The onset of the Trump era forced economists to confront their doubts about their usefulness to the public. They shared this ordeal with political forecasters, Democrats, logicians and journalists. Maybe we all deserved the anguish.
Those economists who remain in a funk should nonetheless snap themselves out of it. One reason is that the sappy self-loathing economist is now embarrassingly cliché. Take it from a sappy self-loathing journalist: despondency is a waste of time and a bad look.
The more important reason is that economic conditions in the US might soon begin clarifying a few enduring mysteries. The labour market continues inching towards full employment. It is not yet there. But after a half-decade of sluggishness, US nominal wage growth started trending higher in the past two years.
Inflation remains below the Federal Reserve’s target of an annualised 2 per cent but is close. And if the Fed and fiscal policymakers avoid prematurely slowing the expansion, then just the nearness to full employment can go some way towards answering questions that have stumped economists and market watchers.
First, will current estimates of the natural rate of unemployment be proved wrong yet again? Changes in these estimates tend to lag behind changes in the actual unemployment rate. The endless debate about the amount of labour market slack — how many people in a more robust economy would rejoin the labour force, and how many part-time workers would upscale to full-time status — can only be ended in a sufficiently tight labour market. The same applies to the difficulty of understanding the relationship between unemployment and inflation, and that between wage inflation and headline inflation — both of which have been called into question in recent years.
Second, how useful is the concept of full employment in the first place? Or, to what extent does the natural rate of unemployment itself shift in response to the expectation of a sustainably robust economy? Similar to the concept of a potential growth rate for the overall economy, the natural unemployment rate may not be a fixed target that economists try to estimate, but rather a shifting target that reacts to expected changes in the demand for workers.
Just one hypothetical example of how this could happen: a tight labour market spurs enough companies to offer training to their workers because poaching from competitors has become expensive. This training then raises the potential productivity and future employability of the workforce, which is another way of saying that the natural unemployment rate has fallen.
Third, has the short-termism of US companies been a symptom of cyclical or structural economic problems? The issue of why corporates have been reluctant to invest despite abundant cash on their balance sheets and easy access to credit remains uncertain. The closer to full employment, the more incentivised they are to increase capital expenditures as the price of workers climbs. If they do invest more, then resilient cyclical weakness was a big part of the problem to this point. If not, then structural explanations — demographics, disinflationary pressures from abroad, digitisation and automation — carry more weight.
Relatedly, we might also better understand whether the kind of investment and technological innovation that companies choose when full employment is the expected norm differs from when it is not. An expanding economy could be expected to relatively increase the appeal of technology that complements workers versus technology that substitutes for them. But this mechanism is not well understood.
Finally, how seriously should we consider the radical, but newly conceivable, economic ideas now debated by economists and policymakers? Among these ideas are a universal basic income, a federal job guarantee and even a modernised version of government-sponsored industrial policy. They are meant to address long-underestimated problems that account for the spread of populist frustration, including regional inequalities and the secular decline in labour force participation.
Good ideas or not, understanding their relative costs and benefits becomes more relevant if we discover that full employment is now compatible with dying local communities and permanently falling participation in the workforce.
The expectation of full employment is good news for more than just the obvious reason of workers having jobs and better pay. For instance the case for economic internationalism, which most economists still advocate, is also stronger when workers feel secure in their jobs.
Openness needs all the champions it can find at the moment. And with all the lessons that full employment also makes easier to learn, even forlorn economists have a reason to be excited.
