ED LAZEAR USED A telephone call from the White House to explain that the jobs report yesterday isn’t as bad as it seemed. After 47 months of steady growth, the economy lost 4,000 jobs in August. Keep in mind, the chairman of the President’s Council of Economic Advisers told a handful of us economy-watchers, that private sector jobs had increased by 24,000, while public sector jobs fell by 28,000.
That might bring cheers to the anti-big-government crowd, but not to the legion of forecasters who immediately trotted out the dreaded “R” word. Or to traders, who drove the Dow down by almost 250 points (almost 2 percent) to 13,113–still a bit (1+ percent) above the levels prevailing last year at this time, and at the beginning of this year.
Now, some of my best friends are economic forecasters. These brave men and women are required to earn their bread by foretelling various futures–hourly changes in share prices and interest rates, or what Federal Reserve Board chairman Ben Bernanke and his monetary policy committee colleagues will or won’t do on September 18, when they meet to survey the wreckage of the financial markets and the health of the economy.
After yesterday’s report, the emerging consensus–that Bernanke will lower the Fed funds rate–hardened. Friday’s jobs report is seen as the final bit of evidence that the Fed needs to justify easing rates. More significant than the 4,000 decline in non-farm employment in August was the revision of estimates for June and July: they were lowered by a total of 81,000 jobs.
Bernanke now can lower rates without being accused of bailing out improvident lenders to subprime borrowers. No moral hazard, merely good anti-cyclical monetary policy. Throw in speeches by Bernanke’s predecessor, Alan Greenspan, suggesting that he sees a recession around the corner, and the pressure for a rate cut mounts. But the life of a central banker is never that simple.
After all, the U.S. economy is not doing badly. Consumers have not retired from Wal-Mart’s and Target’s aisles, or the posh counters of Saks Fifth Avenue and Nordstrom’s; Goldman Sachs reports “limited spillovers from the market turmoil to the economy so far”; last week’s so-called Beige Book, which summarizes reports to the Fed from around the country, notes that “economic activity has continued to expand . . . [and] credit availability and credit quality remained good for most consumer and business borrowers.” And Lazear expects the economy to grow at about 2 percent in the second half of this year. Set that against the contradictory negative reports coming from the housing and financial sectors, and Bernanke is left to rely heavily on anecdotal evidence gleaned from his financial and business contacts around the country.
We do know this. He does not want to be seen as bailing out the 25 percent of folks being foreclosed on–these are investors who never occupied the houses they bought in anticipation of high rental incomes, or a “flip” when prices rose. He does not want to be seen as risking a resurgence of inflation, which might be triggered as lower rates drive down the dollar and increase import prices. He does not want to be seen as responding to political pressure from the likes of Senator Dodd and other easy money Democrats. He does not want to lower the fed funds rate if he can successfully inject liquidity into the economy by more targeted means. And he certainly does not want to be seen as playing catch-up with his fabled predecessor, who has been predicting an economic slowdown for several months.
But he is a keen student of the history of monetary policy, and he knows that most recessions have been caused or at least exacerbated by policy errors–failure to loosen, or premature tightening. So the famously easy-going Fed chairman is finally learning why he gets the big bucks–well, why he gets the big media coverage.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
