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Politics meets economic uncertainty

According to Scottish highland folklore, “a leap year is a bad sheep year” – that is, a year in which the economy is particularly bad.  But according to some folk at least, 2024 is shaping up to be a prosperous year.  Consider, for example, the spectacular US jobs growth report for January, which recorded an additional 353,000 jobs in just one month.  As Dominic Rushe at the Guardian gushed:

“Joe Biden declared the strong jobs figures released on Friday as proof that ‘America’s economy is the strongest in the world.’”

In a more sober and measured commentary, Ryan Cooper at The American Prospect asks:

“Why Were Inflation Hawks Wrong?  Economists like Larry Summers predicted that bringing inflation down would require a large increase in unemployment.  It didn’t.”

Cooper points to several of the errors within conventional economics that I have often raised here, including the spurious Philips Curve correlation between inflation and employment:

“This is an observed relationship between unemployment and inflation; if unemployment is low, inflation tends to be higher.  The theory then assumes that future inflation is based on current inflation, plus expectations of future inflation, plus any deviations from the NAIRU [non-accelerating inflation rate of unemployment] level of unemployment.

“This model isn’t entirely implausible, and it worked well enough when applied to the inflation of the 1970s.  But it simply did not work today.”

Cooper also correctly points out that most of the “inflation” (once the pandemic handouts are accounted for) came from self-correcting disruptions to global supply chains:

“Inflation was transitory, largely caused by supply chain snarls resulting from the pandemic and Russia’s invasion of Ukraine that have since been sorted out.  That fits with the low unemployment of this period.  Insofar as high demand was responsible for some inflation, the fact that it fell without any increase in unemployment suggests that we were high on the slope of the Phillips Curve (if there is such a thing)—meaning that prices would fall rapidly in response to only a small change in demand.”

As with Rushe at the Guardian, Cooper also argues that “Biden’s half-improvised economic program” is succeeding and that a blinkered Federal Reserve risks derailing it by maintaining interest rates when they should be cutting them.  And this, in turn, reminds us that 2024 is not only a leap year, but also a major election year in the USA, UK, and Europe, and that the incumbent neoliberals are determined to talk up the economy even if ordinary people are still experiencing a severe hit to their living standards.

Here, of course, we also get a whiff of wishful thinking.  In the USA, Trump is 20 points ahead of Biden on the economy, while in the UK the Labour Party is 30 points ahead of the Tories, with the economy still the number one issue for electors.  Meanwhile in a European Union which has sanctioned its industry and agriculture close to death, the fear is of a big rise in support for anti-EU populist parties of both left and right… if only the economy would pick up sufficiently to take the edge off the economic travails of the past three years, voters might be persuaded to stick with the neoliberal centrists.

In any case, we can expect the establishment media to talk up any and every fragment of positive economic news, while wilfully ignoring the negative, right up until the last vote has been counted – after which, of course, it will be tax increases and public spending cuts all round.  And so, it falls to those outside, or only on the fringes of the establishment to tease out the more nuanced economic picture that is emerging at the start of 2024.

Take, for example, those positive US jobs numbers.  For most people – especially those who want a Biden victory in November – the headline is all that matters.  But – as the old saying has it – there are lies, damned lies, and statistics.  And in the case of the Establishment Survey which provided these figures, we see the very worst kind of statistical massaging in which the actual number is “adjusted” to fit a predetermined trend.  The corrective comes from the Household Survey which found just 84,000 new jobs had been added in January.  As Dean Baker at the Centre for Economic and Policy Research explains:

“If the household survey gives us a more accurate measure of job growth, it would radically alter our view of the state of the economy.  While we may not have a good sense of what job growth was in a specific month, if we are on a pace that gives us 2.76 million jobs over the course of a year (230,000 a month), then the economy is not adding jobs at a pace that is necessarily unsustainable.  The fears over inflation prompted by the January figure of 517,000 would be much more contained if the number were someone near 230,000.

“This slower pace of job growth is also more consistent with the picture we have seen of slower wage growth.  The rate of wage growth slowed sharply over the course of 2022.  For the month of January, it was just 0.3 percent.  That seems hard to reconcile with a labor market that added 4,970,000 jobs over the course of a year, when the unemployment rate had already fallen to 4.0 percent.”

We must also remember that jobs are not people.  A large part of the US jobs growth in 2023 came from part-time and temporary positions, so that a growing proportion of US workers are taking on two or more jobs to make ends meet – something which helps explain why the high rate of economic inactivity seems not to be affecting jobs numbers.  For much the same reason, the headline wage increases – which, in any case have been falling sharply in recent months – have not translated into an improved standard of living since the hourly rate of pay is cancelled by the reduction in hours worked:

Similar problems beset a UK economy which is far less resilient than the USA.  UK employment growth has been falling sharply through 2023, and the latest Office for National Statistics estimate for December shows a big decrease.  And on the other side of slowing jobs growth is a big fall in job vacancies:

“In October to December 2023, the estimated number of vacancies in the UK fell by 49,000 on the quarter to 934,000.  Vacancies fell on the quarter for the 18th consecutive period, the longest consecutive run of quarterly falls ever recorded but still above pre-coronavirus (COVID-19) pandemic levels.”

This explains why the UK fall in hours worked has been less steep than in the USA.  However, it also means that median pay turned down at the end of 2023.  Although to our detriment, the Bank of England’s preferred wages data – which includes bonuses paid to better off public sector employees – continues to rise… albeit at a slower rate than previously.

This, no doubt, played into the three-way split in the Monetary Policy Committee’s decision to hold the overnight interest rate at 5.25% earlier this month.  Six members voted to hold rates, two voted to raise them even further – fearing the fabled wage-price spiral – while one voted for a cut.  But the risk today is that the Bank of England has already over-tightened.  As Ambrose Evans-Pritchard at the Telegraph argues:

“The Monetary Policy Committee (MPC) was too slow to act when money growth was spiralling out of control in 2021.  It fuelled the fire very late in the day with a second round of pandemic quantitative easing (QE).

“It now risks repeating the opposite mistake by keeping interest rates too high, for too long, and by persisting with quantitative tightening (QT) despite a fall in the M4 money aggregates and a squeeze in credit.  Two members of the MPC voted to raise rates yet further today.  Only Swati Dhingra dared to buck the oppressive consensus by voting for a cut.”

Dhingra – who had previously warned that nearly three quarters of what the MRC was treating as “inflation” was actually the rising cost of imports feeding into the UK’s domestic economy – points to the poor December sales figures as evidence that the UK economy is decelerating at a dangerous rate:

“Compared with December, we were hearing from the [regional] agents that people are saving up for the special treat for the festive season.  So I was waiting for information and if we had seen a really sharp increase in retail sales or some kind of sharp increase in consumer prices, particularly on services. The fall in retail sales is pretty convincing.  If anything, I think it was a bit unexpected.  So I’m not fully convinced there’s some kind of really sharp excess demand in the economy coming from the consumption side.”

This latter point seems to have gone over the head of Bank of England governor Andrew Bailey, who pointed to the closure of the Red Sea to western shipping as a reason to keep rates higher for longer.  Although how, exactly, high domestic UK interest rates would persuade the Houthis to put their drones away went unanswered.  The same might be asked of the impact of sanctions and of still-disrupted global supply chains which continue to put pressure on import prices despite having absolutely nothing to do with the amount of currency in circulation in the UK.

In fact, the crisis in the UK is already baked-in even if it has yet to put in an appearance.  We saw the beginning of this last month in the sharp rise in mortgage arrears, in growing credit card debt, and in the growing number of businesses going into insolvency.  That is, in the real world, businesses and households don’t just roll over the moment interest rates rise.  Rather, they seek whatever means they have to stave off bankruptcy… including maxing out credit cards so as to keep a roof over their heads.  But – and this is what the mortgage arrears data was telling us – there comes a point where all of the lines of credit dry up.  For those whose mortgages rolled over last year, that point was likely the weeks leading up to Christmas.  But what we also know is that there are another million or so mortgages rolling over in the first half of 2024 which, for the moment, are still sheltered by the low interest rate in 2020.  Many, no doubt, would have hoped for an early rate cut.  But that isn’t going to happen fast enough to save them from getting into arrears either.  And since the government’s “solutions” – switching to interest only and/or extending the length of the loan – are next to useless, it seems likely that the UK will be in a major debt default crisis in the second half of 2024.

Across the pond, the Biden administration will no doubt be hoping that any similar crisis in the US can be held back beyond the November election.  But here in the UK – where the prime minister can choose the election date – much will depend upon whether the government believes its own bullshit about an economic recovery or whether they are paying attention to economists like Swati Dhingra or the unofficial “shadow” MPC – which has voted unanimously for an immediate rate cut to head off the potential for deflation by 2025.   If the latter, then despite the advice of their own Office for Budgetary Responsibility we may see a raft of pre-election tax cuts and spending pledges in the 6 March budget, followed in short order by the announcement of an early election.

As you made it to the end…

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