Power & Market

On July 2, 2019, President Donald Trump nominated Mrs. Judy Shelton to join the Federal Reserve Board of Governors. She has a distinguished career as an economist and even co-authored a book called Roads to Sound Money, which supports ideas such as sound money and individual liberty. To those who support the free market and monetary/fiscal responsibility, her nomination is nothing short of a Godsend. But as of Tuesday’s vote, the Republican majority Senate still has not confirmed her nomination. Despite this process being highly bureaucratic and requiring many if’s, she actually still has a shot! CNN reports:

The final vote was 47-50.

The 50 votes against Mrs. Shelton include:

Senate Majority Leader Mitch McConnell, who had initially voted for the nominee, switched to vote against her, giving him the procedural right to bring her up for another vote in the near future.

Mitch switched his vote, utilizing a “procedural right,” something most citizens could never cite nor likely even knew existed.

However:

Sen. Chuck Grassley, a Republican from Iowa, announced he would have to quarantine after potential exposure to Covid-19 and miss the vote -- his first missed vote in 27 years. He joins Florida Republican Sen. Rick Scott, who announced Saturday he would be away from the Capitol for the same reason.

“If” the two Republican Senators were in attendance, and “if” Mitch voted for Shelton, then things would look much different; but that did not happen. So where does that leave things?

Should there be another vote, CNN goes on to say, it will likely be scheduled after Thanksgiving. But this complicates things as:

Sen.-elect Mark Kelly, a Democrat who won a GOP seat in the special election in Arizona, is expected to be sworn in, meaning there would likely be one more Democratic "no" vote…

This wouldn’t bode well, as the Wall Street Journal reports that Democrat Mark Kelly would be sworn in on Nov 30, if combined with the three Republicans Mitt Romney, Susan Collins and more recent “dissenter” Lamar Alexander, it would make an already slim “yes” confirmation all the more difficult.

Once the math, voting strategy, and party lines become drawn, a new question arises:

When did the Federal Reserve governor nomination become “partisan politics” in Washington?

Even the Wall Street Journal notes:

Party-line votes for Fed board positions haven’t occurred before, reflecting the institution’s apolitical nature. 

For all that’s been said about this “controversial” pick, Mrs. Shelton would have only one vote on a seven member board. She’d hardly be a threat to stopping the (unofficial goal of) US dollar debasement overnight, nor would she be able to implement a gold standard anytime soon. But what she has already done, even if inadvertently, is illustrate various problems with the way this system of democracy and central banking works. Since her nomination, we’ve seen countless displays of this “system,” which appears to not even help those it claims to serve.

Republican Senator Lamar Alexander displayed this on Monday when he came out against Mrs. Shelton, as CNBC quotes him saying:

I don’t want to turn over management of the money supply to a Congress and a President who can’t balance the federal budget.

Lamar is just one of 100 elected Senators, chosen “by the people” to represent their interests. In this case, they must confirm someone to serve on the board of governors to manage the nation’s central bank, an idea championed by many anti-capitalists, including Karl Marx.

Nonetheless, as the system is currently designed, it requires elected Senators like Alexander to be charged with managing the economic affairs of the entire nation; whether these senators understand economics is besides the point. Luckily, in instances where an elected official doesn’t understand, or wishes to be rid of someone with an idea they disagree, they can employ demagoguery to sway public opinion. As noted above, the Senator can paint a picture that the nation’s money supply would be somehow handed over to the President and Congress. This is misleading because it completely misunderstands the notion of sound money, limited government, and the control of the money supply, all which underline the gold standard.

If Judy Shelton does not get confirmed to the Federal Reserve, we lose an opportunity to expand the knowledge base at the Fed. We’ll have to add that to the list of things gone wrong in 2020, then move on. This leads us to the inevitable, unpleasant question: If not Judy, then what must the next candidate say or do in order to appeal to both sides of the political aisle?

On Tuesday Reuters reported comments made by Republican senator John Thune:

Judy Shelton, U.S. President Donald Trump’s controversial pick to serve on the Federal Reserve’s interest-rate-setting panel, does not currently have the votes to win confirmation in the U.S. Senate.

Hope still remains as Senator Thune’s role as majority whip requires him to track votes made by Republicans; the official vote has not yet happened. In the senator’s words:

She’s a priority for the White House. It’s the Federal Reserve. It’s important. So, obviously, we want to get it done. But we’re not going to bring it up until we have the votes to confirm her.

The story is troubling because Republican’s have a 53–47 senate majority, but still not enough votes to approve the nomination. This raises questions for the Grand Old Party; mainly, what is the hesitation?

The Wall Street Journal echoed the “controversial selection” narrative:

Ms. Shelton has been a longtime proponent of a return to the gold standard, which would limit the Fed’s ability to influence inflation and employment, and concedes that her views are outside the mainstream of economics.

Of course, limiting the Fed’s ability to influence the free market, including inflation and employment is the purpose of the gold standard. The controversy centers around members of Congress and the Fed who may not want to concede the power to influence the market. It’s dangerous to those at upper levels of government and the Fed, as their control rests in the ability to manipulate interest rates and create US dollars in order to buy assets and run perpetual budget deficits.

A month ago a group known as “Fed Alumni,” comprised of various former Federal Reserve employees, as well as several presidents, published an open letter to the Senate with thirty-eight signatures asking them to reject the nomination. The number now stands at seventy-seven signatures.

Upon reading the letter, the problem with mainstream economics is revealed:

She has advocated for a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.

The dogma is followed by hubris:

The Fed has serious work ahead of it. While we applaud the Board having a diversity of viewpoints represented at its table, Ms. Shelton’s views are so extreme and ill-considered as to be an unnecessary distraction from the tasks at hand.

If there is a controversy, it should be about the “serious work” the Fed has ahead of it. With the new goal of aiming to “achieve inflation moderately above 2 percent for some time,” it appears very few are asking the purpose behind this. Especially since the Fed is moving away from the belief in there being a tradeoff between inflation and unemployment, there seems little reason to push for higher price inflation any longer.

Contrast this sentiment with those in science, math, or physics, where questions and the ability to refute or prove theories allows these fields to advance. Yet economics is devoid of this advancement; as we can see, when someone offers ideas such as a return to the gold standard, the result is contempt. But it’s one thing to petition congress claiming lack of qualifications, yet quite another to offer coherent arguments, articulating where exactly the problem lies. So far, we’re still looking for a critique which goes beyond being discredited for brainstorming economic solutions.

This somewhat explains why economics is divided into “orthodoxy” and “heterodoxy,” which normally refer to religious doctrine—heterodoxy for beliefs falling outside the mainstream. Perhaps it’s time for the Fed to stop treating economics like a religion and start searching for the truth, where someone like Judy Shelton is praised instead of punished for questioning economic tradition.

Much uncertainty remains as we wait for 51 democratically elected senators to give their blessing, allowing Ms. Shelton to ascend to the hallowed halls of the Eccles Building, where she can join the ranks of those select few who have the almost godlike ability to decree paper (or its electronic equivalent) legal tender. Maybe long-standing beliefs like money creation leading to prosperity should be widely questioned: If it holds up to scrutiny then great; if not, then why should we adhere to it?

According to new jobs data released today by the US Labor Department, total nonfarm employment grew by 4.8 million in June (seasonally adjusted). The gain was even larger (5.1 million) in non–seasonally adjusted totals. 

June's unemployment rate was 11.1 percent, a drop of 2.2 percent.

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This means total employment is now "only" 14.6 million below the November peak, meaning the US is now back to where total employment was in 2015. 

As we can see in the first graph, so far a "V-shaped recovery" looks possible. In April, employment crashed by the largest amount seen since the Great Depression. The economy recovered more than 3 million jobs in May in addition to June's 4.8 million jobs.

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But it remains unclear if the current job recovery will continue at the same rate. In June it looked like government-imposed business closures might be disappearing, but by late June state governors and other policymakers had begun announcing or threatening new business closures and lockdowns. This will no doubt have an effect on employment in July, but the extent of the effect is impossible to predict at this time. 

If the recovery continues at its current rate, then total employment could recover within a few months, making the 2020 recession (at least in terms of jobs) considerably shorter than the Great Recession. Here is total employment (by recession and final month in each cycle before job losses began) indexed to peak month, and the number of months that passed before employment returned to peak levels:

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In recent weeks, however, unemployment claims have remained stubbornly flat. For the week ending June 27, new unemployment claims increased by 1.43 million. This was only down slightly from the previous week, when there were 1.48 million new claims. Since March, new unemployment claims have totaled over 48 million. 

That 1.43 million number for last week remains very large. During the Great Recession, new unemployment claims peaked at around 660,000 in late 2009. So long as unemployment claims continue to number above a million, we're looking at job losses well above what would be considered "normal" even in a recession. 

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Moreover, continuing unemployment claims actually increased slightly from the week ending June 13 to the week ending June 20, climbing to 17.9 million. 

If unemployment claims continue to move sideways, there's good reason to suspect employment in July may do the same. 

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At the same time, the unemployment rate could continue to fall if workforce participation continues to fall. As people leave the workforce, the unemployment rate could theoretically fall even without any job growth. 

And workforce participation is indeed falling. In April of this year, participation (for all ages) fell to about a 43-year low, coming in around where it was in April 1976. Participation climbed again in May and June, but remains near a forty-year low for June. 

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The weak jobs market appears to be most impactful on young workers and old workers, as workforce participation in prime earnings years has not been as affected. For workers in the 25–54 category, workforce participation is back to where it was in 2015. 

Unless we start to see a more rapid drop-off in unemployment claims, it's difficult to see how a V-shaped recovery will continue. Moreover, much will depend on how harsh ongoing business closures and partial "lockdowns" are in the US. Since these policies are set at the state level, employment numbers will likely be very uneven from state to state. As we saw in the state-to-state data for May, many states with particularly harsh lockdowns, such as New York and Michigan, were among the states with the highest unemployment rates.

Mises Institute president Jeff Deist tells The Hill why the "stimulus" bailout is very bad for America in this excerpt from his op-ed:

The unasked question lurking underneath the Senate bill is this: How do we pay for it all? Congress doesn’t have $2 trillion to spend, and 2020 tax receipts won’t begin to cover the bill. This means the federal government will effectively “print” the money, likely in a circuitous way by issuing new Treasury debt and using the Federal Reserve Bank as a backstop to buy it all if investors won’t. And what sort of investor wants to loan Uncle Sam money for 10 years at less than 1 percent interest anyway? 

At least Sen. Bernie Sanders (I-Vt.) is more honest: He thinks government simply should give Americans money every month, with or without a crisis. We now see plainly that congressional Republicans agree with him, at least conditionally. What a sad state of affairs. 

If the bailout of 2008 had worked, U.S. companies would not need a bailout today. They would have thanked their lucky stars then, and focused on building healthier balance sheets with more cash and less debt. Let new owners, not American taxpayers, save them today.