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Friday, April 23, 2021

It’s clear where the debate over the economy is headed in 2020

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The two simple facts on which the Trump administration, the Republican establishment and other advocates of their policies hinge their case are the following: Full employment is reflected in historically low jobless rates, and high unemployment is reflected in persistently high labor force participation rates. This means that the jobs market is the reason the economy is in good shape. Hence, there is a job shortage due to the absence of labor.

Where is the demand for labor if unemployment is so low? This is the debate. Nowhere. After two years of high unemployment (not simply high labor force participation) and other indicators of joblessness, the labor market is indeed viewed by many as unusually weak.

As a result, an election will be fought almost entirely on the economic reality that most Americans will experience in 2020. What will the economy look like then?

The good news is that if Trump or his opponents interpret the labor market to mean low unemployment in 2020 — that the economy will have to rely more on labor — they are making a serious mistake.

Employment is up 24 percent since July 2009, even as our economic output (gross domestic product) has grown by only about one-third. GDP can grow fast without lowering unemployment, and recovery from the 2001 recession is particularly encouraging because unemployment was almost twice as high as it is today. The point is that there is very little policy implication from low unemployment — low unemployment lowers the unemployment rate, but it also often reduces the rate of growth of output. (A lower growth rate would raise the unemployment rate, but that can only happen if unemployment, well above average, declines.)

None of that means the economy is doing perfectly. It is not. The real story is that the economy is growing, and that is what matters to most Americans.

If there is a protracted period of stagflation — high inflation but low economic growth — it will have big implications for voters and policymakers. There is already a bit of this on the way, with recent reports of rising inflation in some industries and a weak recent reading on producer prices. The more ordinary circumstances of a sluggish recovery and a weak jobs market could produce policy responses as well.

In a year or two, when everyone takes the measure of what was America’s ongoing economic triumph over the Obama years, we could be faced with an unhappy choice between between Trump and Clinton. The American public will either find the results disappointing or genuinely remarkable.

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