Although he’s an accomplished economist who’s widely recognized for the accuracy of his prognostications, David Rosenberg played the part of a lecturer in Economics 101 last week
He started with employing a graph you might find in any text, displaying aggregate supply and demand curves. The point at which they meet is… Class? Anyone? Bueller? “The price,” he explained.
And while for years in the 1980s and ’90s, thanks to an elastic supply curve, price was stable despite rising demand, that is changing, he suggested.
Breaking from the kind of conventional wisdom you’ll find on the front covers of magazines that warn of potential deflation, or lower prices, Rosenberg suggested that an inelastic supply curve, which won’t react to increased demand, means prices – of labour to start with –are set to go up.
There’s a pent up demand for labour in the United States, despite record high joblessness, he noted.
Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, provided his analysis of the economic landscape at a session held during last week’s Taking Care of Business program. The event is a UJA Federation of Greater Toronto get-together, which featured keynote addresses from business leaders W. Brett Wilson, Seymour Schulich and Ken Tanenbaum, as well as seminars in a variety of fields.
Examining conditions south of the border, Rosenberg said, “This goes down as by far the weakest recovery, despite all the stimulus.” GDP growth stands at only 1.6-1.7 per cent per year. “For this stage of the cycle, it’s substandard growth.
“The corporate sector is struggling from not enough clarity in terms of policy.”
The Affordable Care Act – popularly known as Obamacare – is more than 2,000 pages long; the Dodd-Frank Wall Street Reform and Consumer Protection Act checks in at 800 pages; there’s been no budget passed for five years and small business complains about government regulation.
“If you’re a business, how do you plan for the future when the guys in Washington can’t do that?” he asked.
Looking at the labour participation rate, which stands around 63 per cent, Rosenberg said “it’s important to assess why people are leaving the labour force in droves.”
Currently, “90 million [people] reside outside the traditional labour force.” That’s up from 80 million.
There are 140 million people at work, another 10 million looking for a job. But 90 million are in limbo. “That’s like a country.” Are they all living downstairs watching Breaking Bad? he quipped.
A new socio-economic situation is developing, Rosenberg said. People are being subsidized to not work. Federal disability benefits have grown at five times the population growth. A record number receive food stamps. You can spend 99 weeks on unemployment insurance.
“That would make a guy from Newfoundland blush,” he said.
In 39 states you can make more on benefits that you could working as an administrative assistant; in 11 states, your income on assistance is higher than that of a teacher.
While many have taken themselves out of the labour force, demand for workers has gone up. Companies can’t find skilled labour, so the number of firings has dropped to record low levels. Companies compensate for the lack of workers by asking current employees to work more. After a time, people get fed up and look for other jobs, at which point, employers raise their wages. With salaries going up, prices follow as companies try to retain their profit margins. Referring back to the supply/demand curve, Rosenberg suggested that as labour supply continues to constrict while demand increases, the prices – wages – will go up. And as consumers are more likely to spend than corporations, the result will be a “wonderful multiplying effect on the economy,” he said.