On February 15, 2014, The Economist published:
IT TOOK barely a month for the bubble of optimism that formed over the American economy at the start of the year to deflate. Job growth slowed sharply in December, and stayed weak in January, suggesting more than bad weather was to blame.
The unemployment rate, though, tells a much cheerier story: it dropped to 6.6% in January from 7% in November. Indeed, it could soon hit the Federal Reserve’s 6.5% threshold at which it may consider raising interest rates.
The jobless number has been sending a strangely upbeat message about America’s recovery for some years now. Yet the Fed and other researchers have downplayed its significance, linking the rate less to buoyant demand for labour than to stagnant supply, as discouraged workers stop hunting for jobs. On February 11th Janet Yellen, in her inaugural appearance before Congress as chairman of the Fed, called the recovery in the labour market “far from complete” and averred that she would consider “more than the unemployment rate” in deciding when to declare it healed.
Listen to the numbers
Even so, recent research suggests the unemployment rate is saying something important. It’s just that the message is a depressing one: America’s labour supply may be permanently stunted. If so that would mean that the economy is operating closer to potential—using all available capital and labour—than generally thought, and that there is less downward pressure on inflation than the Fed has assumed.
Figuring out the gap between actual and potential output is tricky because potential, always hard to discern, is more uncertain than usual. In a recent report Lewis Alexander of Nomura Securities, a bank, calculated the output gap using three different labour market indicators (see chart). The proportion of people with jobs plunged from 63% of the population in late 2007 to below 59% in 2009. It has barely budged since, suggesting the output gap has not closed at all. The unemployment rate, in contrast, is 1.1 percentage points above its estimated “natural rate” of 5.5%, suggesting most of the output gap has disappeared. Finally, if one looks just at those who have been unemployed for less than six months, the output gap appears to have closed completely.
Deciding which measure to use involves determining why so many people have left the labour force. The labour participation rate (measuring those in work or looking for it) is down to 63% from 66% in 2007. The Congressional Budget Office (CBO) attributes just a third of that decrease to discouraged workers who have temporarily stopped looking for jobs. The remainder it ascribes to demographics, as ageing baby boomers retire early, or to people who have gone jobless for so long they have permanently given up looking. This is one reason the CBO has sharply revised down its estimate of America’s potential, and with it, the size of the output gap, which it now puts at a little over 4% of GDP. Had its estimates of the economy’s potential not shrunk since 2008, that gap would be 10% of GDP.
So if the unemployment rate is understating the output gap, it is not by much. Indeed, for the Fed’s purposes, it may even be overstating the gap. That’s because the longer someone is unemployed, the less attention they get from recruiters and the less vigorously they hunt for work. As a result they are not much of a curb on wages.
In 2005 Ricardo Llaudes of the European Central Bank found that short-term unemployment predicted inflation in European economies better than total unemployment. This was less true for America, where short-term and long-term unemployment have tended to move together. But the two have recently parted ways, with long-term unemployment declining much more slowly.
Several researchers from the Federal Reserve Bank of New York recently re-examined the relationship and found that short-term unemployment better explained why wage growth has not fallen further. To be sure, inflation itself has fallen to a little over 1%, well below the Fed’s 2% target. But a report accompanying Ms Yellen’s testimony attributed some of that to falling commodity prices and a stronger dollar. It noted that growth in wages has been weak but that unit labour costs, which adjust wages for productivity, are growing at about the same rate as before the recession.
This doesn’t mean the Fed has to raise interest rates now, given how low inflation is. But if inflation moves up, “this debate becomes front and centre, right away,” says Mr Alexander.
The Fed could, of course, let inflation rise above its target in hopes of getting unemployment down further. Ms Yellen played a central role in the adoption of a strategy that allows for that. But it may be fighting a losing battle. Unpublished research by Alan Krueger of Princeton University finds that in 2010 about 18% of the long-term unemployed quit the workforce each month. That has since risen to 24%. Meanwhile, the rate at which they find work has edged down to 10% per month. The work they find is often transitory or part-time. Thus, with each passing month, more of the unemployed are drifting to the fringes of the labour market than re-entering it. More monetary and fiscal stimulus may have saved them a few years ago, but are of much less help now.
Policymakers will need to put more effort into making the long-term unemployed once again employable. Barack Obama recently persuaded several hundred companies to pledge not to discriminate against them. Unfortunately that will probably not be nearly enough.
The common thread of articles that address unemployment and underemployment are solutions that would build an American society of dependent citizens on tax extraction and national debt to provide social insurance. While social insurance is certainly an emergency measure that requires implementation, it should not be seen as a panacea. The real task is to change the culture, from one of wanting or lacking personal responsibility and dependency on the “State,” into one where our human nature can be sustained and advanced through a private property ownership mentality, pursuing individual virtue. We need to transform the present credo, as advocated by progressive political leaders and others from one of servitude and dependency to one of personal responsibility and sustainability by means of broadening wealth creating, income-producing private property ownership by EVERY citizen of the productive capital (non-human) means of production. Private property ownership is the cornerstone of American liberty. Without it our free enterprise system, our free markets, and our republican form of self-government cannot endure. Nor can we prosper without the equal opportunity to acquire capital ownership financed by its own earnings. We need to pursue policies that will strengthen the economic position of the individual, the family, and the local community with decreasing reliance on government welfare support financed by tax extraction and national debt.
The article states that “the economy is operating closer to potential—using all available capital and labour.” This does not have to be but is due to the growth limitations the system creates by restricting the basis for FUTURE economic growth on the requirement of “past savings” (denial of consumption), rather than on financing FUTURE growth in the formation of new wealth-creating, income-producing physical productive capital using insured, near-zero interest capital credit loans repayable out of FUTURE earnings.
No longer is the American economy labor-intensive with opportunity for jobs that strengthen the middle class. The new challenge is structuring the economy to empower EVERY citizen to benefit from technological advancement. Technological change makes tools, machines, structures, and processes ever more productive while leaving human productiveness largely unchanged (our human abilities are limited by physical strength and brain power––and relatively constant). The technology industry is always changing, evolving and innovating. As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes capital ever more productive. Bottom line: technology is an easier and faster way to get a job done.
Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. Digital automated systems now replace many middle management and many manual jobs. At some point the traditional jobs at the bottom of the economic pyramid paying low wages will become automated. This will result in more and more people chasing fewer and fewer jobs. At some point the issue of earning a living will become problematic for the American economy and those contributors and their references will have to address the issue of concentrated ownership as productive capital will obviate most jobs as we know them to be now.
Sadly, the system is rigged by the wealthy ownership class to manipulate the lives of people who struggle with declining labor worker earnings and job opportunities, and then accumulate the bulk of the money through monopolized productive capital ownership. Our scientists, engineers, and executive managers who are not owners themselves, except for those in the highest employed positions, are encouraged to work to destroy employment by making the capital “worker” owner more productive. How much employment can be destroyed by substituting machines for people is a measure of their success––always focused on producing at the lowest cost. Only the people who already own productive capital are the beneficiaries of their work, as they systematically concentrate more and more capital ownership in their stationary 1 to 5 percent ranks.
The reality is that personal and family household income for those who are dependent on a job as their ONLY income source is declining. Wage and salary incomes will continue to decline simultaneously with global competition and, as a result of the necessity to turn to increasingly more productive non-human means of production, destroy jobs that will become unnecessary and devalue the worth of labor.
Full employment is not an objective of businesses. Companies strive to keep labor input and other costs at a minimum in order to maximize profits for the owners. Private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role. This will not change with companies realizing that they can operate more efficiently with fewer employees. Therefore, unless the employees are owners, the share of corporate profits going to the employees will continue to decline.
But because this is not well understood, what we as a society have been doing is to continually shift the work burden from human labor to real capital while distributing the earning capacity of capital owners (via capital ownership of stock in corporations) to non-owners through jobs and welfare. Such policies do not function effectively.
Thus, the primary distribution through the free market economy, whose distributive principle is “to each according to his production,” delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contribution through labor.
Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on full production and broader capital ownership accumulation. This is manifested in the belief that labor work is the ONLY way to participate in production and earn income even though EVERY wealthy person and family knows that capital incomes can be far greater than wage incomes. Long ago labor work was prime because labor provided 95 percent of the input into the production of products and services. But today that is not true. Capital provides not less than 90 to 95 percent of the input. Full employment as the means to distribute income is not achievable. When capital “workers” (productive capital owners) replace labor workers (non-capital owners) as the principal suppliers of products and services, labor employment alone becomes inadequate. Thus, we are left with government policies that redistribute income in one form or another including unemployment benefits and other social insurance programs.
Conventional economists, political leaders and the national media are oblivious to the structural problems that plague our economy, especially with respect to the ways the system further concentrates ownership of wealth-creating, income-producing productive capital assets and growth among the already wealthy ownership class, which represents 1 to 5 percent of the population. With such concentrated economic power, the American majority is barred from participating in the ownership of the non-human factor assets that are doing the bulk of the production of products and services, leaving them with their ONLY income source a job or welfare. Thus they are shut out from a most significant income source to effectively empower them to be “customers with money” and propel economic demand, and thus real productive growth of the economy.
There is a way out if the Federal Reserve System can be reformed to act as a purveyor of economic growth.
Right now the Federal Reserve creates money by loaning it to banks, who re-loan it multiple times because of fractional banking rules. With Capital Homesteading (http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm), money would be created by loaning it directly to citizens using insured capital credit loans via banks at near-zero interest to invest in FUTURE wealth-creating, income-generating (full dividend payout) productive capital assets formed by producer companies. To build real wealth and also phase out our near-defunct social security scheme, the new full-reserve money would go into a long-term retirement account (a super IRA) to be invested in dividend-paying, asset-backed shares of diversified corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.
In this way, the Federal Reserve could play a more positive role, removing artificial barriers to equal citizen access to acquiring and owning productive capital wealth. By creating asset-backed money for production, supported by growth-oriented tax policies, the Federal Reserve could truly help promote shared prosperity in a market system.
Wealth creation needs to benefit EVERY citizen. Virtually all the economic gains have pertained to the wealthy ownership class within the top 1 to 5 percent of the population, who own the vast wealth-creating, income-generating productive capital assets of American corporations.
Unless we reform the system, economic inequality will expand and the American people will experience far greater competition globally as teams of people and machines compete to produce and sell their products and services at the lowest possible cost. This means that we must look to increasing the productiveness of technological innovation and invention.
The reality is that more and more people are being squeezed financially, faced with dismal job prospects (their only source of income) and on the blink of having to turn to the government for unemployment benefits, welfare support and other social insurance programs funded by tax extraction and national debt. Americans, for the most part, are in a mode of retrenchment even though they have tremendous pent-up demand and unfulfilled dreams for a more affluent life, which they see enjoyed by the wealthy ownership class (without realizing that those people are wealthy because they OWN).
See “Perpetual Unemployment And Underemployment” at http://www.nationofchange.org/perpetual-unemployment-and-underemployment-1388414374 and at http://www.huffingtonpost.com/gary-reber/perpetual-unemployment-an_b_4516814.html.
