Wednesday, November 5, 2014

A little post-election-day economic balm

 - by New Deal democrat

Perchance you would like to ponder something other than politics this morning.  In that case, let me offer you some economic balm.

The likelihood is that absolutely nothing is going to get done in Washington in the next two years.  In fact, I expect - and hope - that exactly one thing happens, and that is that the US does not default on its debts via a Debt Ceiling Debacle even worse than the one we had in 2011. (and please, pretty please, Obama, resist the urge to cave in to a "grand bargain" on your way out the door).

If Washington can simply manage to do absolutely nothing to the economy in the next two years, except to agree to pay already incurred debts (a/k/a lift the debt ceiling), then we are in the best position we have been in for nearly a decade for the economy by itself to improve the lot of the working and middle class appreciably.

Here's why:

  • there is nothing in the long leading indicators to suggest that we are going to enter an economic downturn at any point in at least the next 9 months.  If interest rates continue to drift lower and housing starts improve as a result, you can extend that forecast into 2016.
  • continuing economic growth means continuing positive monthly jobs reports
  • so long as there is positive jobs growth, and initial jobless claims stay at or near their current levels, the unemployment rate is going to continue to decline -- and that's not just the usual rate, but all the other variations on the unemployment rate as well.
  • Because the unemployment rate should remain below 6.5% for the foreseeable future, that means that nominal wage growth, which has been improving for the last 18 months, will continue to improve further - i.e., to 2.5% YoY or 3.0% YoY.
  • Also, incremental tightness in the labor market is going to mean that better paying jobs become an increasing share of employment - my hypothesis is that this recovery is no different from previous recoveries, where low wage jobs get added first, and higher wage jobs get added later. Like the expansion after the deep 1982 recession, there was so much slack that it took a long time for those higher paying jobs to show up. There is evidence from the last few jobs reports that it is beginning to happen.
  • Unless there is a reversal in gas prices, this is going to mean significant real wage growth to the average working family.
In short, simply leaving the economy alone for the next 2 years is likely to mean a continued improvement in the jobs picture, and a significant improvement on the wage front. Or, if ever there was a time when laissez faire might be a perfectly decent policy, this point in the cycle is it.

Just the probabilities, I know. Lots could go wrong. But the above scenario isn't just plausible, among the plausible scenarios, it is the most likely.