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Decades ago, economist Arthur Okun – chairman of the Council of Economic Advisers under Lyndon Johnson – advocated what he called “high-pressure economics.” He meant one in which expansionary policies could create above-average gross domestic product growth coupled with low unemployment, resulting not only in a strong economy, but also in disproportionate job creation for the most vulnerable groups.
This is exactly the kind of policy the Biden administration has pursued, so far successfully. 353,000 new jobs were created in January, twice as many as expected, and the gains were seen in almost every sector and job category. America has 1.4 jobs available for every unemployed person – well above the historical norm. This makes it the strongest labor market since at least the 1960s. All this, with inflation returning to tolerable levels and markets booming.
The United States is experiencing, as Treasury Secretary Janet Yellen recently said, a recovery “remarkable for both its speed and its fairness.” So what’s not to love about this high-pressure economy? Nothing, except that the pressure points are not always oriented upwards. Due to the extent of market bleeding, the scale of fiscal stimulus at stake, wildly unpredictable geopolitics, and the fact that neither the 2020 recession nor the recovery has been historically typical, the economy under high pressure could easily run out of steam in one direction or the other.
There are three pressure points that I monitor closely. The first and most important is the fact that this is simply not a normal economic cycle.
While it is very difficult to argue that the Biden administration’s new supply-side economic policies are not working, or that this recovery is somehow a mirage, it is also important to remember that the last three years have been extremely atypical due to Covid-19, the war in Ukraine and the Chinese debt crisis, among others. This makes it much more difficult to use historical data to predict the future.
As Dario Perkins, TS Lombard’s managing director for global macroeconomics, pointed out in a recent note, all kinds of macroeconomic distortions continue to work their way through the system. These range from big pandemic-related changes in consumer spending (first on goods, now on services) and supply chains, to pent-up demand from excess savings and to budgetary over-indebtedness, to the destruction of volumes due to inflation, to confusing signals from China, and so on. Standard economic indicators, such as yield curves and price levels, have been misleading.
Demographic changes and the artificial intelligence revolution have further complicated matters. Who would have thought that productivity growth would be one of the strongest in over a decade, or that the retirement of older workers would not be deflationary, but inflationary, as wealthy baby boomers in working people continue to spend throughout their golden years and where younger people get more bargaining power in the near future. a booming job market?
Another pressure point I think about is the difference between data and the felt experience of economics. Concerns about the economy have eased as continued job growth and rising wages have offset a cost-of-living crisis that has seen inflation outpace the incomes of ordinary Americans.
But even as consumer confidence has improved, there is also, I think, a deeper and less understood sense of long-term economic vulnerability among the American public. They live with virtually no social safety net in one of the most rapacious capitalist societies on the planet, where rapid hiring and firing with little or no severance remains the norm. And while companies look forward to the productivity gains generated by artificial intelligence, workers are increasingly worried about how it will change the labor market, particularly for white-collar, middle-class jobs .
Meanwhile, even though overall inflation appears to have stabilized, the prices of all the amenities necessary for middle-class life – like education, housing and health care – continue to rise faster. than the underlying inflation rate. Medical emergencies and debt are a leading cause of poverty in the United States, where more than half of working adults struggle to meet their healthcare costs.
This would be unthinkable in Europe. America is a country where people can be middle class, even upper middle class, and still feel quite economically vulnerable. We are rich compared to the rest of the world. But we are not safe. And when people fall in the United States, it’s a long way to go.
The idea of a fall brings me to the third and final pressure point, which is the nature of markets today. I was one of the first Cassandra about the “everything bubble” – where the prices of stocks, real estate and other assets keep rising – and I admit I lost some money. money accordingly.
Corporate profits and optimistic forecasts would argue in favor of the prices of the flagship assets of the moment. This is not a case of massive concentration in a handful of technology platform companies. When the market capitalization of the Magnificent Seven – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla – is equal to the combined size of the stock markets of Canada, Japan and the United Kingdom, one has to wonder about valuations .
Or, at the very least, wonder what will happen when the pressure valves are released.