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Structural forces could slow US economic recovery. This includes long-running under-investment in human capital, community-level opportunity, and infrastructure, along with persistent COVID risk.
The official US jobs numbers for April were lower than expected, after significant new hiring in March. Some analysts have speculated that “too much spending” has led to inflation, and this has somehow slowed hiring. In normal economic times, concerns about inflation having this effect could be a useful analytical tool, but there are several problems with this reasoning, because these are not normal times:
Tens of millions of Americans have lost some or all of their income for a year.
Thousands of small businesses have closed forever, and Main Street economies remain significantly weakened.
There is a need for hiring across the economy, meaning there are more offers than applicants, which requires higher wage offers, in an economy where revenues remain uncertain, because so many have lost income.
COVID is still spreading, ICUs are still near capacity, not enough people are fully vaccinated, and partially vaccine-resistant variants are a serious threat; in short, people aren’t as ready for a “return to normal” as many believe.
There is also another pressing economic abnormality interfering with the inflation interpretation: Inequality in access to new income is so high, it is effectively an economy-shaping force. Macrocritical drivers like income inequality determine far more about everyday behaviors and outcomes than short-term analysts tend to recognize.
Because far more direct reward goes to the already wealthy, the risk-reward calculus for working people isn’t what supply-side thinkers want it to be. It is simply not as safe, not as life-affirming, not as rewarding for many to return to work as analysts and investors hope. When death is one of the potential outcomes of any mistake in business management or operations, a reasonable person uses caution.
Those who argue that a sudden burst of inflation is slowing hiring are saying it is too expensive to hire, and consumers can’t afford the cost of living, because it has been artificially inflated. Neither of these things is true. The living reality is:
Wages should increase when workers are in demand.
The cost of living isn’t artificially inflated; total household income over the last year has been artificially depressed.
At least 1 in 6 Americans faced food insecurity or chronic hunger in 2020 (some estimates are much higher), and many are not yet back on solid footing.
The problem with wage responsiveness is that economic support policies from May through December of 2020 were grossly inadequate to protect small businesses and ensure layoffs and permanent closures were not the norm. Closures became commonplace, because too much income was lost for too long, debt repayments were not suspended, and not enough real future investment was offered.
Main Street economies suffered, and bringing them back will require a bigger and more focused program of new investment than would normally be the case. This is why the country really does need the American Rescue Plan, the American Jobs Plan, and the American Families Plan.
If investment in economic recovery and new and upgraded physical and human capital infrastructure is slowed, to avert inflation, the result will be a slower, and narrower, recovery. That slower and narrower recovery will have serious side effects that might not show up in many economic models, but will have a depressive macrocritical effect nonetheless.
One major adjustment that takes place when mainstream income is less available is a shift to informal economies.
Though many important day-to-day tasks are carried out by informal workers, the stripping of rights and wage protections can be hugely damaging to the health of mainstream economic activity: interfering with rights protections, depressing wages, and creating locally rooted economic “buffers” that make it easier to commit crimes and to get away with criminal acts.
These effects then cut into property values, increase the cost of borrowing, and undermine local government revenues, leading to deficits and service cuts.
Side effects of a shift to informal economic behaviors include: worsening of widespread food insecurity, higher incidence of untreated chronic non-communicable diseases, more negative mental health outcomes, higher rates of gun violence, and failure to contain the ongoing opioid epidemic.
It is also harder to get means-tested relief to informal workers, because they cannot show past tax history or COVID-related disruption of their income.
Those who worry that hiring costs more than they wish, or who want consumer prices to be at the optimum level for businesses they are focused on, need to be aware that it is the tens of millions of people and thousands of businesses, both incorporated and informal, that they are not paying attention to, that urgently need a robust, future-building policy response.
A study by McKinsey found that if labor share of income in the United States, which has been declining for decades, were at the same level it was in 1998, “all else being equal, average worker pay in real terms might be higher by roughly $3,000 per year today”. That means both workers and employers are behind the curve, in terms of being able to rapidly enact full economic recovery from the COVID crisis.
The previous administration focused on using government power to boost the stock market. This did not resolve the structural problem of the increasing capital share of income across the US economy. Financial decision-making in the public and private sectors must begin to be more aligned with generating real-world returns on investment for people and communities, or the core of the US economy will continue to be hollowed out.
What do lower than expected jobs numbers in April tell us?
People are not as ready to ‘return to normal’ as financial analysts would have everyone believe. There is still real COVID danger, community spread nearly everywhere, and a lack of trust in businesses and leaders who refuse to prioritize personal COVID safety above all else.
That common sense, rational behavior is a positive thing; smart investments can and should be made that align with people’s natural caution and their desire to see a prioritization of the human value of people normally left out of balance-sheet calculations.
We need an increase in the labor share of income, through creation of new, lasting, and meaningful opportunities that limit the informalization of local economies—financing of better livelihoods, not further financialization of everyday life.
The United States needs an economic renaissance, and it needs to be supported by sustained investment that makes real people’s lives better. That means whole communities need to see new investment that expands the space for better livelihoods. We know from observed history, and common sense, that capital replacement of paid work cannot achieve this.
Investment in sustainable expansion of human potential must be the priority.