Nearly everywhere I look in the blogoshphere and financial media today, I see discussions about the recent predicament of slow RGDP growth in the G7 countries, particularly in the US, debates about its cause and whether it is curable.
I have found two of the most convincing slide decks on the subject thus far from the Economic Cycle Research Institute (here and here), that combine the demographics argument with the plunge in capital intensity in productivity since 2010. We have much less potential labor force growth combined with a decline in capital investment into the people we have – possibly proving the point that we can do only less with less.
Convincing as these slides may be, there seems to be that certain something missing that ties it all together as the most likely plausibility. The theory behind them is pretty much basic macro. There is no doubt that there is some grain of truth pertaining to the situation of the present, but very little insight into possible alternate realities is offered. For instance, do the underlying potential labor force growth figures discount all of the individuals currently not in the labor force as being water under the bridge? If so, on what basis?
Given everything I know about the political economic situation in the US, as good of an explanation as these slides are, the current level of political discontent is way beyond anything I’ve yet witnessed, and as such, the low growth phenomenon is not so easy to explain away as ‘demographics’ that implies voluntary inactivity when the politicians are cracking down on legal and illegal immigration because it is believed these immigrants “take jobs from Americans.” Somebody bought the rhetoric and voted for it after it had been soundly rejected at ballot boxes everywhere all throughout the 1990’s. So, intuitively, perhaps there is way more to the labor force story than meets the eye and these slide decks are yet more well-intentioned feeling around the elephant in the dark.
Some other things that we know about the situation are that the Philips curve is alive and well at the Fed, and they use it to keep things in some level of “equilibrium.” Unemployment is fine where it is, keeping both inflation and macro prudential risks at a minimum – or perhaps producing Sumner’s view of the new Greater Moderation – the demand for labor has equalized the supply.
This is all well and good if the object of the game isn’t full employment as it is defined in the Full Employment and Balanced Growth Act. Rather than some arbitrary estimation of the NAIRU, the Act vaguely defines full employment as an obligation of government to foster an economic atmosphere that provides jobs for everyone and intends for monetary policy to be complicit in this obligation. So whatever this new Greater Moderation may be, it isn’t in conformity to the legislated mandate that puts managing AD so that government can meet its obligations to the people up front. Government not meeting its obligations carries with it political and real monetary risk, and I wonder sometimes, when I hear elitists and ivory tower intellectuals squealing and screaming about Trump’s policies, if they ever really thought about the tradeoff involved in managing macro the way they have, as if they are the only ones who matter in this nation that we all share.
Just imagine a pre-Lehman world where monetary policy were managed optimally, and the same demographic shift occurred. People were retiring at record numbers with their happy little nest eggs. What would be the expected impact on the LFPR, on productivity, on the capital intensity of productivity, and on the unemployment rate assuming immigration levels were equal to average?
I will leave the answering of these questions to people more qualified to answer them, but I am supposing it wouldn’t result in the sort of ongoing deprivation that culminates in the election of Donald Trump. I could, however, envision inflation hawks with the Philips curve stirring up such a result. But maybe it’s just me.