Bears versus Bulls Slugfest Continues on Wall Street

After a monster surge upward in stock prices on Thursday, the markets turned ugly again on Friday, with all of the major indices going back into negative territory. On Thursday, the index of 30 big industrials rose well over two percentage points, wiping out part but not all of the losses it had sustained over the preceding week of trading. Similar results were seen in the broader blue chip index and in the NASDAQ composite. Friday, however, the markets started out quietly, but a major wave of selling in the mid-afternoon pushed stock prices down hard. At one point, the Dow had lost over a hundred points; but late buying by bargain hunters trimmed losses somewhat, and by the closing bell, stocks were still down, but the heavy negative momentum had slipped away. When the dust cleared, the index of 30 industrials had lost six-tenths of a percent for the day, and the index of 500 blue chips had lost almost seven-tenths of a percent. The broad NASDAQ composite index ended the day faring far worse, losing more than a percent-and-a-half of its value over the course of the trading day.

Excitement on the Street was generated by a major drop in first-time claims for unemployment benefits, which fell below the 300,000 mark. At first blush, this looked like major good news for the economy, indicating that the jobs market was strengthening. Upon closer examination and consideration, though, the numbers weren't as favorable. First, the total workforce is shrinking, which has been causing the unemployment rate to fall merely because of the arithmetic of the unemployment rate calculation, not because of underlying features of the health of the economy.

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The Federal Reserve Board could see unemployment claims falling as a sign of inflation pressures because, if more people are getting and keeping jobs, wages might start going up faster than the rate at which productivity is increasing.

  Second, even if the jobs market is heating up, this could cause the Federal Reserve to see more signs of inflation pressures looming, triggering a more robust anti-inflation stance by the central bank. With regard to the first point about the contraction of the American workforce, this is particularly troublesome because the number of people who need jobs has to be rising as the number of new entrants to the labor force exceeds the number of people retiring. Thus, if the official labor force used in calculations by the Bureau of Labor Statistics is contracting, that means the category of "discouraged workers" is growing at a rate that is alarming to some economists.

Although neo-conservative and free-market economists would argue that the category of discouraged workers should not be of concern because these people do not want to work and would likely be of lower marginal productivity if they were to secure employment, other economists and social scientists disagree, saying that such non-working people are a symptom of a jobs market that is leaving more and more able-bodied adults simply incapable of finding work in their specialties and without the resources to retrain to more employable skills sets. While the debate is likely to continue, the fact there is a progressive increase in the number of people who could be working but are not being counted is troublesome to many, and the argument that they are not being counted because they don't want to work might not be sufficient to explain the growth in this category of citizens.

In previous times, the federal government intervened in weakening jobs markets with fiscal policy initiatives aimed at decreasing the unemployment rate through jobs programs—sometimes derisively called "make-work" programs—and direct forms of assistance to help with education and re-training expenses.

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Many discouraged workers have training and experience that is no longer economically viable. Unemployment of this kind is called "structural" unemployment.

  But with the federal government under the neo-conservatives pulling away from a commitment to direct, demand-side fiscal stimulus in recessionary economic environments, more and more people who would have been able to remain in the workforce simply surrender their search for gainful employment. What happens to these people is difficult to summarize, but it is likely the case that, although they have exited the workforce, they might very well remain a vital part of the political process, eventually posing a challenge to any political party that has systematically ignored their plight while pursuing taxation and spending policies that provide continuing and massive fiscal stimulus windfalls to the businesses that no longer need them as workers.