This morning has seen the focus shift to the United States and in particular onto a couple of TV interviews given by the new Treasury Secretary Janet Yellen. The main focus with CNN was on the impact of the planned stimulus on unemployment.
“The Congressional Budget Office issued an analysis recently and it showed that if we don’t provide additional support, the unemployment rate is going to stay elevated for years to come,” she added. “It would take (until) 2025 in order to get the unemployment rate down to 4% again.”
Whereas if the stimulus plan is passed then something of a magic wand will be waved.
“I would expect that if this package is passed that we would get back to full employment next year,” Yellen told CNN’s Jake Tapper on “State of the Union.”
On the face of it that is a pretty extraordinary claim. After all even if the stimulus bill was passed it would take some time to spend all the money. Whilst stimulus checks can go out quickly other types of fiscal policy have plenty of leads and lags. That is why it is monetary policy which responded to the pandemic first because it is expected to act more quickly. There is a slight irony of course from Secretary Yellen previously heading the US Federal Reserve. Perhaps she briefly forgot not only the “always an economist” on her Twitter bio but also all her economics training.
There were two triggers for this and let us start with the CBO or Congressional Budget Office.
Real GDP expands rapidly over the coming year, reaching its previous peak in mid-2021 and surpassing its potential level in early 2025. The annual growth of real GDP averages 2.6 percent during the five-year period, exceeding the 1.9 percent growth rate of real potential GDP
So economic growth will be pretty good for these times and will be 3.7% this year. As to “potential GDP” nobody with any sense thinks they have any idea what that is right now but we do learn something from it and it is a subject we will return to. Because what they are really saying is that there is an inflation risk. Of course they water that down for their actual inflation forecast but even so they suggest there is a risk after 2023.
Now let us switch to unemployment.
Labor market conditions continue to improve. As the economy expands, many people rejoin the civilian labor force who had left it during the pandemic, restoring it to its prepandemic size in 2022.1 The unemployment rate gradually declines throughout the period, and the number of people employed returns to its prepandemic level in 2024.
As you can see our “always” an economist has put in another swerve which is switching to unemployment ( with all the measurement issues that raises) as opposed to employment to gain an extra year. Actually I could write a whole article on the concept of “full employment” as it is as slippery as an eel as for example for the Bank of England it went from 6.5% ( 7% if we are harsh) to 4.25%.
The other factor at play was this from Friday.
The unemployment rate fell by 0.4 percentage point to 6.3 percent in January, while
nonfarm payroll employment changed little (+49,000), the U.S. Bureau of Labor Statistics
reported today
Secretary Yellen would want us to focus on the lack of job creation which in fact left us worse off than we thought we were due to this.
With these revisions, employment in November
and December combined was 159,000 lower than previously reported.
Of course you would have to look away from the actual unemployment rate which improved a fair bit. That leaves us with an awkward situation where apparently the unemployment rate is a bad guide to itself in the future.
Inflation
This is an issue raised by the size of the stimulus plan and the Financial Times pointed out it was under fire.
The size of the proposed package came under attack this week when Larry Summers, who served as Bill Clinton’s Treasury secretary and Barack Obama’s top economic adviser, warned that Biden’s plan might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”.
In official speak we are back to potential output where the stimulus plus expected growth is above what would be potential output. Whilst the numbers have more holes than a Swiss cheese there is a point here. Indeed the point is reinforced by the denial.
Addressing Summers’ fears that the package would cause inflation, Yellen conceded that it was “a risk that we have to consider”. But Yellen, who as former Fed chair oversaw US monetary policy, added: “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises.”
Revealingly she stopped short of naming them.
The Market Response
The benchmark US ten-year yield rose to 1.2% overnight and the thirty-year has touched 2%. By past standards this is a minor move and certainly not a return for the bond vigilantes. But there is another context which is the rising amount of the US national debt which means that even small yield rises will be very expensive. These days it is just under US $28 trillion.
In another form the bond yields are still way to low. Even if you take Secretary Yellen at her word inflation will rise towards the 2% per annum target. So in real terms the thirty-year yield offers you nothing and the ten-year a loss.
Comment
We can open with the issue of “tools” which is another subject Secretary Yellen has brought over from the central banking world. What are they to defeat inflation? The first is raising interest-rates, except that very quickly hits the issue of the increased debt. Last time around the US Federal Reserve under her successor Jerome Powell got the official interest-rate up to 2.5% before retreating, so even then it did not reach the “normal” level of 3% or so. Now the situation is even more difficult and reminds me of the advice from the song The Gambler.
He said, “Son, I’ve made a life
Out of readin’ people’s faces
Knowin’ what the cards were
By the way they held their eyes
So if you don’t mind my sayin’
I can see you’re out of aces
Fiscal policy is another potential way but that is a no-go road unless they intend to abandon ship on the stimulus. Another is wage and price controls which would only be suggested by someone who has little or no idea of how they have actually worked in practice. Or who believes this nonsense from the Bureau of Labor Statistics.
Real average hourly earnings increased 3.7 percent, seasonally adjusted, from December 2019 to
December 2020. The change in real average hourly earnings combined with an increase of 1.2 percent in
the average workweek resulted in a 4.9-percent increase in real average weekly earnings over this
period.
If we switch to the US Federal Reserve which is buying some US $80 billion of US bonds a month we are left wondering what happened to Yield Curve Control? Or is it now planning to taper? I think that is what you call a confused message!
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