Jobs report shows more stimulus isn’t the answer
Friday’s Labor Department employment report for April was a shocker. Instead of the anticipated million-plus new jobs and continued declines in the unemployment rate, the economy created only 266,000 jobs and the unemployment report crept upward by 0.1 percent.
What happened? Supply problems, not demand, drove the disappointing report and Congress needs to take to heart the risks that recent policy has created and design future policy accordingly.
Demand for goods and services, and the labor that produces them, appears to be no problem at all. Consumer spending has been rising sharply — 10.7 percent (at an annual rate) in the first quarter of 2021 — and households have experienced rising incomes and wealth over the past year.
In the report itself, there is strong evidence of employers scrambling to add to their workforces to meet demand. The number of workers who worked part-time because of “slack work or business conditions” plummeted by 632,000 in April. Those at work worked longer as average weekly hours rose at an annual rate of nearly 6 percent. Weekly payrolls — the combination of jobs, hours and hourly wages — rose at an annual rate of 15 percent. The overall picture is one of employers scrambling to add labor by converting part-timers to full-timers, hiring and raising pay.
Labor supply, however, is much more concerning. Leading up to the report’s release, there was a steady drumbeat of anecdotes regarding employers struggling to fill positions. Montana Governor Greg Gianforte released a statement that asserted, “I hear from too many employers throughout our state who can’t find workers. Nearly every sector in our economy faces a labor shortage.”
The key is how many potential workers are available. Labor force participation did rise somewhat (from 61.5 to 61.7 percent) but only to levels previously reached during the pandemic and well below the 63.4 percent recorded in early 2020. Put differently, if 63.4 percent were the current participation rate, there would be 4.4 million more workers available to fill open jobs.
Why are people slow to return to work? There are myriad possible explanations. For some, it could be as simple as fear of the coronavirus. Others may have childcare responsibilities that stem from closed schools and daycares. Still others may feel little pressure to return to work because of the federal government’s generous $300 weekly supplement to state unemployment insurance benefits. Montana’s governor certainly believes the last is a major factor: “Incentives matter and the vast expansion of federal unemployment benefits is now doing more harm than good. We need to incentivize Montanans to reenter the workforce.” He has ended Montana’s acceptance of expanded unemployment benefits.
There are two important implications of these observations. The first is that the American Rescue Plan (ARP) is, as feared, a massive over-stimulus of demand in the economy, likely leading to inflation.
The ARP was very poorly timed, as it was no longer the spring of 2020 when the economy was contracting at an annual rate in excess of 30 percent. Instead, it was passed in the midst of a quarter featuring 10 percent growth in household spending and nearly 6.5 percent growth in gross domestic product (GDP). Given this growth, there was little merit in stimulus, especially because Congress passed $900 billion in support for the economy at the end of December.
The ARP was also far too large. At $1.9 trillion it was four or five times the size of the overall economic shortfall present at the end of 2020. Given that there was accumulating evidence of supply-side bottlenecks and labor shortage, one would expect that the ARP would manifest itself as inflation instead of job growth. Former Treasury Secretary Larry Summers has been a vocal critic of this administration’s fiscal policy, warning that it could reignite consumer price inflation. That might be the case if enough of the fiscal push turns into spending, but the personal saving rate was 19.8 percent in January, 13.6 percent in February and jumped to 27.6 percent in March. Clearly a fair amount of cash is flowing into different forms of saving and asset accumulation. In this view, the primary price inflation will be asset price inflation.
The two views are not mutually exclusive, and, in the end, it will be an empirical issue. The price spike among assets, from houses to equities to cryptocurrencies, is plain in the measurements. Similarly, prices of commodities such as oil, construction costs, and the producer price index all display a shift upward that suggests inflation moving up the supply chain. Indeed, the only price index to yet be affected is core (non-food, non-energy) prices, and that is probably just a matter of time.
The corollary of the over-stimulus lesson is that the proposed American Jobs Plan (AJP) and American Families Plan (AFP) must be carefully designed to avoid further near-term stimulus and instead focus on long-run issues of trend growth.
Long-run trend growth is fundamentally about expanding the supply of goods and services, real wages and standards of living. The AJP and AFP must be evaluated based on their ability to expand these. At present, they fail this test. There is nothing about raising the corporate rate to an uncompetitive level, raising the only global minimum tax in the developed world by another 50 percent, more than doubling the tax on the majority of capital gains, and more that will enhance saving, investment, and supply growth. Proponents counter that those tax revenues fund productive investments that outweigh the tax-based headwinds. Unfortunately, a careful and detailed American Action Forum analysis of these claims indicates that even a disciplined investment program will fall short. The AJP and AFP need to be rethought from the perspective of economic growth.
Friday’s jobs report was a wakeup call. It was a timely reminder that simply more stimulus and massive government spending is not better. Instead, Congress needs to target the actual problems facing the U.S. economy, now and in the next decade.
Douglas Holtz-Eakin is the president of the American Action Forum. From 2003 – 2005, he was the director of the Congressional Budget Office, and from 2001-2002, he was the chief economist of the President’s Council of Economic Advisers (CEA). Follow him on Twitter: @djheakin