News last month showed that the Eurozone countries had a bad second quarter of economic growth. For the three-month period that ended in June, the Eurozone economies grew at 0.0%. Germany, the largest economy in that group, shrank by 0.2%, and Italy, the third largest, fell back into recession. While initially there was much celebration that Germany’s work-sharing schemes prevented the massive job losses experienced in the United States, Germany’s tepid fiscal response, and weak accommodation by the European Central Bank (ECB) to the global downturn of 2008, have meant Europe continues to flounder. This should be a real lesson that austerity is not a better proscription than the policies pursued in the United States.
This week, the U.S. Bureau of Economic Analysis posted an upward revision to America’s second-quarter growth, a healthy rebound from the decline of the first three months that ended in March. Comparing Europe with the United States, some may view the 4.2% growth as a sign this country is roaring. But, that should be tempered because against the 2.1% shrinkage of the first quarter, it means so far this year the United States is growing well below the the U.S. Federal Reserve Bank growth target.
At Grand Teton National Park in Wyoming last week, several of the Federal Regional Bank presidents, Chair Janet Yellen and Vice Chair Stanley Fisher of the Federal Board of Governors and high-ranking central bankers from Japan, Brazil and the U.K. convened to discuss the very fine points of whether the labor market is tight enough to exert inflationary pressures on the economy. While Mario Draghi, president of the ECB, painted a “grass is greener” picture of the U.S. labor market, his cautious tone suggesting it may be time for the ECB to be more aggressive echoed the standard view of many that central bankers really don’t understand the precarious position of working people. To that end, a group of workers, organized by the Center for Popular Democracy, also convened at the Jackson Hole Economic Policy Symposium to put names and faces to the more sterile unemployment numbers and esoteric discussion of whether long-term unemployed workers are the cause of weak labor pressures on wages.
In her remarks, Yellen explained the more aggressive stance U.S. monetary policy has taken. She did appear, however, to waiver on how weak the U.S. labor market is. Since the gathering in Wyoming was about to hear research on the subject, perhaps she wanted to offer a balanced stance to encourage engagement of the regional bank presidents in the dialogue. In the face of continued moderate price inflation despite the continued expansion of the labor market, “hawkish” economists have new explanations to tout why inflation is just around the corner. One novel idea is that firms have a hard time cutting the wages of existing workers, and so are now engaged in pent-up wage deflation—gaining a return to targeted profits by suppressing wage growth. Under this theory, at any moment the current unemployment rates will pressure firms to escalate wage growth. Another is that because the long-term unemployed are viewed as undesirable by firms, firms react only to the short-term unemployed and are willing to bid up wages to hire them, and do not hold over workers the presence of large numbers of jobless people who might take the job for less. All this to maintain a theory that unemployment and inflation are strongly related, and unemployment cannot continue to fall without costing the economy with higher rates of inflation.
But when there is uncertainty, the best way may be to look at the costs of the relative risks in the economy. Right now, the automobile market, a key ingredient in U.S. resurgence, is fueled by loans to people with scarred credit records. That debt is sustainable as long as those workers can keep their jobs and keep making payments. So the cost of raising interest rates and making those loans more costly is the threat of repossessions growing, flooding the auto market with thousands of used cars and plunging demand for new automobiles and jobs. That’s a big downside risk, since new auto sales also generate tax revenues for state and local government—the weakest segment of the recovery. Add to that it has taken us five years to get to this point of recovery, and the downside risk looks very high.
Dr. William Spriggs is the chief economist for the AFL-CIO.