More on the possibility and risks of a recession

So both the (inverted) yield curve and the Sahm rule indicate a recession. This together with two months of slower employment creation, and the slightly higher unemployment rate, has many wondering whether the economy will crash soon. I discussed before -- a while ago, before the pandemic recession, that had nothing to do with the yield curve -- why an inverted yield curve doesn't necessarily mean a forthcoming recession. The Sahm rule, like the inverted yield curve has an impressive track record. It suggests that if three month moving average of the rate of unemployment rises 0.5 or more above the minimum of the same averages for the previous twelve months a recession is under way. Figure below, although scale doesn't help, shows that we are at 0.57 for last August [ominous music here].

This is essentially an a-theoretical measure, contrary to the yield curve which could have different explanations, including the Wicksellian one used by the mainstream. It expresses basically a trend. Unemployment rates go up in recessions, and after a while going up, you're basically in one. The two episodes in which it fails, as far I can tell, were in 1959 and 2003. No clear reason for why, as opposed to housing market measures that failed in 1951, 1967, and perhaps now (if you believe me), because of two wars (Korea and Vietnam) and fiscal packages (Bidenomics).

In a few weeks now, the Fed is very likely, almost certainly really, going to reduce interest rates. I don't expect that to stimulate the economy much, and it certainly will not create any danger about an inflationary resurgence. Also, as I noted on Marketplace a week or so ago, there are some positive signs about the economy. Real wages at the bottom are growing, and consumption went up. And no, you should not be concerned with the low savings rate. I was a little less sanguine that I sound in that short soundbite, but overall I think that's correct.

Sure enough a recession could certainly imply a return of Trump, and Trumponomics. I doubt that it would cause inflation and that his election would deepen the recession, as some had argued. Not because tax cuts for the wealthy would stimulate the economy. But the truth is that Republicans in power don't care about the deficit or debt. They care about cutting social benefits, and about facilitating the lucrative relations between the corporate sector and government. What Jamie Galbraith called the Predator State. Trumponomics shares with Reaganomics, and other GOP supply side voodoo economics notions, a persistent characteristic. It is always against unions and higher wages, and always for lower taxes for the wealthy.

Dems are less consistent, but certainly less keen on both (and Kamala seems to have accepted Bidenomics and the pro-union agenda). The problem with that is that it has opened the door for right wing populism. The differences with previous versions of conservative economics are subtle, and in some sense rhetorical, since they do very little for working people. On right wing populism economics and their connection to the working class, and the problematic relation of Dems with the working class, I suggest the recent piece by Kim Phillips-Fein on the London Review of Books. She says:

"In 1968 George Wallace talked to a working class that was afraid of dispossession. Trump speaks to workers too, but more directly uses the language of money and corporate success; his appeal derives from identification with the boss -- reflecting the extent to which he seeks to win the allegiance of small business owners. Just as American political institutions have been hollowed out since the 1960s, so has the country's political economy, in ways that have helped to increase Trumps' appeal."

The self-made man myth, an American neologism (Henry Clay, if I'm not wrong), is incredibly corrosive. I hope I'm right and we can avoid a recession, and Trump.