food prices

I used to joke that the most important ingredient for a good economy was good weather. Add that to a growing population to supply an ever increasing workforce, and you are all set. Our recent spate of bad weather seems to confirm that.

I wasn’t able to comment on Friday’s employment report, so I have watched as others express their bemusement at its almost bizarre quality. By now you all know the numbers: only 36,000 new jobs, but a steep decline in the unemployment rate to 9.0%. These apparently contradictory pieces of information have elicited a wide gamut of reactions, from distress to indifference.

What should we think?

First 36,000 new jobs is just awful. It implies that the economy fell further behind workforce growth, since we need to add about 125,000 jobs a month to keep up with demographic shifts. At face value this report is a real stinker. But should we take it at face value? Probably not. The point being that our vaunted twenty-first century data collection system has been severely disrupted by the weather, which also did a number on hiring as firms postponed adding workers in the midst of our bevy of snowstorms. If this narrative holds up we should see something of a reversal next month and may even get a couple of months of higher job creation months. As our doughty bureaucrats dig themselves out from the snow drifts that evidently are preventing them from working, and as our redoubtable entrepreneurs stop being overwhelmed by the snow banks around them, we will no doubt experience a surge in hiring. This surge will be equally as specious as last months apparent drought. So it may well be the late spring before we get back to seeing more reliable and non-weather spoiled data.

As for food prices.

Near panic is setting in over world food prices that have now risen rapidly for a while. From what I can tell this spike in prices is more a function of bad weather ruining crops than it is purely driven by higher demand. The world has experienced all manner of droughts, floods, and storms over the past year or so and consequently key crops have been disrupted. That has crimped supply just as the post recession return to growth has expanded demand. Combine these and we have the reason for the spike in prices.

There is some concern that speculators are the root of the problem. That could be in one or two commodities, but there doesn’t appear to be much sign of it is foodstuffs. Odd movements in inventories are the telltale sign of speculation. To be successful, a speculator has to take delivery of the physical commodity. Otherwise the buy and sell sides of future transactions simply offset each other. To corner a market you need to hoard stuff somewhere. Thus inventory reports would betray your activity. As of now food inventories are declining as I would expect them too after a disruption in supply from bad weather. Later this year as the new crops come in, we will get an opportunity to re-assess and determine whether [no pun intended] the culprit behind the surge in prices was crop failures of simple demand. My money is still on bad weather.

Having said all this, it remains true that both employment and food supplies are causing great short term concerns. Food price increases will inevitably affect demand for other goods and thus could slow down general growth. This can only happen if the price rise is both sustained and then prices holds at a higher level. If it turns out to be a temporary supply problem, then prices could fall again even if demand remains strong.

As for jobs: the picture remains gloomy. There is juts no way to describe the situation in anything other than poor terms. The US economy has lost its vaunted job creating capacity, a loss that appears to be befuddling policy makers who apparently have no idea what to do. The years of rapid growth, which ended in the late 1990’s, beguiled us all and gave rise to a new aspect of American “exceptionalism”. The US economy, the story ran, had none of the European sclerosis: wages were more flexible, workers were quick to move to higher growth areas, US companies were more innovative, and our unions were not capable of injecting rigidity to prevent this ease of movement. Plus our government left the market to clear itself and didn’t interfere much. Where it did interfere, as in setting minimum wages levels, the mantra grew that this was a distortion we should eliminate too. No one appears to have noticed that all this went away in the early 2000’s. Or, rather, few people did. Especially those in power. And if those in power noticed, they did nothing to fix the problem. They relied on those magical market forces to set things right. The only problem with this inaction was that it was the magical market doing the damage. So by not intervening policy makers revealed the market’s wishes. Less American labor needed. More off-shore labor required. Capital was cheap. Labor costs, including health care and retirement charges, were high. The recipe for a shift in the employment mix was clearly visible. There was no mystery. In fact some of us made a regular habit of lambasting the Bush regime for its complete absence from the job creating arena.

So while I joke about the weather and its disruption of the data, no amount of such distortion can hide the fact we are facing a major and protracted problem in our job markets. So far our policy makers have failed to confront the issue decisively, and, given their relative unanimity around market driven solutions, we should not expect dramatic or powerful fixes being introduced any time soon.

A sure sign of policy confusion and admission of failure is all the fuss being generated by studies of structural and related problems. Things like our poor education system are being blamed for leaving us with masses of unemployable workers. Unemployment assistance is now apparently the cause preventing our workers from looking hard enough for jobs. And, in any case, how can we compete with all those low cost workers in Asia?

Not to be blunt: this is all rubbish.

Let me repeat myself. Our policy elite has become so separated from the rest of the nation that it can no longer even understand the problems being faced outside its cozy walls. It has to frame all those problems in terms of its own existence. Since that elite is highly, possibly over, educated, it assumes that being less educated is inevitably a source of weakness. Likewise globalization. The elite has benefitted from mixing with its peers elsewhere. It has more in common with highly educated people in Asia than it does with less educated people in Kansas. So our national problems cannot stem from the elite’s failure to lead or manage well. It must stem form the weaknesses of the laggardly out there in the hinterland.

This is why our bankers still cannot admit it was their error that caused the crisis, and why our politicians resolutely stick with the now debunked economic theories that drove us onto the rocks. The key to remember is that from their perspective those actions and theories were a huge success. They reaped vast personal rewards from them. Undoing them will hurt the elite. We should not expect them to self inflict such harm easily.

In turn, this feeds into the current panic about debt. The elite is a creditor class. They would be harmed by higher inflation, which would erode the value of their assets. And they would be harmed by default. They would lose in debt restructuring. They would lose in any course of policy action that did not center on making the solution as general as possible. Hence the urge to protect capital. And hence the urge to impose austerity on the rest of us.

We can pay for their error.

That is their policy. Which is why we are currently incapable of getting the right policy to reduce unemployment properly we need more demand. That implies prolonging the cyclical deficits.

That they do not want, for fear it ends up hurting them. So we have a policy freeze up. Or, at least it looks that way.