I’m inclined to cut Treasury Secretary Janet Yellen a tiny little slack here, pun intended. Rather miffed by all this talk of recession, appearing on ABC’s Good Morning America the Monday following the release of the gigantic January jobs report, Yellen confidently dismissed every idea the US economy might be in trouble.
“You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years.”
It’s the combination of the two statistics which gives her point a chance. Economists such as the Secretary absolutely love the appeal of this pair of major labor market numbers. However, a shrewd enough observer of economic history, she knows well the need to clarify the one with the other.
Not that it might do her any good in the end. Until that end, the unemployment rate is by its lonesome no decent proxy for future distress. There are numerous examples where low unemployment rates give way, even immediately, to some of the worst circumstances.
That list includes the last time the rate was as low as it is calculated to be right now, the very one she indirectly cited in her sentence quoted above. In May of 1969, the BLS showed it had been the same 3.4% as now. And like now, it fluctuated by a tenth of a percent or two from that low level.
The Autumn of ’69, however, produced indications of a sharp economic slowdown, one which began to proliferate in some key data points contrasting with so many others showing the opposite. Capital spending among businesses softened, consumer spending suddenly wasn’t as inflation-arily robust as it had been, sentiment weakened.
Much of it had been dampened due to the onset and persistence even in those early years of the Great Inflation. That initial phase in the late sixties represented a serious enough challenge, though one that has been forgotten to history because of how much more it would get out of hand over the years, the decade ahead. Many people also conflate the later oil shocks, 1973 and again in 1979, with the debacle, thereby missing this period or leaving it out entirely.
As today, policymakers were perplexed about where it was coming from – the inflation, not the economic weakness. Owing much to the work and influence (political and otherwise) of Economists Paul Samuelson and Robert Solow, beginning with their 1960 paper dryly styled, Analytical Aspects of Anti-Inflation Policy, the unemployment rate became the center of focus.
Quite a lot of debate over the decades has been spent on it because of how much it impacted contemporary thinking (somehow still surviving in “evolved” formats to the present day). Alan Meltzer in his History of the Federal Reserve observed “The Phillips curve was an empirical relation with no formal foundation, but it had great appeal and moved with remarkable speed from the economics journals to the policy process.” That appeal was understandable, obvious, and regrettable.
Regrettable not because this theory when put into practice had been responsible for the Great Inflation, as many today still believe, as Meltzer asserts, in the absence of legitimate explanation, rather because the idea of Samuelson and Solow’s “menu of choice between different degrees of unemployment and price stability”, as they put it in that paper, presumes inflation always within the grasp of authorities.
That menu further presumes policymakers making rational decisions and then applying them to the real economy skillfully leveraging considered tools can achieve desired results. Should any undesired results arise, they would be easily corrected with no more than fine tuning.
This view proposes competition for workers at the center of everything; the tradeoff allegedly available for technocratic exploitation, the exploitable Phillips Curve. In 1960, the pair wrote, “Wage rates do tend to rise when the labor market is tight, and the tighter the faster.” From this simple contention, should governments and authorities choose to tolerate higher inflation from tighter labor markets they might then achieve those tighter labor markets.
From this derive some very weird and perverse views, even incentives. Back in November 1969, policymakers at the Fed were almost cheering for economic weakness if only to tamp down the inflationary pressures which they fully believed were being driven by the labor conditions described by 3.4% or 3.5% unemployment rates.
The notes from the Fed’s policy meeting in that crucial month, the Memorandum of Discussion, record several such laments. An example:
“Labor continues scarce in most markets, and while there may have been some modest easing of this scarcity the reported unemployment rate probably exaggerates the extent of this development. Thus, it remains very doubtful whether the slowdown will be substantial enough or last long enough to make a serious dent in the problem of inflation.”
First recognize just how similar that statement is to the one made by Janet Yellen fifty-three years later referencing nearly identical unemployment rates. At root, both begin from the belief that labor scarcity is the source of inflation and also economic strength; indeed, the two tied closely together.
For the FOMC in 1969, officials were hoping such weakening in the general economy could help solve their inflation problem, though being highly pessimistic that it might because what they thought of as their inflation problem they also thought would keep the economy from slowing down near enough to help. It borders on circular reasoning.
Worse, in December the FOMC realized there was something off about financial reaction to what they were seeing:
“Practically all of the signals being given off by the nonfinancial economy suggest that interest rates should be in a rather convincing downtrend by now. As Mr. Wernick has pointed out, indications of current and developing weaknesses in the economy are widespread; indeed, it may turn out that we are in a mini-recession right now without knowing it.”
As it would turn out, the 1969-70 recession began, at least according to the NBER, the very next month in December 1969. Oddly enough, the unemployment rate was the same 3.5% that December as it had been in November.
We know and hear much about inverted curves these days, though back then interest rates were considered more like mysticism when, like now, bond markets were observing and discounting clearly even if policymakers couldn’t or wouldn’t appreciate these signals.
In November ’69, the 10-year UST yielded (on a constant maturity basis) about 7.15%, thereabouts. Despite passing into recession the following month, that yield and others on the Treasury curve went higher in December, reaching roughly 7.75% and then even higher in January 1970 nearly 8% and remaining near that level almost throughout.
It wasn’t until a full year later, November 1970, close to the end of the contraction, yields finally backed down substantially. It was this and other aberrations which shortly would become commonplace for the Great Inflation so that by the middle of 1971 Federal Reserve Chairman Arthur Burns was befuddled to the point of wondering if the laws of economics had been somehow repealed.
Nonsense; economics was still economics. What Economists failed to grasp was how much any tightness in the labor market was coincidental, an effect derived from other causes. Furthermore, legitimately sustained inflation had little to do with it anyway, no matter how low any unemployment rate might get (see: 2019).
Persistently high bond yields were telling officials, or anyone else, that whether or not unemployment jumped because of the recession, inflation risks (reality) remained high regardless. Irving Fisher’s decomposition of longer-term yields has proven useful time and again, in all kinds of situations.
As growth expectations declined facing 1970 and beyond, inflation expectations rose countering those, an unnatural balance act derived from appreciating the out-of-control money creation (eurodollar) market participants were witnessing close if not directly participating in themselves.
It was only at the end, the severest part of the recession that the balance tipped away from inflation and only then by a relatively small amount. The 10-year CMT rate dipped under 6% by March 1971, but from there it began to rise all over again (thus, Burns). The economy temporarily stalled; the money, not even close.
What Secretary Yellen proposes today is too much like the FOMC back then. She likewise believes the low unemployment rate suggests underlying economic strength while at the same time expecting inflation to be slowed down by the Fed’s selection from a similar Samuelson/Solow menu.
Meanwhile, unlike the late sixties, interest rates remain low and are attempting to go lower battling outright against the Fed’s hikes. Longer-term yields are being pushed up by those alone, though nowhere near as much as the policy rate increases at the short end producing what is today recognizable inversion.
This inversion has reached extremes not seen since the Great Inflation, but unlike then it is telling us there is no inflation to be concerned about today or afterward. On the contrary, it is underlying economic weakness here and abroad which will suffer the US and global economy irrespective of how tight anyone in America might perceive this country’s labor market.
Again, employment follows the economy rather than the other way around while inflation has nothing to do with the unemployment rate. The latter has actually fallen further from the middle of last year while at the same time consumer price estimates have slowed substantially (though not yet as much as they will).
But Yellen wisely added that qualification. She said it isn’t just 2023’s historically small unemployment rate, there’s also the matter of the big payroll number on top. Her point being this employment market is truly robust as a product of an economic environment where half a million workers were snatched up for work in a single month unlike late 1969 when the labor market was said to be “tight” even if not many companies appeared willing to hire.
So, even if the unemployment rate rises it should only go up a little bit thereby helping just enough with “inflation”, some loosening in the labor market, though supported sufficiently by demand for workers so as to avoid recession. She added last month, “What I see is a path in which inflation is declining significantly and the economy is remaining strong.”
The Secretary is hardly alone in expressing this view predicated on the payroll report.
However, those, too, have time and again proven unreliable. In fact, in nearly all US recessions up to the present (excluding 2020’s) the payroll numbers have tended to remain resilient even throughout the first stage or even half of whichever associated contraction. They’ve repeatedly proven to be no more than a means to rationalize longstanding biases – like those clearly exhibited in Yellen’s sentiments.
We can’t really blame her, though, she’s a politician through and through. But we should recognize the common thread of irrationality which binds her beliefs and predispositions to those of her ancient predecessors even when employing those means and methods in service of Goldilocks propaganda. The menu of choices has always included the only wise one, the option of ignoring the bastardized work taken from AW Phillips.
