Would You Help Out A Fellow American Who's Down On His Luck?


Although or because I agree with the following comments from David Rosenberg, chief economist & strategist at Gluskin Sheff + Associates, I think they need some devil's advocacy. Gluskin Sheff requires a subsciption, but you can get the excerpts here and here.

Concerning last week's very fishy good news on unemployment, Rosenberg writes:

The auto sector added 28,200 to the industry payroll in July, which was the highest tally in 11 years. To show you just how big that really is, it is a 69% annualized surge. Normally, the industry, which is in secular decline, posts job losses of between 20,000 and 30,000 consistently, so this alone represented roughly a 50,000 swing. We estimate that there was about a 30,000 swing in the rest of the manufacturing sector due to the spillover from the current inventory adjustment in the motor vehicle industry. The 0.3% MoM increase in the workweek was also skewed by the 4.1% MoM jump in the auto sector.

As we mentioned, there have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today's report that 12,000 federal workers were "hired" in July. Again, mathematically, this contributed about 20,000 to today's headline number. In other words, and we have no intent on raining on anyone's parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today's report into a view that we are about to fully turn the corner on the job market front.

Yes, the income number was also firm; average weekly earnings popped 0.5%, but again, this reflected the bounce in the auto sector as well as the 10.7% increase in the minimum wage to $7.25 an hour. Again, this is a non-recurring item and does not at all reflect an improvement in underlying income fundamentals in the personal sector. We had a similar bounce in the summer of 2008 when the minimum wage was last boosted.

As for a possible GDP rebound, Rosenberg writes:

The reason why we remain skeptical over the sustainability—the operative word for investors—is because the U.S. economy (or the global economy for that matter) has yet to show any ability that it can stand on its own two feet without the constant use of government steroids. At a time when the U.S. government is running a 13% fiscal deficit-to-GDP ratio, it somehow has enough in the coffers to try and perpetuate a cycle of spending by inducing a populace in which 20% are already three-car families, to go out and buy a new car to support a shrinking industry at future taxpayer (or bondholder) expense.

Look at what happened in that first quarter GDP number—total GDP contracted around $30 billion at an annual rate, but when you strip out all the government activity, ranging from spending, to tax reductions, to benefit payouts, the decline exceeded $300 billion. In other words, without all the government intervention, the decline in GDP in 1Q would have been closer to an 8% annual rate, not 1%.

Motor vehicle sales surged to a 10-month high in July—an annualized 11.2 million units compared with 9.7 million in June. The results largely reflect the "Cash for Clunkers" $1 billion program that ran out of money in barely more than a week…

But what all these gimmicks do is bring forward consumption—they don't "create" anything more than a brief spending splurge at the expense of future performance—the pattern gets distorted as opposed to there being any real permanent change in the trend.

The proper Keynesian to this is, "So what?" Market intervention assumes (probably correctly) that normal people are not overly concerned with the integrity of the free market; they just want somebody to help. Where is the injury if a targeted intervention by Washington results in even a temporary reprieve? You can argue that Cash for Clunkers and auto industry life support rip off the many to support the needs of the few or the one, but the constitutional mandate to "promote the general welfare" doesn't mention anything about doing so with optimal market efficiency. If it's your job that got saved or created the benefit is obvious. And if you're one of the majority of Americans who will pay for it, the injury to you, as of today, is not clear. The dollar continues to strengthen despite trillions in newly created bills. You can say this will be hyperinflationary, but in the absence of facts on the ground, you're left with the argument that it will hurt everybody in the long run. But all good market interventionists know that in the long run we're all dead.

I know how I would respond to that last paragraph, but it's hard to make the argument without sounding like some ivory tower poindexter. The logic of market intervention, like the logic of international intervention, swallows up detractors even though it is highly illogical.