A strong labor market is a common argument cited by experts who convince us that the national economy is strong and that the threat of recession is far-fetched or at least premature. Such experts, like the Nobilist Paul Krugman, constantly use words like “surprisingly strong,” “unexpectedly resilient,” and so on.
Agree, it is quite strange to operate with such terms to economists, who are supposed to understand and explain the cause-and-effect relations, or at least to state the phenomenon, but in adequate terms.
The fact is that the current strong, or should I say tense, labor market does not refer to any inexplicable phenomenon at all. Nor can it be an objective indicator of the stability of the economy today.
Moreover, this market tension in labor is a direct distortion of the government’s paternalistic and ethical policy of increasing economic leverage – the discrepancy between credit growth and productivity.
By constantly borrowing from future generations, the government satisfies the immediate demands of voters and effectively buys their loyalty by closing their eyes with cheap money and social subsidies to avoid looking ahead.
A strong labor market today is a systemic distortion that lifts your spirits now, creates a false sense of security for tomorrow, but in reality is nothing more than a time bomb. The current resilience is nothing more than a remission of the economic organism on the background of cancerous metastases caused by the leftist socialist policies of the government.
Let us take a sober look at the reasons for this strong market and answer the question: What are the reasons? Once we understand the reasons, we can honestly answer ourselves: is this the stability we all desire, or is it the calm before the storm?
So, in order.
1. The labor shortage. It has developed due to obviously inadequate government actions both before and during the covid. President Trump’s anti-immigrant and protectionist policies have had a detrimental effect on the labor market, and excessive covid restrictions have severed the normal exchange in the labor market.
2. Low labor force participation. Labor force participation plummeted during the covid pandemic and has not recovered to pre-pandemic levels. Obviously, the excessive and destructive restrictions on the economy and the actual freezing of the economy during the pandemic, and most importantly, the filling of the pockets of consumers who not only did not work, but also could not spend that money, created a spring effect.
After restrictions were lifted, consumers either began to spend with twice the energy, which was an important but obviously unstable factor for expanding production, or they increased their savings, allowing them to not work or work less.
3. The continued policy of high government spending, particularly on social subsidies. In addition to the easy money received in the pandemic, the poorest segments of the population continue to receive high social subsidies. This encourages them to be passive workers, not to look for work, but simply to reduce their quality of life, but not to waste time and energy on work, looking for work, etc.
Given the low base of quality of life initially for low social strata, the difference between living on 4 points out of 10 when people work or 3 points out of 10 when they live on small savings plus payments from the state is extremely insignificant. Choosing between a piece of meat with lots of bones and a steak is not the same as choosing between a castle and a shack, between a Mercedes and a cheap Chinese small car. In this way, the state simply encourages the degradation of the consumer behavior of the population and economic passionarity in general.
4. High inflationary expectations force consumers to spend a lot: consumers understand that money will be burned, and tomorrow they will buy fewer goods with this money. High consumption and retail sales support capacity utilization and cash flow levels of producers, allowing them to raise prices and maintain output and margins, while also keeping jobs and other cost components at the same level. And given labor market shortages, even increase labor costs through wage rate increases.
5. Obviously, firing and hiring are extremely costly processes for employers. In case a producer wants to optimize costs, he will resort to layoffs last, preferring to keep this expense item or optimize it softly.
6. Finally, expectations with regard to the vector of the government’s paternalistic policy remain extremely positive. Saving half-dead corporations to avoid mass layoffs, rescuing depositors, failing banks (for reasons for which the same government is to blame), keeping social and other government spending high – all this gives a clear signal to economic agents that the honey will still drip for free.
This government policy is absolutely destructive to the productive and entrepreneurial motivation of economic agents. It stimulates not to think about risks, not to think about efficiency, not to think about competition, not to strive for leadership – all this becomes not the most important thing, because the native state will take care of everything, removing the need to worry about all these nuances.
This leads not only to economic, but also to socio-cultural degradation, when the level of individual consciousness and civic responsibility is steadily decreasing, and the degree of socio-ethical, civil and economic infantilism is increasing. It is not hard to guess what this may lead to in the end – an enlargement of the state and an inevitable drift toward authoritarianism.
We should not rejoice in the current stability of the labor market. Even less should we hope that we won’t have to pay off debt and recession with a blind expansion of leverage. Government expansion has led us to create artificial deficits in the labor market, and the incessant pumping of credit into the economy keeps consumption and production afloat for now.
But this equilibrium is artificial, fragile and obviously short-lived. The reduction of globalized production exchanges, breaks in global production chains and industrial production relocations back to consumer countries, corresponding geopolitical contradictions and growing tensions between countries are changing macroeconomic and social conditions.
Recession – bringing the cost of credit down to the real productive capacity to repay or service it – is a completely inevitable consequence of years of cheap money and government expansion. Moreover, a recession is necessary for the recovery of both the economy and the social conscience. The weak must give way to the strong, the inefficient to the efficient, the unwilling to work to the willing to work, the uncompetitive to the competitive, the uncreative to the creative, the unenterprising to the enterprising.
The natural alignment of productive capacity and entrepreneurial power with consumerist desires is the only way to organic growth. But to do this, we must sharply reduce the state and neutralize the distortions it introduces not only into economic processes, but also into social preferences in general. And this can only be done when the voters feel the need for such state contraction on themselves personally.
Without a recession, without the serious economic cataclysms that inevitably follow after years of distorting the normal market, without macro-social shifts, it is impossible to awaken public consciousness. The good news is that no matter how much a leftist-paternalist government seeks to maintain a vicious equilibrium and status quo, the success of continuing such policies in the new conditions of global hypershift is, fortunately, highly questionable.
Renewal is impossible without costs. How high they will be is up to us.
The year 2024 is ahead.