What would it look like if the economy was running hot?

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

President Trump has argued that the economy is doing well under his leadership. And Brad Delong, who has positioned himself as a mildly left-of-center economist, seems willing to agree:

Nick Bunker has a very nice piece from late last month on wage growth and employment, as it bears on the question of whether the United States is at “full employment.” My take is that the U.S. economy probably is because at current unemployment and employment rates, if no additional shocks were to hit the economy, inflation would probably start creeping up very slowly, if things continued as they are as far as unemployment and employment rates.

If one tries, one can find economists who are less optimistic than Trump.

Dean Baker says: “The rate of job growth in the first 21 months of the Trump administration is somewhat below the median for recent presidential terms.”

But The Fed feels that low unemployment is dangerous:

When some people ask why the FOMC is reducing monetary policy stimulus in the absence of clear inflationary pressure, what they really might be thinking is, “Why doesn’t the Fed just conduct monetary policy to help the unemployment rate go as low as physically possible? Isn’t this by definition the representation of maximum employment?”

While this is indeed one definition of full employment, I think this is a somewhat short-sighted perspective that doesn’t ultimately serve the economy and American workers well. One important reason for being skeptical of this view is our nation’s past experience with “high-pressure” economic periods.

…For the purposes of this discussion, the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession.

The original definition of chutzpah applied to a son who killed his parents and then asked the court for mercy because he was now an orphan. The modern definition is “shameless audacity.” The obvious reason why high pressure economic periods are followed by recessions is because high pressure economic periods trigger a sequence of 4 events:

1.) workers wages go up

2.) businesses complain, to the Fed, that workers wages are going up

3.) the Fed raises rates until the economy enters a recession

4.) workers wages stop going up

But in the above article the Fed authors write “the important thing about high-pressure economies is that, virtually without exception, they are followed by a recession” as if this is a natural phenomena, like hurricanes and tornadoes, over which the Fed has no control.

If the economy was actually allowed to run hot, then these things would happen:

Wages would go up.

The decline in women working would reverse, because the USA would be desperate to catch up with other Western nations, if only to avoid relative economic decline. The government and business would do what was necessary to help women work.

Unpaid internships would cease to exist because there would be good paying jobs for everyone.

Racial bias would cease to exist because there would be good paying jobs for everyone. Businesses would be forced to hire everyone based on merit, otherwise the businesses would lose significant market share.

Gender bias and sex bias would cease to exist because there would be good paying jobs for everyone. Businesses would be forced to hire everyone based on merit, otherwise the businesses would lose significant market share.

Prostitution would cease to exist because there would be good paying jobs for everyone. Even if people were suffering from drug addiction issues, businesses would simply hire people and then find ways to deal with some of the issues arising from addiction.

Pornography would cease to exist because there would be good paying jobs for everyone, including young women who otherwise try to make money from pornography.

Until all forms of exploitive labor have ceased to exist, the economy is not running hot enough.

I say all of the above in an idealistic mode. Obviously none of the above would ever happen. It could only happen if you thought that businesses were run by rational actors who wanted to do what was economically best. We all know this isn’t true. I’ve been helping businesses for 20 years and I’ve never seen an altogether rational entrepreneur. It is far more common to run into psychopaths of the type that I describe in my book “How To Destroy A Tech Startup In Three Easy Steps.” And as business gurus such as Peter Drucker have noted, self-destructive entrepreneurs are surprisingly common.

The desire to hold on to various social ranks, even when economic forces are trying to undermine those social ranks, arises from the psychological need some have to dominate over others. The most extreme case was the desire of slave owners to hold on to their slaves. I’ve read that the USA Civil War cost more, just in terms of money, than it would have cost to buy every slave at normal market prices and give them their freedom. A large number of people in the USA South were willing to give their lives to keep that freedom from happening.

Adam Smith talked about this craving for slavery:

Adam Smith made two positive claims about slavery in the context of developing economies. First, Smith explains that slavery is in general highly inefficient. By his account, the net product under freedom is 12 times larger than under slavery. Second, he observes that, despite its inefficiencies, slavery persists in most of the world. Taken together, these claims create a fundamental puzzle: Why do elites – owning slaves and holding political control – fail to make themselves better off by freeing their slaves?

…Smith asserts that people have a fundamental desire to dominate others, and slavery provided that opportunity for slaveholding elites.

In the early days of “laissez-faire” slavery was seen as a natural part of free trade:

For nearly four centuries, the Atlantic slave trade brought millions of people into bondage. Scholars estimate that around 1.5 million people perished in the brutal middle passage across the Atlantic. The slave trade linked Africa, Europe and the Americas in a horrific enterprise of death and torture and profit. Yet, in the middle of the 18th century, as the slave trade boomed like never before, some notable European observers saw it as a model of free enterprise and indeed of ‘liberty’ itself. They were not slave traders or slaveship captains but economic thinkers, and very influential ones. They were a pioneering group of economic thinkers committed to the principle of laissez-faire: a term they themselves coined. United around the French official Vincent de Gournay (1712-1759), they were among the first European intellectuals to argue for limitations on government intervention in the economy. They organised campaigns for the deregulation of domestic and international trade, and they made the slave trade a key piece of evidence in their arguments.

Indeed, that is why I think it is important to oppose free markets on moral grounds. History teaches us that free markets tend toward slavery; the less regulated a market is, the more likely it is that actors in that market will start buying and selling humans.

In modern times, the inflation rate indicates how much conflict there is between those who are hiring and those who are working. Big spikes in inflation can be seen as a kind of laziness among business leaders — they refuse to do what is necessary to raise productivity enough to offset rising wages. It can also be an indicator of traditional and irrational thinking among business leaders — rather than bring more people into the general workforce, the business leaders complain about rising costs, thus creating pressure for the Fed to raise rates.

Clarity of goals is important. What would a really hot economy look like? I write this post to remind myself of what our economic goals should be. I don’t want to get distracted by articles that talk about the economy being at full strength, when I know the economy is no where close to where I want it to be.

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[Off topic: I become sad when I see how much the right-wing now owns Adam Smith. He deserves better than this. He himself was no right-winger. Yet when I search for "adam smith slavery" on Google, the first several pages link only to right-wing sources.]

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