Despite the insipid whining from the usual suspects, labor market conditions continue to improve on the back of ongoing reflation by the Federal Reserve and lower tax rates on the factors of production. Labor compensation is growing above a 7 percent annual rate while aggregate hours worked are rising at a rate consistent with 4 percent real GDP growth. The multiple of hours worked and wages paid, a proxy for income and production, has risen back to levels last seen during late 2000 when the unemployment rate was 3.9 percent. The chain-weighted capital-to-labor ratio, the raw fuel for productivity and income growth, has reached record levels and continues to grow at a two-digit pace, well above historical norms.
Those arguing that the labor market is weak insist the unemployment rate has dropped due to a declining labor force participation rate. They also argue that low-end wages are not keeping up with inflation. Even if we accept this assertion (which is false), the Keynesian cure is worse than the supposed labor market disease. The neo-Keynesian elixir typically is a combination of higher tax rates on the entrepreneurial class (the rich), higher tariffs, and a devalued dollar. Africa and Latin America, which have binged on this advice for three decades, show exactly what the effects have been: no growth, dire poverty, disease, and desperation.
The employment participation rate — the fraction of the population in the labor force — only is 0.8 percent below its average from 1992-2000, which was biased upward due to dot-com overhiring. Since 2004, the participation rate has averaged 66 percent while the unemployment rate has dropped to 5 percent from 5.7 percent. Non-farm payrolls have expanded by more than 3.2 million during this period. This completely refutes the nonsensical claim that a mass exodus from the labor force has been the primary driver of the recent fall in the employment rate.
Since 2001, the growth rate of real wages of non-supervisory production workers, a group under pressure in the global economy, is about 0.9 percent above the rate of inflation (using the non-core PCE deflator). This is about 75 percent of the average from 1992-2000 and more than three times the average from 1971-2000. Despite claims to the contrary from the Hooverite protectionists, CPI-adjusted wages of non-supervisory production workers have risen more than 8 percent since NAFTA became effective in 1994. Using the PCE deflator, real wages have risen more than 15 percent since NAFTA took effect. In other words, the current anti-China/trade protectionist sentiment in Congress, which has seduced both political parties, is not pro-worker and certainly not pro-growth.
Another Keynesian sleight-of-hand comes by way of dire warnings about the current account deficit, which is assumed to be sapping our national wealth, blocking job creation, and limiting production. According to Russell Roberts of Café Hayek, “The U.S. has run a merchandise (goods) trade deficit every year since 1976. And since 1976, the U.S. economy has created over 50 million jobs.” To be exact, the U.S. has created 54.5 million jobs during that span despite running a cumulative “deficit” in goods of $5.5 trillion. Real disposable incomes are up $4.8 trillion since 1976 while real equity prices have more than tripled and household net worth has risen more than nine-fold to an all-time high of $48.7 trillion. The trade account is nothing more than the capital account with the sign reversed; it is an accounting identity.
An additional trade fallacy recently was articulated by a bumptious Sen. Chuck Schumer in defending his inexplicably protectionist Schumer-Graham 27.5 percent China tariff bill. During a CNBC interview, Schumer said, “free trade is predicated on freely floating exchange rates.” While the Schumer-Graham bill likely will lose significance in the wake of China’s recent decision to change its currency peg, the central assertion behind it — that free trade requires floating currencies — could not be further from the truth.
One of the greatest explosions in trade in the history of the world was during the heyday of the pre-WWI gold standard. This naturally set up a system of fixed currency-exchange rates between nations, as currencies fixed to the same unit of measure (gold) naturally are fixed to each other as well. America’s fateful brush with full-blown trade protectionism in 1930 created a chain reaction that led to a global trade war, a collapse in the international economy, the incubation of fascism in Europe, mass murder, and world war.
A system of fixed exchange rates based on gold and the dollar was adopted by the Allied powers at the Bretton Woods monetary conference in 1944. The Bretton Woods era spanned nearly three decades of strong growth, little-to-no inflation, historically low interest rates, expanding trade, and a rising standard of living.
History shows that free markets, free minds, and free people are undermined by unstable currencies, high tax rates, burdensome regulations, and government overreach. Phantom weakness in the job market, fears over an accounting identity called the current account “deficit,” and xenophobia regarding China’s shift to market capitalism are not reasons to torpedo our current prosperity with destructive policies that have failed the test of time.
— Michael T. Darda is the chief economist and director of research for MKM Partners, an equity execution and research boutique located in Greenwich, Conn. He welcomes your comments here.