Hot Air

NYT: Yeah, everything we knew about the jobs market was wrong

This admission is long overdue, but it’s less about the New York Times than on the media in general. For several years, media outlets claimed that we had reached peak employment in the latter half of Barack Obama’s presidency despite ample evidence of a massive overhang of discouraged workers weighing down the job markets. When Donald Trump ran on an agenda of deregulation and tax incentives to spark new hiring and drive wages upward, only a handful of media outlets managed to avoid outright scoffing at the very idea that we had any room to expand.

Today, NYT’s Neil Irwin deserves some kudos for admitting that the “experts” got it wrong — and that it was “an extremely costly mistake”:

Still, there is a bigger lesson contained in the data, one that is important beyond any one month’s tally of the job numbers: that the American economy is capable of cranking at a higher level than conventional wisdom held as recently as a few years ago. As the economy continues to grow well above what once seemed like its potential, without inflation or other clear signs of overheating, it’s clearer that the old view of its potential was an extremely costly mistake.

This in fact was precisely the argument Trump made in 2015-16, and that the regulatory and monetary policies of the Obama era were holding back a bigger expansion. Media analysts largely ridiculed the idea, even after it began paying off in mid-2017 and later again in early 2018 after the tax-reform package passed. However, the signs were there all along, especially in wage stagnation. Having spent the last decade paying close attention to the data produced by the Bureau of Labor Statistics and historical models, I have long argued that the stagnation of wages both before and especially after the Great Recession pointed to an underuse of labor in the US economy, and that government policies were getting in the way.

Rather than recognize that the supply-demand tension demonstrated this rather amply, media analysts preferred to argue instead that traditional supply-and-demand dynamics no longer applied to jobs markets, an absurd claim. It was made for two reasons — to claim that Barack Obama had created “full employment,” and that Trump couldn’t possibly succeed. And for a long time, even policymakers clung to that view, at significant cost to workers:

In January 2017, for example, nearly three years ago, the Congressional Budget Office forecast a 4.7 percent unemployment rate as far as the eye could see, and it projected that the United States labor force would consist of 163.3 million in 2019. The jobless rate has averaged less than 3.7 percent through the first 11 months of the year, and the labor force now stands at 164.4 million people.

The Federal Reserve likewise was too pessimistic about the potential of American workers; in projections three years ago, the consensus view of its leaders was that the unemployment rate would average 4.5 percent in the final months of 2019. If that forecast had materialized, 1.6 million more Americans would currently be unemployed than actually are.

They also expected their target interest rate to be around 2.9 percent — reflecting rate increases they believed would be needed to head off inflation. Instead, that interest rate is around 1.6 percent, and you have to squint to see signs of inflation.

If you go back even further, to the late Obama years, there was an even more pessimistic tone about the outlook for American workers embedded in the fine print of both public and private-sector forecasts.

Go back even further to the earlier Obama years. Rather than deregulate and incentivize investment, even outside the financial sector, the Obama administration chose to expand regulation instead. It tinkered around with foolish momentary interventions that simply shifted existing demand (remember Cash for Clunkers?) and stimulus packages that did nothing much more than allow bureaucracies to expand and give states cash to cover over their massive deficits in the short run. That needlessly turned the dial down on dynamic growth, while most of the experts simply shrugged off the labor overhang as the effect of boomer retirement. Had we tooled regulatory, tax, and monetary policies toward growth in the private sector rather than in the public sector, we might have gotten to this point several years earlier.

What about now? Have we reached peak employment? Some Trump supporters think so, and get annoyed when I suggest that we haven’t. However, wages haven’t grown so fast that it would indicate peak employment, as the Washington Post points out today:

By just about any metric this is the best job market since the late 1990s. The economy has been adding jobs for 110 straight months — a record streak. Jobs are plentiful. Unemployment is at a half-century low. And the unemployment rates for African Americans, Hispanics, Asians and Americans with less than a high school education are all at the lowest levels since the Labor Department began keeping track.

There’s a lot to cheer.

But one of the few head scratchers in this strong jobs picture is why wages aren’t growing as fast as they did in the late 1990s, when yearly wage growth routinely topped 4 percent.

The latest monthly report card on jobs came out Friday from the Labor Department and shows that the average worker’s pay — known as average hourly earnings — is up 3.1 percent in the past year. It’s a pretty good number. But it’s nowhere near where it was before.

There are three answers to this. First, we haven’t completely dealt with the overhang from the Great Recession and have too many discouraged workers left in the system. Two, the 1990s was a bubble economy that burst with the dot-com meltdown. And three, Trump’s trade wars — no matter how necessary or well-intentioned — are dragging on the economy. Resolving the third would probably go a long way to resolving the first.

Still, it demonstrates that we have not reached peak employment yet, even if we are getting closer to it. We still have room in trade, regulatory, and tax policies to spur even greater dynamism, even if the Fed seems to have learned its lesson on monetary policy.

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