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I am thinking that our next Zoom discussion should be on the state of the economy. What are the important indicators, and what are they saying? Some time after the 4th of July. Maybe the evening of July 10?
The economy is doing way better than expected, don’t you think? The much-anticipated recession is not yet here. Inflation has been declining. My YouTube feed is still filled with guys predicting imminent doom, but that is probably because there is no market for describing things as “OK,” or even “meh.”
Readers of Specialization and Trade know that I have a pre-Keynesian view of the overall economy. Whereas Keynesians see an economic expansion as an “outbreak of demand” (the way some Democrats want to see inflation as “an outbreak of greed”), I see an economic expansion as an implementation of the law of comparative advantage.
When people are unemployed, they are not participating in market exchange. This means that they are not taking advantage of specialization and trade. When entrepreneurs find a profitable way to exploit comparative advantage, specialization and trade increases and market activity increases. Market activity is what GDP measures.
When businesses engage in unprofitable commerce, this is not sustainable. At some point, they shrink or shut down, and market activity decreases. The recession persists until entrepreneurs find new ways to exploit comparative advantage.
I am among those who believe that President Biden’s economic policies are not good. Too much deficit spending. Too much government interference. Concerning one typical example, Moses Sternstein writes,
Khan’s band of “nice ecommerce company you got here . . . would be a shame if you had some ‘regulatory’ trouble” is especially mad that Amazon (supposedly) made it hard to unsubscribe. But, how does one unsubscribe from the FTC, I wonder? I feel like I’ve been forced to buy “consumer protection” that I don’t really want. Is there a number I can call?
But if you measure performance by employment and GDP, the economy is doing well. One way to reconcile bad policies with improved economic indicators is to suggest that economic well-being is not rising along with the indicators.
Freshman economics students learn that GDP can go up for the wrong reasons. An increase in crime causes people to buy more alarm systems. Or an increase in subsidies for “green energy” or domestic chip factories increases spending but leaves consumers worse off. Government deficit spending makes us feel wealthier in the short run, while raising the prospects for inflation and political friction down the road.
Like this post if you are a paid subscriber ready to sort this all out on the evening of July 10.
Substacks referenced above:
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Specialization and Trade are Increasing
1) Inflation outpaced wage growth since 2020, and so real wages fell.
2) The fall in real wages spurred demand for labor.
3) But the people receiving lower real wages, while they had jobs, felt like they were working more for less.
4) Hence you can have low unemployment and poor consumer sentiment at the same time.
5) Whether inflation is moderating and how that will affect real wages going forward we will see, but employers and long term debtors "stole a march" on their counterparties during the pandemic with "surprise" inflation.
6) I get the sinking feeling that there is a lot of low interest rate debt on peoples balance sheets that is unsustainable in a high rate environment, but since whenever it comes to the for there is a bailout its hard to know.
Also today:
https://feeds.feedblitz.com/~/750341126/_/marginalrevolution~The-rise-of-niche-consumption.html