Last week the US government released the latest monthly job numbers for July — a whopping 550,000 net new jobs created, reducing unemployment to a mouthwatering 3.5%. It was the ninth straight month in which more than 500,000 net new jobs were created.
There are now more Americans employed than was the case before the Covid-19 pandemic. That 3.5% is also the lowest rate of unemployment since the US government began collecting such data 50 years ago.
As a South African, I’m jealous. Our unemployment rate is unsustainably high, 35% to be exact — and that is just the people still looking for work. Add the people who have given up trying to find work and that number rises to 46%. This means almost half of South Africans of working age are not working at all.
Even with the bumper job numbers, US President Joe Biden finds himself in serious political trouble. His job approval rating is low. In fact, last week only 38% of Americans polled by Reuters believed he was doing a good job. Most of them cited the economy as the reason for rating him poorly.
No, Reuters did not get the statistics wrong. Many other polls by different organisations reach the same conclusion. For instance, on July 18 CNN released its own polling statistics that cited a 38% job approval rating for Biden, with the majority citing his “handling of the economy” as the primary reason for their disapproval.
When Stats SA released the results of the Quarterly Labour Force Survey for the first quarter of this year, it showed the largest decrease in employment came from private households, where 186,000 jobs were lost.
It doesn’t make any sense, right? Well, it kind of does.
According to the CNN poll, 75% of Americans complain about cost of living — inflation, really. Inflation is the rate of price increase in an economy. Like most major global economies, the US is dealing with much higher than usual inflation, at a record 9.1%. In the UK the inflation rate is even higher, at 9.4%, leading to daily talk of a “cost-of-living crisis”.
The Federal Reserve, the US equivalent of the SA Reserve Bank, has been raising interest rates to curb inflation. The last two decisions resulted in a hike of 0.75% each, also called 75 basis points. These monetary policy interventions take time, so Biden’s popularity is going to languish for quite some time before it gets better, if it does at all.
Just two weeks ago the SA Reserve Bank communicated the decision of its Monetary Policy Committee (MPC), which was also a hike of 75 basis points to the repo rate, bringing it to 5.5%. SA’s inflation is now 7.4%, much lower than the US and the UK but above the central bank’s inflation target of between 3% and 6%.
The decision to hike interest rates was met by howls of protest, mostly from those who felt the bank should have rather kept the same repo rate or reduced it.
Their reasoning is that since an interest rate hike is meant to reduce credit-based consumption (and incentivise saving), unemployment will persist. I have sympathy for this view, but I also note that the reasons SA’s economy is hardly growing at all mostly have nothing to do with monetary policy.
In their wisdom, our political elites decided to destroy Eskom, so companies must deal with high electricity prices while they go for hours without any at all due to scheduled blackouts. In other parts of the country, such as Gqeberha, Eastern Cape, load-shedding is accompanied by water restrictions.
Given the near collapse in administration in most municipalities, families and businesses must reckon with dilapidated roads and other infrastructure, which often extracts the additional cost of alternative arrangements. Bad roads mean replacing car tyres at a much faster rate than should be the case. For a courier company, for instance, this cost is lethal when you consider that couriers cannot even make the minimum number of deliveries per day due to traffic congestion caused by load-shedding.
When inflation is so well controlled, it is easy to take the impact of rising cost of living for granted, but a skyrocketing cost of living has bad consequences. For instance, when Stats SA released the results of the Quarterly Labour Force Survey for the first quarter of this year, it showed the largest decrease in employment came from private households, where 186,000 jobs were lost.
I shudder to think what runaway prices would do when wages are not going up every other month either.
Simply put, people can no longer afford to have a domestic worker or a permanent garden maintenance person. These are real human beings who no longer have an income because their employers also find it hard to afford the same things as before.
The most frequent complaint on social media and on radio is the cost of fuel, which is very high. Fortunately, most people can relate to its impact, such as increases in the cost of commuting to work. Some people are even questioning whether they can afford the cars they drive and are considering trading in for a smaller vehicles that consumes less fuel.
Now let us assume the government and the SA Reserve Bank decide to please critics and adjust the inflation target from 3% to 6% to between 9% and 12%. Consider how many people are already struggling now, and ask whether they would still feel happy with rising prices.
Let us also assume the bank were to follow the Turkish example and lower interest rates in the face of rising inflation. Well, inflation in Turkey is just under 80%, though it likely ticks up every other day, and that economy is not shooting the lights out either.
It is of course agonising that so many people remain unemployed, but it is important that those with a big public voice give a full picture when they make policy propositions. It is not honest to propose there are no trade-offs, or that there are consequence-free policy choices and decisions.
My view is that I would much rather have modest price increases, because so many people can’t make ends meet as it is. I shudder to think what runaway prices would do when wages are not going up every other month either.
Successful economies have governments that can do more than one thing at once, such as well-informed monetary policy on the one hand and proper governance on the other. Monetary policy will never make up for the wreckage that is our government in all spheres. Ultimately that matters more than anything any central banker can ever do.
Ask Biden. He’ll tell you unhappiness about cost of living may cost him his job even though he’s producing over 500,000 jobs a month.
