US Job Crisis Joins the Inflation Debate

Officially, the government figures say the unemployment rate fell to 6.7% in December, from 7% in November. That’s the lowest unemployment rate since October 2008. But it seems widely known that the drop is mostly because many people stopped looking for jobs.

The Economist reports that the proportion of American adults participating in the labor force is at its lowest level since 1978. The so-called labor force participation rate (LFPR) is now just 62.8%.

And Daniel Alpert points out, in a note published by Westwood Capital, that the LFPR is back where it was before the surge of women entered the workforce. It’s below where it was in the recession of 1980-82. According to Alpert, if you left the LFPR where it was before the recession (66.4%) in January 2007, then the unemployment rate is really 11.75%.

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But there is more to the story…

Some people have put forward the idea that the LFPR is falling because people are retiring. We have an aging population, they say. So some of this we should expect. Alpert nukes that argument:

‘One would expect that if the LFPR were declining so precipitously because more people were retiring ‘voluntarily’ that the employment/population ratio (EPR) for the 55 years and older category of employees would be declining as well. Not only has it not done so, but the EPR for workers aged 55 and older was, on average, higher in 2013 than it was during the Great Recession and any other time prior thereto.’

As he says, ‘Older Americans are hanging onto their jobs for dear life.’ In the post-2008 world, retirements are less secure.

Keep in mind, as economist L. Randall Wray notes on his blog, the labor force figures don’t count people who are in school or in prison. Poor job markets usually aid college enrollment. And you are surely already aware of the millions we hold in jails and prisons. If anything, the LFPR is still prettier than the real picture.

In any event, the broadest picture doesn’t lie: At the end of 2013, the U.S. had 118.5 million full-time workers and 26 million part-time workers. ‘In other words,’ writes Wray, doing the math, ‘just 37.5% of the residents of the USA are working full time to support the other 62.5%.’

Two words: Not good.

Wray is one of the founders of Modern Monetary Theory, or MMT. This school of thought has a theory as to what causes mass unemployment.

I’ve heard Warren Mosler, another founder of MMT, relate the theory in a very simple way. He calls it ‘the dogs and bones story.’ It goes something like this: If you send 100 dogs into a room to fetch bones but put only 95 bones in the room, then at least five dogs aren’t going to get bones.

So what do you do? Are you going to pull those dogs aside and give them extra training so they can acquire the skills to make them better at getting bones? That’s absurd, because there aren’t enough bones. No matter what you do, there are always going to be at least five dogs that don’t get bones.

The analogy with the economy is easy enough to make. At its most basic level, mass unemployment means there aren’t enough dollars out there to satisfy the demand. This dovetails nicely with Wynne Godley’s sectoral analysis. The only place for the private sector to get dollars is from government spending. It has to be this way in a fiat currency system, like it or not.

Now, this doesn’t mean the government should spend a bunch of money on whatever. MMTers know that higher government spending doesn’t mean jobs will magically appear in Detroit. They do not advocate pump priming or supply-side economics or any of the usual stuff.

What they advocate is: a job guarantee program similar to what existed in the 1930s with the Work Progress Administration (WPA). It’s a discussion that would take us too far afield here today. Besides, what does a job crisis mean for you as an investor, anyway?

The stock market has flown to great heights, despite this lousy economy and lack of jobs. As I never tire of pointing out, the economy is not the stock market. And the stock market is not the economy. The two can go their own way.

Still, I think the vast number of unemployed contributes to the idea that inflation isn’t going to be a problem anytime soon, despite the federal deficit and the Fed’s zero interest rate policy. (I use the term “inflation” here as the man on the street uses it: generally rising prices.)

Over the weekend, I read Van Hoisington’s latest letter. Hoisington has gotten a lot right when it comes to inflation and the direction of interest rates. And he’s made his investors a lot of money. Hoisington has long said we are in a debt deflation. Interest rates are not going higher. In his latest note, he is still singing that song.

‘Weakness in prices is evident in various price indexes,’ he writes. They have all come down over the last 12 months. He cites demographics, debt levels, savings rates and other factors. Relying on the work of Irving Fisher (1867-1947), who had all this figured out in 1932, he concludes:

‘Thus, fundamental conditions are now conducive for an inflation rate averaging 1% or less. Based on the Fisher equation, long-term bond yields should be comfortable trading at 3% or lower.’

Things can always change, and sometimes quickly. But if you are betting that interest rates are going to take some big jump in 2014, my guess is that you will be disappointed. The risk of a sustained surge in interest rates seems as low today as any time since the 1930s.


Chris Mayer
for Markets and Money

Ed Note: Job Crisis Joins the Inflation Debate originally appeared in Markets and Money USA


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Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Daily Article series to here in Markets and Money. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.

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