A fair question, and one that begs for a bunch of graphs, the assembling of which is especially fun.
Those of us worried about current economic conditions (that’s you, Brad) talk a lot about how the economy has “excess capacity,” it’s not at “full employment,” and other such catchy phrases that imply economic resources, including people, machines, structures, are not currently being fully utilized.
It sounds obscure but it’s actually really, really important. If the job market is “too loose,” meaning there are a lot more people seeking jobs than finding them, wage growth tends to slow and living standards stagnate.
Here’s a look at two pictures of job market weakness. First, the share of the population employed is a basic measure of labor market demand. It’s very cyclical, as you can see, falling in downturns and climbing in recoveries, but it tanked in the Great Recession and while it’s stopped falling, it’s yet to start making up lost ground.
The drop in the employment rate from the peak is about four percentage points and to get even half of that back, given today’s working age population, would mean about 5 million jobs. That there is some “excess capacity.”
You can see the similar dynamic at work on the net job creation side of the ledger. The Economic Policy Institute calculates how many payroll jobs there would be out there if trend job growth continued apace, uninterrupted by the nasty recession. Answer: a lot.
What about some measures from the macroeconomy? The GDP gap concept in the next figure is much like the jobs concept in the last one: it shows how much more national income would exist if GDP hadn’t taken a dive in the downturn.
Finally, if the economy is “overheating”–nearing or surpassing full capacity–core inflation climbs to levels well above where it is now (in the interest of getting a cleaner read of price pressures, the core leaves out two volatile components: food and energy prices). It’s climbing off the floor, for sure, and that’s a good thing–shows there’s some life out there. But it’s well below capacity constraint levels.
So what does this all mean vis-à-vis current policy? Some things are improving, including some very important ones, like jobs. Other, like employment rates, really aren’t yet. Nothing here on housing, but, believe me, I’ve got some ugly pictures on that too (actually, some signs that we’re close to the bottom of that correction—but clearly no boost from the sector).
I think the best way to answer that policy question is this: those who have these pictures in mind worry a lot more RIGHT NOW about jobs and wage deficits than about budget deficits. That ‘right now’ is in caps to imply that, yes, I also worry also about sustainable budgets, but that there’s a timing imperative here.
There will come a time, when we’re closer to full capacity, to shift our policy focus to reducing budget deficits, and there’s nothing wrong with designing that path now…I’m all for it. Just don’t start down it just yet.