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Kevin Cochrane: A view of an economic and political precedent for 2019 and 2020



It's 1970, when political pundits cast blame on the administration and Congress held impeachment hearings. “The sky is falling,” the left yelled with smiles on their faces. “Look everyone, the economy only added 130,000 new jobs last month — down from 164,000 the prior month — and that proves that a recession is on the way!” Yes, typically a slowdown in hiring indicates a slowing economy. But not so fast.

As the Chinese curse portends, “may you live in interesting times,” and we definitely do. When new jobs are created and added to the labor pool, it is usually seen as evidence of a growing economy and as a vital necessity to driving down unemployment. However, what if there isn’t any unemployment? What happens then?

The current unemployment rate of 3.7 percent is the lowest America has seen in 50 years, and it has remained pretty much unchanged over the past year or so. Economists define full employment as an economic state where unemployment hovers somewhere between 4 percent and 6 percent — some employable folks choose to watch daytime TV instead of getting a job even when one is available. The “interesting times” we find ourselves in are a period where the labor force is actually overemployed.

Ask any first-year economics student and they will tell you that the demand for labor is a derived demand. What that means is that the demand by businesses for employees is driven by the demand for the goods and services they sell. If business is good, they hire (demand) more employees. If business slows down, they let folks go. But we haven’t seen times like these for half of a century, so maybe it doesn’t work that way when we’re beyond full employment.

Sure, new job creation is slowing — albeit, one month isn’t a trend — but it is slowing. And the GDP growth rate is slowing, too. These are both signs that pundits point to as indicators the economy is headed down. But what if growth is slowing because firms can’t hire enough workers? Yes, the derived demand for labor is there, but output can’t increase because there’s nobody to fill the jobs. What would be a sign that this may be the case? Wage gains, of course.

When the supply of something is constricted, its price goes up. In the case of labor that price is the wage rate, and we’re seeing stronger gains in that area the past 18 months than have been seen in a decade. The current 3.9 percent increase exceeds inflation and is close to pre-2008 recession levels.

The last time the unemployment rate moved beyond the full employment level a recession didn’t immediately follow, but slowing job growth did, and also slowing GDP growth. That was in 1968 and 1969, and inflation started rising along with wage levels. The Federal Reserve tried to stem the rapidly rising price level with higher rates, but its efforts were ineffective. 

Looking at the economic picture in 1970 — essentially 2020 in our current world — the GDP only grew 0.2 percent, compared to 3.1 percent the previous year. Currently, the U.S. GDP is growing at about 2.1 percent down from a decade high of 3.1 percent in 2018. In 1970, the economic growth was slowing just like today, while low unemployment drove wage growth upward, along with inflation. 

By the mid-1970s, the ultimate result of this inversion between unemployment and full was stagflation — a flat economy with high inflation and high interest rates, but not a recession. Nonetheless, political pundits laid the blame on the administration and things escalated from there. The outcome was capped with Congress holding impeachment hearings. Sound familiar?

• Kevin Cochrane teaches economics and business at Colorado Mesa University, and is a visiting professor of economics at the University of International Relations in Beijing.


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Posted: September 12, 2019 Thursday 01:19 PM