The Permanent News About the Transitory Monthly Employment Report: June 2015 Snapshot

It seems that every month people ask me for my view on the current month’s job report. And every month what I have to say is very close to what I said the previous month. Thus it seems to me it would be a good idea to set out a document that will have a larger shelf-life than a month. While hardcore data junkies want to know what is new in the job report, hardcore data junkies are few. What everyone else really wants to know is what is important about the job market report:

What about the most recent employment report, anyway?

• This month’s employment report–in fact, the last few months’ employment reports–should not lead us to change our minds about anything. What did you think three months ago? You should think the same thing now. Information about the changing destiny of the economy drips out only slowly. And so your view should change only slowly

• What should you have thought three months ago? Eight things:

• First, for the past 50 years the unemployment rate and other indicators of the health of the labor market–ease of getting a job, business willingness to build more to fill vacancies, employment the population adjusted for demographics and sociology–have all pointed in the same direction.

  • Not anymore.
  • Today the unemployment rate suggest that we have had a full recovery, while other labor market indicators suggest a very partial and very incomplete recovery.
  • The Federal Reserve is still mostly looking at the unemployment rate.
  • They are smart, and they know all the arguments, but when I look at all the evidence I cannot agree

• Thus, second, it looks to me like we are still far short of anything that might be called a normal or neutral business-cycle level of employment.

  • So it is not time to start cooling off the economy.

• Third, it will not be time to start cooling off the economy until either we get different signals:

  • Either from the employment share numbers.
  • Or from the wage growth numbers.

• Fourth we never recovered to the pre-2007 trend.

  • It was not that the pre-2007 trend was unsustainable.
  • In 2007 we were buying the wrong things: too many imports and too much housing.
  • But the economy as a whole was not overheated.
  • Why haven’t we had a full recovery to the pre-2007 trend? Two reasons:
    • First, Republican economists have failed to properly brief Republican members of Congress that what is needed now are the policies that Milton Friedman’s teachers, people like Jacob Viner, recommended for the 1930s–not austerity and not shrinking the Federal Reserve balance sheet shrinkage, but rather coordinated monetary and fiscal policy expansion.
    • Second, because in late 2009 Ben Bernanke overestimated the economy’s self-generated recuperative powers, and so failed to understand the seriousness of the situation.
    • Third, to be fair, because Tim Geithner thought the same as Bernanke–that the economy was going to recover on its own–and Obama believed him.

• Fifth, it is still not too late to turn the macroeconomic policy ship around:

  • Global investors are willing to lend the US government money at unbelievably low terms.
  • Every reasonable calculation I have seen tell us the benefits of borrowing up to $1 trillion a year more and spending it on infrastructure and education are huge.
  • It is definitely worth doing, unless and until interest rates return to normal levels.

• Sixth, there are also important structural issues:

  • Growing inequality.
  • The rise of the robots.
  • Globalization, etc.
  • But these are roughly in the same state today that they were in 2007 or indeed 2000.
  • Changes since then or overwhelmingly due to short-run macroeconomic events and problems:
    • The housing bubble.
    • The Wall Street crash.
    • The deep depression.
    • The anemic half-recovery.

• Seventh, Obama… Taking a broad view, under Obama the American economy has done worse than it has done under any Democratic president since the Civil War

  • Save perhaps Carter.
  • Of course, that also means the economy has done better than under any Republican president since Coolidge
    • Save Eisenhower.
    • But these days the Democrats are claiming Eisenhower as his. Certainly today’s Republicans don’t want that RINO.
    • In fact, these days Democrats are also posthumously baptizing Lincoln as a Democrat, kind of like the Mormons do, when you think about it…

• Eighth, things could have been much better:

  • We would have had to switch out of housing and into exports and investment between 2006 and 2009.
  • We were well on the way–about halfway–through making that switch at full employment.
  • But then Wall Street mashed up and caused the crash.
  • We did not need a depression.
    • Especially not a depression this long.
  • What we needed–and could have had–was an expenditure switch. We still could have one–to education, to business investment, to infrastructure, to exports.