By Patrick Watson*
Unexpected questions are valuable. They force you to think fast, which helps new ideas emerge.
Last month, for example, I was on a webinar for Mauldin Economics clients. Our publisher Ed D’Agostino asked the panel what popular ideas about the economy we thought most people were getting wrong.
When my turn came, I said (paraphrasing), “I think we will never again see the kind of mass unemployment that used to happen in recessions.”
In hindsight, maybe “never” was too strong. Another COVID-like scenario might do it. But barring that, we have a different situation than existed in 2008, 2000, and other modern recessions. The new demographic balance is producing a chronic labour shortage.
Thinking about it later, I realised the implications go far beyond employment.
People debate when the next recession will come. I’m not sure recessions (as conventionally understood) are even possible anymore. And if we do get one, it’s not clear if the Federal Reserve’s traditional tools would still work.
This is just a theory. But if it’s right, some big changes are coming.
Ending the cycle
Quick review: The economy grows in a repeating cycle of expansions and recessions. Simplified, it looks something like this:
When the green line rises, consumers feel confident, businesses expand, and jobs are plentiful. All good. But eventually it gets overheated, often becoming inflationary.
Central banks try to control this by raising interest rates. Usually, they tighten too much. Recession follows as companies lay off workers who then reduce their spending.
(To be clear, these are average conditions. Some people fall behind in expansions or prosper during recessions. But they are exceptions.)
After a painful retrenching, the economy expands again. The Fed spurs this by cutting interest rates, which helps businesses expand and rehire the people they laid off. The net effect over long periods (decades) is growth but not in a straight line.
Now, notice how jobs have a key role in this cycle.
The Fed controls inflation by reducing demand. It reduces demand by creating conditions that make businesses fire people. People who lose their income buy less stuff, which forces producers to cut prices.
The fact that inflation-fighting policies usually kill jobs isn’t coincidence. Lost job income is what produces the necessary demand destruction. Tighter credit is just a trigger mechanism.
Labour imbalance
The business cycle hasn’t been working normally in recent years.
- A pandemic, not Fed tightening, sparked the 2020 recession.
- The 2022 inflation wave came from supply chain snags and a war-driven energy crisis, not excessive demand.
Nonetheless, people keep thinking economic weakness will raise unemployment, forcing the Fed to cut rates. It’s going to happen any month now, they’ve been saying… for years.
Yet unemployment stays stubbornly low. Why?
Here’s one reason:
The lines in this graph show the US population since 1950, split by working age (15-64, the green line), elderly (65+, red) and children under 15 (yellow). The lines start in 1950 and are projected out to 2100, assuming the UN’s “medium fertility” scenario.
Notice how the ratio of working-age to elderly Americans has been shrinking. That’s because people are a) living longer and b) having fewer children. The ratio fell from 6.6 workers per elderly person in 1960 to 4.0 in 2020.
The pace is accelerating, too. It will drop to around 3.6 by the end of this year.
That means today’s economy has more non-working people to support and fewer workers to produce what they need. Barring sharp changes in fertility and/or life expectancy, the ratio will keep dropping for decades.
So how are fewer workers going to support more consumers?
Labour-saving technologies are one answer. That’s happening and it helps. But many of the goods and services elderly people need—food, healthcare, personal assistance, etc.—are hard to automate. AI systems excel at processing information. They aren’t great at helping grandma take a bath.
Millions of service jobs are highly secure, almost regardless of economic conditions, because demand for them is “non-discretionary.” This is new. It also means the Federal Reserve can’t easily cool the economy by generating layoffs.
Bulletproof economy?
So back to the original question. How do you have a recession if unemployment can’t rise?
It doesn’t seem possible. Occasional weakness in specific sectors? Sure. It happened in tech last year, for instance.
But in the big picture, an economy with…
- Structurally stable, labour-intensive aggregate demand and
- Structurally shrinking labour supply
…is kind of bulletproof. Or at least recession-proof.
That’s not entirely bad. But if it’s right, we can’t count on monetary policy to bail us out of crisis. And eventually, some kind of crisis will come.
We all gripe about the Fed. The era before modern central banks wasn’t all sunshine and roses, though. Economic imbalances resolved themselves through bank runs, hyperinflation, deep depressions, and sometimes war.
We don’t want to go back there. Yet a central bank that can’t suppress demand - because it can’t kill enough jobs - is largely powerless.
This fits what we’ve seen recently. Those aggressive 2022‒2023 rate hikes had almost no effect on employment. Inflation, while lower than it was, hasn’t gone away.
If the Fed’s main policy tools don’t work anymore… what’s next?
*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a Mauldin Economics series called Connecting the Dots. It first appeared here, and is used by interest.co.nz with permission.
37 Comments
Haha reminds me of the quote "Stock prices have reached what looks like a permanently high plateau"... just ignore the US cranking out $1 trillion every 100 days... it has absolutely nothing to do with anything, the status quo will continue and it'll go away if you don't think about it.. :P
Japan kinda shows us you can hit a point where money printing has little to no effect on re-igniting an economy, and the aging demographics coinciding. That hasn't yet been felt in parts of the West that haven't experienced the same aging, potentially mitigated by a better ability to drive immigration.
That means today’s economy has more non-working people to support and fewer workers to produce what they need. Barring sharp changes in fertility and/or life expectancy, the ratio will keep dropping for decades.
So how are fewer workers going to support more consumers?
It's actually a bit worse than that because many of the jobs being created are in areas of the economy which as basically black holes as far as productivity growth goes. Healthcare isn't much more efficient than it was twenty years ago and houses are build in much the same way they have been since the second world war.
I wouldn't say we will never have another recession again because that's a function of GDP which has little to do with the economy but I would say that workers are increasingly becoming prized piggies. I would also say that this will likely be an inflationary environment.
"It's actually a bit worse than that because many of the jobs being created are in areas of the economy which as basically black holes as far as productivity growth goes. Healthcare isn't much more efficient than it was twenty years..."
Not actually true worldwide. But maybe it is in NZ?
Caring for older people has become much more capital intensive in developed countries over the last 20+ years. NZ is quite a way behind as we continue to add Labor to increase Production. This shows up in carer to patient ratios being much lower overseas, i.e. fewer carers are required to look after the daily needs of same number of patients because investments in lifting, turning, washing, etc. devices combined with better designed facilities have meant less Labor is required. Note also that a team of carers needs fewer highly paid specialist carers to perform at the same standard.
NZ doesn't have a worker problem. We have a management and leadership problem.
I don't know about NZ regulations for old age healthcare but the govt in the last few weeks has shot requiring a highly specialised and educated nurse required at either all hours of the day or just or night shift. Previous labout govt proposal? There may be an ulterior motive in this. If such a person is needed then those below may only require absolute minimum of training in age care. Paid barely above minimum due to lower training requirement. So patient to carer ratio could increase.
In any event patient to carer ratio and their training and qualifications is likely to be completely governed by govt regulation. Perhaps it's time to compare this aspect with other countries. Maybe out standards are too high.
"Maybe [our] standards are too high."
Our standards are lower than the countries doing it best in the aged care sector. Higher standards in regulations - with enforcement, which is lacking / uneven in NZ - tends to result in management being far more focused. Another issue that drives higher standards overseas is their legal systems that can result in significant damages being awarded when a substandard level of care has been identified.
NZ doesn't have a worker problem. We have a management and leadership problem.
We have a cohesion problem all around.
A good business should employ the best, pay them the most, spare no cent on customer service, and operate in good faith. That way you get the best product, people feel looked after, and work get done quickly to a high standard.
That's gotten rare, and a tricky needle to thread even if attempted.
Yes, although I would add that the interventions / treatments required per patient are increasing with scientific developments. We have rural clinics across NZ that are now ill-equipped (people and equipment) to provide modern healthcare. Although, as you infer services in urban areas are pretty threadbare.
Jfoe,
"Although, as you infer services in urban areas are pretty threadbare", as I very recently experienced first hand in Tauranga. For the first time, I had to go to A&E around 9.30pm with an issue which was either going to be no big deal or really serious-this was following a major operation.
My wife and I were there for over 12 hours. Finally, were were dealt with very efficiently, but it was so obvious that they were short of staff. The stated aim is to process everyone within 6 hours.
It must be very difficult to measure productivity in healthcare. For example, in my speciality over the last decade our treatment of palliative cases has for many patients evolved from "we'll do what we can to ease your symptoms" to "we will treat aggressively and you could live a fairly normal life for several years before the disease kills you".
The technical resources required for this are probably an order of magnitude higher. My time required for one of these treatments has gone from minutes to hours and other staff groups will be similar.
Are we less productive now? The time invested is wildly different, but so are the outcomes for the patient
Agreed. Some procedures are far more resource intensive than others. And 'new' procedures are being created all the time, while old ones are retired. But many procedures haven't changed much for years. And it is these procedures in overseas aged care environments that are being done far more efficiently. Further, the management focus on efficiency overseas means that even newer procedures are constantly refined so that the reliance on Labour is reduced. A good example of this is the treatment of bed sores. The response overseas is to minimize the incidence rather than treating them, i.e. capital investment in prevention rather than more labor in treatment.
Doesn't this overlook the other effect of central banks raising interest rates? I.e. that the cost of production and the cost of consumption both rise so demand is removed? This can occur without job loses if businesses respond with shorter work hours and/or governments increase targeted spending (real investment) enough to pick up a percentage of the slack.
Just to diverge a tad - we were talking about something like this statement a few weeks back.
When my turn came, I said (paraphrasing), “I think we will never again see the kind of mass unemployment that used to happen in recessions.”
In the classical economic models (pre-Keynes) it was thought that businesses would immediately pick up the slack if the cost of Labor fell. But it sometimes didn't and we got Recessions and Depressions.
Enter Keynesian economic policy. But Keynes' solutions could only work with centralized control by governments and/or a central bank. And for that to happen, we needed a system of centralized (i.e. cleaned & aggregated) information.
And now of course we live in an age where information travels at the speed of light over over the world. And the quality of that information is getting better and better. So being the eternal optimist that I am, I'd rephrase Patrick's statement to read:
“I think there is no reason we should ever again see the kind of mass unemployment that used to happen so long as we depoliticize the information and reject self-interest biases.”
Some interesting assumptions made in this article. Not the least of which is the assumption that people that have exceeded the working age range cannot support themselves and require working age people to provide support for them. Seriously???
This is a sophomoric article. Yes, there are some valid points in regard to changing demographic issues, although the extrapolations made by the author are without a solid foundation. There are also some rather silly aspects.
Reading between the lines in this article, the implicit conclusion is that deficit spending is a good thing, and does not affect inflation. Good luck with that concept.
Some interesting assumptions made in this article. Not the least of which is the assumption that people that have exceeded the working age range cannot support themselves and require working age people to provide support for them. Seriously???
Seriously. Labour rate participation falls off significantly once people hit 65, for a myriad of fairly obvious reasons.
Some old people can support themselves without working, some can if they work, and some work if they can. But a growing number of them are without enough income to support themselves. And they're a lot more expensive to support than a 5 year old.
Maybe robotic exoskeletons with built in life support will save us.
Or inter generational managed communes of say, 120-150. Living sustainably off shared enterprise and resources. That's worked for a long time.
At some point, one has to eat the meal that one has prepared.
By the time that one has made it to 65, one has had more than 45 years to prepare for retirement. Yes, one can hope that ones offspring will support you in your dotage. One can also plan for ones dotage. Better to continue driving the old car instead of upgrading, continue living in the modest home instead of shifting to a high dollar house, etc. Living beneath ones means is how one ends up not being reliant on others largesse. Sadly, it seems that a lower percentage of people are now planning financially for their future.
I think 1 in 4 over 65s are renters. And it looks mostly tough.
And as a problem, it'll get worse.
But yes, it's something inevitable people should provision for. At the same time, you only need to have one or two things go against you as you age, and you could be stuffed.
The house price explosion of recent years has been New Zealand's biggest social disaster.
The young of course. But also those hitting retirement still renting. Just an awful situation that was so unnecessary.
All the government of the last 30 years have been negligent.
Get enough, surely you eventually get unemployment.
Where the article comes into question is that youth unemployment doesn't discriminate based on age. Japan's youth unemployment is 4 and Italy's is nearly 20, for instance - both have low birth rates and aging populations. Likewise countries with high birth rates can have either very low, or very high youth unemployment.
I don't think we've felt anything like the full force of this and I think it's at least a year away.
"Get enough, surely you eventually get unemployment."
Perhaps...though not necessarily...or at least it may be transitory.
First ask yourself ..what is a recession?....employment (or unemployment) is incidental....a recession is primarily a monetary phenomenon.
We could all work for free as of tomorrow and have a recession....the work (output) would still be done (perhaps)
Looking at that peak and trough cycle of growth, it strikes me that if this were an engineering system, then the control and regulation systems would be a total failure. It is like being in a car that is trying to drive down a straight road but the control system is so useless that the best you can do is lurch between the grass verges on either side. Picture the only control being brakes on either the left or right wheels that cannot both be applied together . Surely a steering wheel would be better where there is a strong correlation between where you point it and where the car goes.
The principal control regime that reserve banks have is the CPI inflation/ OCR rate model. This model grew out of the very high inflation that prevailed during the 80's. The linkage between the measured variable (high inflation), the control applied (raising interest) seem logical and has proven a semi OK proportionate control lever at controlling high inflation. It seems to me that we have taken this concept and incorrectly assumed that it should be applied in reverse when inflation rates are low. Manifestly this has proven a very poor control, and the principal result is that excess liquidity is channeled into capital asset speculation that strongly fuels the boom bust cycle illustrated in the graph. How many times have we been through this? Why does low inflation need to be corrected. It seems to me that it is equally valid to say that if high inflation is bad, then low inflation is good, negative inflation possibly even better. If we did not have the capital asset stimulating loose liquidity, there would be lot less need raise interest rates and dive us to a bust situation. The whole system has been driven into a state of continuous oscillating instability. In engineering terms this is a classic state for an out of control, control system.
In a competitive free economy, classical economic theory tells us that Adam Smiths invisible hand will naturally maximize production at the lowest price. i.e. free competition will drive increased productivity to produce goods at the lowest price. We have totally lost this element of our economy. If any producer sticks their head above the parapet and lowers prices then the the reserve bank will will step in to counteract that and pump money into the economy to underwrite the inefficient producers and worse still pump up an asset bubble. Worse still, if some other sensible country is able to increase their productivity and supply us with lower price goods, then the RB will pull the levers so that our production costs, profits etc rise to preserve positive inflation. Overseas economies get more productive and competitive, so ours must get worse to compensate. This is completely nuts.
If the problem that we are trying to address is a depressed economy, then maybe we need a far better measure of this. Unemployment perhaps, decreasing GDP/Capita or similar? The steering wheel that we need to apply to address this needs to have a very clear corrective relationship with the variable that we are trying to control.
The graph shows that despite these boom and bust cycles our economic well being rises steadily. Is this really true. What measurement is this based on? When I was a child we had full employment, pretty much every body could afford a home, to feed their family and have enough left over for a few treats and to save. These days that is far from the situation. Owning a home, a few treats and saving are just a sad dream for a large proportion of our population. So in real terms, I don’t see any evidence that our economic well being is improving. It is manifestly obvious that it is going backwards.
Overseas economies get more productive and competitive, so ours must get worse to compensate. This is completely nuts.
The good news is that productivity has fallen fairly uniformly across virtually all developed economies
https://www.intereconomics.eu/contents/year/2017/number/1/article/the-g…
They all operate under pretty much the same regime.We have very significant imports from China which is not run this way.
It is terrible news as the whole world would be better if we all had rising productivity. It goes some way to explaining why the western economies are falling behind others. We all will suffer.
Productivity is fairly commonly linked to GDP growth. And GDP growth is fairly linked to labour costs (or lack thereof). That's not to say there aren't outliers, Ireland has high GDP growth and ok wages, but its also off the back of being a tax haven. Australia is bouyed by resource markets.
The sorts of gains we get from the traditional driver of productivity, something like the advent of the internet, better telecommunications or robotics advancements, are usually short lived and fairly insignificant to overall productivity.
It can be viewed as somewhat fatalistic, but the current models simply don't allow for rising living standards that are sustainable, and for productivity and GDP to also increase in a linear way. Hence, we gloss over it via other mechanisms. Is that sustainable? Probably not.
GDP is a very poor measure of the economy. We could fill up Wellington with bureaucrats, pay them a fortune and this would be measured as an increase in GDP. That is great isn't it. Why don't we do more of this and make everyone a highly paid bureaucrat. That will hugely increase the GDP.
In a wider sense this is what we are doing. government, councils, red tape, traffic controllers, etc, etc. Really clever; increasing the GDP while making it impossible for the real generators of wealth.
We use fairly basic indexes like unemployment, GDP, debt, etc, because traditionally this accompanied the things we were desiring from an economy; better quality of like, improved health, education, etc.
As the system maturates and becomes more complex, the validity of these traditional indexes becomes more and more contextualized.
As you say, we can improve GDP via malinvestment, on either a public or private level, and make an argument we're doing ok, when we may not.
It's on that assumption I tend to believe we're far poorer than these indexes would tend to indicate.
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