A bummer of a jobs report released Friday morning triggered a sharp drop in the stock market and stoked fear of a coming recession—thanks to something known as the "Sahm Rule."

So what is that?

It is named after economist Claudia Sahm, who served as a top economic advisor during the Obama administration and identified a historical indicator of coming recessions in 2019: every time since 1970 that the three-month moving average of the U.S. unemployment rate is more than half a percentage point above the lowest three-month moving average from the previous year, a recession has soon followed.

That's a bit complicated, admittedly. If you want to know what it looks like in practice, check out today's jobs report. Unemployment in July ticked upwards to 4.3 percent. Over the past three months, the average unemployment rate has been 4.13 percent. That's quite a bit higher than the lowest three-month average from the past year—which was 3.63 percent, between June and August 2023.

Thus, the Sahm Rule has been triggered.

But the "rule" is also a set of guidelines. In the 2019 paper where Sahm identified this historical early warning system for a coming recession, she called for governments to begin distributing stimulus payments as soon as this alert was triggered. Doing so, she argued, would allow for a speedier response to a recession by eliminating the lag that occurs while politicians and other observers debate whether a recession is coming and what to do about it. Essentially, it is meant to be a technocratic solution to a recurring problem.

The political system has not adopted that approach—and thank goodness, because the federal government is $35 trillion in debt and already on pace to run a $2 trillion deficit this year. There's literally no money for stimulus checks right now.

The markets, however, seem to be taking the Sahm Rule seriously. There was a huge sell-off on the stock market Friday morning and bond yields fell as well—an indication that investors are essentially "pricing in" the cost of a coming downturn.

But there's one more complicating factor. Sahm herself says this might be a false alarm.

The Wall Street Journal reports that "Sahm doesn't think the economy is on the immediate cusp of a recession. She reckons that changes in the supply of labor since the pandemic, including the recent jump in immigration, have led the Sahm rule to overstate how weak the job market is."

"We are still in a good place, but until we see signs of stabilizing, of leveling out, I'm worried," Sahm, who also worked at the Federal Reserve and is now the chief economist at New Century Advisors, an investment firm, told the Journal.

It's good to be cautious about the predictive power of historical trends. Indeed, in that 2019 paper, Sahm warned that "the Sahm rule is an empirical regularity. It's not a proposition; it's not a law of nature."

Federal Reserve Chairman Jerome Powell echoed that sentiment this week. He called the Sahm Rule "a statistical regularity" on Wednesday, adding that "it's not like an economic rule, where it's telling you something must happen." At a meeting earlier this week, the Federal Reserve decided to hold interest rates steady, though it indicated that a rate cut could be coming in September.

So are we heading for a recession or not? As always, it's impossible to know until we're already in one. The commonly used definition of a recession is back-to-back quarters of negative economic growth—but the economy grew by 2.8 percent during the second quarter of 2024. By that metric, it would take until the end of the year for the country to be in a recession.

The official arbiter of recessions is the National Bureau of Economic Research (NBER), a private entity whose definition of a recession takes into account monthly indicators like employment, personal income, and industrial production along with quarterly gross domestic product (GDP) growth (by their terms, two consecutive quarters of negative GDP growth often, but not always, correspond with an official recession).

Still, the outlook is certainly darker after Friday's jobs report. If a recession is coming, the federal government's and Federal Reserve's ability to respond will be severely limited by the poor fiscal and monetary decisions that have left the Treasury deeply in debt and the central bank's balance sheets overstretched.

The Sahm Rule has correctly predicted every recession in the past half-century. Let's hope it got this one wrong.

The post What's the Sahm Rule? Alarming Jobs Report Raises Recession Risk. appeared first on Reason.com.

Congressional Budget Office (CBO) projections provide valuable insights into how a big chunk of your income is being spent and reveal the long-term consequences of our government's current fiscal policies—you may endure them, and your children most certainly will. Yet, like most other projections looking into our future, these numbers should be taken with a grain of salt. So should claims that CBO projections validate anyone's fiscal track record.

So much can and likely will happen to make projections moot and our fiscal outlook much grimmer. Unforeseen events, economic changes, and policy decisions render them less accurate over time. The CBO knows this and recently released alternative scenarios based on different sets of assumptions, and it doesn't look good. It remains a wonder that more politicians, now given a more realistic range of possibilities, aren't behaving like it.

First, let's recap what the situation looks like under the usual rosy growth, inflation, and interest rate assumptions. Due to continued overspending, this year's deficit will be at least $1.6 trillion, rising to $2.6 trillion by 2034. Debt held by the public equals roughly 99 percent of our economy—measured by gross domestic product (GDP)—annually, heading to 116 percent in 2034.

The only reason these numbers won't be as high as projected last year is that a few House Republicans fought hard to impose some spending caps during the debt ceiling debate. The long-term outlook is even scarier, with public debt reaching 166 percent of GDP in 30 years and all federal debt reaching 180 percent.

No one should be surprised. To be sure, the COVID-19 pandemic and the Great Recession made things worse, but we've been on this path for decades.

Unfortunately, if any of the assumptions underlying these projections change again, things will get a lot worse. That's where the CBO's alternative paths help. Policymakers and the public can better see the potential risks and opportunities associated with various fiscal policy choices, enabling them to make more informed decisions.

For instance, the CBO highlights that if the labor force grows annually by just 0.1 fewer percentage points than originally projected—even if the unemployment rate stays the same—slower economic growth will lead to a deficit $142 billion larger than baseline projections between 2025 and 2034. A similarly small slowdown in the productivity rate would lead to an added deficit of $304 billion over that period.

Back in 2020, the prevalent theory among those who claimed we shouldn't worry about debt was that interest rates were remarkably low and would stay low forever. As if. These guys have since learned what many of us have known for years: that interest rates can and will go up when the situation gets bad enough. So, what happens if rates continue to rise above and beyond those CBO used in its projections? Even a minuscule 0.1-point rise above the baseline would produce an additional $324 billion on the deficit over the 2025-2034 period.

The same is true with inflation, which, as every shopper can see, has yet to be defeated. If inflation, as I fear, doesn't go away as fast as predicted by CBO—largely because debt accumulation is continuing unabated—it will slow growth, increase interest rates, and massively expand the deficit. To be precise, an increase in overall prices of just 0.1 points over the CBO baseline would result in higher interest rates and a deficit of $263 billion more than projected.

Now, imagine all these variations from the current projections happening simultaneously. It's a real possibility. The deficit hike would be enormous, which could then trigger even more inflation and higher interest rates. The question that remains is: Why aren't politicians on both sides more worried than they seem to be?

What needs to happen before they finally decide to treat our fiscal situation as a real threat? President Joe Biden doesn't want to tackle the debt issue. In fact, he's actively adding to the debt with student loan forgiveness, subsidies to big businesses, and other nonsense. Meanwhile, some Republicans pay lip service to our financial crisis, but few are willing to tackle the real problem of entitlement spending.

The time for political posturing is over. The longer we wait to address these issues, the more severe the consequences will be for future generations. It's time for our leaders to prioritize the nation's long-term economic health over short-term political gains and take bold steps toward fiscal responsibility. Only then can we hope to secure a stable and prosperous future for all Americans.

COPYRIGHT 2024 CREATORS.COM.

The post The Congressional Budget Office's Alternative Scenarios Forecast a Dire Economic Picture appeared first on Reason.com.

The recent wave of headlines about shoplifting and retail theft, accompanied by viral videos of people brazenly walking out of stores with stolen goods, has captured the attention of the media and politicians. The tough-on-crime crowd has advocated for a crackdown on shoplifters through more aggressive prosecution and harsher penalties. Others have emphasized the need for rehabilitation for offenders. 

One group of progressive California lawmakers claims to have found an even better solution: banning self-checkout machines from stores in the name of fighting crime. In reality, this "anti-crime" bill is nothing more than naked protectionism for union jobs. 

The proposed legislation would prohibit groceries and other retail stores from using self-checkout machines unless a host of conditions are met. These include having at least one staffed employee for every two self-checkout machines (and the employee must be exempt from any other duties), only permitting the machines to be used by shoppers with 10 items or fewer, and ensuring at least one regular cashier lane is also available at all times.

The bill's sponsor, state Sen. Lola Smallwood-Cuevas (D–Los Angeles), calls her approach "smart" on crime instead of "hard on crime," telling The New York Times: "We have so many bills in this Legislature that are trying to increase penalties….We know that what makes our community safe is not more jail time and penalties. What makes our community safe is real enforcement, having real workers that are on the floor." 

To underscore her point, Smallwood-Cuevas cites a study suggesting that retail theft is up to 16 times more likely to occur at self-checkout machines than at traditional registers, leading to an estimated $10 billion in annual losses for retailers. 

A closer look at the fine print of the bill, however, reveals the true intent behind it. The legislation mandates that any store seeking to install self-checkout machines must first produce a study analyzing, among other things, the number of employees "whose duties would be affected by the workplace technology," as well as the "total amount of salaries and benefits that would be eliminated as a result of the workplace technology." The study must then be provided to employees potentially impacted by the technology (or their collective bargaining representatives) and posted "in a location accessible to employees and customers."

Were this a game of poker, this mandated study would be the tell: Smallwood-Cuevas and her fellow progressives are trying to tuck a pro–union jobs bill inside the Trojan horse of crime prevention. 

Smallwood-Cuevas was a labor organizer before her legislative career, and some of the bill's biggest sponsors are labor unions. A press release on the United Food and Commercial Workers' website lauds the legislation, with the president of the local chapter complaining that "employers have increasingly implemented automated checkout to drastically cut staffing and reduce labor costs." The press release does not mention the word crime at all and only uses theft twice and shoplifting once. In contrast, jobs, staffing, and worker displacement are referenced a total of 10 times. 

Efforts to limit self-checkout in other blue states provide corroborating evidence, such as a proposed anti-self-checkout ballot initiative in Oregon that labor interests tried to get on the 2020 ballot, explicitly positioned as a pro–union jobs measure. 

While a pro-labor bill in California may seem utterly unremarkable, some on the right may be buying the bill's anti-crime framing. Both Fox Business and the New York Post ran articles highlighting the bill as an anti-theft measure, with little reference to the real motivations behind the legislation. Given the right's increasing embrace of labor unions, it is not hard to envision an unholy alliance of pro-labor progressives and tough-on-crime populist conservatives supporting bills around the country to eliminate self-checkout.

Supporters of the bill and numerous media outlets have cited two examples of large retail chains making their own internal decisions to reduce or remove self-checkout machines to clamp down on theft. The aforementioned statistics about self-checkout lanes leading to more shoplifting are also frequently referenced. But these points ironically cut against the need for government involvement: If self-checkout machines are really leading to massive inventory losses for stores, then retailers themselves have a direct bottom-line incentive to scrap self-checkout. 

No one cares more about inventory loss than store owners, whose entire business model is predicated on customers actually paying money for their products. That is why some retailers are reevaluating the efficacy of self-checkout and experimenting with new monitoring tactics such as "smart video" cameras that can halt the self-checkout process if they notice a customer declining to scan any items. 

There already is a built-in market response to theft concerns around self-checkout—more government interference is simply not needed. If lawmakers still want to ban self-checkout machines anyway, they should at least be honest about why.

The post The Real Reason for Self-Checkout Bans appeared first on Reason.com.

This week's featured article is "In the AI Economy, There Will Be Zero Percent Unemployment" by Andrew Mayne.

This audio was generated using AI trained on the voice of Katherine Mangu-Ward.

Music credits: "Deep in Thought" by CTRL and "Sunsettling" by Man with Roses

The post <I>The Best of Reason</I>: In the AI Economy, There Will Be Zero Percent Unemployment appeared first on Reason.com.