Submitted by Eugen von Böhm-Bawerk of Bawerk.net
The great “science” of economics once discovered an empirical
relationship between GDP and unemployment that has been dubbed Okun’s
Law. It simply states that the unemployment rate rises as GDP contracts,
or vice versa, as production shrinks less people will be employed. It
is not exactly rocket science.
However, this made us think about another relationship we have observed lately. US government real tax
receipts have been trending downwards while employment has kept up
remarkably well. If we draw a chart of US withholding taxes (smoothed
from all the short-term noise) and overlay that with employment growth,
we find a worrisome divergence that has historically not been there.
If
we plot the same chart, but using annual change in real GDP instead of
the annual employment growth, everything seem to fall into place though.
What can explain this dichotomy? The most obvious explanation is the
increased employment of low paid workers with lower productivity
relative to what we have seen in previous recoveries. Substituting $50 –
100k full time breadwinner jobs with barmaids and waiters is certain
to drive down wages (and hence taxes) and GDP as the marginal
productivity of each additional new hire is lower than the previous.
Both productivity statistics and the monthly labour market report
substantiates our view.
Years of capital consumption have led to peak debt whereby each
additional unit of debt reduces economic growth instead of artificially
stimulating it. There is only one way out of this, and that is a
wholesale admission that current policies of extend and pretend is no
longer working; unfortunately only real crisis seem to focus minds
enough to implement necessary changes. Until then, the painful slog will
continue. Our dire prediction for the future is simply one where the
confluence of a struggling middle class and politics jointly forces
through some sort of structural change. These usually make things much
worse before the system is reset toward a more sustainable path. Upcoming
elections in Italy, the US, the Netherlands, France, Germany and Spain
in a post-Brexit environment provide ample opportunity for radical
change.
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