Notwithstanding the dour tone and title of the October 3, 2009, CBS News article, "Unemployment Figures Cloud Recovery Hopes," the recovery is proceeding in the right way, as explained in my last article, "Anatomy of an economic recovery," here at Examiner.com. I wrote:
Unemployment is as high as it has been in 26 years, and it is not likely to fall significantly for some time to come. Believe it or not, that's good news, if "good" can mean continued hard times for millions of Americans. No one is expected to cheer if, in the months ahead, news analysts keep talking about stubbornly high jobless rates, but a sluggish rebound in the jobs market could very well be the engine for a sustained period of robust economic expansion down the road.
The dynamics boil down to a trade-off between a quick recovery in the jobs market and inflation. An unemployment rate dropping too rapidly will ignite inflation, and the cure for inflation coming fast and furious would almost certainly throw the country right back into recession.
The graph below, drawn from the Bureau of Labor Statistics database, shows the corrosive effect on per-person output of the recession that is now ending. It also shows how the beginning of the recovery was led by the first increase in productivity since the beginning of 2008. For the second quarter of 2000 (the most recent for which data is available), the index of output per person in the manufacturing sector rose from 173.162 to 175.164, as workers still employed were pushed to produce more.
This goes right along with what I wrote in "Anatomy of an economic recovery":
If [businesses restock declining inventories] with their existing workforces and maybe a modest increase in new hires, the workers doing their jobs will work harder, and the companies will see their profit margins start to improve as the inventories are sold; but if the companies have to hire lots and lots of workers to rebuild inventories, competition for qualified workers will heat up, and companies will have to start bidding up wages and salaries.
So far so good. Productivity per worker is going up, and this is happening without any overall national increase in employment, which means it's the already employed labor force that is working harder on the job. (That, of course, is not great news for working people, who are very likely feeling like they're being flogged to greater productivity in the ship's slave galley right about now.)
What about labor costs, though? If this really is shaping up as a strong recovery, the other part of the equation, worker pay per hour, should be holding steady. In fact, labor costs had risen dramatically right before this latest recession in a typical Keynesian catch-up with other price increases earlier in the 2001 to 2008 economic expansion; but they have now leveled off, staying almost flat from the first to the second quarters of 2009, as indicated in the graph below.
That means wage inflation is in check for the time being, so as other prices rise, workers will have to continue delivering greater productivity to hold on, and as long as businesses don't have to start furiously competing with higher wages for new workers, the unemployment rate can be brought down slowly without triggering the inflation spiral I described in my last article.
Bad news really is good news, at least sometimes. Unemployed people really are suffering, and that is where humane public policy projected through assistance programs can blunt the damaging effects of joblessness and all the problems it creates for individuals, families, and communities.
We have the makings of a sustainable, strong economic expansion. The figures provide clear evidence of this, but the story isn't finished. Once the expansion gets its own momentum, the central bank of the United States will have to turn its attention away from providing liquidity to keep interest rates low and start the long, perilous, difficult process of draining from the economy an incomprehensibly large overhang of dollars that has been accumulating since early in the current century.
That excess liquidity is much like a tidal wave still well out at sea, out over the horizon. It will come ashore, and if it is not drained away long before we see it, the resulting inflation will be a relentless force that only the most draconian of contractionary monetary policies can stop.
The question yet to be answered is whether or not there will be enough time between when the economy has upward momentum that will not need liquidity from the central bank and large stimulative spending by Congress and when the Federal Reserve has to turn to fighting inflation in such a way that the draining of excess liquidity is not too damaging to the economic expansion.
Right now, it looks like it can be done.
Unfortunately, the size of that tidal wave mentioned above is not really appreciated by most people, and maybe not even by most policy makers in Washington. It's out there, and it won't go away if we pretend it's not. It's coming; and just like tidal waves on the ocean, which have the odd habit of making the tide go out right before the massive wave hits, the dollar overhang will have the perverse effect of creating sporadic evidence of deflation in the months before the inflation comes in as a relentless force driving commodity prices, wages, food prices, and interest rates upward.
If it gets to the point where our public policy officials are fighting the tidal wave at the shoreline, we will have a grim, debilitating battle, indeed.
We should hope that our leaders in Washington will seize the opportunity soon available to deal with the impending difficulty before they later have to manage an inevitable disaster.
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