Global economics is a balancing act.
If one side of the scales moves up, the other side goes down.
This truism was well-demonstrated by the recent volatility in the world’s stock markets.
Only a few weeks ago the IMF forecast the best year for economic growth in ten years—3.9 percent.
Two weeks later world stock markets plunged. They recovered but left a crowd of nervous investors in their wake. The markets are concerned with profits and it is one of life;s economic ironies that growth can hit profits.
The drop started in New York. This is logical because an unpredictable president should lead to a volatile market. Donald Trump’s economic policies have in the short term, at least, been a success. American unemployment is now down to 4.1 percent. And growth is up to 2.6 percent.
Full employment is reckoned to be 5 percent of the labour market. Below that and economists reckon you need to import workers in order to maintain growth. Trump’s immigration policies are doing the opposite. If the country’s does not import workers than the law of supply and demand will push up wages, which is exactly what is happening.
Higher wages means higher corporate costs which means less profits which is reflected in the share prices.
This is why when the markets opened in Asia they plunged even further and faster—five percent down compared to 4.8 percent in the US. Unemployment in Japan is 2.8 percent, China 3.1 percent and South Korea 3.3 percent.
It also helps to explain why the European markets dropped less than 2 percent later in the day. Unemployment in the Eurozone is 8.7 percent.
There were some other items that caused the scales to tip. Wage inflation fuels general inflation which the central banks usually correct by increasing interest rates. These have been at record lows. In Japan investors in treasury bonds receive only 0.07 percent interest. All the central banks have said rates are going up.
This means two things: It will become more expensive for companies to borrow money (which again hits profits) and investors will start to shift cash from shares to government bonds and banks.
Finally there is government spending, especially in the United States where the Trump Administration is dramatically increasing spending to cover its disaster relief bill, anti-immigration costs and a huge jump in the defence budget. Next week the White House is expected to announce that it will spend up to $2 trillion on improving America’s infrastructure.
At the same time, the Trump Administration has dramatically cut taxes. This means that there is a strong likelihood that the US government will need to borrow more, which—because of the supply and demand law—will lead to higher interest rates and draw more cash away from the financial markets.
Trump hopes that the increased deficit will be offset by increased tax revenue from corporate growth. This is the Holy Grail of government economics and goes a long way to explaining jangled market nerves.
The US is not alone. Japan, South Korea and Russia are all increasing their defence budgets because of the tense international situation. Both China and Russia have recently indicated the start of a new—and expensive—nuclear arms race after Trump’s recent Nuclear Posture Review called for more and better ICBMS and the development of a new generation of low yield nuclear weapons.
In Europe They have suffered nearly ten years of German-imposed austerity which has kept the economies of Greece, Franc e, Italy, Spain and Portugal just on the right side of the bankruptcy courts. This looks set to change. The newly agreed German coalition government has resulted in a Social Democrat in charge of the Ministry of Finance and the Social Democrats plan to loosen the purse strings.
German Social Democrats also have the foreign affairs portfolio and are marching in step with French President Emmanuel Macron. He wants to move further and faster towards European integration and the development of a European defence force. All of which costs money.
The world forecasts remain good, but the scales are also delicately balanced.
* Tom Arms is foreign editor of Liberal Democrat Voice and author of “The Encyclopaedia of the Cold War” and “America Made in Britain".
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14 Comments
Tom, you are incorrect the now standard minimum of 5% unemployment is not full employment; it is NAIRU (non-accelerating inflation rate of unemployment) and its role is to assist in controlling inflation, which is the now standard economic target (I think from 1979 in the UK). Full employment is defined by Wikipedia as “around 1 to 2 per cent of the total workforce”. I think in the UK the target was about 2.5% from about 1946 to 1976.
Keynes defined full employment as the absence of involuntary unemployment. As Liberals we should not be supporting anything which is involuntary? Beveridge defined full employment when the number of people unemployed equals the number of jobs available. When this is so the unemployed have choices. As Liberals we should think this is a good thing.
The work force of the UK is about 33.65 million, 5% of this is 1.6825 million; no liberal should think that having that number of people involuntary unemployed is acceptable.
Running the economy to try to keep unemployment under 2.5% of the work force also increases wages and so reduces poverty and economic inequalities. So a win, win, win situation.
Michael BG,
it is long term unemployment that needs to be addressed, not temporary or frictional unemployment. This requires direct policy interventions. Macroeconomic solutions won’t do it. The UK unemployment rate is currently around 4.3% of which 1.2% are long-term unemployed https://tradingeconomics.com/united-kingdom/long-term-unemployment-rate.
There are circa 810,000 vacancies or 2.5% of total workforce. Address long-term unemployment with a job guarantee program for the 400,000 long-term unemployed and we can get close to Beveridge’s definition of full-employment, where the number of people unemployed equals the number of jobs available.
“Full employment is reckoned to be 5 percent {Unemployment -PM} of the labour market. Below that and economists reckon you need to import workers in order to maintain growth.”
This isn’t right.
Some economists will argue that unemployment needs to be kept high to keep inflation under control. The concept is encapsulated in the phrase non accelerating inflation rate of unemployment. In other words wage inflation becomes a problem unless a certain number of people are deliberately kept in a state of idleness.
The contradiction is that workers have to be paid enough so that everything that is produced is sold. Also, capitalists have to spend their profits too. But if the workers aren’t paid enough and the capitalists decide to store their profits as cash piles, then it won’t be sold and Government has to step in with deficit spending to keep the economy moving.
https://en.wikipedia.org/wiki/NAIRU
I think we will have to agree to disagree. I was using the US Federal Reserve Bank’s NAIRU which is 5.0 to 5.2 percent. My old economics professor told me that 1.2-1.5 percent of the working age population are simply unemployable because of illness, disability or just plain orneriness. That leaves about 3.5 percent of the population who are legitimately between jobs. So I think the figure of one percent unemployment would better be described as a severe labour shortage.
@ MIchael BG @Tom Arms,
The work force of the UK is about 33.65 million, 5% of this is 1.6825 million; no liberal should think that having that number of people involuntary unemployed is acceptable.
I agree. Except I might replace “no liberal” with “no sensible person”. Even Margaret Thatcher won an election on the slogan “Britain isn’t working” when unemployment was running at 5%. 5% then is more like 3% now, when we bear in mind all the changes in the way that the unemployed are counted. Then there’s the question of underemployment, eg ZHCs, and insecure employment, sometimes insecure self employment, on very low pay.
No-one, including the US Fed, can possibly put a figure on what the NAIRU is unless these factors are included too. Presumably the powers-that-be in the EU have their own idea of what the NAIRU is. They seem to prefer unemployment to be in double digits.
But in any case, let’s challenge the economic mainstream to use the term NAIRU in the mainstream media. If they are saying we have to have 5%, or whatever, unemployment as a disciplinary measure against ordinary working people, they should be honest enough to admit that publicly.
Running the economy to try to keep unemployment under 2.5% of the work force also increases wages and so reduces poverty and economic inequalities. So a win, win, win situation.
Not for those who like there being high levels of inequality, it isn’t !
@ Tom Arms
I can’t imagine that your “old economic professor” was a liberal. He clearly did not value each human being equally. Of course in the UK he is wrong. There are 1.98 million people in the UK who are not well enough to work according to the latest Labour Force Survey (https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/january2018#economic-inactivity). They are not counted as unemployed in our figures. In the 1950’s and 60’s there was no long-term unemployment in the UK because employers had to employ those who are difficult to employ.
It should be possible for growth to continue at full employment levels if employers invest to increase productivity. The UK had continuous economic growth from 1949 ton 1974 when the government pursued economic policies to achieve full employment (https://upload.wikimedia.org/wikipedia/commons/thumb/4/4b/Annual_U.K._GDP_Growth%2C_1948_to_2012.png/350px-Annual_U.K._GDP_Growth%2C_1948_to_2012.png). It is only when employers want cheap labour and don’t invest to improve productivity that they need to import cheap labour.
@ Joe Bourke
You state that there are about 810,000 vacancies which is about 2.5% of the work force. Therefore if unemployment was 2.5% we would have achieved Beveridge’s definition of full employment – having the same number of vacancies as unemployed.
There are also 1.98 million people who are not well enough to work some of whom I expect were once long-term unemployed but became too ill to work because of their lack of a job. To reduce unemployment down to 2.5% of the work force would encourage employers to offer work to not only the long-term unemployed but also those who have been receiving employment and support allowance for a long time.
I also support a guarantee of a job or training scheme where people are offered either a job or a training course or scheme which suits them. And this should also be offered to those who have long-term health conditions but wish to work. I think the training part should be offered after 6 weeks and the job guarantee after 6 months.
@Michael BG Lies, damned lies and statistics, as my father used to say. It really depends on what you include in your statistic when making your calculation. My understanding is that the Fed does include the disabled, etcetera in their figure and because I was talking about world economics and the US is dominant player in the world economy, I was using the Fed formula as my benchmark. BTW, you’re right, my economics professor was an adviser to the Heath government, oops there goes my claim to be a thirtysomething.
I should add that it is interesting how the subject of my article has been twisted to focus on the intererpreation of unemployment figures. The purpose of my writing was to draw atention to the fact that there are too many variables for economics to be an exact science and that the best we can hope for is a constant effort to balance the money scales by constantly adjusting the variables. At the moment one variable–relatively low unemployment (notice that I did not use the term “full employment”) is unbalancing the scales and this is one of the main causes of the current volatility in world stock markets. Do you agree? If you do, what do you think should be done about it?
Michael,
during Prime Minister’s Questions, 2 April 2014, David Cameron observed:
“My right hon. Friend is factually correct: every Labour Government have left office with unemployment higher than when they came to office.”
It is clearly not enough to think you can fine tune the economy and keep unemployment under 2.5% of the work force by government fiat; you have to have Economists/Ministers who know how to do it without crashing the economy, like Keynes and Beveridge in their times.
@ Tom Arms
You should not be surprised people will pull you up when you make sweeping statements regarding economics. If you recognise that economics is not a science and it is an art form, you shouldn’t make such sweeping statements which are widely disputed.
We can agree that world trade has to balance and so can be seen as a multi-faceted scale.
We can agree that if a government provides full employment this should cause wage inflation, as well as reducing poverty and inequality. Can we agree that if governments control unemployment to the NAIRU level then they can control inflation at an unacceptable human cost, which also increases economic inequalities and so increases poverty?
I don’t understand why anyone thinks stock prices are important for the real economy. If the stock market is increasing all it shows is that there is confidence in the market and if it is falling that there is not confidence in the market. These fluctuations are quite normal. The only time to worry is if there is a stock market crash which leads to a banking crisis.
However we should be clear full employment should bring economic growth. It is possible for every country in the world to experience economic growth at the same time.
I don’t think governments should take any action to stabilise their stock exchanges unless it appears the drop in share values will affect the real economy. Stock exchanges are not normally criterial but exchange rates can be. If a country’s currency is falling it can create real problems for that country’s economy as can a rapid rise in the value of one’s currency.
@ Joe Bourke
There is some dispute that David Cameron’s facts are correct especially for 1924. However, it could be said for most governments. It was true of the Conservative governmental periods 1951 to 1964, 1970 to 1974 and 1979 to 1997. We should expect this. When a government has not dealt with the economic situation it is more likely to get elected out of office. What the figures really tell us is that since about 1975 unemployment has never been lower than 1 million. Having 1 million people unemployed in the UK should be unacceptable to everyone and especially to liberals who value each person equally.
Michael,
if unemployment is at a 42 year low then the phrase – “if ain’t broke, don’t fix it” comes to mind. I agree that policy action is required on measures to assist the long-term unemployed, but the focus of policy attention now should be on improving productivity and living standards, and tackling the immediate crises we face in public services – particularly the NHS, Adult social care, schools and local authority funding.
@ Joe Bourke
You think 1976 was the high point of our society and we can only seek to get to that level but no better. Be more ambitious. You are happy with 1.44 million people unemployed and 1.9 million not well enough to work. You are happy with 14 million living in poverty in the UK. How are you treating them equally with the rest of the population? The system is broken. We need to fix it. We should be focusing on reducing economic inequality and poverty so everyone in the UK has the same choices and the same freedoms or we are not liberals.
If we had full employment productivity would increase, living standards would rise (for everyone), and the government would have more revenue to spend on the NHS, social care and education.
@Joe B and Michael BG. Joe, you write “the focus of policy attention now should be on improving productivity and living standards, and tackling the immediate crises we face in public services.” Michael, you write ” We should be focusing on reducing economic inequality and poverty … If we had full employment productivity would increase, living standards would rise for everyone, and the government would have more revenue to spend on (services) ” You both seem to have admirable aims. Need they be incompatible?
@JoeB,
……. if unemployment is at a 42 year low
But is it? If the unemployed were counted the same way now as they were 42 years ago, how much higher would the figure be?
42 years ago we didn’t have the same problem of underemployment. We didn’t have people on ZHCs with next to no work, as we do now, but who aren’t counted in the figures.