I read Vox so you don’t have to, but in case you want to read what inspired me to write this post, here is the link: https://www.vox.com/policy-and-politics/2019/7/19/20699366/interest-rates-unemployment-globalization-minimum-wage-deficit
So the author, Jared Bernstein, lays out “4 myths” and explains why freshmen socialist AOC is brilliant for questioning the employment rate.
Well, lets not talk employment and unemployment rate, lets talk “labor participation rate.” This is going to paint an entirely different picture of the economy than the unemployment rate.
Yeah… a low unemployment number either means that people are getting hired back, or they’ve stopped being eligible to collect unemployment. The Obama Administration, of which Jared Bernstein was an “economic advisor” oversaw that precipitous, steady drop in labor participation rate. President Trump’s administration, has not been able to increase the labor participation rate, which means that job creation is expanding at pace with population (people between 16 and 65 entering the workforce through birthdays, immigrations, etc at a surplus compared to people exiting the workforce through death, aging out, immigrating away, etc). To put this into perspective, about 4 million people in the US will turn 16 before the end of the current year. If they don’t get a job, they don’t go into the “participating” pool.
Ocasio-Cortez didn’t waste time poking holes at it. She pointed out that the unemployment rate, now 3.7 percent, has fallen well below the Fed’s estimates of the natural rate, which it forecast at 5.4 percent in 2014 and 4.2 percent today. And yet, she noted, “inflation is no higher today than it was five years ago. Given these facts, do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”
Powell’s response, to his credit, was as simple and direct as you’ll ever hear from a central banker: “Absolutely.” He elaborated: “I think we’ve learned that … this is something you can’t identify directly. I think we’ve learned that it’s lower than we thought, substantially lower than we thought in the past.”
While the author has many good things to say about AOC, he doesn’t point out that we are still in a historic low period for labor participation, which means that unemployment is now irrelevant to inflation because of HOW unemployment is calculated (by people filing for unemployment) rather than any measure of the “economic health” of the workforce.
We could have 0% unemployment now, and still have fewer people working than before Obama took office because we are 4% short on the labor participation rates.
Now, some people will not be in the labor participation numbers for personal reasons, such as a stay at home parent, or retiring early, or permanent disability. By no means am I advocating to try to get 100% labor pool participation.
The natural rate of unemployment that AOC questioned is one such idea (more on that below). There are three others worth singling out:
that globalization is a win-win proposition for all, an idea that has deservedly taken a battering in recent years;
Ok, despite the fact that this is a huge straw man, globalization is a win-win with caveats. The biggest caveat is that trading partners won’t “militarize” their economy to achieve leverage against the U.S. and won’t try to circumvent free markets. Clearly (and if you’ve read this blog for a while you have probably read my thoughts on Chinese weaponization of their economy). On it’s own, globalization is just a thing, and requires context between trading partners on everything from coffee (are you destroying the Amazon, or will we pay a premium for sustainably grown coffee?) to diamonds (are you supporting child labor in Tanzania?). Free trade, and globalism, is a net win for the United States, but it will not always be a net win for U.S. manufacturing, because there are a lot of places where manufacturing is cheaper.
Then again, Trump sinking the Pacific Partnership deal inherently recognized that it wasn’t a good deal for the US, so at least the Trump administration understands the caveats of globalism.
that federal budget deficits “crowd out” private investments; and
This is another broad generalization, because budget deficits CAN crowd out private investment under certain financial circumstances. Such as when market risk is high for low reward and government bonds are very attractive to private capital.
that the minimum wage will only have negative effects on jobs and workers.
Well, how to address this. Minimum wage will have a net negative effect by reducing jobs, and reducing hours available for workers to work. Bernie Sanders is now catching flack for cutting workers hours to get them the 15 dollar an hour wage he supports. Many minimum wage jobs in the food industry exist on margins that cannot support their current workforce at 15 dollars an hour, so either they have to raise prices on the consumer and hope that they don’t lose consumers, or they have to cut employment costs.
A self service kiosk or checkout terminal is not “free” to an employer. But when one of those costs less than the yearly salary for an employee, and doesn’t ever take a sick day or miss a shift, it looks like an absolute bargain.
Case in point about minimum wage, look at the labor participation rate again. We have low unemployment, but we don’t see increasing labor participation. Because those jobs that are lost to automation in the form of kiosks and self checkout terminals, are not coming back. It will take a time for the economy to progress to the point where new human specific jobs are generated.
I’m not an economist, and I just showed you the critical reasoning gaps from someone who was Vice President Biden’s economics advisor. Sure he’s probably got much more in depth analysis not written into the Vox article, but he also was part of the administration that saw a 4% drop in labor participation. I’m not sure his advice is worth crap.