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Grasping for reasons why his
multiple QEs and Fed balance-sheet-bursting policies haven't spurred economic
activity, Dr. Bernanke posited a new diagnosis last week in Minneapolis.
"Consumers are depressed beyond reason or expectation," the New
York Times paraphrased
the Fed chief as saying.
Even though unemployment is high,
price inflation is up, home values are down, and many people are deep in
hock, Bernanke thinks the funk that average folks are in is too deep.
"Households seem exceptionally cautious," Bernanke said.
"Indeed, readings on consumer confidence have fallen substantially in
recent months as people have become more pessimistic about both economic
conditions and their own financial prospects."
Bernanke described the business
sector of the economy as "more upbeat." Exporters have benefited
from a weak dollar, and investment in equipment and software has increased.
What the Fed chair didn't say was that since the second quarter of 2009,
"Spending on equipment and software has risen 25.6 percent in the last
seven quarters, while companies' aggregate spending on employees has risen
only 2.2 percent," as New York Times economics reporter Catherine
Rampell explained recently.
Rampell points out
that the gap between hiring and capital spending is wider than any other
post-recession recovery and puts her finger on the reason. "One reason
hiring has been so sluggish is that equipment and software prices have been
dropping quickly, while labor costs have been rising fast."
While total compensation costs have
risen by more than 3 percent, equipment and software prices have fallen
by more than 2 percent.
Some of the compensation increase
is a hike in the cost of benefits (healthcare). However, not coincidentally,
the federal minimum-wage rate was increased from $6.55 to $7.25 an hour in
2009. Also during boom times, a number of states passed laws to index their
state minimum wages to an amount exceeding the federal minimum.
In his Minneapolis speech Bernanke
spoke often of the economy's "restorative forces" and "natural
recovery process," claiming,
As the business cycle bottoms out
and confidence returns, this pent-up demand, often augmented by the effects
of stimulative monetary and fiscal policies, is met
through increased production and hiring.
Bernanke figures he's done the
stimulating; now consumers need to put on a happy face and confidently start
spending. The idea of spending less and saving more is just plain unnatural,
un-American, and most importantly un-Keynesian. Binyamin Appelbaum
writes,
Economic models based on historic
patterns of unemployment, wages, debt and housing prices suggest that people
should be spending more money. Instead, just as corporations are sitting on
their money, households are holding back, too.
Why? Well, one possibility is that
Americans collectively are suffering from what amounts to an economic version
of post-traumatic stress disorder.
"People are on edge waiting
for the other shoe to drop," John Williams, the president of the Federal
Reserve Bank of San Francisco, told the Seattle Rotary Club on Wednesday.
"It's hard to have a robust recovery," he said, "when
Americans are so dispirited."
Besides malinvestments,
booms and bubbles create widespread hubris. In a boom, when all is going
well, everyone feels smart. A rising stock portfolio means we're wise. If the
value of our home rises, it is due to our acumen.
Mises wrote in Human Action
that booms produce impoverishment and moral ravages.
It makes people despondent and dispirited.
The more optimistic they were under the illusory prosperity of the boom, the
greater is their despair and their feeling of frustration. The individual is
always ready to ascribe his good luck to his own efficiency and to take it as
a well-deserved reward for his talent, application, and probity. But reverses
of fortune he always charges to other people, and most of all to the
absurdity of social and political institutions. He does not blame the
authorities for having fostered the boom. He reviles them for the inevitable
collapse.
Far from now collectively suffering
from a disorder, Americans are regaining their sanity, albeit slowly and
blaming others along the way. The present uncertainty has Americans acting
more vigilantly. Mises explained it is uncertainty
that causes people to act: "If man knew the future, he would not have to
choose and would not act. He would be like an automaton, reacting to stimuli
without any will of his own."
Keynesians can call Americans
depressed if they wish, but people, instead of being foolishly blinded by
increasing home values and stock portfolios, are simply paying more attention
to their spending habits, being more frugal and careful.
The collective disorder inflicted
on Americans by the Fed's monetary pumping was bubble hubris. Wikipedia
explains, "Hubris often indicates a loss of contact with reality and an
overestimation of one's own competence or capabilities, especially when the
person exhibiting it is in a position of power."
Now, it is the hubris running through
the chairman's office at the Eccles Building that
has consumers and businesses alike proceeding cautiously. While the Fed chair
believes he can lower interest rates to the perfect number of basis points to
cause a million positive chain reactions, ultimately leading to more people's
gainful employment, that just cannot be done.
"If man is not to do more harm
than good in his efforts to improve the social order," Hayek said in his
1974 Nobel Prize acceptance speech,
he will have to
learn that in this, as in all other fields where essential complexity of an
organized kind prevails, he cannot acquire the full knowledge which would
make mastery of the events possible.
Profitable businesses are letting
cash build up on their balance sheets because while the Fed has lowered
rates, thinking that will prod business to expand and hire,
few companies have dropped hurdle rates since 2008. In other words, time
preference in corporate boardrooms hasn't changed. As Morgan Stanley's
Caitlin Long explains,
"low visibility into true cost of capital means companies face high risk
of miscalculating, which could cause a mistaken investment in projects that
ultimately have a negative NPV [Net Present Value]."
The NYT's Appelbaum writes that in his speeches Bernanke tries to
cheer people up, saying that the American economy has a bright future. But Appelbaum adds, "There is also the possibility,
however, that the national mood is a more accurate reflection of the economic
reality than any of the other, sunnier statistics."
This depression will only recover
naturally when the Fed chair stifles the pep talks, stops the monetary
pumping, and gets out of the way.
Article originally published on www.mises .org
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