Is There a Name for this Economic Mess?
Posted June 07, 2021
The latest jobs numbers show the addition of 559,000 positions — lower than expected — yielding an unemployment rate of 5.8%. On paper, that looks like full employment. But there’s something strange behind the numbers: the US is experiencing a chronic labor shortage.
It’s what happens when you pay people not to work following a full year during which time people were tempted by the idea of living off government largess forever.
Hence the strange paradox: unemployment fell, but so did labor participation. It is now down to 61.6% from a peak of 67.3% in 2000. Women’s labor participation took a massive hit in lockdowns and is now back to levels of the mid-1970s. Half of businesses report not finding people to fill currently open positions. Restaurants and bars are trying to expand hours and open new locations to serve the spending boom but cannot because they cannot find workers.
Many Types of Inflation
At the same time, inflationary pressures keep popping up in strange places: lumber, steel, energy, cars, clothing, housing, hotels, flights, and food. We are even seeing the return of so-called “shrinkflation.” This happens when packaging reduces the amount of a specific good consumers buy while maintaining the same price. Shrinkflation can take other forms too, such as rental cars ending the practice of unlimited mileage, or hotels no longer flipping beds while you are staying there.
These kinds of odd pricing trends are hitting sector after sector, with pressure building as consumers engage in what a clever journalist called “revenge spending.”
The personal saving rate shot up from 7% to an incredible 33% at the height of lockdowns, and still today stands at 27%. That’s actually the best of the news: this savings can serve as the basis for capital formation and investment, same today as following World War II. That’s provided inflation expectations do not kick in and inspire people to unload as much as possible, as soon as possible, to avoid currency depreciation.
People have all kinds of opinions about the future of inflation, with experts I respect holding opinions all over the map.
There are many moving parts here: huge increases in the Fed’s balance sheet, while money supply aggregates and the money base show terrifying increases. The possible effects are mitigated by possible downward pressure on prices in some sectors, due to productivity increases and continued low velocity of money. Velocity fell 25% during lockdowns and has yet to register much change.
What’s In a Name?
In short, these times are unprecedented, so much so that there is no name yet for what is happening.
During lockdowns, Gene Epstein and others called it the Great Suppression. It was the violent imposition of bans on working, gathering, producing, and exchanging. Totally amazing, so much so that I still can’t believe that it happened. Governments used to be committed to boosting the economy, even if they did so incompetently. Last year, we saw the opposite: a determined attempt to crush it all in the name of virus control.
So what do we call this? In the very olden days, economic downturns were called depressions. It referred to the low end of an economic cycle, lasting an indeterminate amount of time and leading to recovery later.
After World War II, that word became politically incorrect. Then people would speak only of recessions or downturns. By the late-1970s, we experienced what Keynesian-style macroeconomics said was not possible: high inflation and unemployment at the same time, a malaise measured by the misery index.
What do you call a macroeconomic environment characterized by high pockets of inflation, soaring GDP growth, high savings, plus a chronic labor shortage? Let the neologisms fly!
I’m most interested in the Biden administration’s policy response. We know from recent experience that the economic wisdom in this administration could fit in a thimble. There can never be too much government spending or money creation. Irresponsible doesn’t capture; it’s more like bat-guano crazy.
Why are the Democrats doing this? They watched as lockdowns — the most unimaginably extreme policy dictatorship we’ve experienced in our lifetimes — were imposed without too much protest from the public. That reality has emboldened the worst parts of government. They conclude that anything is possible. Get out the wish list.
In addition, they are aware that they only have 18 months in power. It’s now or never for every crazy idea hatched over decades by the far left. The House will probably flip to the GOP in 2022, and perhaps the Senate too. And the chances of someone like Ron DeSantis beating a moribund Biden in 2024 seems pretty likely (and everyone knows that Kamala stands zero chance). This is why there is so much focus by the Democrats in stopping Republican attempts to tighten election law. Pulling a mail-in caper like last year might be their only hope.
Even so, let’s say inflation keeps picking up, rising to double-digits in some sectors. Would the Biden administration hesitate to impose price controls? Not even slightly. But they won’t call it that. Instead we’ll see the invocation of anti-gouging laws. We already saw this in the great gas shortage of this spring, when stations up and down the Eastern seaboard flatly ran out.
What did the Biden administration do? They deployed their bureaucratic army to announce that anyone who gouges the consumer for gas will be prosecuted. “Do not, I repeat, do not try to take advantage of consumers during this time,” Biden said. “Nobody should be using this situation for financial gain. That’s what the hackers are trying to do. That’s what they’re about, not us. That’s not who we are.”
Imagine that! He compared regular gas station owners who are trying to preserve supplies and a modicum of profitability with actual cyberterrorism! Also what could it mean to issue a general condemnation of “financial gain?” Would he prefer financial loss? Short answer: yes. There is next-to-zero economic understanding among Washington’s most powerful today.
This administration is the least competent crew in a century to intelligently manage a genuine economic crisis. For reasons of attribution of the old school deep staters, and their replacement by economically ignorant wokesters, they could make a mess like we’ve never seen before.