Other Views: August 13

High interest rates could be killing job gains

From the Aug. 2 edition of The Washington Post:

The post-pandemic hiring surge is over. Job seekers in nearly every industry are having a harder time finding employment. As the latest jobs report showed on Friday, the unemployment rate has ticked up to 4.3%. Though that is low by historical standards, it's a significant jump from 3.5% a year ago. More than 7.1 million people — each of them requiring housing, food and security — are now out of work. That's up by more than 1 million from last summer. Americans without college degrees have been especially hard-hit.

Since the post-pandemic inflation spike, the Federal Reserve has elevated interest rates to restrain price increases so rapid they poison the economy. For a year, rates have been near 5.5%. Miraculously, the big trade-off of high rates leading to sluggish growth and unemployment failed to manifest. No longer. With inflation close to its 2% target, the Fed now needs to pivot back to supporting the labor market, finally lowering interest rates at its next meeting in September and likely again later this year.

Fed officials still have time to prevent a downturn. Economists rely on what's known as the Sahm Rule to gauge when a recession arrives. It's based upon the observation that when the unemployment rate rises significantly in a year, it has always heralded a U.S. recession. The July unemployment numbers were high enough to trigger the Sahm Rule. But there's reason to hope this time is different. Companies are not laying people off, just reducing their hiring after they took on new workers rapidly in 2022 and 2023. Firms appear to be in wait-and-see mode, which is why Fed action this fall could make a decisive impact. The real estate and manufacturing sectors, for example, could pick up quickly since they tend to be the most sensitive to interest rates.

The Fed and other policymakers need to see the wider context. Economists have shifted profoundly their understanding of sustained tight labor markets and their benefits to society. For years, economists believed that a 5% unemployment rate was about the lowest possible in the United States. (There will always be some people looking for jobs, even in a good economy.) In 2016, a top Fed official called that level " basically full employment." And yet the U.S. economy has now seen at least two extended periods of unemployment at 4.0% or less. There was a two-year stretch from March 2018 until the pandemic and then 30-month stretch from December 2021 through this May. The benefits have been extraordinary — especially for women, people of color, people without college degrees and Americans with disabilities. People not only got hired; many say they were able to get on a career path that will help them for years to come.

These periods of low unemployment have led many companies and government agencies to drop college-degree requirements for many jobs. This has opened up career prospects for the 119 million Americans who have no college degree of any kind. The trend of more flexible jobs — including work-from-home and part-time shifts, even in factories — have particularly helped women with kids.

Having a job is about more than a paycheck. It brings dignity. New research from economist Raj Chetty and his colleagues finds that children raised in neighborhoods where most people are employed have better life outcomes for decades to come. Even if their own parents aren't employed, they can see what is possible by looking at their relatives and their friends' parents. The study looked at data on 57 million people born between 1978 and 1992 and found "large effects" for children who move into communities where employment is growing.

All of this is why it's concerning to see signs that the labor market is turning, with unemployment rising and hiring slowing sharply outside of health care and government. That's a major change from last year, when almost every sector was hiring robustly. It's notable that the unemployment rate for Americans without a high school diploma is now 6.7% (up from 5.3% a year ago). For people who graduated from high school but not college, the unemployment rate has shot up to 4.6% (from 3.3% a year ago).

"I would not like to see material further cooling in the labor market," Federal Reserve Chair Jerome H. Powell said on Wednesday. Unfortunately, that's exactly what happened. A soft landing is still within reach, but the Fed will have to take action to secure it.

What the selection of Walz as VP means about Harris

From the Aug. 6 edition of The Wall Street Journal:

Donald Trump did Democrats a favor by choosing a running mate who reinforced his base rather than reaching out to swing voters. Kamala Harris has now returned the favor in selecting Minnesota Gov. Tim Walz, the progressive favorite, as her pick for Vice President.

The choice that scared Republicans was popular Gov. Josh Shapiro of Pennsylvania, a swing state crucial to an Electoral College victory. But Mr. Shapiro, who is Jewish, was the target of an extraordinary and nasty campaign against him by the Democratic left. He was too pro-Israel and had upset unions by showing rhetorical support for school vouchers.

Ms. Harris appears to have wilted under this pressure, perhaps fearing protests at the Democratic convention in Chicago this month. She went with Mr. Walz instead, and there goes Mr. Trump's hope of flipping the decisive swing state of Minnesota. That's a joke, since the Land of 10,000 Liberals has voted Democratic in every presidential election since 1976.

Mr. Walz's progressive bona fides will please Sen. Bernie Sanders and the teachers unions. But his governing record will be fodder for Mr. Trump. And picking him is a bad omen about the ability, or even willingness, of Ms. Harris to defy her party's left.

Mr. Walz, age 60, has a plain-spoken personality and an appealing Midwestern background. He joined the Army National Guard at 17, graduated from a state college, and became a high-school teacher and football coach. He was elected to Congress in 2006 from a rural district, and one selling point to Ms. Harris is that he might appeal to Trump voters.

But as Governor since 2019 Mr. Walz has moved Minnesota sharply to the left. He still wears a baseball cap and work jacket, but since Democrats gained control of the entire Legislature in 2023, he's governed more like California Gov. Gavin Newsom, including:

Increasing taxes, though Minnesota already has the fifth-highest top income-tax rate among the states, 9.85% at $193,000 of earnings for a single filer. Mr. Walz added a 1% surtax on net investment income above $1 million, while reducing deductions, and the Governor wanted more.

Minnesota is a rare state that still levies a death tax, up to 16%, on top of the federal 40% rate, which is one reason the state is losing taxpayers to better climes.

Making an estimated 81,000 illegal immigrants in the state eligible for driver's licenses, along with health insurance through the MinnesotaCare public marketplace.

Funding "the North Star Promise Program, which provides free college for students with a family income under $80,000," including illegal immigrants.

Creating a state system for paid family and medical leave, capped at a combined 20 weeks a year and funded by a 0.88% payroll tax.

Mandating that public utilities generate 80% carbon-free electricity by 2030, ramping up to 100% by 2040. He's a fervent believer in "climate action."

Subsidizing electric vehicles by "requiring EV charging infrastructure within or adjacent to new commercial and multi-family buildings," as the Governor's office bragged.

Passing one of the nation's most permissive abortion statutes that has essentially no limits and no age consideration for minors.

Declaring Minnesota to be a "trans refuge," with a law saying that the state will ignore a "court order for the removal of a child issued in another state because the child's parent or guardian assisted the child in receiving gender-affirming care in this state."

Establishing automatic voter registration and letting Minnesotans sign up for a permanent absentee ballot option.

No wonder Mr. Sanders is a fan. Yet now the vetting will begin in earnest. Mr. Walz's response to the 2020 riots, after George Floyd's killing, will be scrutinized in particular, as poor areas in Minneapolis burned and many business owners lost everything.

Did he hesitate to send in troops? Why is Minnesota losing residents to other states? Republicans are circulating remarks by Mr. Walz acknowledging what he calls his white privilege and urging his party: "Don't ever shy away from our progressive values. One person's socialism is another person's neighborliness."

Despite her four years as Vice President, Ms. Harris is largely unknown to most voters. Democrats want to keep it that way, hoping she can dodge media interviews and ride a gauzy theme about "the future" in a campaign sprint of a mere 100 days.

But her choice of a running mate is her first presidential-level decision, and it confirms the views she expressed in 2019 when she ran for the White House as a left-wing Democrat. Choosing Mr. Walz suggests that the real Kamala Harris is the one who wants Medicare for All and to eliminate cash bail. Voters who don't like Mr. Trump might decide he's still better than signing up for that.