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Unintended Consequences


Insanity is defined as doing the same thing over and over but expecting a different outcome. I would add a corollary to that: it's also saying the same thing over and over and expecting a different result.

Over the last several days, both in print and on the air, I have heard a handful of economists and market strategists write and speak about the imminent boom in employment; that the number of employment adds will "soon" get back to "normal" levels for this stage of the economic cycle. We've already written that this profits recovery is net 7.6 million jobs short of the typical economic rebound this far after the end of the recession. Normal jobs growth would be in the 300,000 range at least about now.

But no one, and I mean no one, is talking or writing about the substantial disincentives that the Fed and the administration has created in the labor markets. The calculation that employers have to make in choosing between labor and capital stock that I wrote about in a previous article bears repeating, since you won't read about it anywhere else.

With the cost of money so cheap (record low interest rates), and the Administration's capex tax depreciation credit sunsetting in 2005, employers are choosing to add capital equipment (PCs, telco/comm equipment, software, etc.) over employees. They are doing this because (1) they can borrow money to fund the purchases at record low costs and (2) they can write off the depreciation of that capital stock faster and net against their tax liabilities. To add employees means adding a variable cost whose price, because of health care insurance, 401k plans, and the like, constantly increases. Like I said before, networking equipment doesn't get sick and doesn't ever need a day off. And once you've paid for it, you know the cost isn't going to increase (I'm exaggerating of course).

Employers are doing this because it makes more economic sense to do so. And they are doing this because the Fed and the administration are trying to "engineer" the economy.

You already know that I think interventionist economic policies create all sorts of unintended consequences that, because we're dealing with a highly complex system, are impossible to predict or model. And I think this particular paradox, a series of disincentives that make labor relatively more costly than capital equipment, is the single most important unintended consequence of the Fed's interest rate largesse.

So when you see the employment numbers come across the tape tomorrow - no matter what they are - know that the underlying forces at work that are keeping job gains sub-par are largely of the Fed's making.

And when you hear economists and bullish strategists wax about the imminent turn in the employment numbers, keep the definition of insanity handy. After all, the Fed remains hard at work implementing policies that make that turn an improbable event. Expecting different results from the same policy; insane.
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