"Full employment" isn't what it used to be. A decade ago it was the central goal of national economic policy. Arriving there was a cause for celebration.
Well, the unemployment rate (5.4% in July) has been 6% or less for a year. Most economists would judge the economy at full employment. But there has been little cheering. It's almost a non-event.
George Bush may be the first victim of this change. Bush and his new campaign manager, recently resigned Treasury Secretary James A. Baker III, have a right to feel a little cheated and baffled. By the conventional wisdom, Republicans ought to be basking in the glow of economic success while Democrats scramble to offset the political advantage of good times. Instead, the roles are reversed. Democratic nominee Michael S. Dukakis is leading in the polls.
One reason that full employment no longer seems so magical is that it's a muddled concept. Today's economists generally see full employment as the lowest possible unemployment rate that won't trigger more inflation.
This doesn't produce utopia. Many unskilled workers may still lack jobs. Depressed regions or industries may remain. Economists simply warn that these problems are too stubborn and local to be cured easily by policies--lower interest rates, tax cuts, more government spending--designed to speed up the economy. Higher inflation would be the main result as scarcities of skilled workers and goods drove up wages and prices.
Even the term full employment has fallen into disuse among economists. They've invented a new phrase, which is a mouthful: the non-accelerating inflation rate of unemployment. Thatis the level of unemployment that will not increase inflation.
Most economists don't think that this level is permanently fixed. For example, if more unskilled workers can be trained, an expanded labor force of better workers would lower the rate. There's a lively debate over the current level; most estimates vary between an unemployment rate of 5% and 6%.
Few Americans have followed this academic debate. But it reflects a broader change in public consciousness. In 1988, full employment hasn't seemed so impressive to Americans for at least three reasons:
--There's skepticism that it will last. People fear the next recession. The economic turbulence of the late 1970s and early '80s left scars. Gone, or weakened, is the faith that skillful economic policies can keep the economy expanding forever.
--There are so many other economic problems to distract people from full employment. A partial list: drought and continued hard times in the farm belt, hard times in the oil states, failures of banks and savings associations, high poverty rates. No one ever believed that full employment would instantly cure all of the nation's problems. But it was supposed to create a climate, a sense of optimistic generosity, that even the toughest problems could be solved with new government and private programs. This optimism has faded.
--Reaching full employment has confirmed the enormity of this country's federal budget deficits. When unemployment was high, the issue was confused. Some of the deficit reflected an economy that was performing below its potential. Widespread joblessness raised spending on unemployment benefits and welfare while lowering tax revenues. Now these problems are irrelevant. The deficit measures the genuine gap between Americans' desire for government services and their willingness to be taxed. It's about $150 billion, or 3% of the gross national product.
These perceptions seem to have robbed Bush of his most powerful campaign issue. Prosperity isn't helping him. Unless he can reclaim economic leadership as a Republican issue, it's hard to see him closing with Dukakis. That's the good news for Dukakis. The bad news is that the next President, whoever he is, will inherit the dilemmas of a full-employment economy. It's here that the debate among economists is relevant. What's the lowest unemployment rate that won't worsen inflation?
Some economists think that it may be 5.5% or less, rather than the 6% that had been widely accepted. The high unemployment of the 1980s is said to have scared workers. Even in labor markets that are tight they are less inclined to demand high increases in wages, because they fear that they could lose their jobs in the next downturn. In addition, the aging of the baby-boom generation promotes slightly lower unemployment, because the older workers change jobs less often than do the teen-agers or young adults.
The theory sounds good, but unfortunately it may be wrong. Many economists still put full employment around 6%--increases in wages and fringe benefits have risen noticeably. The economy may already have passed full employment. If so, the next President faces an unpleasant choice between higher inflation and higher unemployment.