This week’s unexpected rise in US inflation is an opportunity to revisit an old debate, which is often a useful exercise. This current bout of inflation has its roots in mistaken assumptions made a decade ago.
After the 2008-2009 recession, the recovery in the labor market was notoriously slow. This was commonly blamed on the demand side; monetary and fiscal policy could have done more, it was said, to stimulate recovery. A less popular view — but one that looks correct in retrospect — is that both the demand and supply sides were at fault.
In particular, there were problems in the labor market: The US had a human capital deficit, with a lot of people simply not keen on returning to full-time, gainful employment in a prompt manner. The labor market recovery was so slow because both sides of the market were inadequate.
Fast forward to the pandemic and early 2021. It was the conventional wisdom that inflation would be very difficult to create, because demand is usually deficient and supply can respond to any surge in spending, thereby offsetting inflationary pressures. That was the consensus formed after the Great Recession, and it turned out to be spectacularly wrong. Now the US is living with its consequences, namely high inflation with a possible recession to follow.
The evidence is piling up that the US has been suffering from a deficit of human capital. For instance, a recent report showed that US life expectancy first stalled and then has been falling. In other words, current Americans — or at least some subset of them — are having trouble just staying alive.
And if a subset of current Americans is having trouble staying alive, then isn’t it plausible that, earlier in life, they had trouble finding and keeping work? That doesn’t follow as a matter of logic, but the two human capital deficits seem part of a broadly common social trend. If someone died in 2021 of opioid addiction, that same person may have been making some less-than-perfect employment decisions a decade earlier.
It doesn’t matter whether you blame the individual, as old-fashioned morality might do, or blame larger social forces, as is currently more fashionable. A subset of the US population seems off the track of making consistently good decisions.
A more controversial extension of this point would suggest that many Americans have been off the track of making good political decisions as well. You could make this charge of both the left and the right (and no, by citing both sides I am not suggesting there is moral equivalence).
Another trend is that many people are marrying later in life, or not marrying at all, especially in the lower socioeconomic strata. That’s not necessarily bad. Still, an era characterized by fussiness in marriage may also be characterized by fussiness in choice of job. And marriage itself may be a spur for getting a job, especially for men. Again, individual choices — and not just insufficient demand — seem to have been a significant reason that labor markets were so slow to recover in the aftermath of the Great Recession.
It is also instructive to look at what is called “quiet quitting.” The US economy is close to full employment, in part due to an extreme overstimulation of demand. Even so, the human capital problems and labor market malfunctions haven’t gone away — they’ve just been pushed into other facets of the workplace experience. According to a recent Gallup poll, at least 50% of the US workforce are “quiet quitters.” Meanwhile, labor productivity is down dramatically, and though the measure is imprecise, it is hardly a good sign.
Many commentators are quite willing to entertain the hypothesis that there are significant problems with human capital in the US. But when discussion turns to the slow labor-market recovery following the Great Recession, all the blame is put on a weak monetary and fiscal response. Part of the reason they make this argument, of course, is that they want to preserve the case for the necessity of a vigorous response. It is past time to redress this intellectual imbalance and admit just how widespread the problems are with human capital — not just now but a decade ago.
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