New Fed Chairman Janet Yellen and other major central bankers at their annual Jackson Hole conference seem to have committed a heresy by advocating full employment as the goal of central bank policies, above and beyond fighting inflation. That may be an easier call today, given inflation is low and unemployment still high after the Greatest Recession since the Great Depression.
But you can depend on the Wall Street bankers and conservative economists who don't like Central Banks controlling economic growth to call for restricting credit before the labor market -- and economic growth -- has become self-sustaining.
What is self-sustaining? It's enough GDP growth to sustain not only full employment, but maintenance of a healthy social safety net. We know from past history that GDP has to exceed 3 percent growth, and has exceeded 3 percent on average since the Great Depression, for this to happen. That is what has made America and many Americans prosperous. But GDP growth is now averaging just 2 percent since the end of this Great Recession -- in fact, over the past decade.
And this is mainly because not enough consumers have rising incomes, while housing prices are just beginning to recover -- no surprise, as I've said. So the news from Jackson Hole was welcome, as it signaled that the Central Bankers of the EU, Japan, and the U.S. are serious about returning to full employment.
As reported by the New York Times Benyamin Applebaum, among others:
"Leaders of the world's major central banks made clear in speeches at this year's conference, which ended Saturday, that they were focused on raising employment and wages. The pursuit of lower inflation has been replaced by a conviction that inflation is actually too low for the good of the economy."
There is no question that economic activity is heating up. The Conference Board's LEI just surged again and has been positive since February. Even housing seems to be growing again, though existing and new-home sales aren't yet up to last year's levels. But housing construction is growing again, with almost 1 million units being started to add to current low inventories.
The real cure to what ails the U.S. economy is the creation of more jobs. And that is something the Fed has only limited power to do. It can hold down interest rates for an extended period by buying securities, which enables consumers to afford more, and banks to lend more.
This has helped the U.S. outdistance both Japanese and European growth, but once again the upper limit seems to be in the 2 percent growth range without fuller employment and a recovered housing market -- the basis of much of middle class wealth, let us not forget.
Thomas Piketty, in his epochal Capital in the Twenty-First Century, highlighted the dilemma of mature developed countries with declining and aging populations, a major determinate of economic growth. Developed countries' populations have declined to a 1.5 percent growth rate, whereas the U.S. population after WWII soared as high as 5 percent, which gave us 5 percent growth for a while. So population growth will continue to be a problem, which is why a larger workforce is so important.
But the truth is that consumers power 70 percent of economic activity, and governments another 20 percent. And with consumers still hampered by record debt loads mainly incurred by the housing bust, and governments hampered by austerity policies that limits their spending and cuts revenues on badly under serviced public services, higher growth cannot happen without another exploding another heresy; that higher taxes can be beneficial for job creation.
Many have said it, and research is beginning to prove that governments do add to economic growth. Tax expert David Cay Johnston is one such who has been saying higher taxes can stimulate growth, using California's economic resurgence, one of the highest tax states, as an example.
"Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30," said Johnston. "Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.
"Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. California is home to 12 percent of Americans, but last year it accounted for 17.5 percent of new jobs, Bureau of Labor Statistics data shows."
This not only benefits much needed public services, but actually boosts GDP growth, since much of government-financed work now employs private industry. George W Bush in his push to privatize government services put more than 800,000 private-sector employees under government contracts just during his watch.
So the evidence is mounting, if not already there, that some higher taxation -- including a streamlining of the various tax codes that eliminates the perks -- is needed to spur continued growth. But when will the politicians finally wake up to that fact?
Harlan Green © 2014
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