The durability of the American economic superstructure rests on three pillars: full employment; declining inflation; and the dollar as reserve currency. All three are in need of attention, as is the concrete in which they are rooted: the rule of law and the constitution.
Start with the labour market. This pillar is showing some short-term cracks. True, the official unemployment rate of 4.2 per cent, and the 4.5 per cent expected by Federal Reserve Board policymakers for year-end, are well within the Fed’s mandated goal of “maximum employment”. But worrying cracks include the high unemployment rate among college graduates, the increasing time that unemployed job-seekers spend on benefits while seeking work, a decline in job postings, and a rise in corporate lay-offs.
That’s all amenable, though, to reasonable control through the tools in the Fed’s kit.
Not so the labour market of a future already upon us — a future that will be increasingly dominated by artificial intelligence and robots. Amazon chief executive Andy Jassy plans to shrink the company’s worldwide workforce of 1.56 million employees, and warns staff to learn “how to get more done” using AI. There is broad agreement; unlike previous technological changes, where the creative destruction of jobs produced an even greater number of different jobs, AI will destroy more jobs than it will create.
The ability to produce more with less toil might prove John Maynard Keynes prescient when, almost 100 years ago, he predicted “economic bliss” — a 15-hour work week that provides all our economic necessities plus that “longed-for sweet”, leisure.
The best policy for government is to get out of the way of this unstoppable revolution, allow American entrepreneurs to shape its nature and pace, restrain luddite trade unions, and provide ample but not incentive-killing help to warehouse brawn replaced by robots, and to entry-level white-collar workers replaced by AI.
• ‘I have two degrees in computer science. AI is stealing my jobs’
Then there is inflation, tame if seen through the rear-view mirror. Looking down the road through the windscreen, we see tariffs pushing up prices after companies draw down outsized inventories built up before the tariffs took effect, so undermining one pillar: a stable price level.
Sooner or later, the Fed will be forced to choose which of its two equal goals, stable prices and maximum employment, is more equal than the other. Three of four companies tell the New York Fed that they plan to raise prices — to the consternation of consumers patrolling supermarket aisles, businesses faced with hard-hit workers looking for wage relief, and companies paying more for steel, aluminium and other inputs. Former Treasury secretary Janet Yellen expects “inflation to shoot up to at least 3 per cent … because of tariffs”, in line with the 3.1 per cent median guess of Fed policymakers.
The third pillar, the dollar, is being challenged by enemies domestic and foreign. The value of the dollar is down almost 10 per cent this year, to a three-year low. America is the world’s largest debtor, with net foreign liabilities exceeding 70 per cent of GDP. Countries that store their gold reserves with the Fed are considering bringing them home.
Pan Gongsheng, governor of the People’s Bank of China, warns that fiscal problems in America might “overflow to the world in the form of financial risks and … an international financial crisis”. Better to have “a few sovereign currencies co-exist, compete and check and balance each other.” He would say that, wouldn’t he?
• Dollar slumps as Trump hints at new Fed chief
For now, the dollar, used in 88 per cent of global foreign exchange transactions, dominates world trade. It is “the undisputed lingua franca of world trade”, writes Harvard economist Kenneth Rogoff, “reinforcing its resilience amid fiscal concerns”, adds economist Peder Beck-Friis at the investment manager Pimco. The main threat to the dollar is the enemy within. The Trump administration views the dollar’s reserve currency status as a burden, with JD Vance claiming that it encourages “mass consumption of mostly useless imports … crap”. Sigh.
Donald Trump’s “big beautiful bill” will increase deficits by some $2 trillion-$4 trillion over ten years, to about 7 per cent of GDP. Except for the 2008 financial crisis and the pandemic, that level has been reached only during the Second World War. It well might force the bond vigilantes, quiescent so far, to demand higher interest rates to cover the risk of being paid in inflation-depreciated dollars, raising the cost of carrying the $37 trillion national debt. Wrong, says the administration: our pro-growth tax and regulatory policies will attract investment, save jobs, reduce deficits.
But critics aren’t buying what the administration is selling. Goldman Sachs’s investment strategy group contends that we will reach “the tipping point at which the interest burden on the US government and the US economy crowds out essential government expenditures and private sector capital formation, but it is likely at least ten years away”.
Jamie Dimon, chief executive of JP Morgan Chase, agrees that the bond market will “crack” under the weight of rising deficits and debt, but is uncertain of the date: “I just don’t know if it’s going to be a crisis in six months or six years.”
Meanwhile, the major share-price average hit an all-time high, as did shares in Dimon’s JPMorgan Chase. Go figure.
irwin@irwinstelzer.com
Irwin Stelzer is a business adviser