Krugman Implies Inflation Will Add Employment – June 2011 Economic Forecast

Nobel Laureate Paul Krugman in a Memorial Day Weekend Op-Ed in the NYT, blasted both USA political parties because they are acting as if “nothing can or should be done about jobs“.

Professor Krugman suggests:

The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade. Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment. And once you realize that the overhang of private debt is the problem, you realize that there are a number of things that could be done about it.

For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt. We could have a serious program of mortgage modification, reducing the debts of troubled homeowners. We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.

The solution to job creation does not run through repairing roads or inflation.  Construction or repair never been a driver of employment – but it is the use of what is constructed which creates jobs.  Repairing of roads is necessary, but not a jobs driver.  There is not a shred of evidence that inflation has ever created jobs.  As the following graph shows, inflation spikes have usually coincided with unemployment spikes (employment dips), with the inflation peak having a variable lead time of up to two years or so.

Inflation – especially on a weak consumer – kills the economy.  Every inflation spike since 1960 was an economy killer.  Admittedly Professor Krugman’s 4% is a relatively small spike but big in comparison to the current USA economic growth.

Wage growth generally follows inflation by a year, and in a global economy where a nation’s unit labor rate is on the high side likely will result in falling inflation adjusted wages.

What creates jobs is a solid economy, the current economy continues to run well under pre-recession levels.  Econintersect’s Employment Index is based on economic elements which create jobs.  Econintersect’s Job’s index (explanation here) is at a cycle low, but is recovering in July.

This index measures the historical dynamics which lead to the creation of jobs, but it is not precise as many factors influence the exact timing of hiring.  This index should be thought of as a measurement of jobs creation pressures.

For those, such as Professor Krugman, who believes there are single bullets which will create jobs – Econintersect is open to debate this anytime, anywhere.  The solution runs through literally thousands of points including laws, regulations, trade agreements, taxation, education, monetary policy, fiscal policy, and the closed minds of too many.

There are many combinations of solutions to create jobs, and Professor Krugman is right – everyone has given up in trying to create jobs.  The solution (which is provable) is repairing the economy – and besides a little smoke and mirrors, here again little has been done to repair the economy.

With stimulus wearing off, the economy is beginning to look weak as the core issues which were not solved are being exposed.   And inflation is being added to the economy to ensure the consumer is constrained from expanding the economy.  This is the first economic expansion which is business driven with the consumer not adding significantly.

Econintersect believes the non-monetary transport counts are the canary in the economy.  Transport counts, although less good – are solid across the board.  Some elements only days old are actually slightly improving.  Do not construe this as saying the economy is in good shape.  The transport counts are lethargic, and in most cases are well below pre-recession levels.

It is likely that inflationary pressures will be effecting the May data which will start being released this week, and the impact will continue into June.  Inflation likely caused Econintersect’s May 2011 forecast to be slightly overoptimistic – and the May 2011 data should generally be coming in “less good”.

Econintersect’s Economic Index (EEI) is a month-over-month comparative index measuring improvements across a broad range of forward looking non-monetary economic pulse points which historically correlate to economic activity.  The index this month is saying the economy in June 2011 will be less good – not negative.

The design of this index does not allow comparison year-over-year – it is meant to establish month-over-month trend lines so that the general direction of the economy can be forecast.  And the EEI will only generally track GDP as the EEI elements tend to track Main Street.

The “less good” forecast breaks the existing improving trend line.

For a complete explanation of the EEI, please see the October 2010 forecast.

Past EEI Forecasts for: May 2011, April 2011, March 2011, February 2011, January 2011, December 2010, November 2010, October 2010, September 2010.