US job creation disappointed for the second month in a row even as the labor force participation rate — a better measure of labor market health — fell in May. Contrast this with the 6.4% scorching pace at which GDP rose in the first quarter. Consider as well that job openings reached a series high of 8.1 million at the end of March. Are we talking about two different worlds?
Economists use the cautionary Latin phrase ceteris paribus (“other things remaining the same”) in making economic prognostications. In this case, other things did not remain the same. Additional federally financed jobless benefits passed in the final weeks of the Trump administration, followed by new payouts authorized at the beginning of the Biden term, put more money in workers’ hands. All workers entitled to regular unemployment compensation also became eligible for a supplemental $300 weekly benefit.
It is not surprising that for some of the lower-income workers, it was better to remain unemployed and collect benefits. Even for those for whom the benefits were somewhat less than earned income, unemployment compensation sure beat having to work for a living!
You can see how all this got translated into low monthly job creation numbers, and high levels of job openings. An earlier SriKonomics piece had anticipated this problem by suggesting that merely doling out benefit checks would not create sustainable economic growth. Making some of the payments conditional on workers agreeing to be trained for jobs in greater demand would have limited government spending as well as raise productivity in the future.
President Joe Biden appears to understand this aspect of the labor market. He said Friday that it “makes sense” for the $300 weekly benefit to end on September 6 as scheduled. 25 of the 50 states have already decided to end the benefit that they saw as a job-killer. But there is still a lot of support within the administration for continued benefits.
For example, as recently as May 20, Cecilia Rouse, Chair of the White House Council of Economic Advisors, believed that “we’re not there yet” with respect to cutting benefits. With reference to the more than $4 trillion in infrastructure spending that the President has proposed, she was of the opinion that the risk is doing too little to promote economic recovery, not too much. Secretary of the Treasury Janet Yellen has also subscribed several times in her recent speeches to the “bigger is better” theme.
How is all this related to the ongoing debate over whether inflation is temporary or permanent? Several Federal Reserve officials (for example, here) have suggested that the burst in inflation demonstrated by the recent figures is due to the reopening of pandemic stricken sectors and is, therefore, transitory. However, if compensation for not working remains a major component of the stimulus program, and is accompanied by increased spending for infrastructure and ancillary areas, the sheer weight of the dollars will push up inflation and interest rates.
Of course, the Federal Reserve is also on a spree, adding $120 billion a month to its balance sheet. The surge in Viet Nam war-related spending in the early 1970s, accompanied by a pliant Federal Reserve led by Arthur Burns, laid the foundation for the inflationary surge that came later in the decade.
We have since not seen a similar confluence of like-minded expansionism on both the monetary and fiscal fronts until now. While yields have not reacted yet to the stimulus due to the “Uncle Jay and Aunt Janet will take of us” sentiment, that sentiment by itself cannot sustain a sanguine bond market.
History may not repeat but it often rhymes. This time is no different!
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California 90401
June 6, 2021
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