Trumponomics and the next recession

Progressives for balanced budgets and free trade

It was the best of times; it was the worst of times. Or that is what you would think if you follow the economics press lately. Sebastian Mallaby has a column on Trumponomics a while ago, suggesting Trumponomics is not working. I wouldn't disagree with the verdict, but the explanation is far from correct, and that is a common feature of discussions of Trumponomics in the media, and frankly by many progressive (not just liberal, in the US sense of the word) economists. On the other hand, you can expect a lot of praise in conservative circles (and bragging from the Trumpsters) about the unemployment level reaching 3.7%, the lowest since the Kennedy/Johnson boom of the 1960s. Many would say we are at full employment, and in a sense they might not be wrong (I think it's debatable; more on that below).

The question is then how things can be both good and bad. First, let me explain the more obvious, the labor market story. The recovery from the 2008 crisis has been long and slow, as it is well-known. And it is unclear what impact Trump's tax cuts will have, but it is highly unlikely that they would lead to any significant acceleration of growth, if past evidence is a good guide. So the current low unemployment level is the result of a process that started with the Obama fiscal package and has proceeded at a slow pace pushed essentially by consumption (after the initial fiscal stimulus). And that's why it has not been a more robust recovery (it remains very slow, even in the two Trump years).

This is reflected in an employment to population ratio that is still below the previous peak, even if now recovering. In other words, the participation rate in the labor market remains relatively low. And, hence, wages have not yet started to pick up significantly, and inflation remains subdued, which casts at least doubts about the meaning of full employment.

This suggests that we would need more fiscal stimulus, and not austerity. That's one concern I have with some critics of Trumponomics. That they presume that fiscal deficits and Trump's tax cuts are both bad. I would suggest that the latter is certainly bad, for distributive reasons. But deficits in the current situation in which the recovery has not raised all boats is far from a problem. I think it was Barbara Bergmann (citing Alvin Hansen) that said that the full employment deficit was the fiscal deficit necessary to bring the economy to full employment. We are probably not there yet. Btw, this is what used to be called functional finance and Trump's critics should learn about it.

Some critics, like Mallaby, are concerned with the trade wars. Here too I'm a bit worried about the positions taken by critics. Progressives have complained about Free Trade Agreements (FTAs) for a long while now. And also criticized the concept of Free Trade (see here for a list of entries in this blog). Mallaby, for example, suggests that the trade war with China, and the new version of NAFTA (USMCA now), which is worse for him than the original (the name for sure, Moreno-Brid suggested at a conference in Mexico this week MEXCUSA, a good pun in Spanish), would reduce productivity and growth.

I still don't have a full picture of the USMCA deal, but it seems that beyond the clauses about North American content and percent being produced with higher wages in the auto industry (both clauses that seem to favor the US and not Mexico), the liberalization of Canadian dairy industry, and tighter restrictions on generic medications (all of which seem to favor US corporations against Canadian citizens), the most important is the one that allows any member country to essentially veto free trade agreements with non-member countries. That is, most likely, a clause for the US to veto FTAs with China.

In that sense, USMCA is just an extension of the trade war with China. I don't want to write much on this, but it seems to me that the US finally decided to revert the opening policy towards China, that harks back to Nixon, and to take the Chinese challenge (and at this point it's just that; I don't see a Sinocentric world any time soon) seriously. In all fairness, it seems to make a lot of sense, from an American security position to make it difficult for Chinese firms to go about the process of catching up, which includes acquiring companies, reverse engineering, violations of copyrights and patents, industrial espionage and more. And yes, there will be disruption of the commodity chains. For example, maybe Apple will move some of its i-Phone production out of China into other developing countries in the region (don't think many manufacturing jobs will return to the US though). But productivity won't suffer much.

If you're concerned with productivity, fiscal policy and its impact on growth should be a greater concern to you. Expansion of demand is what pushes labor productivity (productivity is not the cause of growth, but the result; search the entries on Kaldor-Verdoorn Law in the blog). The slow recovery is the problem.

Finally, I'm still unsure about when the recession will come, but neither the fiscal or trade fronts, which are the ones attacked mostly by Trump's critics seems to be the crucial problem. Monetary policy might be though. If the Fed continues to raise rates, something they suggested they would do, then there is a serious possibility of a crisis ahead. Higher rates would affect the already overextended American consumer, and lead to a recession. Nothing like the last one, I think. And the Fed would be forced to reverse course pretty soon. But the Fed remains independent, also something that old critics of the concept have embraced in the Trump era.

Interest rates are up, and what is the real problem with that

Not by much. To 0.75%, and yes it wasn't necessary because we're not at full employment yet (Krugman thinks we're; his point is that wages are increasing again, but not that much and participation rates remain low). Two things worth mentioning. One is that Yellen agrees with Krugman, and that signals that the Fed doesn't get what's the current state of the economy. She said:

"I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. With a 4.6% unemployment and a solid labor market, there may be some additional slack in labor markets but I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not obviously needed to provide stimulus to get back to full employment."

Again, fiscal policy was needed to get a healthy recovery according to Clinton's plans, and it is also true under Trump. I know Trump won't expand the welfare net, quite the opposite, and some of his spending will help his businesses and his cronies. But some infrastructure spending will do some good. And it's needed.

The other important misconception is that Trump's possible fiscal stimulus won't work. Krugman says:

"Meanwhile, Trump deficits won’t actually do much to boost growth, because rates will rise and there will be lots of crowding out. Also a strong dollar and bigger trade deficit, like Reagan’s morning after Morning in America."

First, that's not crowding out per se. In other words, it's not that the use of funds by the government crowds out private investors. It's more like monetary policy will be used to counter the fiscal expansion. But the previous experience with contractionary monetary and expansionary fiscal (militaristic and welfare cutting and full of cronyism too), yeah the Reagan era, led to significant growth, with increasing income inequality.

I'm skeptical that interest rates will go up by a lot. But let's say I'm wrong and Yellen decides to do that, and Trump does expand military and infrastructure spending. That danger is not an overheating economy and too much inflation. It's increasing income inequality. Higher rates will make the life of workers and debtors (consumers, kids in college, etc.) considerably harder. The stimulus will create jobs, but not good manufacturing jobs with high pay. More McJobs. And yes, economic growth, which might help in a reelection campaign in 2020.

Trumponomics might just be Reaganomics on steroids, but Krugman misreads the main danger. The trade deficits didn't stop growth (and won't this time either). Besides the manufacturing jobs wouldn't come back even with a very large depreciation (we're not about to pay Chinese salaries in the US). It's inequality stupid!

Martin Feldstein on Wall Street Instability and Interest Rate Policy

Martin Feldstein, chairman of the Council of Economic Advisers (CEA) during the Reagan administration, and one of the most influential economists in policy circles says that: "Market participants know that the economy is now essentially at full employment, that the consumer-price index is close to 2% and that there is little risk of deflation."

Few things. This:

Broader measure of unemployment is at 10.4%. Then this:

That is, the increase in employment, for the growing population, since the crisis has been almost nil. And finally this:

That is, wages have not increased much in real terms (click on figure for a better image).

Also, the deflation that matters (again) is asset deflation, not CPI, or some broad price index, deflation. Funny thing is that Feldstein thinks it's possible that asset deflation would have real effects. He says: "Much of this mispricing will likely unwind in the months ahead. What isn’t clear is whether the fall of equity prices and other corrections will have adverse systemic effects as they did in 2007-08, bringing down consumer spending and business investment and thereby reversing the recent labor-market improvement. Only time will tell."

I'm more skeptical that the effect would be big. For most consumers the effects of the Wall Street crash are irrelevant. But clearly there is no risk of inflation. In sum, not at full employment, and inflation is not really a problem, since wages are subdued. So his call for higher interest rates is hard to defend. Unless there is something else going on.

PS: Feldstein was on the board of AIG for many years, and he received a lot of money (millions?) from the company, which was at the center of the financial meltdown in 2008. He never defended regulation of financial markets. It might be a coincidence of course that his personal interests and his views are well aligned. But it would be good to know who are his clients now. I mean, just to make sure that his advise on interest rates is not biased ("Nudge, nudge. Wink, wink. Say no more").

The U.S. Federal Reserve and Shared Prosperity

By Thomas Palley

The Federal Reserve is a hugely powerful institution whose policies have an enormous effect throughout the economy. For that reason, it is doubtful the United States can achieve shared prosperity without the policy cooperation of the Fed.

Now, with the economy stronger, there is debate over whether the Federal Reserve should raise interest rates. That conversation is important, but it is also too narrow.

It keeps policy locked into a failed status quo which has seen the Fed consistently take care of Wall Street first, while placing the concerns of Main Street a distant second. Though the Great Recession has triggered some policy shift toward helping ordinary Americans, much more is needed.

Read rest here.

Dean Baker on The Paid Vacation Route to Full Employment

 

By Dean Baker:

The economics profession has hit a roadblock in terms of being able to design policies that can help the economy. On the one hand we have many prominent economists, like Paul Krugman and Larry Summers, who say the problem is that we don't have enough demand to get us back to full employment. There is a simple remedy in this story; get the government to spend more money on items like infrastructure, education, and clean energy. This is a simple story, but politically it is a non-starter. Few Democrats are prepared to push for anything more than nickels and dimes in terms of increased spending, nothing close to magnitudes that would be needed. As far as the Republicans in Congress, it would be easier to convert the Islamic State folks to Christianity. (We could also boost demand by lowering the dollar and thereby reducing the trade deficit, but economists don't talk about that one.) The other side of the professional divide in economics doesn't have much to offer on full employment because they say we are already there. The argument goes that people have dropped out of the labor force because they would rather not work at the wage their skills command in the market. In this story, we may want to find ways to educate or train people so they have more skills, but unemployment is not really a problem in today's economy. The notion that seven million people (the drop in population adjusted employment since the start of the recession) just decided they don't feel like working, doesn't pass the laugh test outside of economic departments and corporate boardrooms. This leaves us stuck with a policy prescription - more stimulus - that has zero political prospect any time in the foreseeable future. There is an alternative.

Read rest here. 

Krugman and the Fear of Wages

Although Krugman is a New Keynesian, who, by definition, oftentimes implicitly assumes a natural rate, he is quite on point:

Four years ago, some of us watched with a mixture of incredulity and horror as elite discussion of economic policy went completely off the rails. Over the course of just a few months, influential people all over the Western world convinced themselves and each other that budget deficits were an existential threat, trumping any and all concern about mass unemployment. The result was a turn to fiscal austerity that deepened and prolonged the economic crisis, inflicting immense suffering.

Read rest here.

Josh Bivens: Nowhere Close: The Long March from Here to Full Employment

By Josh Bivens

The last official business cycle peak occurred in December 2007. After that, the economy entered 18 months of virtual freefall—with job losses averaging more than 750,000 per month for the worst six-month stretch. The official end of the recession was June 2009—and some have recently declared full recovery has been reached in the 54 months since, as 2013 per capita GDP finally exceed its pre-recession levels. However, for the very large majority of Americans who rely on paid employment for the vast majority of their income, recovery likely still feels very far off. And they’re right—by any reasonable definition the United States is far from having reached a full recovery. That’s because simply clawing back to the per capita income level that prevailed before the start of the Great Recession is far too low a bar to clear to declare mission accomplished on recovery. The reason for this is simple: Joblessness (and the sapping of bargaining power that accompanies its rise even for still-employed workers) rises whenever a gap develops between the economy’s underlying productive potential and aggregate demand for goods and services. The intuition here is simple: A given number of customers’ demands can be satisfied with fewer people as each incumbent worker becomes more productive, and each new potential worker (new graduates, for example) seeking to enter the workforce will only be employed if there is extra consumer demand for what he or she produces. So, demand has to rise in line with the economy’s productive potential in order to keep joblessness from rising.

Read rest here. 

Palley on the limitations of MMT once again

Tom Palley's new paper on MMT titled "Modern money theory (MMT): the emperor still has no clothes" is out. From the abstract:

Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics.

 The full paper is here.

EPI: Recovery Fails To Reach Escape Velocity in 2013

By Josh Bivens

We now know that the U.S. economy grew at a 3.2 percent annualized rate in the last quarter of 2013, and grew 1.9 percent during all of 2013. This is simply too slow to generate a full recovery from the damage inflicted by the Great Recession in a reasonable amount of time. Too many policymakers seem eager to move on to other economic issues, but the necessary condition for addressing almost every other economic challenge—be it boosting job quality or increasing opportunity or checking the rise of extreme inequality—is a return to full employment, and that should be the nation’s first priority.

See rest here and here

New Book By Baker & Bernstein: Getting Back to Full Employment - A Better Bargain for Working People

By Dean Baker and Jared Bernstein

From the Introduction:

A strong labor market with full employment need not be a rare economic anomaly that returns roughly twice for every one appearance of Halley’s Comet. Full employment can be a regular feature of the policy landscape, with tremendous benefits for rising living standards, poverty reduction, the federal budget, and equitable economic growth. In this book we present the benefits and importance of full employment in ways that are particularly germane to the economy today, and we offer policies to begin moving to full employment now. Full employment can be defined as the level of employment at which additional demand in the economy will not create more employment. All workers who seek a job have one, they are working for as many hours as they want to or can, and they are receiving a wage that is broadly consistent with their productivity.

Full PDF here.

Unemployment Insurance Extensions Haven't Expired With Long-Term Unemployment So High

Following the last post (see here and here), it is worth pointing out that over the course of preceding recessions since 1957, Congress has not let long term unemployment insurance to cease with sustained high unemployment. 

By Heidi Shierholz

Four and a half years after the official end of the Great Recession, there is still a gap in the labor market of nearly 8 million jobs. With job opportunities so weak for so long, workers have gotten stuck in unemployment for unprecedented lengths of time. The share of the workforce that is long-term unemployed is nearly twice as high today as it was in any other period when Congress allowed an extended benefits program to expire. The figure shows the share of the labor force that has been unemployed for more than six months. In the Great Recession, that share rose to more than two-thirds higher than the previous record set during the downturn of the early 1980s. It has since come down significantly, but it is still above the previous record. Today’s long-term unemployment crisis is no mystery; it is exactly what we would expect given how long our labor market has been as weak as it has. It is not the fault of individual unemployed workers failing to exert enough effort or flexibility in their job search.

Read rest here

More on Unemployment: "Missing Workers"

 

The official US unemployment rate significantly underestimates the weakness of available job opportunities. This is due to the existence of a large pool of “missing workers” (also termed 'discouraged workers' in the literature)—potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job.

EPI's “missing worker” estimates:

Total missing workers as of September 2013: 5,190,000

	Actual unemployment rate	Unemployment rate if missing workers were looking for work
Jan-2006	4.7%	5.1%
Feb-2006	4.8%	4.9%
Mar-2006	4.7%	4.8%
Apr-2006	4.7%	4.9%
May-2006	4.6%	4.8%
Jun-2006	4.6%	4.7%
Jul-2006	4.7%	4.8%
Aug-2006	4.7%	4.6%
Sep-2006	4.5%	4.5%
Oct-2006	4.4%	4.4%
Nov-2006	4.5%	4.4%
Dec-2006	4.4%	4.1%
Jan-2007	4.6%	4.3%
Feb-2007	4.5%	4.3%
Mar-2007	4.4%	4.2%
Apr-2007	4.5%	4.8%
May-2007	4.4%	4.7%
Jun-2007	4.6%	4.7%
Jul-2007	4.7%	4.8%
Aug-2007	4.6%	5.0%
Sep-2007	4.7%	4.8%
Oct-2007	4.7%	5.1%
Nov-2007	4.7%	4.7%
Dec-2007	5.0%	5.0%
Jan-2008	5.0%	4.7%
Feb-2008	4.9%	4.9%
Mar-2008	5.1%	5.0%
Apr-2008	5.0%	5.1%
May-2008	5.4%	5.3%
Jun-2008	5.6%	5.5%
Jul-2008	5.8%	5.6%
Aug-2008	6.1%	5.9%
Sep-2008	6.1%	6.1%
Oct-2008	6.5%	6.4%
Nov-2008	6.8%	6.9%
Dec-2008	7.3%	7.4%
Jan-2009	7.8%	8.1%
Feb-2009	8.3%	8.6%
Mar-2009	8.7%	9.2%
Apr-2009	9.0%	9.3%
May-2009	9.4%	9.6%
Jun-2009	9.5%	9.7%
Jul-2009	9.5%	9.9%
Aug-2009	9.6%	10.2%
Sep-2009	9.8%	10.8%
Oct-2009	10.0%	11.2%
Nov-2009	9.9%	11.0%
Dec-2009	9.9%	11.4%
Jan-2010	9.8%	11.2%
Feb-2010	9.8%	11.2%
Mar-2010	9.9%	11.1%
Apr-2010	9.9%	10.8%
May-2010	9.6%	10.8%
Jun-2010	9.4%	10.9%
Jul-2010	9.5%	11.1%
Aug-2010	9.5%	11.0%
Sep-2010	9.5%	11.1%
Oct-2010	9.5%	11.3%
Nov-2010	9.8%	11.5%
Dec-2010	9.3%	11.3%
Jan-2011	9.1%	11.2%
Feb-2011	9.0%	11.1%
Mar-2011	8.9%	11.0%
Apr-2011	9.0%	11.2%
May-2011	9.0%	11.1%
Jun-2011	9.1%	11.3%
Jul-2011	9.0%	11.4%
Aug-2011	9.0%	11.2%
Sep-2011	9.0%	11.0%
Oct-2011	8.9%	11.0%
Nov-2011	8.6%	10.8%
Dec-2011	8.5%	10.7%
Jan-2012	8.3%	10.6%
Feb-2012	8.3%	10.4%
Mar-2012	8.2%	10.4%
Apr-2012	8.1%	10.6%
May-2012	8.2%	10.3%
Jun-2012	8.2%	10.3%
Jul-2012	8.2%	10.6%
Aug-2012	8.1%	10.7%
Sep-2012	7.8%	10.2%
Oct-2012	7.9%	10.1%
Nov-2012	7.8%	10.2%
Dec-2012	7.8%	10.1%
Jan-2013	7.9%	10.3%
Feb-2013	7.7%	10.3%
Mar-2013	7.6%	10.4%
Apr-2013	7.5%	10.3%
May-2013	7.6%	10.2%
Jun-2013	7.6%	10.1%
Jul-2013	7.4%	10.2%
Aug-2013	7.3%	10.1%
Sep-2013	7.2%	10.2%

Source: EPI analysis of Mitra Toossi, “Labor Force Projections to 2016: More Workers in Their Golden Years,” Bureau of Labor Statistics Monthly Labor Review, November 2007; and Current Population Survey public data series

More here.

Unemployment is involuntary, not structural

There is a common misconception that unemployment is structural, that is, the economy has shifted to such an extent that there is a mismatch between quantity of labor demanded and quantity of labor supplied, based on skills, prerequisites, etc. Unemployment, which has been growing over time in the US, is mostly involuntary, that is, as a result of lack of full employment economic policy and insufficient effective demand, workers are unable to find work at living wages, even if they are actively seeking.

Paul Krugman's The Phony Fear Factor

Much has been said on how economic demagoguery continues to reign supreme, particularly by heterodox writers, so I won't delve much into this topic. Nevertheless, it is interesting to see that in his NYT op-ed, Paul Krugman, a pretty mainstream economist, disparages the 'confidence fairy' by citing Kalecki's “Political Aspects of Full Employment” (a Monthly Review link, interestingly enough). Though, Krugman somehow can't see much of Marx in Kalecki...does he not want to see it?

From the article:

"We live in a golden age of economic debunkery; fallacious doctrines have been dropping like flies. No, monetary expansion needn’t cause hyperinflation. No, budget deficits in a depressed economy don’t cause soaring interest rates. No, slashing spending doesn’t create jobs. No, economic growth doesn’t collapse when debt exceeds 90 percent of G.D.P. And now the latest myth bites the dust: No, “economic policy uncertainty” — created, it goes without saying, by That Man in the White House — isn’t holding back the recovery. 

First, however, I want to recommend a very old essay that explains a great deal about the times we live in.The Polish economist Michal Kalecki published "Political Aspects of Full Employment" 70 years ago. Keynesian ideas were riding high; a “solid majority” of economists believed that full employment could be secured by government spending. Yet Kalecki predicted that such spending would, nonetheless, face fierce opposition from business and the wealthy, even in times of depression. Why?"

Read rest here.

PS: Check also this earlier entry on Kalecki's paper.

The Barriers to Full Employment are Political, Not Economic

By Malcolm Sawyer

In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:

• deficits add to government debt, which is a burden on future generations (rather, the government debt is bonds owned by individuals, pension funds etc.);
• deficits crowd out investment (rather, they allow savings to take place and enable investment); and
• deficits cause higher interest rates (the current situation makes the rebuttal to this clear).

Yet those arguments are still trotted out.

Read the rest here.

Marx, Kalecki, and The Monthly Review School

By John Bellamy Foster

A historical perspective on the economic stagnation afflicting the United States and the other advanced capitalist economies requires that we go back to the severe downturn of 1974–1975, which marked the end of the post-Second World War prosperity. The dominant interpretation of the mid–1970s recession was that the full employment of the earlier Keynesian era had laid the basis for the crisis by strengthening labor in relation to capital. As a number of prominent left economists, whose outlook did not differ from the mainstream in this respect, put it, the problem was a capitalist class that was “too weak” and a working class that was “too strong.” Empirically, the slump was commonly attributed to a rise in the wage share of income, squeezing profits. This has come to be known as the profit-squeeze theory of crisis ...

Read the rest here.

Bob Pollin's new blog

Yeah, a new blog! No really, since there are lots of blogs, but few that are this promising. From Bob's first post:

Yes, another blog is now being launched into the world as I type these words. Does the world really need yet another blog? Obviously, there are lots and lots of them already out there—many, many bad ones, but some good ones as well. There are even lots of good ones out there already dealing with economics and economic policy, which is the focus on this blog as well. So why take up more cyperspace with this blog, on top of all the other ones already going strong?

The aim of this blog will be to develop, extend, and debate the themes that I present in my new little book, Back to Full Employment. In my view, creating a full employment economy is absolutely crucial to creating a decent society—that is, a society in which everyone has the right to earn a reasonable living through their own efforts or the efforts of family members and friends. It’s that simple a point. But at the same time, it turns out to be not so simple. There are large numbers of controversial economic issues around 1) how to get to full employment; 2) how to stay there, once there; and 3) whether full employment should be a basic goal of economic policy to begin with.

Read the rest here.

EPI's The State of Working America 2012

The last edition of the Economic Policy Institute State of Working America is out. A lot of data and more importantly serious and rigorous analysis. Here just want graph, which shows the relation between unemployment and changes in median wages from 1991 to 2011.

As you can see real wages are pro-cyclical, going up in a boom when unemployment falls, and down in a recession. We know that since at least Tarshis and Dunlop critique of Keynes in the 1930s. One more reason why full employment is an important policy goal.

Full employment, why it is important

In my intermediate macroeconomic classes at the University of Utah I always start by asking students what do they think is a more socially relevant problem an increase in inflation of 1% or the same 1% rise in the unemployment rate. Although the answers vary somewhat according to the macroeconomic circumstances, it is almost always true that the vast majority of my students think that inflation is the real problem.

When pressed on why do they think inflation is worse than unemployment they rarely suggest that inflation may hurt the poor more than the affluent, which would show a concern with income distribution, or seem to understand that moderate inflation might be good. Further, they have no idea that deflation is considerably worse than inflation, and that the reason for that is that deflation causes severe unemployment. The point is that they seem to think that unemployment does not hurt them more than inflation; after all they are getting a college education (which is not much of a guarantee these days, but I leave that issue for another post).

I then tell a personal story about inflation and unemployment and why one should be concerned with unemployment. In the Fall of 1999, fresh out of graduate school, I was hired as the Assistant Director of a small think tank. As I learned afterwards, there were another 5 candidates for the position. The average unemployment rate in 1999, I might add, was approximately 4.2 (see here). As it turns out I had another interesting piece of information that one seldom has about a particular position, namely: the number of applicants for the same position the previous time it opened up in 1995.

I always ask my students then, if you know that the rate of unemployment was around 5.6% (here again), that is, 1.4% higher than in 1999, how many people do they think applied for that same position back in 1995. They never get anything close to the 300 or so that vied for the job. In other words, in this particular case, a 1.4% higher unemployment rate implied an overwhelming difference in terms of competition. Of course one cannot, and should not generalize from one observation, but the anecdotal information fits the more substantive evidence for a tight labor market in the late 1990s, in which we actually saw increases in real wages for average workers in the Unites States.

If for no other reason, students, and everybody else, should be concerned with unemployment, because 1% more in the rate can hurt considerably more than the equivalent change in prices [ and that is why Okun's Misery Index, which adds the unemployment and inflation rates makes little sense; it mixes apples and oranges]. But even further, it is important to remember that whereas inflation hits everybody more or less equivalently – even if people have different consumption baskets – unemployment is a divisive social problem, which makes some ‘losers’ and others ‘winners,’ causing deep divisions in society (e.g. immigrants rob our jobs).

It is for that reason that full employment is the most important economic and social policy, the foundation on which to build the other policies. Work defines our lives, to a great extent, and gives dignity to people. And I do not mean just the poor. As I tell my students, I am a big believer in the ethics of hard work, and that is why I think rents and wealth should be heavily taxed, so that everybody needs to work to earn a living. That is full employment for all!

Back to full employment

Robert Pollin has written a short and very important book titled as this post. Bob is correct in pointing out that the main obstacle to full employment has been political, and that there is no technical reason why we are not pursuing policies that would produce lower levels of unemployment. Note that, as I suggested before, the unemployment problem, as bad as it is right now, is actually worse than you might think.

The full employment goal was attacked almost from the beginning, when it was implemented as the result of the Employment Act of 1946 in the United States. Arguably the Fed-Treasury Accord of 1951 was the first bullet shot in the war against full employment policies. Intellectually, the notion of the natural rate of unemployment, developed by Milton Friedman, and still part of the box of tools of mainstream economists (including New Keynesians) gave theoretical respectability to the idea that full employment could not be a sustainable policy goal.

But it was the rise of conservatism in the 1970s, and the Volcker-Reagan economic policies, that effectively eliminated full employment from the policy agenda. Pollin's book is a plea to bring back the role of the State in promoting policies that would benefit society as a whole. Further, he argues that the same State capacity that has allowed the US to remain a military power can and should be used to promote industrial development with equitable income distribution. A must read!

PS: See also Bob Kuttner's article on Pollin's book at the American Prospect, and Bob's piece in the Boston Review on the topic of his book.