Welcome to Known Unknowns, a newsletter that’s happy for you if your IRA gets really big, as long as it’s invested in well-diversified public securities.
Jobs are back
The job market is healing. It seems like some people are coming back to work, with unemployment inching lower to just 4.6%.
Please indulge a technical digression for a moment. I’ve heard a few people say that 3.5% is the natural unemployment rate. That may be true, but I haven’t yet heard a good argument why. This was the lowest that unemployment got before the pandemic, but is that really the natural rate? I suppose it held without high inflation. So, I guess you could say it was NAIRU. But maybe the true NAIRU is even lower—or maybe we’re in a new regime in which the economy is more prone to inflation, and the pre-pandemic NAIRU is lower than the current one. It seems like the Fed is going off the 3.5% number, too. But the unemployment rate before the economy was shut down is not a rigorous definition of the natural rate.
Anyhow, it could be the fall season, lower benefits, school back in session, or greater comfort with the virus, but it seems like people are slowly heading back to work. But every big economic shock leaves scars, and each of the last few recessions have resulted in people leaving the labor force and not coming back, especially those who work routine jobs that require less education. And even if unemployment is falling and hiring is up, labor force participation has not similarly improved. And it’s not just here in the U.S.—Europe is also experiencing labor shortages.
My Bloomberg column last week explored what might be behind people quitting their jobs and/or leaving labor force altogether. I’ve read many articles about this phenomenon, but I haven’t quite found any satisfying answers. It seems like everyone is projecting a bit about exactly how they feel about their current jobs.
It’s true that wages are higher, which creates an incentive to quit your job for another opportunity, but lots of people are quitting and not getting a new job at all. I’ve dug into the data, and I’ll admit that I don’t think I know, either. But some things are worth noting. Despite lots of stories about unhappy junior bankers and lawyers (again, projection!), the proportion of people quitting their jobs appears to be at the same level or has even fallen for those with a college education or more.
Almost all of the job leaving has been taking place among workers with a high school education or less. That’s true for job-to-job transitions and those who quit and are still looking, or those who have left the labor force altogether. The hot question is why? I think it’s hard to find an easy answer, which is why no one has offered one. I think we lose sight of the fact that quitting one’s job is a very personal act. Pay matters a lot, but so does how it actually feels to go to work each day—whether or not you feel valued, whether or not you feel that your job has purpose, and often whether or not you like your colleagues. That’s all true, no matter what your job is, because you do spend lots of time doing it. And all of that comes down to good management. In this tight labor market, no one can afford bad management.
The hot question is whether this recession play out like the others. Will the people leaving the labor force not ever come back? Based on the demographics, it doesn’t look good. But I’m optimistic, nonetheless. This is a supply-driven recession, which means that the old rules don’t apply. If wages continue to increase and inflation goes up, maybe the labor market will heal.
Or maybe we’ll just decide to give everyone checks and consign ourselves to a non-working underclass. Only time will tell.
It’s hard times for public finance economists…
…and this is because the tax policy debate is just so bad at the moment. Ideally, taxes raise revenue while creating as few distortions as possible. We can layer in questions about fairness, and the fact that higher-income people can afford to pay more. But this really isn’t that hard.
I saw a Senator demand that if we increase the SALT cap to $80,000 (gasp), we need to bring back the wealth tax for 700 people that was on the table last week. I think I died a little when I heard that. It’s like they took basic public finance and decided to do everything wrong on purpose. I don’t think that this will happen, now that the infrastructure bill passed, the rest of BBB’s more controversial future looks iffy. But it’s still a problem. It feels like bad ideas get in the ether, and I think to myself, “That’s such a terrible idea—it will never happen.”
But then it gets normalized over time because we keep hearing it, and then of course it happens. And this constant talk about people not paying taxes on unrealized gains—as if this is really a form of tax evasion (I’ve seen this from both the White House and Pro Publica)—is really not healthy for good tax policy. There are good reasons why we don’t tax unrealized gains. But even if you disagree, you can’t accuse someone of not paying taxes that they don’t actually owe.
This all feels so punitive, which makes me uneasy, because that’s not the purpose of taxes. The budget also includes a plan that would require drawdowns on your retirement accounts once they reach $10 million. Not that many people would qualify, obviously, but still—distortionary! If we’re so concerned about a small number of people using retirement accounts as tax shelters to make money in private equity, then why not restrict asset ownership to public securities? That would be much cleaner, easy to justify, and wouldn’t have to use the tax code in order to single out people who we don’t like.
If we want to raise lots of revenue, and make it progressive—well, that’s not very hard. We just have to broaden the base, bring down rates, and add a progressive VAT.
Two last things
Tapering finally started—better late than never. Why are we still doing QE? I mean, there’s currently high inflation, and unemployment is less than 5%. What are we actually trying to achieve here?
Also, I’m getting skeptical about forward guidance. Simply saying that you’ll raise rates a quarter of a point in 12 months doesn’t count as contractionary policy. Anything can happen between now and then, and I doubt that lots of it will justify keeping rates low.
Until next time, pension geeks. Hope you had a good end to DST, even if we don’t have to live with this madness!