Claudia Sahm's Eponymous Recession 'Rule' Pulls the Fed Even Further From Reality

“The correct answer, I am afraid, is that we have virtually no economic use for national accounts.” If only Sir John Cowperthwaite were around to address Claudia Sahm, the latest Federal Reserve economic planner to win fawning acclaim from her fellow economists, along with media members captivated by mediocre thought. The quote that begins this piece comes care of Hong Kong’s financial secretary from 1961 to 1971.

Cowperthwaite famously wouldn’t allow government officials in Hong Kong to calculate economic growth. Activity on the island was far too dynamic for the low-imagination types who presumed to measure it, plus government measure of anything has a tendency to be economically perilous. That is so because politicians invariably want to “do something” in response to the economic slowdowns real and imagined divined by a profession that actually thinks war is stimulative. The economists who claim an ability to measure things are only too happy to help them “do something.” Sahm is one of those activist economists.

Funny is that Sahm thinks she’s figured out a way to detect recessions in quick fashion. Scary about her endless pretense, Sahm thinks she has the fix for the recessions she claims to be able to detect early. With economists, their solutions are – if possible – invariably more problematic than the problems they claim to diagnose. Rest assured Sahm doesn’t disappoint here. She’s got a plan. Economists always have a plan, and they never learn from the failure of past plans frequently hatched by economists….

So what signals a recession? If Sahm is to be believed, a good indicator of one is if the average unemployment rate over three months increases a half percentage point or greater over the low rate of unemployment from the previous year. Economists generally believe economies are machines, as opposed to people producing to varying degrees, so they invariably come up with fixes to that which they can’t possibly understand. These fixes include “fighting” recessions.

Up front, never explained by members of a profession who near uniformly believe economic growth causes inflation is why they’re so eager to fight recessions to begin with. This rates discussion when it’s remembered that painful as they are, recessions are a sign that an economy is recovering. Think about it.

During periods of economic growth it’s only natural that the individuals who comprise what we call an “economy” will develop bad habits, that companies large and small will perhaps make more speculative hires than they would during periods of austerity, not to mention the likelihood that those same businesses will pursue riskier business lines than they normally would, based on confidence gained during a boom.

Though once again painful, recessions are a natural and necessary driver of growth simply because they force the realization of errors without which there can be no progress. During recessions we fix bad habits, companies release employees who are bad fits to the betterment of employee and company alike, plus those same businesses sunset expansion plans that aren’t working, all the while re-engineering those that have the potential to work.

To the above, some will respond that recessions are more realistically a consequence of bad government policy, that only governments cause recessions. They’re partially right. No doubt it’s true that politicians can erect all manner of barriers to production, but it’s important to stress that slowdowns created by government don’t call for more government as Sahm presumes; rather they call for greater freedom from government's meddling, grasping hand. In short, if government policies are suffocating production, shrink the government as opposed to expanding its footprint. Unfortunately Sahm seeks government-footprint expansion. She’s an economist after all.

In Sahm’s case, research conducted by her and her fellow planners concluded that subsequent consumption by individuals was greater after the federal government handed out lump sum payments (think 2001 and 2008) versus smaller paycheck increases achieved through reduced tax withholding. Yes, Sahm believes consumption powers economic growth.

It’s plainly lost on the economist that we all have endless consumptive desires that governments need never stimulate. It’s also seemingly lost on Sahm that consumption is not a driver of economic growth, rather it’s a logical consequence of it. How this basic truth eludes nearly every economist is a mystery, but then let’s not forget that members of the economics profession near unanimously believe that prosperity grows when Nancy Pelosi and Mitch McConnell extract precious wealth created in the private sector, only to let their fellow congressmen and senators hand out the wealth to favored constituents. Economists are not like you and me. They quite literally don’t understand how economies grow.

Try not to laugh, but Sahm’s recession cure is, according to the Wall Street Journal, for Treasury to quickly send out checks to constituents “equal to 0.7% of Gross Domestic Product, or 1% of consumer spending.” Ok, readers can laugh.

Missed by Sahm is that Treasury sending out money will do nothing to stimulate demand. Not one iota. Think about it. In a real economy, we’re only able to consume insofar as we produce. And for those who don’t produce, they’re only able to consume insofar as actual producers shift their consumptive ability to others. This is all kind of basic. People don’t consume more in Manhattan than they do in the Bronx based on sun spots, or because Treasury is more generous to Manhattan-ites; instead they spend more in the borough below the Bronx because they produce exponentially more there. Sahm’s laugh line of a “solution” won’t once again boost consumption as much as it will merely shift it.

If anything, Sahm’s plan, one that only an economist or an economist’s mother could love, will shrink consumption, and it will for two reasons. For one, real economic growth is a consequence of investment (once again, we all have endless consumptive desires) that enhances individual production. Investment sets us up to produce more, which means we can consume more, but during recessions Sahm aims to shrink investment capital by empowering Treasury to oversee a proverbial helicopter drop of money. You can’t make this up!

After that, Sahm’s plan would essentially compensate individuals for not doing anything. As opposed to one’s ability to consume being a function of production, Sahm aims to compensate the individuals who comprise the U.S. economy whether they produce or not. Basically, Sahm’s sham of a recession solution would elongate the downturn by rewarding indolence and shrinking investment right when less of the former and more of the latter would enhance recovery.

So yes, economists never learn. They can’t. They inhabit a profession that exists to always and everywhere intervene. Except that freedom is what powers economic growth. Sahm’s solution is to shrink freedom when it’s needed most. In short, Sahm is perfect for the Fed, perfect as an economist, but perilous for those of us who actually want economic growth.