Easy Money and Jobs

Why in the world would anybody put chains on me?
I've paid my dues to make it
Everybody wants me to be what they want me to be
I'm not happy when I try to fake it
--Commodores

Like his predecessors, President Trump is not shy about taking credit for positive economic news reported on his administration's watch. Yesterday's job report was no exception.

Record JOBS DAY!! 223K jobs added. Unemployment is 3.8%, lowest in 50 yrs. Black and Asian unemployment hit historic new lows. Adult men and women, and teenagers, are at lowest since 2000. Hourly earnings are up! Tax CUTS are working. America is WINNING BIG under President Trump!

— President Trump (@POTUS) June 1, 2018

Yet any reasoned mind merely looking at the data must question what is truly different under the Trump administration when it comes to jobs. After all, the record low unemployment number reported yesterday marks the continuation of a downtrend that commenced early in the Obama administration:

When viewed in this manner, even the widely touted Trump tax cuts haven't changed the trend in unemployment. The trend has clearly been down for nine years with little change in the rate of decline (as reflected by the slope).

What policy has been consistent across these two administrations? Ultra easy monetary policy. Easy money in the form of cheap credit, quantitative easing (QE), and like-minded programs were initiated during the credit crisis under Fed chair Ben Bernanke and perpetuated by his predecessor Janet Yellen. It remains to be seen precisely how new Fed head Jerome Powell will uphold this approach but early indications are that he is no different from previous chairs.

How does easy money policy influence jobs? Cheap credit drives businesses to invest more today than they would otherwise, and consumers to spend more today than they would otherwise. Stated differently, artificially low credit pushes spending from the future into the present. The increased economic activity serves to improve employment in the near term.

Unfortunately, the artificially driven boom inevitably leads to a bust. Projects that never should have seen the light of day do not pay off. Shutting them down pushes people who found jobs during the upswing to head to the unemployment line once again. Moreover, less economic resources (read: savings) are available in the future that can be applied toward capital projects since they have been consumed in the present. This prolongs economic malaise during the depression.

Although the timing of the bust is difficult to predict, the outcome is as predictable as night following day. And, given the degree of money, credit, and debt created during this most recent interventionary cycle, a large, deep period of darkness almost certainly awaits.

The other thing that is completely predictable is that, if the darkness happens to commence during his watch, then Donald Trump, once again following his predecessors, will assume no responsibility for the bust.