For the longest time, Jupiter was never thought to play much of a role in celestial mechanics of the much smaller scales in the solar system. Comets and asteroids may not seem to be significant to solar reality, but to those of us that reside on Earth there is much to appreciate about even planetary gravity and the survival of species. In a tale described in more detail at AstroBiology Magazine, astronomers and mathematicians realized in the 1780’s that Jupiter was altering the trajectory of comets. One particular comet viewed in June 1770 in France showed up again in 1776 on the far side of the Sun. When it failed to show up at all as predicted in 1782, mathematician Pierre Simon-Laplace calculated that the comet’s trajectory had been seriously altered by the massive tug of Jupiter’s gravity.

Apparently, that episode had a real effect on how Jupiter was perceived in the comet and asteroid business, especially “long period” comets. In 1994, this idea of Jupiter as “protector” gained statistical “evidence” with some rough computer simulations done by George Wetherill. With limited computing power in the mid-1990’s Wetherill’s simulations were more of limited value as he had to make some rather large assumptions in order for the compute cycles to be realistically feasible.

Subsequent studies with orders of magnitude more computing power are not so sure about Jupiter. Not only are there doubts about whether Jupiter’s huge gravitational pull helps or hurts, there is even debate over whether avoiding asteroid or comet strikes altogether is desirable – where did the Earth gets its water and its life? If water arrived via extraterrestrial means then Jupiter increasing comet participation with Earth’s orbit was certainly welcome, even if it destroyed the dinosaurs in the process.

In the sense of epistemology there isn’t likely to be any conclusive theories about Jupiter. Stepping back a bit, what we do know is that Jupiter is one big distortion in the solar system that may produce, certainly if it pushes the next extinction event our way, horrible results. The accumulation of theory on Jupiter was such that it was impossible to ignore, which was especially true when, in the early days of modern astronomy, calculated predictions failed to materialize.

It’s always dangerous to compare astronomy, physics and hard sciences to economics simply because that is what economists most deeply desire. Despite being an obvious “social science”, economics is treated by its own practitioners with certainty and predictability that just isn’t justified.

While that has been the case significantly in the past, it is perhaps the defining feature of the period that began on August 9, 2007. The tremendous errors in economic forecasting have manifested in numerous places, most spectacularly in the panic and Great Recession itself (both of which were contemporaneously “calculated” as less than trivial possibilities). That “tradition” continues on in this “recovery.”

The perplexing nature of the labor market is our current “Jupiter”; the dichotomy so large that it cannot now be ignored any longer. We have heard incessantly that the economy is booming by virtue of the Establishment Survey and the unemployment rate, yet there is scant evidence beyond these accounts for such a narrative. It has grown so difficult to reconcile that even orthodox economists are being forced to at least recognize the divergence, if not fully accept (yet) all the implications.

If Federal Reserve policymakers were to look solely at headline labor market indicators, they might be tempted to conclude that the U.S. economy had finally reached cruising altitude. The unemployment rate has fallen from a peak of 10 percent in 2009 to 5.5 percent, within the range considered to be full employment. Nonfarm payroll growth has averaged 275,000 a month over the last year, a pace last seen in the roaring ’90s.

 

Yet nothing else has that ’90s feel: not the pace of economic growth, not capital investment, not productivity growth, not even Nasdaq 5000. The juxtaposition of solid job growth and tepid economic growth describes what the current expansion lacks: dynamism and innovation. These are the forces that drive productivity growth, allowing companies to produce more with less and provide a higher real wage to workers.

That leaves just two possibilities – that the jobs are statistical phantoms or that the labor market itself has been altered. Yet, regardless of which of those is ultimately true, there are correlations that suggest causation.

In fact, the jobs numbers seem so out of sync with everything else that analysts at Arbor Research and Trading LLC decided to quantify the gap. They compared the increase in nonfarm payrolls to the implied change based on a composite basket of major economic indicators, including industrial production, durable goods orders and personal income. They found that nonfarm payrolls outpaced the composite by more than 1 million jobs in the past year. “The last time the gap was that wide was during the dot-com bubble,” says Benjamin Breitholtz, senior vice president of Arbor’s quantitative analytics group. [emphasis added]

And there it is. For such a profound observation, the article quoted above gives it…nothing further. That is the only mention of “bubble” in the entire piece.  Economists are puzzled over these occurrences in labor and productivity yet are doing everything in their power to come up with an explanation other than asset bubbles and asset inflation. That is highly unusual for a discipline that considers itself a scientific endeavor, as observation forms the basis of any method that courts such consistency and logic.

It is exceedingly easy to understand how bubbles act as a massive distortion upon basic and organic economic function. There is no math required to confirm that as we all have our own personal experience with “easy money” and the path of least resistance.

As noted in the first quoted passage above, the major “mystery” of the labor market is the separation from the quantity of jobs from high wage growth. One transmission of that is productivity, a feature of innovation and dynamism that is more often taken for granted as “just there.” What should be more acceptable is the fact that innovation and dynamic processes like it are highly susceptible to financial distortion, as beyond just the credit realities of “aggregate demand.” In fact, this demand-side equation makes no distinction whatsoever about “demand”, only that some demand take place as it is simply expected to lead to more and be neutral about it.

Financial distortion is particularly potent when taking into account “creative destruction”, a factor that up until the 1970’s was thought fully incorporated into the capitalist tradition – in fact it wasn’t capitalism that changed only monetary theory that cast aside the capitalist tradition in favor of top-down command which is anathema to true capitalism. Suddenly, as the central bank’s proclivity toward activism arose in the 1960’s, recession was an outcast without ever considering any potential downside to making such an assumption. The entire point of asset bubbles is to thwart creative destruction and recession, under the further assumption that all “demand” under aggregate demand is perfectly interchangeable.

In the bigger picture of long-term economic changes, the entire purpose of activist central banking and its soft central planning via interest rate targeting (and now “quantitative” methodology) is to reduce variability in the economy; “filling in the troughs without shaving off the peaks.” By definition, less variability means less dynamism as innovation is and should be highly disruptive. In that important and indeed overriding sense, modern monetarism has dedicated itself via massive distortion to destroying innovation through depressed dynamic changes. Why are all economists so surprised about this?

Even on a more micro-scale, the FOMC has since 2007 been on a mission to end any sense of “tail risk”, which is nothing more than the same kind of high variability. The huge distortions created to banish “tail risk” have, as a practical matter, undone creative destruction in the financial sector first and foremost, but also spilling out into other areas (artificial energy resource allocation, for one). Given the economic realities of the mid-2000’s bubble age, finance was where creative destruction was most needed – and actually began to take place in the panic.

But rather than allow that natural and organic reset (reversion to the mean if you want to stay within the math) central banks sought instead to recreate the mid-2000’s by appealing yet again and in greater size to the same distortions which intended to remove any possibility of a massive and dynamic shift away from huge financialism as a primary economic factor. As I said yesterday, it isn’t difficult to understand that there will be long-term and likely deeply negative implications from such a distortive industry that leads to this:

If an asset bubble forms and leads millions of people into day trading instead of STEM, millions of lawyers and mathematicians to Wall Street instead of industry, both “saltwater” and “freshwater” economists are perfectly happy because people are doing “something”; and that something gets reflected mathematically into GDP and the unemployment rate.

Whether the jobs of 2013-2015 are real or whether they are statistical phantom is almost beside the point now. The economy does not operate as it once did which indicates not the dynamic changes we seek to foster long-term and sustainable advance, but rather its conspicuous absence. That is the great mistake of this half century of repeated activism, in that the actual constant is change through innovation; so instead of trying to remove it, its recessions and creative destruction through huge financial distortions, policy should have been removing impediments to dynamic processes that will always and everywhere be messy and free flowing yet inevitably fruitful. In trying to reduce the chaotic nature of capitalism, central planners removed progress since it is chaos that creates.

You can never prove a counterfactual, but increasingly even economists are being forced to admit what is obviously missing; though at this point they have yet to cast off the mathematical shackles (secular stagnation) that prevent a full accounting and recognition. Baby steps.