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Hong Kong Shares Drop Amid Tensions With China

“US trade tariffs have been less disruptive than economists and businesses feared,” Kevin Hassett, chairman of the White House Council of Economic Advisers, declared in a Wall Street Journal op-ed this week.

He wasn’t wrong about the short term. The labor market is humming, inflation is under control, and GDP is expanding briskly. But the longer-term impact of Mr. Hassett’s policy prescriptions (which have led to rising prices and stagnant wages) isn’t yet clear.

Along with Yale economist Robert Shiller, Mr. Hassett created the employment elasticity model, based on labor productivity growth and a number of other factors, to show how strong businesses would be in the face of rising wages and tariffs.

But the effect of tariffs on growth is never the simple thing it would appear to be. In fact, a great deal of the confusion surrounding them is the product of experiments gone badly wrong.

In one study, for example, the Federal Reserve bank of Minneapolis found that tariffs actually undercut labor productivity and erode economic growth. This isn’t a huge surprise, given that the average cost of imported components in a factory is really a promise to move work. But it demonstrates that tariffs have to be dealt with by subtracting labor from the price of goods, and that they really aren’t as disruptive as many Americans have been led to believe.

In other words, tariffs do really hurt productivity.

Another thing we have learned about tariffs: In the case of aluminum, production fell after the imposition of duties last year, mostly because of shifts from aluminum to steel production, and changes in the production mix. A lot of imported aluminum ended up ending up being used by producers of flat-rolled steel, which uses that product.

Mr. Hassett’s case for higher tariffs is about the “supply side,” as the supply of steel and aluminum goods in the United States has fallen over the past few years, as imports have become more expensive. What he neglects to mention is that production capacity is now fully in place for production of steel and aluminum; the tariffs are instead only preventing overcapacity in making plastics and aluminum pipes.

What else should we pay attention to in the Jobs Report?

First, the fact that employment surged by 2.34 million in the four-month period through April, while the unemployment rate remained near historic lows at 3.9 percent. There was nothing particularly remarkable about the April figure; everybody’s usually betting on some kind of rebound from that. And yet, as the chart below shows, it doesn’t really come out to much more than 120,000 jobs a month, but not enough to turn the unemployment rate down.

What that means is that the economy is generating new jobs just slightly faster than we can find people to fill them. Meanwhile, some of the jobless people aren’t finding work. In April, for example, 23 percent of the unemployed were unemployed for more than six months — that’s about 12.8 million people. As Bill Wilkins and Lance Roberts wrote in an interview for On the Economy, the unemployment rate has “high ceilings” as long as it remains above 5 percent, which is where it was back in 2006 before the financial crisis. That’s not enough to get the jobless back to full employment.

The third thing worth keeping an eye on is the structure of the labor market. It’s very important to see the extent to which wage growth has held up in the face of rising unemployment. The key question is whether the great share of workers who are stuck at lower-paying jobs will be able to move to more fully employed ones — or whether the economic cycle will ever turn there in the first place. It’s not enough to say that employment is rising, or that unemployment is falling. For evidence that the shift to part-time work has started to abate, take a look at a decade ago in the NYT, which listed all the people who were employed in retail and other industries that use part-time workers. In just two years, that number had fallen by two million people. Only 1.5 million of those people remain. (Roughly two-thirds of these jobs are still in retail.) Even if employment is rising, this part of the labor market is still not absorbing new workers at anywhere near capacity.

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