(Bloomberg) -- Heading toward this fall's midterm elections with an eye on the White House in 2020, Democrats have been testing out their economic message. They would love to campaign on employment, with ideas like a jobs guarantee program, put forward recently with backing from some possible presidential candidates.
But it's a peculiar time to be focused on jobs, with unemployment at generational lows and consumer confidence at its highest level since 2000. It's also wishful thinking. Instead of campaigning in that climate, Democrats are likely to be running for the highest office just as Americans start to feel pinched by inflation. The economic cycle may turn against them.
The unemployment rate is 3.9 percent, and has fallen half a percent over the past year, indicating very little remaining labor slack barring a flood of re-entrants into the labor market, which has failed to materialize so far. The last time the unemployment rate was this low, the U.S. had excess investment in the technology sector and monetary policy much tighter than we have right now, with recession right around the corner. But that's not the situation now.
Instead, private-sector investment is relatively low for how tight the labor market is. Increasing numbers of industries are reporting labor shortages, and higher freight rates caused by a truck driver shortage are cutting into profits of many companies. Commodity prices are surging, with lumber at a record high and oil flirting with $70 a barrel for the first time in over three years. Companies are going to have no choice but to pass along those higher costs to consumers, with Tyson Foods being the latest to say as much this week. The prospects of somewhat higher inflation are the greatest that they've been in a while.
The last time the U.S. had sustained unemployment below 4 percent showed a similar pattern. Unemployment dipped below four percent in February 1966. It stayed there for four years. The problem was inflation. Core inflation was 1.5 percent in February 1966, but by the end of the year it was over 3 percent, and two years later over 4 percent. While a two-year economic view is always uncertain, the prospects of unforeseen inflation are greater than the prospects of an unforeseen economic downturn.
And this is a problem for the party that wants to run in 2020 on new spending programs. Even a cursory glance at items proposed by Democrats shows an expensive list. Employment programs, including perhaps a job guarantee plan. More money for health care. Child-care support for working parents. Infrastructure. More spending for higher education.
If higher inflation is a problem by 2020, voters will be looking to Democrats for solutions. We know what the Republican proposal will be: spending cuts, entitlement reform and higher interest rates. The left will need a rebuttal.
Democrats do have some policy ideas that can fight inflation. Rather than spending cuts, they can propose higher taxes on the wealthy, investors and corporations, which would help close the budget deficit that was widened by the Republicans' Tax Cut and Jobs Act.
If inflation is caused by a labor shortage, Democrats can propose immigration measures targeted to bring in workers in industries like construction where the shortage is particularly acute.
Undoing some of President Donald Trump's rhetoric and policies on trade might alleviate the price pressures facing the steel, aluminum and lumber industries.
And it might not be a job guarantee program, but incentives to increase labor-force participation would both get jobs for people and increase the labor supply, which should help with inflationary pressures in labor-starved industries.
Until that higher inflation materializes, Democrats will likely scoff at this message, and keep pushing an agenda with their favored economic programs. But they'll have to campaign in a different economic environment than they face today. They're likely to be running against inflation.
©2018 Bloomberg L.P.