President Harry S Truman famously said he wanted to find a one-armed economist who would not answer questions saying "on the one hand but on the other hand." There are in fact many economists who speak with certitude, but their convictions are usually based on ideology or politics. However, as one un-steeped in ideology or politics, I am fully aware that my profession is more an art than a science, and our wisdom fraught with uncertainty.
That uncertainty has been brought home to my profession with a vengeance in recent years. If there is one fundamental tenet to economics it must surely be -- or at least has always been -- that flooding an economy with easy money will inevitably spark inflation. In earlier years, the Federal Reserve has employed high interest rates to reduce the money supply to rein in inflation. In the early 1980s, Fed Chairman Paul Volcker pushed interest rates to unprecedented highs to bring prices under control. He deliberately brought on a recession that elicited howls from politicians and business leaders, but it worked. Since then we have enjoyed relatively modest inflation.
But the quantitative easing embraced by the Fed in recent years has undermined our understanding of the relationship between money supply and inflation. The infusion of vast sums of money into the economy has not brought on a new round of runaway inflation as our traditional understanding of economics would have us expect. We can offer many extenuating circumstances to explain this odd result, but they are not persuasive. A critical axiom of economics that the profession long accepted has become tenuous.
Now we have yet another mystery to explain. The latest data on the economy are grim to say the least. It had previously been reported that the GDP declined by 1 percent in the first quarter of the year. That was bad enough, but now we are told it actually fell by 2.9 percent. That is scary enough to send investors running for the hills, or at least it should be.
And yet the latest employment report suggests solid growth afoot. During the same second quarter in which the GDP was apparently in free fall, we were adding an average of 231,000 jobs per month. Employer reports about hiring and firing showed that more people were hired during the first quarter of this year than in any comparable period since the first three months of 2008 as the Great Recession was just beginning. The National Federation of Independent Business said that in June some 26 percent of small businesses had job openings they could not fill.
So what are we to make of this glaring contradiction? My own sense is that the data used to assess GDP growth (or decline) are diverse and subject to a variety of mitigating forces that can cause extreme swings in the short term. The data on job creation, on the other hand, are much more focused and reliable. Employers have been slow to hire in this recovery because they were apprehensive about the future, but they are clearly gaining confidence in the economy -- and so should the rest of us. You don't have to be an economist to see things are looking up.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. July 2014