Latest jobs report should be bellwether for Trump econ team
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One has to hope that President-elect Donald TrumpDonald John TrumpObama calls on Senate not to fill Ginsburg's vacancy until after election Planned Parenthood: 'The fate of our rights' depends on Ginsburg replacement Progressive group to spend M in ad campaign on Supreme Court vacancy MORE’s economic team will take a close and dispassionate look at the last job and wage inflation numbers under the Obama Administration that were released today.

More importantly, one has to hope that those job numbers will prompt a serious rethink by his economic team on Mr. Trump’s economic policy proposal to simultaneously undertake large tax cuts and big increases in public spending at this stage of the business cycle.

Failing that, we should brace ourselves for a stronger dollar and higher interest rates and inflation than the Federal Reserve is now contemplating. This could have untoward consequences for both the U.S. and global economies.


Headline unemployment, at 4.7 percent, and the broader U-6 unemployment, at 9.2 percent, are at their lowest levels since the onset of the 2008-2009 economic crisis. Wage inflation now seems on the mend, as indicated by a jump in average hourly-wage earnings to 2.9 percent — the highest level in the past seven years.

Throughout the election campaign, Donald Trump expressed deep skepticism about the steady growth in employment under the Obama administration and the notion that the U.S. economy was anywhere close to full employment.

He did so by focusing on the large number of discouraged workers who had dropped out of the labor force and by emphasizing the decline in the U.S. labor participation rate to historically low levels.

These considerations induced him to believe that today’s U.S. economy has plenty of slack left in it. Under the correct policies, according to Trump, U.S. economic growth could increase from its present level of around 2 percent to somewhere between 3-4 percent in the period ahead.

While there is a certain basis to Mr. Trump’s skepticism about the strength of the U.S. labor market, today’s job and wage inflation numbers should give him pause as to whether labor conditions can tighten any further.

While there can be a legitimate debate as to which of the many labor market measures best captures the state of the U.S. labor market, there can be little room for doubt that increased wage pressures indicate an economy close to full employment.

This would especially seem to be the case today when the pace of hourly wage inflation is not only accelerating, but is also considerably higher than the Federal Reserve’s 2 percent inflation target.

Even the most ardent Keynesian proponent of fiscal policy activism would agree that the appropriate use of fiscal policy depends on the stage of the business cycle.

When the economy is weak and unemployment is high, an expansionary fiscal policy would help support the economy.

However, when the economy is at full employment, fiscal policy should shift to a more cautious and restrictive stance, especially if one wants to avoid further build-up in the already high levels of national public debt.

It is in this context, with an economy already experiencing a notable rise in wage inflation, that one has to question how advisable it would be to both cut taxes and boost public spending in infrastructure — two of Trump's stated goals.

Would such a policy course not raise the risk of inflation and force the Federal Reserve to substantially hike interest rates in a manner that might disrupt both domestic and global financial markets?

Would such a course of action not lead to a further substantial appreciation of the U.S. dollar, which, in turn, would undermine U.S. export competitiveness and lead to a widening of the U.S. trade deficit?

Hopefully, now that the election is over, President-elect Trump will grasp how dangerous it is to engage in aggressive fiscal expansion at a time that the U.S. economy is close to full employment.

If he fails to do so, we should brace ourselves for some rough economic sledding in the years immediately ahead.


Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.


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