JW Mason: Good News, Bad News, and the "Only" Alternative

JW Mason offers Good News on the Economy, Bad News on Economic Policy, a post "on new economic data". I take that to mean "on new releases of the data". Here's his opening:

On Friday, the the Bureau of Labor Statistics released the unemployment figures for May. As expected, the reported unemployment rate was very low—3.6 percent, the same as last month.

Getting into the evaluation of new data, Mason says this "suggests an exceptionally strong labor market by historical standards." Then, moving beyond evaluation of the data and into the politics of economics:

On one level this really is good news for the economy. But at the same time it is very bad news for economic policy: The fact that employment this low is possible, shows that we have fallen even farther short of full employment in earlier years than we thought.

I distinguish between economics that describe economic conditions (and economic forces) on the one hand, and economics that serves an agenda on the other. To say that the unemployment rate is very low describes an economic condition. To say that we have fallen even farther short of full employment in earlier years than we thought, to my ear, brings us into the realm of political agenda.

Mason goes back then to the data: "Virtually every other measure also suggests a labor market that is relatively favorable to workers, at least by the standards of the past 20 years," he says. Yes, the reference to "the standards of the past 20 years" is a twist of the political knife; but Mason does touch on the following data items:

• broader unemployment measures
• the labor force participation rate
• the quit rate ("higher than it ever got during the previous business cycle")
• job openings ("at their highest level on record")
• wage growth ("noticeably faster since 2016") and
• labor share in the nonfinancial sector

He interrupts himself then, to serve the agenda, saying

For progressives, it can be a challenge to talk about the strengthening labor market.

After calming and soothing his readers, Mason writes:

we need to call attention to the real gains to working people from a high-pressure economy—one where aggregate demand is running ahead of available labor.

Okay, maybe I'm wrong. Mason offers a strong statement about how the economy works, one that I strongly agree with. And yet, he is pushing the agenda. To me, if the argument is good you shouldn't have to push the agenda. He's not just dangling a toe, either. He jumps into his agenda with both feet:

Labor markets do seem to be doing well today. But that only shows that macroeconomic performance over the past decade was even worse than we thought.

He defends his statement by talking about macroeconomic policy and our inability to actually measure targets like potential output and full employment. He wants to be doing economics; he doesn't want to be doing agendas; that's easy to see. And hey, maybe he's coddling readers and working the liberal agenda into his article just to keep his readers' attention. God knows, I don't do that, and I don't have readers.

One can see, in the paragraph on macroeconomic targets, that Mason's argument fails:

Everyone agrees that the US fell short of full employment for much of the past decade, but we don’t know how far short. Every month that the US records an unemployment rate below 4 percent suggests that these low unemployment rates are indeed sustainable.

He uses what we don't know as evidence. Talk about weak links in a chain of logic! But Mason runs with it:

..these low unemployment rates are indeed sustainable. Which means that they should be the benchmark for full employment. Which also means that the economy fell that much further short of full employment in the years after the 2008-2009 recession—and, indeed, in the years before it.

He leaps from the suggestion that low unemployment is sustainable, to policies that should be put in place, without regard to the frailty of the suggestion.

I damn well agree with Mason that full employment is lower than policymakers think. I think we could have kept using the 4% number that was used back in the 1960s. When the number seemed to climb upward in the 1970s, we should have started looking for problems that had higher unemployment as a side effect -- problems like excessive private-sector debt. But apart from Minsky and Kindleberger, it seems no one did anything like that.

Now, late in the 20-teens, Mason at least is looking back to the 1960s as the benchmark for a good economy. There is yet hope.

Mason again:

But let’s suppose that today’s unemployment rate of 3.6 percent is sustainable—which it certainly seems to be, given that it is, in fact, being sustained. Then the unemployment rate in 2014 wasn’t 1.4 points too high but 2.6 points too high, which is nearly twice as big of a gap as policymakers thought at the time. Again, this implies that the failure of demand management after the Great Recession was even worse than we thought.

Yeah, but this is based on supposition, on fantasy. It may be enough to convince an audience of believers, but the argument is certainly insufficient to convince the people with most of the money.

When he switches back to agenda-mode the argument gets strong again:

For years now, we have been repeatedly told that the US is at or above full employment—claims that have been repeatedly proved wrong as the labor market continues to strengthen. Only three years ago, respectable opinion dismissed the idea that, with sufficient stimulus, the unemployment could fall below 4 percent as absurd.

Solid argument, well written. Yet Mason's next words quickly return us to the fallback position of all those who refuse to accept high unemployment as a policy objective, but see only one alternative:

As a result, we spent years talking about how to rein in demand and bring down the deficit, when in retrospect it is clear that we should have been talking about big new public spending programs to boost demand.

The people who accept high unemployment as policy have already rejected the "big new public spending" approach. Rejected it for decades. Embracing the solitary alternative, Mason restores an old stalemate.

I think we should have kept the 4% full-employment number that was used back in the 1960s. When the number seemed to wander upward in the 1970s, we should have started looking for problems that cause higher unemployment as a side effect -- problems like excessive private-sector debt. But we didn't do it then, and almost no one does it now, despite the obvious fact that the crisis which preceded the Great Recession was a FINANCIAL crisis.

For most of the past decade, interest rates were as low as they could be. You couldn't get them lower. You couldn't reduce the cost of finance any further by lowering rates more. If you wanted to further reduce the cost of finance, the only way to do it would have been to reduce the size of the debt on which interest is paid. Unfortunately, this was never a priority of policy.

Our economy has "recovered". But it is a listless recovery because we still have so much private-sector debt, and nobody wants to take on more debt. Then too, we use credit for growth, so if we're not using much credit we don't get much growth.

We use credit for growth because economists tell policymakers that the resulting accumulation of debt is harmless. It isn't. And debt accumulates, because we have lots of policies that encourage the use of credit, but none that encourage the repayment of debt.


One sentence more from Mason:

Again, the fact that today’s labor market outcomes are better than people thought possible a few years ago shows that the earlier outcomes were even worse than we thought.

I agree, the earlier outcomes were worse than most of us thought. However, Mason takes a premise

today’s labor market outcomes are better than people thought possible

and uses it to suggest policy for the future. What he does not do is take the premise -- the fact that things are better than we could have expected -- and figure out why things improved.

Things improved because financial costs peaked around 2008 and have fallen significantly since. When the payment to finance falls, more money is available for wages and for the profit of productive ("non-financial") business.

Many people have called the economy good of late. I would be embarrassed to say such a thing. But it has improved.