Wednesday 9, February 2022

The incredible disappearing workforce

The Ethical Skeptic has moved on from analyzing genomes to understand where Covid came from. He has taken a look at why there is a collapse in the partipation rate of young white men in the USA. Economists have worried about this for a while. I am not an expert in this field, but the name David Autor comes to mind, and he certainly has written papers which appear to be on this topic here.

Skeptic pulls no punches in explaining why a young(ish) man might choose to live in his parents’ basement rather than going out and doing a “real job.” Not all of these factors apply in the UK and Europe, but clearly some of them do. It’s all very well maximizing productivity, but if fewer and fewer people are productive, but we have a progressive tax system, everyone will be worse off.

Anyway, it’s worth a read, and it’s clearly very hard to fix.

Money is being created

When the Fed does QE, banks swap their treasury bonds for reserve balances at the Fed. The asset side of the balance sheet of the commercial banks remains steady. The banks can lend out these reserves to the private sector, but mainly they don’t. You can lead a banker to the discount window, but you can’t make him lend (to anyone but the Fed). Banks can lend, though if they so desire and it seems that they actually do desire, now that the economy is being unshackled. This is what Milton Friedman would say will lead to inflation. And who am I to gainsay a Nobel laureate?

Credit card balances increased by $52 billion, the largest quarterly increase observed in the 22 year history of the data. Despite the substantial increase, credit card balances are $71 billion lower than at the end of 2019. Auto loan balances increased by $15 billion in the fourth quarter, a change similar to that seen in the fourth quarter in the previous two years.

— NY Fed.

Wrap

(I’m writing this on the morning of the 10th, so it’s even more of historical interest only.) The summary of news today was that central banks are still tightening (Romania!), Unemployment and inflation are still surprising on the upside (i.e. indicating stronger than expected growth of the economy), and government bonds are continuing to be spooked. The 10Y yield hit 1.96%. If it goes over 2%, it will be a big deal. The market is, in effect, already tightening for the Fed.

What is tightening?

With inflation being a headline topic in most serious news sources recently, we hear a lot about tightening. This includes increasing taxation, reducing central banks’ balance sheets and increasing interest rates. The narrative goes that these things ‘take money out of the economy.’ But, when you think about it, that’s nonsense. Ignoring impacts outside the country (e.g. balance of payments, capital account etc.), savers and borrowers are exactly in balance. When rates go up, borrowers pay more, but savers receive more, to exactly the same extent. The redistribution moves money from one group to another. You could argue that savers, because their consumption is less than their income, are less likely to buy stuff if they have more income. But a lot of savers are tweaking the extent of their saving to ensure they have enough income from their savings to get by. So, an increased return on those savings will lead to extra spending, to a greater extent than the borrowers reduce spending to be able to pay the increased financing costs.

When it comes to QE (balance sheet adjustment), if you view the central bank and the treasury as both agents of government, the total funding requirement for the government does not change. It’s just that duration of those liabilities, as held by the private sector gets longer (with tightening). This might affect prices of bonds, but I cannot see it affecting the real economy much.

When it comes to taxation, as a means of controlling inflation, the government is in a pickle. Governments want to be loved, and re-elected. This is difficult to achieve if you are raising taxes. That’s why central banks have become so powerful: they allow governments to spend without taxing. With currencies no longer backed by any stable store of value (gold), this one weird trick has allowed governments throughout the developed world to keep spending as their populations grew old and left the workforce and as labour productivity stagnated. Anyway, governments have have been fooling all of the people all of the last fifty years, so maybe they can keep the population amused with cheap debt and Netflix. Or, maybe, we’re going to get a reset, where something happens to release debtors from the real consequences of their borrowing.

(I am not sure why productivity cratered, but I have a strong suspicion that it’s because nearly everyone in the west works in a job which cannot be automated. Whereas the Far East is full of factories stuffed with robots.)