Long-Term Economic Cycles Ignore Short-Term Economic Indicators
by Charles Walters - NORM Executive Board Member, Former NORM President, Editor Emeritus of AcresUSA
The Foundation for the Study of Cycles has identified several hundred cycles, all of which are predictable. In a few cases the timing is even predictable, as is the case of the day and year. In most cases, however, the timing trips us up even when we understand cycles. Top formations can cause analysts to pull their hair by going on for months, even years. Still, extreme action on the upside always invokes extreme action on the downside. The laws of nature have so ordered.
My old professors at Creighton University always reminded their students that when assaulted by the imponderable, pause for a while and consider philosophy. They meant St. Thomas Aquinas, of course, but for my purpose this month I'll refer to an equally obtuse commentator. Georg Wilhelm Friedrich Hegel is not a name one would expect to find in an economics newsletter in Acres U.S.A. But here it is, and not without reason. A philosopher famous for his turgid prose and obscure ideas, Hegel nevertheless taught the literate world that long-term trends govern the affairs of mankind. It was Hegel who discerned that the drift of history was toward human freedom, and he illustrated his proposition so well that Will Durant used his outline for his monumental 13 volumes styled The Story of Civilization. Durant provided so much detail for the Hegelian outline, no one human brain can remember it all. He was not to be bested until Arthur Burns and Wesley Clair Mitchell uncorked the statistical potential of what we now call economic indicators. There is a publication called Economic Indicators. It has been discussed before in the paragraphs of this column, usually to denote the general imbalance in the national income equation. These Kuznets arrays -- after Nobel Prize winner Simon Kuznets -- were designed to give political leaders the conclusion that control has been delegated to the process of pacing the rate of bankruptcy, holding inflation to 3% per year, to obeying signals from the wiggles of a multiple of economic indicators too short-term to be meaningful in the fullest sense, and that agriculture has almost been shoved out in the statistical game.
The newspapers dutifully report the lesser indicators, but few readers understand what they mean, and precious little space is devoted to supplying explanations. While the world watches the Dow-Jones Industrial Average Index, acres and acres of bureaucrats count, survey, tabulate, project, extrapolate and, in a sly way, pontificate. Only cursory mention of a few indicators can be made here for want of space. In fact, the tabulations to which I refer often run into hundreds, even thousands, of pages.
The Job Factor
The Bureau of Labor Statistics (BLS) prepares an employment report each month, and its reams of data are usually distilled into a terse paragraph for the public prints. This little understood report states the unemployment rate and non-farm payroll job data. This report is often misunderstood because hardly one editor in a thousand understands how the data are compiled. The employment report actually contains data from two separate independent surveys. Note the word surveys. One, the payroll survey, is conducted as a mail-in survey by the BLS, and is basically a job count based on payroll records.
The Bureau of the Census conducts a Current Population Survey (CPS) of households. This survey measures jobs from the individual household perspective, relying on interviewed households. Both of the above are surveys, not inventories, and results are codified in The Employment Situation. The Labor Department also publishes these data in Employment and Earnings. There is also a spin-off presentation in The Survey of Current Business, published by the Commerce Department The Federal Reserve Board also taps into this codification for its Federal Reserve Bulletin. The snippet of news that makes it to the newspapers compares one month to an earlier period of the same dimension, in effect offering the advice that a little wiggle on the chart telegraphs direction and intensity.
The Current Population Survey provides key statistics on jobs, unemployment, and on persons not in the labor force. This information is derived from a scientifically selected sample of some 60,000 households representative of the civilian population, leaving out prisons, etc. Both urban and rural populations are included. Persons under 16 are excluded. Also excluded are homes for the infirm and mental institutions. Households are interviewed on a rotation basis, not every month. Households are interviewed for four months then added again for eight months, then for another four months before being dropped from the sample. In short, the statistical work has been designed by "geniuses" to be performed by bureaucratic lessers. Employed persons are those who did any work whatsoever as paid employees, or in their own business, or on a farm, or who worked 15 hours or more as unpaid workers in a family operation. Those who had jobs but were absent due to illness or strike, whatever, were considered employed. Those who actually looked for work were so classified, but unemployed persons who have given up no longer rated consideration as unemployed. Included in the total work force are the armed forces stationed in the U.S. In short, there are esoteric rules in statistics wrangling.
Now, the household survey has undergone revision, the net effect of which has to make the employment record better than under the previous system. This indicator is believed to be more sacred than holy writ. Financial analysts tell me they don't bother with it because by the time data are available, the real situation has already been factored into financial markets. Much the same is true of the other physical economic indicators -- auto sales, the Consumer Price Index, the Producer Price Index (hereinbefore called the Wholesale Price Index), the Industrial Production Index, the M-3 Orders Index, the Business Sales Index, the International Trade Index, the Housing Index, the GDP (Gross Domestic Products Index) and -- not least -- the Index of Leading Indicators. All are physical economic indicators, and all presume to forecast, almost always after adjusting data, second-guessing what the figures say and -- it seems -- adjusting the findings to the spin required by the powers-that-be in Washington.
To the average person, you have a job or you don't have one. To the index makers, you don't even exist if you've been down-sized out of work and have given up looking because your shoe leather has worn out, and the wife hauls in enough to keep groceries on the table. We can't really fault the statistics makers. They are professionals at their craft and do the best they can. The problem lies in the fact that the physical indicators are short-term indicators, and this brings us back to what Hegel had to say. It is the long-term that governs. The short term can only make headlines and financial markets because news feeds fear and greed.
The "healthy" American economy must be evaluated in terms of the many depressionary measures invoked and stabilized into the system since the years of the Franklin D. Roosevelt Administration. A mirror image of what will arrive in the United States in the fullness of time can be discerned in European statistics today, namely, permanent mass unemployment.
This harbinger points to the hard realities that face the U.S. Most European governments so far refuse to bring on the strong medicine it will take to deal with the problem. Most European unemployment levels have been stalled at the double digit levels for almost half a decade, according to USA Today foreign reports. Smith-Barney economists report the situation much worse than what statistics show. Private sector growth in Europe has come to a standstill since the 1970s. As a consequence, the French agency NC recently reported a 12.4% jobless rate, and this short-term rate has remained in that general area for months on the long-term scale. Recent data reveal a post-WWII high on French unemployment. Employment conditions aren't much better in Germany, where unemployment remains above or near 11.1%, also a post-WWII record. On-scene analysts forecast little job growth.
In short, most of Europe can look to double digit unemployment in years ahead. The U.S., too, might be experiencing the double-digit syndrome except for a penchant for synthesizing jobs, that is, embracing the wage norm of the hamburger stand. By way of contrast, U.S. unemployment remains near 6%. Our economists complain that wage levels are too high in France, for instance. There the minimum wage equals nearly $10.00 an hour, not including social benefits. As with other European countries, France limits an employer's right to fire or downsize to lay-off workers. These restrictions apply to companies with as few as ten workers.
Moreover, most workers are covered by very generous state-run safety nets and pension plans funded to an extent by heavy payroll taxes, much as in the U.S. The French and European conclusion is that there would be plenty of jobs if there were Chinese wages, even U.S. wages. But that is the entire bent of GATT and NAFTA, to import Chinese wages. Thus the economic conflict: high wages stunt the growth of the service sector. The service sector, of course, is the major source of jobs in the U.S.A. It now becomes clear why French President Jacques Chirac criticized the U.S. policy, saying Europe did not want a Chinese wage level.
Gross Domestic Product (GDP)
It seems clear that comparing unemployment figures in other economies to U.S. unemployment is a lot like comparing soccer and baseball. Gross Domestic Product is the new nomenclature previously stated as Gross National Product. GDP was adopted so the U.S. reporting system stayed on the same wavelength as other countries in handling national statistics. Gross Domestic Product is often characterized as the broadest measure of the health of the U.S. economy. It is defined as the output of goods and services produced by labor and property located in the U.S. Accordingly, it lags other released data. In other words, other indicators proclaim GDP numbers before the quarterly figures are available.
Data in this indicator reflect expenditures as well as income flow, but taken as a short-term tabulation, GDP signals much ado about little. GDP is even a good business indicator, but its handle on the economic drift can be helpful only if trailed for years and decades. The Bureau of Economic Analysis produces GDP figures. Benchmark data are revised every five years. The switch in December 1991 from GNP to GDP was made in order to comply with the visions of GATT promoters. The UN had been promoting this system of national accounts. Actually, Gross National Income would be a better figure to use in calculations, but there are no reliable national income figures for most of the rest of the world. GNP more nearly tracks national income than does GDP, largely because it includes income from abroad, and this may have been the reason it was dropped. Inflow and outflow of income was calibrated under the old system.
GDP tends to erase the distinction between U.S. and foreign production facilities. The old GNP numbers included income earned by the factors of production, assets and labor owned by a country's residents, but excluded income produced within the country's borders by factors of production owned by the foreigner. This is why all of Carl Wilken's tabulations relied on national income stripped out of Gross National Product. Gross Domestic Product was not tabulated or released during his lifetime. Obviously a farmer could not farm and also track the physical indicators, two of which have been mentioned here.
The Physical Economy
What, then, is the message from Cassandra? In Greek mythology, Cassandra was sentenced by Apollo to always be right, but her real penalty was that no one would believe her. Are we arguing at cross-purposes with ourselves? For years this column has been saying that the physical economy governs in the long run. Now I am adding a message that our physical economic indicators leave us helpless, always evaluating things that have happened, never fully in touch with what will happen.
At this point I would like to paraphrase from a page of my book Unforgiven. Perhaps it taps the philosophical insight we need to consider as a codicil to the opening note on Hegel: By 1919 Baron Ernest Rutherford and his associates had developed the theory for breaking the atom and paved the way for Einstein's e=Mc2. Rutherford's chief assistant was Frederick Soddy -- the same Soddy who was to write Wealth, Virtual Wealth and Debt. Soddy saw the economic consequences of this new form of energy -- nuclear energy -- as have few others.
Writing in The Interpretation of Radium, he unloaded this observation: "The problem of transmutation and the liberation of atomic energy to carry on the labour of the world is no longer surrounded with mystery and ignorance, but is daily being reduced to a form capable of exact quantitative reasoning. It may be that it will remain forever unsolved. But we are advancing along the only road likely to bring success at a rate which makes it probable that one day will see its achievement. Should that day ever arrive, let no one be blind to the magnitude of the issues at stake, or suppose that such an acquisition of the physical resources of humanity can be safely entrusted to those who in the past have converted the blessings already conferred by science into a curse." The curse that modern technology showered down on mankind troubled Soddy no end. It caused him to apply the principles of physics to economics. "His anticipatory insight . . . remains highly creditable," noted Lewis Mumford, despite his "single factor analysis." The original entry of Soddy's "anticipatory insight" in Wealth, Virtual Wealth and Debt remains as meaningful today as when it was first issued. Life, after all, continues to obey physical laws. It "works according to, not against the principles of the physical sciences," wrote Frederick Soddy shortly after winning a Nobel Prize. "Neither individuals nor communities can escape conforming to the laws of matter and energy, however they may apply them to their own ends." Pierre Lecomte du Nouy, the brilliant French scientist who perfected a mathematical expression for the process of healing of wounds, once defined science as the method for "foretelling."
The general method, he held, had to be statistical and respondent to the calculus of probabilities. As with Poincare, du Nouy saw in the kinetic theory of gases the best available expression of how physical laws operate, and how the concept of a scientific system discovers laws without first calibrating every movement of molecules. Any gas is composed of free molecules which are in perpetual motion. These molecules move at different speeds, drive in all directions, collide with each other and against the sides of a container. Pressure is nothing more than the measurable result of impacts, the calibration of energy of molecules striking the walls of a container. No one could possibly calculate the path of each molecule. "If by ill-luck I happened to knows the laws which govern them I should be helpless," said Jules Henri Poincare. "I should be lost in endless calculations and could never supply you with an answer to your questions. Fortunately for both of us, I am completely ignorant about the matter. I can therefore supply you with an answer at once.
This may seem odd; but there is something odder still, namely that my answer will be right." We can and will continue to track the molecules of economic activity, and our national leaders will no doubt continue to ignore the simple and obvious systems uncovered by the old Raw Materials National Council and by NORM (National Organization for Raw Materials). But we can state what we have learned from the long-term trends, the trends that govern.
Tucked into GDP -- and only slightly smaller -- is a figure called National Income. It is this number that our first principles of economics require. An entire series of such numbers is available in the Economic Report of the President, which is published annually as required by the Employment Act of 1946. Data represent each year from 1929 to the present.
Such a sweep complies with the historical precepts of Hegel, the cycles of Oswald Spengler (The Decline of the West) and the long-term indicators developed by Simon Kuznets. That Moses Mordecai Levi misread the Hegelian philosophy is no reason to cancel out its wisdom.
Here, then, are the "First Principles" developed under the auspices of the Raw Materials National Council, and refined by the National Organization for Raw Materials (NORM):
By common consent, most U.S. citizens have elected to forego the approach suggested by Poincare and defer to the Dow for their thinking on what is happening to their country and social structure. They watch with fear, greed and anticipation as the Dow reaches for any sort of cyclical completion, or they shudder and whimper when the reach for infinity is threatened. The failure of a down signal during September and October if 1997, or the thought that infinity would be crashed -- like the sound barrier -- prompted many observers to believe the cycles are ended and that the laws of science have been vacated.
Out Legacy is Our Doubt
For now it seems a sideways economic move has taken command, and the economic swan dive expected for late 1997 has been postponed into 1998. Whether the cycle is a neat circle like a basketball, or an elongated watermelon, will be of minimum importance to history.
More important will be confirmation that debt is always the product of an economic society departing from the natural ratios required by the state-of-the-arts of production, distribution, and consumption. The shortage of income in the new wealth sectors (agriculture, mining, fishing, logging, drilling) in terms of a sound base period (1910-14 or the 1940s), plus the interest on money that has to be borrowed to compensate for the shortfall of earned income, is always equal to the public and private debt, this year or accumulated. It is accumulated debt and accumulated inflation that brings civilizations full term through the cycles of national birth, national growth, national stagnation, national chaos, and eventually national downfall.
The cycles say that there is a near absolute 100% chance of a major pivot point being reached within the next 11 months. Elongated cycles are not new or even rare. They are unpredictable in advance, even if the pattern emerges as simplicity-plus later on.
In the final analysis, our national economic tragedy will not be
a convulsion, but the fact that policy has annihilated the mechanism for
recovery, namely a broad-based distribution of land and income once represented
by the family farm.