Gary Cohn Also Believes In "Alternative Facts"

I think that people sometimes believe that just because you head a big Wall Street firm, you are, by definition, an experienced and informed macroeconomist. But, in many cases, this is far from the reality. Many of these executives are just dealmakers and/or good political and bureaucratic infighters.

Gary Cohn at least has some pretty deep experience in the commodities and fixed income markets which means he has a pretty good understanding of interest rates and currency fluctuations. On the other hand, he is basically a trader at heart, reported to be aggressive and abrasive, and, as one peer described Cohn, “When you become arrogant, in a trading sense, you begin to think that everybody’s a counterparty, not a customer, not a client”.

Cohn is reported to have become Trump’s go-to guy on actual domestic policy, including tax cuts and tax reform, regulatory relief, and even figuring out what to do with the Affordable Care Act. All of these are priorities for the GOP Congress. He is also apparently able to explain to Trump that his massive infrastructure promise will either mean the government will have to spend money that Republicans would prefer to give away in tax cuts or find private partners that will take on these projects. That seemed to be news to Trump.

More important to Cohn and his Wall Street cohorts is the rolling back of increased capital and regulatory requirements for banks. According to Cohn, “Liquidity provided by the central banks is now being trapped into the banks because of the increasing capital and regulatory requirements.” Of course there is no indication that companies are having difficulty finding financing these days. On the other hand, reduced capital requirements mean more money for bonuses for executives and shareholders of the banks. In addition, Cohn also seems fixated on other countries engaging in what he believes is currency manipulation to the detriment of the United States.

In addition, Cohn has shown himself to be completely clueless about employment. Bill McBride over at Calculated Risk completely eviscerates Cohn on his claims about unemployment. In a recent Bloomberg article, Cohn is quoted as saying the current unemployment rate “is a very, very fictitious rate. It’s only that low because the participation rate has gone downward…The participation rate really measures people out in the U.S. population that are looking for jobs. There are so many people who are frustrated looking for jobs that they’ve just stopped. If the participation rate normalized — this is a fun fact — if it normalized to Day 1 of the Obama administration, we’d still be at an 11 percent plus unemployment rate.”

This fact is not “fun”; it’s simply not a fact. The participation rate is the number of people who are actively looking for a job or actually have a job as a percentage of the total number of working age people. The participation rate effects the unemployment rate because the unemployment rate is the number of people actively looking for a job but don’t have one as a percentage of those participating in the labor force. So the number of people employed could stay static but the unemployment rate would increase of the participation rate increased. One of the larger issues during the Great Recession is that the participation rate decreased because workers became so discouraged that they were no longer actively looking for a job and technically were no longer considered part of the labor force. But, by last year, it was clear that discouraged workers were no longer part of the reason for the lower participation rate. Because of the existence of discouraged workers, Trump and his team say the unemployment rate is bogus. But the problems of discouraged workers in the unemployment rate has been there for years and there is no indication that it is now significantly more extreme than in the past. In fact, there is separate measure of unemployment that does try to capture the number of discouraged workers and that is called the U6. In 2006, U6 reached a low of 8.4% and went up as high as 16% in 2010. Today it stands around 9.4%.

As McBride points out, Cohn is ignoring his own Goldman Sachs economist who said, “At this point, we see the cyclical ‘participation gap’ as nearly closed.” This means that any changes in participation are more determined by long term trends, primarily changing demographics. As McBride has frequently pointed out, the main reason the participation rate is declining is because the first wave of baby boomers is retiring. An additional factor is that more an more young people are continuing their education into college and graduate school.

The good news is that Cohn at least thinks that the unemployment is only 11%. Trump has claimed many times that the “true” unemployment rate is somewhere over 40%. So maybe he can convince Trump that things aren’t all that bad. The bad news, of course, is that Cohn also lives in the Trump world of “alternative facts”.