(Bloomberg Opinion) -- The question is, how far away is a recession?
George Magnus pointed out that the current expansion in the U.S., from the last trough in activity in June 2009, has now overtaken the expansion from February 1961 to December 1969 to be the second longest ever.
In June 2019 this becomes the longest recovery ever, overtaking the 120-month expansion from 1991 to 2001. The average length of the 12 expansions since 1945, Magnus notes, has been 58.4 months and in the three cycles since 1991 the average was 95 months.
The prospect of the economy slowing before the November 2020 presidential election, in my view, is likely better than 60/40: recoveries do not go on forever. U.S. recoveries usually end because the Federal Reserve raises rates too soon.
The Fed has now realized that its December 2018 rate rise was in error and has pulled back from further increases. The market is pricing in rate cuts by the end of 2019. The April 2019 labor market release represents a further puzzle for the Fed with a 3.6% unemployment rate and a 3.2% rise in hourly wages. This contrasts with 4% increases in 2007 when the unemployment rate of 4.6%. They have no explanation for this weak wage growth.
But we need to ask ourselves: What now, given that central banks have fewer arrows in their economic quivers than they had when the Great Recession hit?
In 2008 interest rates were around 5%, and there was room to cut them to zero and even below. Right now central banks do not have that much room to maneuver. Congress is unlikely to act swiftly in the face of any downturn, and similarly in the U.K., which is preoccupied with Brexit. The left-behinds look set to continue to be left behind. Nobody has apologized for messing up.
First, we need to get to full employment and fast, wherever that is.
There is still a lot of slack in the U.S. labor market, which is why wage growth is well below what it was in the past at equivalent rates. The same applies in other countries including the U.K. and Germany, which also have unemployment rates below 5%. We need to encourage people to work by boosting labor demand, and labor supply will follow. Inflation is a problem of a bygone age.
Sir William Beveridge showed back in 1942 that it is possible for unemployment to surprise and go really low without bad consequences. That would ensure workers are standing by waiting for job offers and push up wages. This will especially help people at the low end. Once that has been achieved we can move on to address other problems. It is unclear when that would be but, as the saying goes, “I don’t know how to define pornography, but when I see it I will know.”
Having the economy cranking, and on fire, which hasn’t happened in our lifetimes, with firms searching for workers, would allow those who have been pushed lower down the occupational pyramid to make better use of their skills.
Young people with degrees who were forced to take jobs done previously by those with high school education could move to graduate-level jobs. It would allow the underemployed to get more hours. It would allow workers to move from part-time jobs they were pushed into to full-time jobs, which would increase their happiness. It would allow the unemployed to get jobs and increase their happiness and that of everyone else. It would make being out of the labor force less attractive as the alternative of holding a job that paid more.
Moving to full employment would boost wages, which is its main point, and hence boost living standards. In the U.K. on March 9, 2017, the Institute for Fiscal Studies estimated that median earnings will be no higher in 2022 than they were in 2007, before the financial crisis.
Paul Johnson, the IFS’s director, said that almost a decade on, the prospects for income and earnings growth remained weak: “what really matters to people is what is happening to their incomes. Income and earnings growth over the next few years still look like being weak. On current forecasts, average earnings will be no higher in 2022 than they were in 2007. Fifteen years without a pay rise. I’m rather lost for superlatives. This is completely unprecedented.”
Second, an obvious way to boost labor demand is to increase infrastructure spending in the U.S. and the U.K., which would create jobs although it is not obvious for whom and where.
The big hang-up with the size of the debt makes no sense as every nation has both assets and liabilities. Plus, in 2018 and beyond, money can be borrowed very cheaply. It matters mostly what the debt is used for, rather than its size.
We also know that countries with high debt-to-GDP ratios can grow, and the 90% rule has been debunked by Thomas Herndon. Consumption bad, investment good.
There are many worthwhile projects that can be started, not least roads and bridges and public transportation. It is time to get commuting times down. If it does nothing else, this would increase happiness. It would also raise GDP, of course.
The U.S. infrastructure needs to get fixed, but the talk of a big package to do this has disappeared from the political radar screen. It is time for a new New Deal. The unemployment rate of construction workers in the U.S. is still relatively high, at 5.2%.
Private construction in March 2019 in nominal terms was only 0.3% higher in March 2019 as its pre-recession high in February 2006. Public construction in March 2019 is 1.5% below its level a decade earlier, in March 2009.
So, there is capacity for a construction burst to make up for the bust. An infrastructure plan may well be something the Democratic-controlled House and Donald Trump could still agree on in 2019.
Construction contracts can emphasize job creation. The federal government can move some of its own operations to deprived areas and set up enterprise zones to make it cheap for firms to move there.
It makes sense to provide workers with incentives to work. A further issue is to provide incentives for firms to use labor over capital. The reason that technology has replaced jobs is that it has a relatively low price. The practicalities of giving firms incentives to hire and train workers, to invest in human capital, rather than in machines, are not simple. One way that has been found to be labor intensive is to encourage refurbishment of old properties. It is more capital intensive to build new ones.
Third, something can be done about changing attitudes and making them more positive. Scott Blinder and Lindsay Richards (2016) found that preferences for reduced migration in the U.K. have been softening in recent years. Alexis Grigorieff, Christopher Roth and Diego Ubfal (2016) conducted a set of experiments that suggest intriguing possibilities. First, they used a large representative cross-country experiment to show that when people are told the share of immigrants in their country, they become less likely to state that there are too many of them.
Then, the researchers conducted two online experiments in the U.S., where they provided half of the participants with five statistics about immigration before evaluating their attitude toward immigrants with self-reported and behavioral measures. This more comprehensive intervention improves people’s attitude toward existing immigrants, although it does not change people’s policy preferences regarding immigration. Republicans become more willing to increase legal immigration after receiving the information.
The researchers also measured the same self-reported policy preferences, attitudes and beliefs in a four-week follow-up, and the results showed that the effects of the information treatment persist. Specifically, these results suggest that targeting individuals with the most negative views on immigration would be the most effective way of changing people’s attitudes toward immigrants.
Fourth, government should subsidize child care for working parents. This could be done by making these costs fully tax deductible, which would encourage work, or states could offer subsidies. Fifth, tax subsidies and other measures to help people move in the U.S. and help the young strike out on their own would make sense, especially from the states that are struggling. Countries that have low mobility like Spain and Greece have high unemployment rates.
Sixth, use the tax code to reduce income and wealth inequality. One obvious possibility would be to lower tax rates on those who make less than the median income. It would also make sense to remove the cap on paying in to Social Security. Contributions should just rise as a fixed or even a rising proportion of income. It would make sense for a millionaire to pay at least the same proportion as his or her secretary and for a billionaire to pay a higher proportion than a millionaire.
I am a great believer in providing incentives to work. It is inappropriate to subsidize indolence.
Finally, it is time to look at ways of encouraging and giving incentives for work to those at the bottom. There has also been talk of universal basic income whereby the federal government would provide each adult below a certain income level with a specific amount of money each year. It acts as a negative income tax. In a new Gallup poll taken in February 2018 an astonishing 48% of Americans support this idea.
The latest results from a Finland study showed that those getting basic income experienced less financial insecurity. According to the Social Insurance Institution of Finland (Kela), survey respondents on basic income reported they felt less stressed about their finances and more in control of their lives than the control group.
The concern may be that in the long run it will not be possible to Make America Great Again for the less educated. Settlers arrived in the United States and obtained vast amounts of wealth. There were economic rents to be shared, and less-educated Americans obtained living standards for themselves that were not replicated by similar workers in Europe and beyond.
No return of steel or coal jobs.
The answer, to quote William Beveridge once again, in “Full Employment in a Free Society,” is to always have “more vacant jobs than unemployed men, not slightly fewer jobs. It means that the jobs are at fair wages, of such a kind and so located that the unemployed men can reasonably be expected to take them.”
The same applies to unemployed women these days.
People are hurting. The worry is that policymakers have not learned from their mistakes, but now they have little firepower to deal with the onset of the next economic crisis. The whole world wants a good job. Gizza job.