NEW YORK, 8 September 2003 — Soon after the August employment report was issued Friday morning, National Association of Manufacturers President Jerry Jasinowski called it “lousy.”
It could have been lousier. The manufacturing sector in particular added fewer jobs than is usual for this time of year, which translated into a seasonally-adjusted decline of 44,000 jobs. Both government and other private sector employment were basically unchanged, as was the unemployment rate, which ticked down to 6.1 percent in August. (The jobs hard to get/jobs plentiful indicator mentioned last week had been calling for an unemployment rate of 6.4 percent.)
And as we’ll see in minute, the recent drumbeat of good news about the economy in general should soon spill over into the labor markets.
Jasinowski cited the figures on manufacturing as further evidence that this is “not just another cyclical downturn,” as the “armchair experts would have us believe.” Rather, it’s due to “structural changes in international trade” that are threatening the “economic strength of this country.”
No wonder at least one seeker of the Democratic nomination has already promised a “manufacturing policy” if elected, as though the government doesn’t have too much of that already (steel tariffs, subsidies to auto makers and the like).
Speaking as an armchair expert, however, the evidence does not support Jasinowski’s view. The problem is not “relentless foreign competition,” but the relentless increase in productivity.
Manufacturing’s share of private sector output has barely changed over the last decade.
According to the best estimates, manufacturing output accounted for 19.4 percent of total private sector output in both 1996 and 2000, the highest share since 1989 (figures on a value-added basis). Through the 2001 recession, the most recent year for which data are available, the share fell to 18.2 percent, nearly as high as 18.6 percent from 1991 to 1993.
The decline in manufacturing output recorded by the Federal Reserve since 2001 has mainly been due to the on-again, off-again economy that has caused manufacturers to meet rising demand by drawing on inventories. But the rebound already seems to have begun.
The survey indexes on manufacturing issued by the Institute for Supply Management (closely watched by Chairman Greenspan), jumped in August, after increasing in July. They are now signaling about an 8 percent-10 percent annual increase in manufacturing production, which makes sense, since the sector will have to produce enough to both satisfy rising production and rebuild the inventories that have been depleted.
Even at the current rate of productivity growth, a double-digit rise in output should mean the sector must start adding jobs.
Meanwhile, there are favorable portents about employment in general. For one thing, as Free Market chief economist Michael Lewis points out, the signs that GDP growth could run as high as 6 percent in the current quarter also suggest upward revisions in employment for July and August.
For another, the disparity I’ve mentioned between the Household Data, from which we get the unemployment rate, and the Establishment Data, from which we get the employment figures cited above, still persists.
According to the Establishment Data, there are 1.26 million fewer jobs on private-sector nonfarm payrolls since the trough of the recession in November 2001; according to the Household Data, there are 360,000 more private wage and salary workers in the nonfarm sector since November 2001.
Now, when the commissioner of the Bureau Labor Statistics herself feels called upon to bring this up, you know there must be something to it. Commissioner Kathleen P. Utgoff remarked Friday that the Establishment Data are the whole truth. But she erred. When the Household Data points up and the Establishment Data down, the record shows that the E.D. tends to close the gap.
And speaking of employment, I wish to thank the brilliant N.Y.U. undergraduate Neil Dutta for serving as my intern this summer. I don’t know how I’ll carry on without him.
Think of Fiscal Man and Monetary Man as two pyromaniacs whose day jobs consist of running the fire department. They put out the very fires they set.
That’s one analogy I’ve been offering in response to the huge number of queries prompted by the first three installments in my series on monetary and fiscal policy. But the analogy is useful only up to a point. Yes, the F&M men in this story do more harm than good — but fire departments shouldn’t be abolished.
What should be abolished is the Federal Reserve as we know it. And what must be outlawed is government’s right to run deficits; surpluses, as we recently learned, will take care of themselves. (In case of an emergency like an outbreak of war, the government will have to raise taxes, or reallocate spending, on an emergency basis.)
What would I replace them with? Once again, that question will have to wait. In this installment, I want to answer a few skeptical questions that have already come up.
1. You’ve written that the money supply grew rapidly in the years leading up to the Great Depression. But in A History of the Federal Reserve: 1913-1951, Carnegie Mellon University Professor Alan H. Meltzer observes otherwise. Who’s right?
Meltzer does call monetary policy “deflationary” over this period. But if your measure of money simply includes cash, checks and savings deposits, you find that in the eight years from June 1921 through June 1929, the money supply grew at a compound annual rate of 4.8 percent per annum. With broader measures of money, you get even faster rates of growth.
Meltzer seems to prefer restricting the definition of money to just cash and checks, which together grew more slowly than savings deposits. But he does observe that “More rapid growth of bank lending was achieved by growth of time deposits, in part encouraged by bankers’ efforts to reduce required reserves while increasing deposits.” So even from his standpoint, it seems hardly out of bounds.
2. Weren’t there major booms and busts before the Federal Reserve was created?
Sure, but the Fed was hardly the first government agency in the US to underwrite the creation of money and credit.
You might even say it wasn’t the first central bank. That dubious honor belongs to the First Bank of the United States, established by Congress in 1791 as a kind of partnership between government and the private sector to facilitate the creation of paper money.
After the First Bank dissolved in the 1811, the Second Bank of the United States was formed in 1816, modeled very closely after the First Bank. But several years later, the Jacksonian economists recognized that the Second Bank fostered inflation and business cycles, holding it directly responsible for the Panic of 1819; they urged President Andrew Jackson to close it down, which he did by 1833.
