June 20, 2018

Can unemployment go lower?

The facts:

"The US unemployment rate fell to 3.8 percent in May 2018 from 3.9 percent in the previous month, and below market expectations of 3.9 percent. It was the lowest rate since April 2000, as the number of unemployed decreased by 281 thousand to 6.07 million and employment rose by 293 thousand to 155.47 million. Unemployment Rate in the United States averaged 5.78 percent from 1948 until 2018, reaching an all time high of 10.80 percent in November of 1982 and a record low of 2.50 percent in May of 1953"

So, in a sense you see the answer to my question before you. Just 4 months after escaping decades of "Progressive" administrations, with the election of Ike, the American economy went wild in 1953. Though progress had also been made under the preceding moderate Truman administration. Clearly there was a big catchup with business projects that would have been risky under the Democrats being suddenly seen as safe for investment. Much the same has happened under Trump. Conservative administrations are good for business confidence and confident businessmen expand their activities -- creating jobs.

The good figure for 2000 was under Bill Clinton, a passing era in which budgets were not only proposed and adopted but were actually in surplus for three years, partly by way of cutting back the military. Clinton was a moderate in many ways and in relation to the economy ran very conservative policies.

So back to normality. As the summary of facts above shows, the average rate of employment over the years is over 5% and economists have long proclaimed that 5% is a "frictional" or natural level of unemployment -- a level which you can't go below for long

So is that right? There is no sign of it. People thought the 3.9% figure recorded in April was as low as you could go but now we see a further fall to 3.8% in May. And, despite Democrat denials, it is an effect of the present administration. In May 2010, the second year of the Obama administation, the figure was 9.6% -- a large gap indeed. So Trump has got an amazingly successful recipe for American prosperity. Whatever he has been doing must be given great credit for creating jobs

Yet what Trump has been doing runs completely against conventional economic wisdom. Economists preach free trade as the highroad to prosperity -- but Trump has been a champion of tariffs and import restrictions. But Trump has recently said that he learned the free trade story while he was at Wharton and still regards it as the ideal.

So it is clear that free trade alone is not enough for prosperity in the real world we have at the present. You actually have to sponsor jobs -- by protections if necessary -- in order to get good job growth. There was striking evidence of that in the 19th century -- when American industry prospered mightily behind high tariff walls. But there is no such thing as a free lunch and the penalty in that case was a civil war, when Northern manufacturers faced the threat of losing half of their markets in the South. They could not and did not allow that

But although the opposition to Trump is as furious as anything seen in the old South, the powers of a modern president are too great for Trump opponents to challenge. The fact that the military is strongly pro-Trump is also a barrier to armed rebellion.

But economists are not very good at factoring war into their equations so how do they explain the 19th century boom? It is to them a classic case of the "infant industry" exception. American technology and industry were still very new and well behind the mature industries of the old world. So it had to be given time to catch up. And that does seem to be what happened. So the 19th century experience is no guide to the 21st century. It gives us no assurance that Trump's policies will continue to succeed. As initial optimism wears off and the costs become evident, one could argue that America will rebound to the old 5% level of "frictional" employment. You cannot square the circle for long.

So is there any other precedent which would lead us to believe that the Trump good news will continue? There is: Australia of the 1950's and '60s. The Prime Minister of Australia from 1949 to 1966 was the avuncular Robert Menzies, a very conservative man. Many people who remember those years recall that era as a golden age. And what were his economic policies? They were very protectionist and focused on creating and preserving Australian jobs. So that sounds a lot like Trump, does it not? So what was unemployment like in his era? It was almost always UNDER 2%. It was regarded as a political crisis if it looked like it would go over 2%. Frictional unemployment barely existed.

So the lesson is clear: Maximum jobs requires some protection of industry. Both Trump and Menzies have demonstrated that. It could be called the "Trump Rule". And the Australian precedent says that we can even hope for 2% under Trump. How good is that?

So WHY is an actively protectionist administration needed for businessmen to be maximally enterprising? It's dead simple. It gives businessmen throughout the country the feeling that government has got their back. It gives them the feeling that government will at least be on their side if there is a push for change of any sort. Democrat administrations are, by contrast, enemies of business -- and blind Frederick can see that. Hence 9.6% unemployment under Obama compared with 3.8% under Trump. Businessmen are people too. They respond to incentives and recoil from attack -- JR.







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