Given the slide in activity at the nation’s retail outlets in September, and the worries that are going to persist over tapering mortgage refis, the economy probably did not need another setback. More specifically, the “wrong” side of the bifurcated economy is bracing for cutbacks in SNAP benefits. Part of the ARRA (remember the “stimulus” bill in 2009? That it is largely forgotten speaks volumes on its efficacy) included an increase in benefits (and eligibility) for the program.
In California, for example, CalFresh, the state agency administering the program, is expecting a 5% decline, on average, in monthly benefits. According to KPBS in San Diego, that will mean 270,000 people will see such a cut in food aid.
Given that the population of San Diego County is estimated to be 3.18 million, that would indicate an assistance rate of about 8.5%. That sounds rather large, but the national figures actually show much greater participation. There were 47.6 million people in the SNAP program in July (a very small decline from June). Given a Census estimate of 316.1 million people nationwide in that month, the overall participation rate was an astounding 15%.
But the article in KPBS suggests that there is actually a greater problem beyond the official figures, and even the official programs. The local foodbank, Feeding America San Diego, provides food to 73,000 people every week, an average of 3 days worth of food per family.
In historic context, though, the perspective of the real economy and this “recovery” becomes clear.
“Feeding America San Diego distributed 23 million pounds of food last year, compared with 3 million pounds in 2007.”
There has been no transmission of the “wealth effect” in the past five years. This is not to say that foodstamps and SNAP are not in need of cuts (fraud and waste), or that food programs should be endlessly expanded (dependency), only that the economy is not performing by any reasonable measure. There is also the possibility that the above figure is skewed by a change in foodbank program providers that would explain such an increase, but I can’t find any evidence of such.
So we are left, again, contemplating why this “recovery” period has failed so spectacularly at fostering an economic system that performs as it is designed. An economy is not some game of circulating money, to be controlled with centralized levers of power including inflation, but, at its core, a societal benefit that increases the ability of labor to specialize. That is what productivity actually means – that we don’t have to grow our own food and make our clothes.
A healthy economic system, then, is one in which specialization increases as people are gainfully employed in specific tasks. Money only comes in as an aid in that process, not as it its primary focus. The fact that the intended “wealth effect” of QE is so clearly lacking in this kind of data only reinforces that idea. The value of labor to business is in the value of wealth businesses expect to create from the exchange, and wealth is not currency.
Orthodox economists fully expect QE to have a chain effect – rising inflation expectations (leading to negative real interest rates) convince consumers to spend ahead of that expected inflation rather than save. A full part of that is debt-driven, as these consumers are supposed to be seduced by the “free money” of low rates. The problem is that debt is never “free money” and most people are now aware of the consequences after the housing collapse (and may be reminded of that again shortly).
Businesses also respond to rising inflation expectations by focusing on their cost structure rather than taking risks and expanding. Instead, investment takes the form of stock repurchases and LBO’s (Verizon only being the latest and most grossly distorted of recent activity). That means depressed wages and hiring activity, exactly what we have seen and exactly why Feeding America San Diego is overwhelmed.
But that has not persuaded policymakers, as a recent New York Times article makes clear. The appeals to inflation are likely to grow again as the Fed contemplates failure (again), though they will never concede as much.
“The Fed has worked for decades to suppress inflation, but economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.”
Further, the article even attempts to foresee benefits to retailers themselves, as part of that ill-conceived notion of “helping companies increase profits.”
“Retailers including Costco and Walmart are hoping for higher inflation to increase profits.”
What is particularly confusing about this view, to someone with non-orthodox intuition, is that the past few years (until 2012) have not featured a dearth of profitability. Yet, for some mysterious headwinds, companies have not been so willing to share those profits with their workers, or expand their operations beyond the CFO’s finance department (calculating the maximum cash flow that can be diverted to stock repurchasing, especially now that earnings growth has receded and companies need to keep short-attention span investors happy). Why would they suddenly shift their course?
Again, if anything, businesses would take any additional inflationary threats as they have since 2009 – over-manage costs. Wages and hiring are value propositions, if businesses thought there was value to increasing labor costs they would do so. Absent this constant appeal toward inflation (including the delusion toward asset prices) they might actually do that. Businesses, even more than consumers, appeal to stable monetary conditions.
In fact, we have seen exactly this scenario being played out across the Pacific in Japan. The Bank of Japan, as part of Abenomics, is counting on inflation to kick-start a moribund economic system. But, despite a huge reaction from stock prices, yen devaluation and import costs, the economy remains stuck because companies refuse to increase wages. In fact, Japanese businesses are still shrinking hours and appealing to more and more part-time workers (it’s not just Obamacare; QE is an even more powerful anti-tonic against full-time work).
If the new Fed under Yellen, who is every bit the orthodox economist and nothing like a genius, tries to restart the inflation narrative, then we can only expect Feeding America San Diego to become further overwhelmed. Rational expectations as an idea held promise; as a policy of trying to control national behavior it is a disgrace and should probably be criminal.
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