Low US unemployment does not negate the conclusion that the US economy is now in recession

The US Bureau of Economic Analysis published the latest US National Accounts data last week (July 28, 2022) – Gross Domestic Product, Second Quarter 2022 (Advance Estimate) – which showed that the US economy is now in technical recession – two consecutive quarters of negative GDP growth. After recording a contraction of 1.6 per cent in the March quarter in real GDP, the advance estimates for the June quarter show a further contraction of 0.9 per cent. Many commentators are, however, denying the recession narrative because they are pointing to the low unemployment rate (of 3.6 per cent). It is true, that the GDP figures are often revised and when the final, second-quarter estimates are available, they might record positive growth. But there is a puzzle emerging. We have long held the view (based on Okun’s Law – see below), that when GDP growth declines, the unemployment rate rises. This is a long-held stylised fact that has until Covid stood the test of time. But Covid has changed things and at present the US (and other nations) are experiencing a major slowdown in the growth of their working age population as a result of quite alarming rises in long-term disability as a result of the enduring impacts of Covid infections (and repeated infections). That has meant that unemployment rates are lower than they otherwise would have been as a result of worker shortages. On the one hand that is good for the employed. But, on the other hand, it is disastrous for workers who are now disabled. So the meagre fact that unemployment is low does not negate the conclusion that the US economy is now in recession, which has been deliberately created first by a massive fiscal contraction, and then, by the irresponsible conduct of the Federal Reserve Bank.

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New Keynesian inflation model is unfit for purpose

It’s Wednesday – a day for a few short comments and then relaxing to music. Today I consider some statements from the Bank of International Settlements, which suggest that the mainstream inflation approach, based on the New Keynesian Phillips curve is subjected to “serious practical shortcomings”. In other words, it is unfit for purpose, which means you should not be surprised that central banks are hiking rates to stifle a transient supply-side inflation burst. Quackery leads to quackery. I also consider some recent evidence that supply disruptions are easing. And, then, we learn that that the British Labour Party no longer things workers should strike. And if that has driven you mad, then we restore calm with some great music from Jiro Inagaki.

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The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation

Apparently, the Left/Right Paradigm is dead. This narrative keeps coming back. In the 1980s, when governments, coopted by corporate lobby groups, went on a privatisation spree, which transferred billions of dollars worth of public assets into the hands of private wealth holders, and enriched lawyers, management consultants etc into the bargain, we were told that we are all capitalists now because our pension funds bought the assets. Joke. Anyway, I keep reading and being told that there is no longer any meaningful distinction between Left and Right, with both falling into the hands of totalitarian discourse. Even so-called progressives advocate that the traditional Left should partner up with the traditional Right (and far Right) to keep ‘centrists’ out of power or to stop governments taking basic actions to protect public health. It is the ultimate victory for the neoliberals to have persuaded the Left that they have more in common with the Right than ever before. This is another example of how duped the Left has become.

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The Covid trade-off between health and the economy did not exist

With yesterday’s detail CPI analysis, I am transferring the news/music blog post that normally appears on a Wednesday to today. This morning, I read the newly published report from the UK-based – Institute for Public Policy Research – Health and prosperity: Introducing the Commission on Health and Prosperity (released April 27, 2022) – which provides a sobering (to say the least) evidence base for how the pandemic has impacted on Britain’s health system and labour market. As more evidence comes out from the experience of the last 2.4 years, I wonder when those who demanded nations learn to live with the virus – by basically denying its existence – will reflect on the folly of their laissez-faire positions.

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UK unemployment rate is more like 5.6 per cent rather than 3.9 per cent

I have very little time today but there was one question I get asked on a regular basis that I thought I would this space to quickly answer. People wonder who the participation rate affects the official measure of unemployment. For example, the UK Office of National Statistics released data yesterday (March 15, 2022) – Labour market overview, UK: March 2022 – which showed the official unemployment rate had fallen to 3.9 per cent – a decline of 0.2 points. They said this was the result of employment rising by 275,000 in February (the employment to population ratio rose by 0.1 points). They also said that the inactivity rate for those between 16 and 64) had risen by 0.1 points to 21.3 points and was 1.1 points above the pre-pandemic level. So the question I get asked is whether things are really getting better? So here is how it works.

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Workers in UK enduring real wage cuts except the unproductive bankers

It is Wednesday and I have three live presentations to make throughout the day. So we will be brief today. The ABS released the latest Wage Price Index today which shows that annual wages growth in Australia was 2.3 per cent, compared to the official inflation rate of 3.5 per cent. I will analyse that data in detail tomorrow, given I am short of time today. But there was also disturbing data coming out of the UK last week on the wages front, which reflects a major imbalance in priorities and also tells me that there is no wage demands driving the current inflationary episode.

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Bank of England Governor just didn’t go far enough

The Bank of England governor Andrew Bailey caused a stir last week when he said that British workers should not get wage increases in the coming period. This was a day after the Bank of England raised interest rates, presumably because they have some theory that that will cure Covid and get trucks moving again. There was general outrage expressed by a range of voices, who often are not on the same page – unions, corporate interests, the ‘high wage’ aspiring Tory government (perhaps). The outrage was, unfortunately, personalised with critics pointing out that “Bailey was paid £575,538, including pension, last year” (Source) and hasn’t offered to give any of that fat cat salary back. But as in most things, getting personal usually misses the point. Beyond the rage, in a sense, he was correct to highlight that if the current supply-induced price pressures trigger a wider distributional struggle then accelerating inflation will result and the policy implications of such an event as that will be very damaging to workers in the UK. But, the problem was that he didn’t go far enough. This won’t be a popular view but it comes from studying inflationary mechanisms all my career, which means I think I understand how supply constraints move into a generalised wage-price spiral, which then causes worker more damage than some wage restraint. And, remember, we are talking about Capitalism here – not some profit-sharing, collectively-owned nirvana. The Bank of England Governor was clearly thinking that the conditions for a 1970s wage-price spiral are approaching for the UK, which means that wage restraint would be sensible if the goal was to insulate the current supply shocks arising from the pandemic and aberrant behaviour by OPEC etc and render them transitory. I don’t think the conditions are present yet and he should have generalised the concern to focus on other more obvious triggers that do exist at present.

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New UK cost of living dataset improves on standard CPI release – somewhat

The UK Office of National Statistics released a new dataset last week (January 28, 2022) – CPI-consistent inflation rate estimates for UK household groups (plutocratic weighting) – which resumes its analysis of the differential impacts of price rises on different cohorts in the population. Other national statistical agencies have also been doing for some years now. For example, the Australian Bureau of Statistics regularly publishes its – Selected Living Cost Indexes, Australia (last edition September-quarter 2021, published November 3, 2021). This type of data fills the breach left by the standard CPI releases

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When wages go up, we all benefit – what Starmer should have said

The British Labour Party leader (for now) Keir Starmer gave a – Keynote Speech – to the Annual Conference of the Confederation of British Industry in Birmingham on November 22, 2021. If you read it or heard it you will know that his leadership marks the return of British Labour as class traitors. He started by saying the “Labour is back in business”, which should have been ‘Labour is the agent of business’ He played up the line that Britain’s future depends on the business sector profits growing stronger than they are now and that everyone benefits when profits are high and growing. Even at the most elementary level that statement defies the evidence. But for a Labour leader to make it spells trouble for the Party. So what else is new.

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UK Office of Budget Responsibility demonstrating the well-trodden GIGO format

I have finally been able to read the latest fiscal statement – Autumn Budget and Spending Review 2021 – from the H.M. Treasury, which was released on October 29, 2021. That 202 page document is not something anyone should spend time reading but in my job one has to in order to stay abreast of what is happening around the world. It also took me down the Office of Budget Responsibility snake hole to read their latest – Fiscal risks report – July 2021 – which obviously conditions the way the fiscal statement is framed. That is a really bad document. And as it happens, footnotes in that document take us further into the pit of New Keynesian fiction, where we find modelling that OBR relies on, that has the temerity to model fiscal shocks where labour markets always clear and households choose the unemployment rate, which is constructed as ‘leisure’, as they maximise their satisfaction. I suppose that is okay in a world where we assume households live to infinity. That is, nothing remotely like the world we live in. I don’t plan to analyse in detail the fiscal statement. Rather, here are some reflections on some of the material that the Treasury think is useful in framing the statement. Which helps to explain why these sorts of statements become lame quickly.

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