[While inflation-hawks are quick to highlight the cost of higher
prices, they rarely, if ever, mention the costs associated with the
higher interest rate policy they recommend, costs that include higher
unemployment and lower wages for working people.]
[[link removed]]

ONCE AGAIN AUSTERITY PROPONENTS TELL IT LIKE IT ISN’T  
[[link removed]]


 

Martin Hart-Landsberg
January 17, 2022
Reports from the Economic Front [[link removed]]


*
[[link removed]]
*
[[link removed]]
*
* [[link removed]]

_ While inflation-hawks are quick to highlight the cost of higher
prices, they rarely, if ever, mention the costs associated with the
higher interest rate policy they recommend, costs that include higher
unemployment and lower wages for working people. _

, Economic Policy Institute

 

There appears to be growing consensus among economists and policy
makers that inflation is now the main threat to the US economy and the
Federal Reserve Board needs to start ratcheting up interest rates to
slow down economic activity.  While these so-called inflation-hawks
are quick to highlight the cost of higher prices, they rarely, if
ever, mention the costs associated with the higher interest rate
policy they recommend, costs that include higher unemployment and
lower wages for working people. 

The call for tightening monetary policy is often buttressed by claims
that labor markets have now tightened to such an extent that continued
expansion could set off a wage-price spiral.  However, the rapid
decline in the unemployment rate to historically low levels, a
development often cited in support of this call for austerity, is far
from the best indicator of labor market conditions.  In fact, even
leaving aside issues of job quality, the US employment situation, as
we see below, remains problematic.  In short: the US economy
continues to operate in ways that fall far short of what workers
need. 

A turn to austerity to fight inflation is not what we need.  Neither
is a continuation of policies that simply continue the growth of our
currently structured economy.  Instead, we need new policies that can
transform our economy with the aim of employing more people, working
significantly shorter workweeks under conditions that are humane and
fulfilling, for a living wage, producing and distributing the goods
and services required to meet majority needs in socially and
environmentally sustainable ways.

WEAK JOB CREATION

It is important to recognize how limited the economic recovery has
been in terms of job creation.  As Elise Gould notes
[[link removed]],

Most of the vital fiscal stimulus provided in 2021 has now faded while
the labor market is still nearly 3.6 million jobs below pre-pandemic
levels and is facing a shortfall in the range of 5 to 8 million jobs
when taking into account population growth and/or pre-pandemic trends.

And while the unemployment rate has fallen to an impressively low 3.9
percent in December 2021, the labor force participation rate (which
shows the percentage of the civilian noninstitutional population 16
years and older that is working or actively looking for work) tells a
very different story.  As we can see below
[[link removed]],
as of December 2021 the labor force participation stood at 61.9
percent, far below its early 2000’s peak of 67.3 percent.  

In other words, one reason that the unemployment rate has fallen so
low, is that millions of workers have dropped out of the labor force
and, as a result, no longer considered in the calculation of the
unemployment rate. In fact, our labor force would have to be some 13
million larger to match that earlier peak.

There are those that say that the current labor force participation
rate paints a misleadingly negative picture of the tightness of the
labor market.  Many point to the fact of record high quit rates,
which they say shows that many workers are “voluntarily” choosing
to leave the labor market.  Leaving aside the fact that many of those
who quit did so because of health concerns or a lack of childcare
options, the focus on quit rates alone produces a one-side picture of
current labor market dynamics. 

As Elise Gould points out
[[link removed]]:

The media has focused on the high quits rate, but what’s often
missing from that coverage is that workers who are quitting their jobs
aren’t dropping out of the labor force, they are quitting to take
other jobs. . . . Much attention throughout the recovery has been
on accommodation and food services, which suffered the greatest
losses in employment when the pandemic hit and is now experiencing
record-high levels of quits. In November 2021, accommodation and food
services recorded nearly a million quits (920,000). But—and here’s
the part many commentators seem to be missing—hiring in
accommodation and food services exceeded quits in November, coming in
at over 1 million (1,079,000).

As the following figure shows
[[link removed]],
hires are now greater than quits in all sectors of the economy.  What
we appear to have is a high degree of labor market mobility, with
workers leaving one job for another (hopefully better) one.

Another reason offered for why the low labor force participation
should not be given too much weight in policy considerations is that
it is said to be heavily influenced by Baby Boomer retirements.  It
is certainly true that the Baby Boomer generation has a lower labor
force participation rate than that of younger cohorts.  But,
strikingly, and in contrast to that of younger cohorts, the labor
force participation rate of those over 55 has actually grown since
2000, and quite rapidly for those over 65, as we can see in the
figure below
[[link removed]]. 
In other words, Baby Boomers and even older workers have been moving
back into, not out of, the labor force.

THE LABOR MARKET EXPERIENCE OF PRIME AGE WORKERS

Perhaps the best way to appreciate the economy’s employment
generating inadequacies is to look at the labor market experience of
prime age workers, those between 25 and 54 years.  As Jill
Mislinski explains
[[link removed]],

This cohort leaves out the employment volatility of the high-school
and college years, the lower employment of the retirement years and
also the age 55-64 decade when many in the workforce begin
transitioning to retirement … for example, two-income households
that downsize into one-income households.

The figure below
[[link removed]] shows
the labor force participation rate for those 25-54 years.  As noted
in the inset box, some 3.3 million additional workers ages 25-54 would
have to be employed to regain the labor force participation rate
achieved around the turn of the century.

The employment-to-population rate for this cohort is probably even
more telling.  While the labor force participation rate includes both
employed and unemployed workers in its calculation, this rate includes
only those employed.  As the inset box notes, the current age 25-54
cohort would require an increase of 5 million employed workers to
match its earlier peak rate.   

It is worth emphasizing that we are looking at prime age workers.  It
is hard to see how one could consider the US labor market tight,
meaning the economy is close to full employment, when millions of
prime aged workers remain outside it.  And it would take a very
active imagination to believe that these workers have decided not to
work because of their access to a generous government financed system
of social support.  The fact is that the low labor force
participation rate and employment-to-population rate of this prime age
cohort are indicators of just how poorly the US economy is at
generating acceptable employment opportunities.  Policies designed to
slow economic growth and, by extension increase unemployment, are
clearly unwarranted.

INFLATION DANGERS OVERSTATED

Many of the same people that point to the tightness of the labor
market as a justification for their call to tighten monetary policy
also overstate the dangers of inflation.  The rate of inflation has
indeed spiked.  The year-over-year inflation rate from December 2020
to December 2021 hit 7.0 percent, the highest rate since June 1982. 
However, the monthly rate of inflation has begun to significantly
slow—from 0.9 percent in October, to 0.8 percent in November, to
only 0.5 percent in December. 

Pandemic disruptions to the supply chain are the main cause of this
recent spike in prices, something that is not unique to the United
States.  As Dean Baker describes
[[link removed]],
 

We continue to see the supply chain crisis, aggravated by the shortage
of semi-conductors, which has impeded car production. New car prices
rose 1.0 percent in December and are up 11.8 percent over the last
year. Used car prices rose 3.5 percent and have risen an incredible
37.3 percent over the last year. Together, these components accounted
for almost 1.5 percentage points of the inflation we have seen over
the last year.

The major auto manufacturers are getting around the chip shortage and
ramping up production. Since the cost of producing cars has not hugely
risen, we can expect most of the rise in new and used car prices to be
reversed in the not distant future.

There is a similar story in the other components where supply chain
issues have pushed up prices. Apparel prices, which have been trending
downward for decades, rose 5.8 percent over the last year. The index
for household supplies and furnishings, which includes everything from
linen to major appliances, rose 7.4 percent over the last year.

There are reasons to believe that the rate of inflation has peaked and
is now heading down as supply chain disruptions are (at least
temporarily) overcome, and demand itself slows.  In fact, the Federal
Reserve forecasts that its personal consumption expenditure inflation
index will rise by only 2.6 percent in 2022, sharply down from an
expected 4.4 percent in 2021.

Moreover, as Baker also points out, financial investors seem to agree
with the Federal Reserve’s forecast of slowing prices:

The interest rate on 10-year Treasury bonds is just over 1.7 percent.
This is not consistent with an expectation that inflation will remain
near 7.0 percent. The breakeven inflation
[[link removed]] rate between normal
Treasury bonds and inflation-indexed bonds is less than 2.5 percent.
Financial markets can be wrong (see stock and housing bubbles), but at
the moment they don’t seem concerned about runaway inflation.

In sum, we need to continue pushing back against calls for monetary
tightening, and redouble our efforts not just to maintain current
fiscal and monetary policies, with their modest expansionary impact,
but to demand a more aggressive set of changes in how and in whose
interest our economy operates. 

_MARTIN HART-LANDSBERG is Professor Emeritus of Economics at Lewis and
Clark College, Portland, Oregon; and Adjunct Researcher at the
Institute for Social Sciences, Gyeongsang National University
[[link removed]], South Korea. His areas of teaching and
research include political economy, economic development,
international economics, and the political economy of East Asia. He is
also a member of the Workers' Rights Board
[[link removed]] (Portland, Oregon)
and maintains a blog Reports from the Economic Front
[[link removed]] where this article first
appeared._

*
[[link removed]]
*
[[link removed]]
*
* [[link removed]]

 

 

 

INTERPRET THE WORLD AND CHANGE IT

 

 

Submit via web [[link removed]]
Submit via email
Frequently asked questions [[link removed]]
Manage subscription [[link removed]]
Visit xxxxxx.org [[link removed]]

Twitter [[link removed]]

Facebook [[link removed]]

 




[link removed]

To unsubscribe, click the following link:
[link removed]