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At the upcoming Jackson Hole conference FOMC members are likely to revel in the signs of falling inflation and celebrate the prospects for a soft landing. What they fail to realize is that the sweet harmony they believe calls them to a glorious arrival at their final destination of “equilibrium” is really a siren song dulling their ears to the sound of waves of volatility crashing on the rocks of inflation. For each sign that acute overheating has passed, there are multiple that point to an economy with an appetite for consumption that will likely outstrip its ability to produce for years to come.
The available supply of labor is now roughly equal to the demand for labor, meaning there is no idle labor available (Chart 1). That is highly unusual in recent decades and means that firms looking to expand their workforce must bid them away from competitors by raising wages; the slope of the Phillips curve will remain steep as a result. With a young and healthy population eager to produce value a situation with zero idle labor would be difficult, but manageable. The main task of the central bank would be to push real interest rates higher to raise the savings rate with the goal of restraining current demand and funding productivity-enhancing investments.
Unfortunately, the population of the United States is not a young and healthy one eager to get to work, although such people do exist in the country. Despite nonfarm employment sitting at all-time high levels, the percentage of the population actually working is abysmally low (Chart 2). Labor force participation among so-called prime age workers has been rising since the Obama Depression ended in 2016, but the wave of Baby Boomer retirements has swamped the newly rediscovered eagerness to work among those younger than fifty-five (Chart 3). The result is that the U.S. economy has more mouths to feed than before, but with many fewer hands available to generate value or facilitate its consumption.
If the problem were simply one of moving from a larger workforce to a smaller one with proportionally the same sets of skills, goals, hopes and dreams, it would be difficult but not intractable. Either automation to increase the productivity of the smaller workforce, or selling off the unnecessary capital goods to fund the retirements could provide a path to prosperity. In both cases, higher real interest rates would be beneficial. In the first, the additional savings would be needed to fund investments in automation. In the later case higher real interest relative to other countries would allow capital goods to be sold at a high exchange rate by encouraging capital inflows, thus boosting external demand for the local currency.
In the case of the United States however, the older workforce is being replaced by younger workers with a completely different set of skills. Arguably, the younger workers are over-educated and under-skilled relative to their older peers. For younger workers, college has become almost ubiquitous and for the past year these have been the only workers available to employers (Charts 4-6). These workers have the computing skills and social education necessary to survive in a modern corporation but are ill-prepared for another other type of work due to inflated expectations about the value of their college degree.
Until recently there had been enough menial jobs to go around that were centered on shuffling paper, generating content, and taking up office space, but the world has changed. Banal content can be pumped out by artificial intelligence, being in the office is becoming increasingly optional, and the need for human resource political officers will decline with the legal downfall of DEI. Indeed, for the past thirty years the focus of the higher education system has been political indoctrination in service to the New Establishment, rather than the actual imparting of skills. Dealing with college grads disappointed in the value of their investment and saddled with government-provided debt will be one of the major political and economic issues faced by the American government in the 2020s, echoing the situation of the 1970s.