Great Expectations
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“Take nothing on its looks; take everything on evidence. There’s no better rule.” Magwitch, Great Expectations
My father was a newspaperman, but for several years he was also an officer in the Foreign Service. During that time my family moved around from country to country - I believe I attended six different middle/high schools. There was one constant however: every time I landed in a new English class, I had to read Great Expectations. So it should be no surprise that Charles Dickens greatly influenced how I view the world.
On this day before the US jobs report release, I have been thinking about how false expectations, instead of facts or evidence, can shape reality in a negative way. A few examples: war, jobs, and monetary policy.
1. Geopolitical Expectations
Talk of war has sadly grown more commonplace. Are we arriving at a more dangerous place after a time of relative peace for the past 75+ years? We seem to be expecting higher levels of social and political conflict, both domestically and internationally.
In his excellent essay in the current issues of Foreign Affairs, The Danger of Detachment, Ali Wyne discusses how expectations shape geopolitics:
It is concerning, then, that officials in Beijing, Brussels, Moscow, and Washington are all taking a dimmer view of interdependence. In fact, their skepticism alone could make the world more fraught. Drawing on 40 case studies of great-power conflicts between 1790 and 1991, the political scientist Dale Copeland concluded in 2014 that the level of interdependence matters less in explaining the outbreak of hostilities than did expectations about its trajectory.
‘It does not matter whether past and current levels of commerce have been high if leaders believe they are going to be cut off tomorrow or in the near future,’ he wrote. ‘It is their pessimism about the future that will probably drive these leaders to consider hard-line measures and even war to safeguard the long-term security of the state.’
Sadly, Copeland is turning out to be very right. My concern is that we are rushing into conflict based not on facts but on feelings.
2. Jobs: Changing Chinese Expectations
Expectations about the economy are crucial not just for consumers, but for workers. Millions of Chinese college graduates who cannot find jobs are finding out. Since a college degree was seen as a ticket to a stable future, the supply increased dramatically without a concomitant increase in the supply of jobs that required that qualification:
In recent years, the number of college graduates in China has continued to rise. According to the data of the Ministry of Education, the number of college graduates nationwide is expected to be 11.58 million in 2023, and the number of graduates will reach a new high. In 2022, the number of college graduates in China exceeded 10 million for the first time. In 2000, the number of college graduates nationwide was only 1.009 million, which has increased by more than 10 times in 24 years. (Sina Finance March 2023)
At least half of these students cannot find jobs after graduation. Since the Chinese economy is not doing well, a likely result is that they will need to lower their expectations. Factory jobs might not be an answer.
China's huge investment in industrial robotics has allowed it to become one of the most automated nations on the planet in the space of just a few short years. According to the latest study by the International Federation of Robotics, the number of operational robots in Chinese manufacturing reached a ratio of 322 units per 10,000 employees in 2021, exceeding the robot density in U.S. industry for the first time (274 units per 10,000 employees). China now ranks fifth in the world, behind South Korea (1,000 per 10,000 employees), Singapore (670), Japan (399) and Germany (397). Anna Fleck, Statista July 25, 2023
It is easy to see the kind of dislocations this will create, even in a planned economy such as China’s, when expectations of job security by the state are not met.
3. US Monetary Policy
In economics, inflation expectations are a well-known contributor to inflation. Most economists thought that the recent rapid increases in interest rates by the Federal Reserve to combat inflation would lead to increased unemployment, and perhaps a recession. Neither has been the case. In the face of a continued strong job market, more analysts think there might be a soft landing, or at least the US economy will muddle through without a significant drop in GDP growth.
If we do see a drop in employment, how would we know a recession is coming? Economist Claudia Sahm, whose Substack I highly recommend, is the creator of what is known as the Sahm Rule:
When the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months, we are in the early months of recession.
Surprisingly, Sahm thinks that in 2023 or 2024 her rule might break, and we will avoid a recession. She says will be okay with that outcome. Her research supported the theory behind direct payments to individuals which enabled the US to recover. China’s failure to do something similar is perhaps one reason they are lagging.
On a related note, Sahm also says that we need to ban the Phillips Curve that links rising interest rates to battle inflation to reduced employment.
Clinging to the Phillips Curve threatens the U.S. economy. We don’t need a recession; we don’t need sky-high interest rates. We need more workers and investment. This is not an academic debate; our future is on the line.
Rethinking the Fed’s Dual Mandate
If there is no simple lever, no seesaw relationship that can be used to balance interest rates against employment, then the Fed’s dual mandate to control both price stability and jobs really needs to be rethought. No other central bank in the world has jobs as part of their remit.
Technology is changing what work and employment levels mean, as robotics and AI become more pervasive in the workplace, immigration soars in some countries, and birthrates plummet in others. Countries and companies are adapting to this new reality.
This gets back to expectations. If the Fed is going to raise rates until the jobs market breaks, and if that really doesn’t matter in terms of inflation, then we are headed towards a boomerang policy mistake that will affect not just the US, but other countries as well. This could end with the Fed pivoting quickly, but it could take a while for the global economy to recover.
When we get the US jobs report tomorrow we should take it simply for what it is—a good jobs report is a good thing. More people working is a good thing, and should not be an invitation to tank the economy on dubious theoretical grounds.
Everything is not always what it seems, and true value can be hidden, as I learned from Charles Dickens. Proper, not false expectations should be based upon the right set of facts and information in order to enjoy a healthy economy, and a peaceful world.
In the end, great expectations are about political and intellectual leadership.
If you’d like to listen to my podcast with Ali Wyne:
