost of money by creating artificial demand for debt instruments (by buying trillions of dollars of them) and setting official interest rates at or below zero. They created a situation in which markets are now like a tightly coiled spring set to snap when normal functions return (which is why central banks are resisting so strenuously allowing that to happen).
To my mind, inflation is undervalued by the market because it is incorrectly measured (which means if you are hell-bent on owning US Treasuries at least buy TIPS). This means that the nominal returns on all assets, including but not limited to fixed income assets, are meaningfully overstated. If interest rates continue to rise, inflation will follow but the real number to watch remains the real (i.e. inflation adjusted) return on capital. And that is very difficult to measure in a world that isn’t honest about how it calculates price increases.