The job numbers for April came out today and they are impressive. The US added 263,000 jobs, and unemployment fell to 3.6%. This is a 50-year low. What’s going on? Why is the job market performing so well? I will begin by pointing out that full employment, as it is traditionally understood (4% unemployment), was basically achieved under Obama. His administration reduced unemployment from 10% (October 2009) to 4.1% (October of 2017—the point at which Obama’s economy fully became Trumps). Under the current president, the rate has fallen to 3.6%. Of course going from 10% to 4.1% is much more impressive than going from 4.1% to 3.6%. Nevertheless, there is something truly interesting about these new job numbers. Trump’s economy is actually breaking records. Why? A few unexpected (or unprecedented) developments under Trump will quickly explain it.
It has been the economic “wisdom” for much of the second half of the 20th century that during a boom the Fed increases interest rates, and for two main reasons. One, to reward savers (the really rich) and the other is to manage labor and its wages. The thinking, as regards labor, has been to keep the job market not too hot out of fear of inflation, as regards common commodities. There is no other meaning to the world-historical Volcker Shock of 1980 than this command/repression of wages of labor.
Ever since the early 1980s, wages and prices have been pretty flat in the US. Of course, the values of financial assets are free to rise as high as they can, but not wages, as this forces business owners to raise the prices of their goods to protect profits. As one heterodox economist put it, commodity inflation has, as its core, class struggle. But there is another reason why this kind of inflation is loathed by mainstream economists: it takes a huge bite out of the real value of debts owed to the people they speak for, creditors. (Very few economists speak for debtors.) This is pretty standard stuff. But Trump has apparently abandoned all this conventional wisdom. As a consequence, he can be credited with introducing a very new kind of pro-market macroeconomics. One that represses wages, but expands, for political reasons, the job sector. (I will leave this development for academics to sort out.)
Trump wants the Fed Chair Jerome Powell to even cut interest rates to sustain the only game he has in town, the job growth he inherited from Obama. His argument? Inflation is, despite the economy’s expansion, low, and so there’s no risk of the price of consumer goods inflating (current inflation is well below 2%). Now what Powell knows is this will work in the short-term, but it will put the US economy, as it presently operates (which is in the interest of the owners of capital), in a very tight and politically dangerous situation during a bust, which will certainly happen in the not-too-far future. Why tight? Why dangerous? The Fed knows it has only a few policy tools to manage the whole of the economy, the main of which is the determination of the federal funds rate, which presently is at 2.5% (in 2008 it fell down to 0.25% from 4.25%). If the Fed’s benchmark rate is already low during a downturn, it will have no conventional tool to stabilize the economy and restore growth. It will have to resort to exotic instruments like quantitative easing—trading cash (real money) for securities, bonds (effective cash). Why is this worrying? Because cutting interest rates has no impact on the Fed’s books, but exotic things like QE really do.
It’s important to point out that Trump wants the Fed to restart QE, despite the fact the economy is in the midst of an expansion and the Fed still has in its books $4 trillion worth of securities it purchased from the last crisis. This is, as standard economics would explain, procyclical (rather than countercyclical). It’s driving growth during growth. But Trump understands that reviving QE would keep the stock market inflated until 2020. What all of this amounts to, then, is: Fed policies that are usually applied to an economy in crisis are being applied to the constant crises of a generally unpopular presidency.
And so what can you expect during the next market crash? One, the US government has to pay for the Everest of bad bets made by banks and speculators outright because the Fed will not be able to re-excite investment by lowering interest rates (they will already be too low). The banks however will not pump this liquidity into the economy but store it (meaning, expect a repeat of the first QE). Also expect the government to have no money because of the 2017 massive tax cut—which again was procyclical—depleted the public’s purse. QE will likely be ineffective because there’s already too much debt in the Fed’s books. At that point, China certainly displaces the US as the number one economy in the world.
