There is a critical point that I fear the commentariat is just not getting. In my darker moments I fear that some of my fellow economists aren’t getting it either but we aren’t going to go there.
Look at these two graphs because they tell you the fundamental problem in America today:
We have very low capacity utilization (75%) and very high unemployment (10%).
That is, we have factories sitting idle for lack of workers – low capacity utilization. At the same time we have workers sitting idle for lack of factories – high unemployment.
There are machines waiting to be worked and people waiting to work them but they are not getting together. The labor market is failing to clear.
This is a fucking disaster.
Excuse my language, but you have to get that this is a big deal. This is not a big deal like the GOP doesn’t appreciate public goods. Or, Democrats don’t understand incentives. Or some other such second order debate that could reasonably concern us in different times.
This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.
Let me say that again because I think it fails to sink in – literally trillions of dollars in value are not being produced. Not misallocated. Not spent on programs you don’t approve of or distributed in tax cuts you don’t like. Trillions of dollars in value are not produced at all. Gone from the world entirely. Never to be had, by anyone, anywhere, at any time. Pure unadulterated loss.
Time and time again I see people speak about recessions as if they are a bad harvest – an unfortunate event wherein we have to figure out how to go with less. Some say we should all sacrifice – some say the sacrifice should be based on X or Y. Some say each family should take their lumps as they come.
However, they are all getting the basic idea wrong. This is not a bad harvest. The problem isn’t that there is less to go around. The problem is that we are creating less, building less, making less.
We have people who would be working but are instead watching Judge Judy. We have machines that could be spinning but are literally rusting for lack of use. This is a coordination disaster.
The question is how do we end this thing as quickly as possible. How do we stop wasting our basic resources (men and machines), day-after-day, month-after-month, year-after-year.
So when I hear this debate drift oft into how Republicans don’t appreciate the value of infrastructure – I suffer infinite eye roll. This is the time for this? You would watch the core economy grind down while you argue over the need to fix a pothole!
When I hear the GOP running some nonsense about how Obamacare is scaring small business I find myself beating back the desire for autodefenestration. Can we let this go already! There are real issues that need to be dealt with.
Now maybe some people want to explain to me how what appears to be a massive market failure is actually something else: a skill mismatch, a great recalculation, etc. I am willing to have that debate.
Of those that agree that this is the result of insufficient aggregate demand we can debate the fastest means of spurring such demand: aggressive monetary policy, payroll tax cuts, something else we haven’t thought of – I am all ears.
However, these are the limits of rational disagreement.
Side arguments that are basically proxy battles for your general theory of government are sadistic tribalistic grandstanding. You chatter and dawdle while Rome burns.
UPDATE: Savage Henry asks whether or not I am just pointing out that there is a recession and obviously recessions are a big deal.
My point is the extent to which a recession is a big deal.
Its often taken as a big deal in the simple sense that the experience of recession sucks. But, people say, there are lots of bad experiences and this is just one of them. Sometimes we have to suck it up.
My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss.
It would be as if the door to your apartment was ripped off and heat was spilling out into the atmosphere and people said “Well you know sometimes you have deal with the cold, lets talk about the ideal size of an apartment. Big ones are draftier you know. No small ones cool down too quickly”
What! No! Lets fix the fucking door. Do you understand: the door is missing. This is not the time to argue about ideal apartment size, this is the time to keep our heat from spilling out purposelessly.
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Tuesday ~ September 7th, 2010 at 10:31 am
Savage Henry
I guess I’m not following.
Are factories sitting idle because there aren’t people to employ, or because it wouldn’t be profitable to make stuff? The nonrecurring costs of factory start up have to be borne, and have to be seen as worthwhile given what the company anticipates selling. If they don’t anticipate selling anything, why should the factory be running, whether or not there are tons of people to work in it?
Isn’t the converse of this — high utilization and low unemployment — just…a good economy? If so, why isn’t this just a bad economy? That is, a recession, or a slow recovery from a bad recession. Change only one of these — high utilization and high unemployment, say — and you get a market that likely isn’t responding to incentives (“We’re making stuff like gangbusters, but don’t see why we should add capacity and hire more people.”, or with low capacity and low unemployment, “Everyone’s working, so what do we do with all these empty factories?”) In one case or the other, you’d expect there would be movement away from the situation based on the incentives of the employers or the employed. The dual movement you have above seems like more of a product of consumer behavior — if they’re not buying, you’re not making, or your not employed to make.
Seems like the real issue is more the second derivative of these trends. If capacity is decreasing while unemployment is increasing, that still sounds to me like a bad economy — all the prior physical capacity built takes time to remove in response to consumer demand, while payroll is relatively quick to eliminate. If you had improving utilization while unemployment rose, you might look to productivity arguments.
Ultimately, I don’t think I see what you’re getting at. The recession is a huge fucking deal, but it seems what you’ve pointed to is just evidence that we were/are in a recession/slow recovery.
Tuesday ~ September 7th, 2010 at 11:13 am
Karl Smith
My point is the extent to which a recession is a big deal.
Its often taken as a big deal in the simple sense that the experience sucks. But, people say, there are lots of bad experiences and this is just one of them. Sometimes we have to suck it up.
My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss.
It would be as if the door to your apartment was ripped off and heat was spilling out into the atmosphere and people said “well you know sometimes you have deal with the cold, lets talk about the ideal size of an apartment”
No! Lets fix the fucking door. This is not the time to argue about ideal apartment size this is a time to keep our heat from spilling out purposelessly.
Sunday ~ June 17th, 2012 at 11:18 am
Rayfield A. Waller
By now, being a university professor in the midst of an intellectual dark age, i shouldn’t be surprised by how thick Americans have become–we’re thick in the shell (in the university classroom) so why wouldn’t we all be thick after we hatch and go out into society unable to think?
But Jeez, Henry, are you that thick? Go back and read what the post actually SAYS–your response is a dodge by way of mindless ideology. Profitability is a reciprocating process, and it winds down just as it can wind up. NO, a single small businessman (that mythical figure from the 1950′s) does NOT find it profitable to open a single closed down factory and to hire a brand new workforce, and start making things again in the dead environment we live in now, AFTER the great wind down following the Reagan years. But YES, the entire American productive force WILL make a profit by reopening ALL of those shut down factories and hiring EVERYBODY in order to commence what has to be commenced: a Great Wind Up, to regain our productive capacity, restart the reciprocity quotient, and re-employ Americans. The reciprocity is the same quotient Henry Ford understood instinctively: he would LOSE PROFIT by paying his workers an exorbitant wage (five dollars a day), but in the cycle of value creation, that loss would reciprocate in the form of greater profit because his workers would have money to spend on Ford’s product! Profitability is not figured in the front load (you must be in your twenties Henry, because like my students, you think value is measured on-hand, or intrinsically, rather than seeing that value accrues–they want A’s from day one, to the end, and want to start working on final term papers at the beginning of the semester before they have even learned anything because they see their classes as obstacles to the end result rather than as the means to grow the result).
Over more, your willful determination TO NOT SEE what Mr. Smith is saying about objective reality (not ideology, but something like what happens when you don’t eat enough–a principle my elderly mother is wrestling with now; she’s losing weight and is in danger of getting deathly ill as a result and laments her inability to gain weight, but will only purchase rice and onions at the market–her favorite foods–and has no desire to ear protein and all the other nutrients she needs to reach the objective, to gain weight). Clearly, what is wrong with (young) Americans is a sort of mania; a foolish unwillingness to deal with certain basic realities, preferring to skip all that and get right to their own reward not for work and sacrifice but for joining the right club and thinking the right things and serving the right Baal.
Meanwhile restate the very fallacy Smith warns against (seeing economic catastrophe as cyclic or as being like the weather), while you have not dealt one bit with not what Smith thinks or believes, or me, or you, or Tom Joad, but with THE GRAPHS Smith put in your face and what they MEAN OBJECTIVELY.
Tuesday ~ September 7th, 2010 at 11:18 am
sargon tm
What would concern me is not the second derivative, but the first derivative. Capacity utilization is increasing fast, without effecting unemployment.
What I don’t know: is the numerator of utilization increasing or is the denominator decreasing? If the former we are putting the machines back to work without needing nearly as many workers to operate them. In other words we are producing more goods with fewer people. This looks a lot like management short-termism, things like running the machines without maintaining or renewing them, which leads to the denominator decreasing.
If the denominator is decreasing the problem is more serious. One might put the blame on the workforce: its historic advantage, education and skills, has simply gone. Why? Education cut-backs did not start in 2009, but rather three decades earlier. Hmm, three decades is a working life, the right time scale for pissing away social capital. Length of empoyment, the source of on-the-job training, has been decreasing for at least as long. There may indeed be more years of education today, but each one is worth a lot less when the student faculty ratio is twenty than it were worth when the student faculty ratio was seven.
I am competing, it seems, in the pessimism stakes. But I can find a cheerful perspective: unemplyment was not created ex nihilo in the US, but was imported, like a noxious weed, from other countries that are happy to be rid of it. And, like it or not — not in my case, it was a more or less conscious decision of a democratically empowered electorate that it should be so.
sargon tm
PS. Re optimism/pessimism.
Optimist — This is the best of all possible worlds.
Pessimist — You’re right.
Tuesday ~ September 7th, 2010 at 12:04 pm
A Fundamental Failure | Fierce Planet
[...] read: this post on the economy by Karl Smith a Modeled Behavior. …This is a failure of our basic institutions of production. [...]
Tuesday ~ September 7th, 2010 at 12:15 pm
Gusdog
The problem with this analysis and other capacity utilization analyses is that the entire concept is wrong. You can’t aggregate things like ‘capacity’. The specifics matter. Factories are idle because they were cutting lumber or manufacturing windows or assembling sinks. That capacity is ‘idle’ because we as a country don’t want any more homes – we have too many. Massive amounts of capital was wasted by the housing bubble, and much of it can’t simply be retooled. Another obvious example is the auto industry. Obviously the big 3 have ‘excess capacity’, but that is because we as a country have decided that we want better, cheaper cars from abroad. A machine that stamps auto panels can’t be reconfigured into a machine that designs telecom chips or whatever.
Tuesday ~ September 7th, 2010 at 12:16 pm
riverdaughter
The problem is that we have a plague of locusts. They are eating everything in site. There is no one in charge of bringing the locusts under control. They insisted that they needed to breed without restraint, that their hunger was big and should be satisfied and that they would not be tied down to one farm. They even managed to convince the farmers that unrelenting locust breeding is a freedom that must be defended at all costs. Now, they are out of control. The farmer is losing everything but by golly, he will defend the locusts freedom to gorge until he drops over from exhaustion.
Never attribute to malice what can easily be explained by stupidity.
Tuesday ~ September 7th, 2010 at 12:20 pm
riverdaughter
sargon, as a member of a highly educated industry that is being devastated by layoffs, I can tell you with 100% certainty that the problem is not one of skills mismatch. No, indeedy. We have permanently terminated the careers of thousands and thousands of highly qualified, trained and experienced scientists in this country in the last couple of years. Those jobs have gone to 1.) Chindia where the labor is cheap and does the hands on work and 2.) Europe where the labor is NOT cheap but where labor unions are a real threat to the governments there.
I’ll leave it as an exercise for the reader as to where America went wrong.
Wednesday ~ September 8th, 2010 at 3:38 pm
economicminor
Has every one lost their minds? This is about debt. To much debt. People need money to buy and that is what drives factory orders. When Wall Street Financiers are taking most of the profits, there was no growth in personal income yet there was tremendous growth in personal debt.. The government could have fixed this by sending every one a ton of money but their handlers would have been unhappy because that was their life blood. Now it is program trading with free money from that same government.
People were led to the debt trough by lies concerning building wealth thru never ending debt. The citizens reached their limit when their incomes could no longer service the debts that had been taken on. There was no where else to go after that. Cut back, default and save. This was a paradigm shift in attitude and it won’t change back soon.
We have heard it all and it is meaningless. When the transfer of our wealth is still going to the fat cats and the costs of food, energy and health care are continuing to rise theories of capacity utilization are nothing more than meaningless BS/divresion.
It will take more that rhetoric from a CEO, an economist or the President to change people’s mind set. It will take real action and that action isn’t throwing money around in a crony system of nepotism. Putting those who ignored their fiduciary duties to their clients in prison would be a good start.
No amount of BS will work to smooth this mess over. Not this time. I and many other Americans are angry about the fat cat bail outs at the expense of Main Street. AND so far the Tea Party has said nothing meaningful except that they are mad… That sounds like Obama in 2007. What’s new? Nothing.
I expect this to continue to get worse for most people until it erupts in either a major political movement, not controlled by a pair of fat cats and or torches and pitchforks in the streets.
Tuesday ~ September 7th, 2010 at 12:28 pm
kdj
“When I hear the GOP running some nonsense about how Obamacare is scaring small business I find myself beating back the desire for autodefenestration. Can we let this go already! There are real issues that need to be dealt with.”
I’m no economist, so bear with me, but I’d like your take on this:
Are you stating that the fact that businesses all over the country are in hiring freezes and sitting on investment funds due to liberal/progressive policies (expiration of Bush tax cuts, cap & trade, government run “consumer protection” scheme, huge spending sprees that will somehow have to be paid for, and yes, Obamacare, among other things) either doesn’t exist, or simply aren’t major factors?
I’m confused. While I completely agree with the factors that sargon tm posted above, those are not short term issues, and a liberal/progressive agenda causing uncertainty in investment, expansion and hiring certainly are. Where I live nearly every company in the area is still in a hiring freeze, though most would say they’ve weathered the storm, but aren’t willing to take chances yet.
Add in that many realistic consumers aren’t spending what they would normally spend for the exact same reasons of political uncertainty, and the problem compounds.
Like I said, I’m not an economist, but why simply say “stop being political when we have real serious major problems!”, when a major short term factor in those problems is, well… political.
Tuesday ~ September 7th, 2010 at 12:37 pm
Fred Fnord
Wow. Just wow.
Whenever I read one of these, I look back nostalgically on the Clinton years, when the biggest challenge was explaining to conservatives that correlation does not equal causation.
It’s essentially impossible to argue with someone who does not occupy the same world as you do.
-fred
Tuesday ~ September 7th, 2010 at 1:10 pm
kdj
Oh, now I see. So all you have to do is just ignore governmental uncertainty as a possible causation for recovery problems, and magically the problem doesn’t exist! Well, because you said so, that’s why! Makes total sense.
We’re talking about specific actions of businesses, not just “liberal agenda = bad economy”. If businesses believe that they are going to take a hit from legislation and wait to see how it goes before expanding or hiring, sorry, that’s causation, not correlation. It doesn’t matter if they’re actually right or not, if they’re sitting on money, they’re sitting on money.
I guess I’m just an idiot, along with Larry Kudlow and anyone else that includes thought processes of business owners into their positions.
Tuesday ~ September 7th, 2010 at 1:13 pm
Jeff Boatright
It’s almost as though he was paid to write it. Almost.
Wednesday ~ September 8th, 2010 at 3:51 pm
economicminor
It is so easy to blame this on uncertainty when it started with to much debt due to an extremely speculative nature of housing. The excessive debt has been reduced a little but not sufficiently. Housing has a year’s supply on the market and another year or so that is in the bank’s inventory, foreclosed but not for sale. Some estimate that a quarter of all home owners are underwater and with the huge inventories, the chances of prices going up in the next 4 or 5 years is slim to none IMO.
Why wouldn’t a small business owner be uncertain if not out right fearful of the future? The consumer has a serious illness and will be in recovery for a long time.
If this was a level playing field, which it isn’t in to many ways to count, our best hope would have been exports but we can’t compete. Because our costs in most areas is to high to sell to those who have expanding economies.
Our next best hope would have to lowered energy costs, which effect all other costs but we are to argumentative or stupid to analyze our real problems and actually work towards solving them.
Tuesday ~ September 7th, 2010 at 1:03 pm
Ian S
As a small business owner, my problem is not taxes, cap and trade, consumer protections, credit limits, etc. but orders for my products. Without an increase in orders, I’m not going to invest in either increased space or more employees. It’s really that simple. I doubt I’m the only one in this situation.
Tuesday ~ September 7th, 2010 at 1:15 pm
Jeff Boatright
“I guess I’m just an idiot, along with Larry Kudlow”
Oh you’re the ONE. You’re the one, last, single person who still thinks Kudlow is worth a listen.
Whew, his sponsor will be glad to know this. It’ll save them a lot on direct mail.
Tuesday ~ September 7th, 2010 at 4:10 pm
J Edgar
The original poster may be Larry Kudlow. That would explain something. How can anyone really worried about getting by dog-whistle about “Obamacare”?
Larry, or whoever, listen to a real-world business person, such as Ian S.
Wednesday ~ September 8th, 2010 at 6:10 pm
dw
the main reason business is being tentative is simple. lack of demand. nothing else matter. cause if nobody is willing to but what you are selling you won’t invest in any thing at all.
Tuesday ~ September 7th, 2010 at 12:30 pm
JW Mason
“This is not happening and as a result literally trillions of dollars in value are not being produced.”
Appreciate the rant, but lots of worse things are happening than that. I get that you’re an economist, but still, human beings are not just factors of production. When they are demoralized by unemployment, living in fear of homelessness, watching our families break up under the stress, etc., there are much more serious costs than the “value” we aren’t producing.
Wednesday ~ September 8th, 2010 at 3:52 pm
economicminor
right on!
Sunday ~ September 12th, 2010 at 11:59 am
A reader
He’s not an economist any more than I’m an NFL quarterback. (In other words, he’s an armchair economist blogger who thinks he can write well. The mystery is why anyone reads this blog.)
Tuesday ~ September 7th, 2010 at 12:31 pm
Fred Fnord
Isn’t the answer obvious? We have too many workers. All of these welfare programs for the unemployed (unemployment, food stamps, social security, Medicare, the national endowment for the arts, needle exchange programs, … uh, what was I talking about again) ensure that the excess workers don’t just die and leave the rest of us in peace.
It’s the fastest way to lower unemployment. Plus liberals should like it because it lowers that ‘income inequality’ thing they’re always complaining about: if you kill off the bottom tenth of the population, everyone else is more equal.
Right?
Tuesday ~ September 7th, 2010 at 3:45 pm
Nazgul35
Sounds like you are advocating eating the poor…
Are there no work houses? Are there no prisons?
Tuesday ~ September 7th, 2010 at 12:32 pm
bakho
Great Post. The BigG could easily serve as intermediator for needed public goods and services produced by now idle production. This is a problem of political will.
Tuesday ~ September 7th, 2010 at 12:32 pm
Balloon Juice » Blog Archive » Everyone just needs to tighten their belts
[...] Via Atrios, an excellent post about the recession: [...]
Tuesday ~ September 7th, 2010 at 12:36 pm
Ian S
It seems to me the most sobering trend shown is the decades long trend towards lower capacity utilization. Is it at all related to the loss of manufacturing jobs? If that trend continues, surely it cannot end well.
Tuesday ~ September 7th, 2010 at 12:47 pm
Dominic Pazzula
the aggregate demand argument is right on.
Skills mismatch / misallocation of labor, no. If you were building houses 3 years ago, chances are you have the ability to build widgets in short order.
The problem, imo, is that our macro economic models rarely take into account the balance sheet of the consumer. Few will argue that we just saw a credit bubble and are suffering a credit deflation. Normal methods to simulate AD are not working. Why? Consumers are more interested in deleveraging their lives than buying more things. Until we figure out a way to fast track consumers out of massive debt, AD stimulation will continue to operate sub-optimally.
Tuesday ~ September 7th, 2010 at 12:52 pm
The door is missing! « Nadir Times
[...] The door is missing! Posted: September 7, 2010 by chadwig in Uncategorized 0 A good rant. [...]
Tuesday ~ September 7th, 2010 at 1:11 pm
Adam Turetzky
Maybe I’m not schooled enough in (at all) in economics but to me most of these idle workers you describe have been replaced by humans across the sea who will do the same job for 1/10th of what an American will do it for.
Should it be a surprise that our factories are idle when China has a similarly skilled workforce who will work for $2.00 an hour and require no benefits because the state takes care of it?
WTO and G8 summits have been pushing this “Globalization” for 20 years. Now we’re just reaping the fruits of that labor. Millions of Americans sit at home on the couch collecting unemployment which pays six times what a chinese factory worker makes while Foxconn in China can’t keep up with demand and employs every living thing with two hands on their continent and Ford and GM assemble cars in Mexico.
What we’re witnessing is the tipping point of American consumers who were pushed to the limits of their spending ability while being laid off and told to stretch farther by loaning themselves money from their mortgages every 3 years until work comes. As soon as that technique saturated and the banks stopped refinancing people weren’t able to grab another $50,000 out of their home to buy things and the economy stopped.
Now everyone is stuck staring at each other looking for an answer as to how an American can afford a $1,000 a month rent while still buying food yet work for 1/4 of the current minimum wage to be competitive with Asia’s factories.
To use your updated analogy, if I’m understanding this correctly, we need to shut the door and only open it for those who which to buy our heat.
Tuesday ~ September 7th, 2010 at 4:38 pm
Lucsav03
I find it truly fascinating that ardent conservative minded, right winged, vehement republican/tea party members look to inspriation from a Communist Chinese economic model.
Tuesday ~ September 7th, 2010 at 1:14 pm
Dan Conley
I’m in agreement with Dominic … if consumers have decided that they don’t want to run up any more credit card debt and they don’t have their houses for ATM machines anymore, wouldn’t we expect a drop in aggregate demand? Why should we expect 2007 level consumption patterns to hold? Marx was right — capitalism always errs toward overproduction. The American consumer economic may be tapped out … short of a consumer explosion in China, it’s going to be very hard to get back to full capacity utilization. We can fill the output gap with Keynesian stimulus, but we might be doing it for a very long time, not just some two year project that returns things to normal. America’s getting old, our views of credit are changing, our real wages have been declining for a couple generations. Something had to give. And in the long run (because Keynes hated the long run) Marx is more on point than Keynes.
Tuesday ~ September 7th, 2010 at 1:18 pm
jazzbumpa
This is the end game of the war on the middle class that started under Reagan. Exporting employment and importing unemployment are not happenstance. They are the direct result of policies deliberately enacted to get us to this point.
Karl – the mythical “free trade” you hold so dear is at the very center of it
Karl and the commenters raise interesting questions, but nobody has a workable solution. This is the Bush legacy. Things are so fucked up, in both foreign and domestic policy, that almost all of the good options have been foreclosed. Certainly, there is no political will to face any of them in a rational way.
Here is the bottom line: inflation benefits borrowers, deflation benefits lenders and impoverishes borrowers. The trend for decades has been for capital to go toward rent-seeking rather than investment. The world of finance has been an adventure in bubble-chasing for over a decade. None of this is productive.
Money, power, and influence are all fungible. Almost all the money is now controlled by a very small elite minority, who have made massive investments in swaying public opinion. Comsider, frex. the Koch brothers, Fox Noise, Rush. We are within easy reach of fascism at this point, wrapped in the flag, carrying the cross, and lying about alleged freedom. The wealthy and big business are just fine with that.
And, no, I don’t have any solutions, either. FDR and Keynes showed us the way the last time we went through this, but the right-wing propaganda machine has denied the New Deal and turned Keynes’ reputation into that of an idiot.
I am optimistic by nature, but have never felt this pessimistic about the short to medium term future. And, honest to god, every day it gets worse.
We are so fucked!
JzB
Tuesday ~ September 7th, 2010 at 1:21 pm
Dan Conley
There’s always a solution — just not necessarily a capitalist one.
Tuesday ~ September 7th, 2010 at 3:02 pm
jamesington
This. What we are witnessing is mostly by design. I don’t think the elites are at all concerned about the recession or capacity, or at least in the same way Karl Smith is. I’m sure the continued consolidation of wealth and dismantling the last supports for the middle and working class is high on the agenda.
Tuesday ~ September 7th, 2010 at 2:00 pm
David Merkel
Try this, then. The reason for idle capacity of production and workers is that the markets and workers are aimed at markets that are saturated at current prices. Time to aim at new markets that are not saturated, and new products that solve needs we haven’t considered yet.
Instead, our policies fight the last war, attempting to reflate industries for which there is oversupply — yesterday’s industries. I am not saying that you are defending this, but many do in name of the failed Keynesian ideology that got us into this mess by always trying to stimulate prosperity, and eliminate useful recessions that clear away oversupply.
The economy will come back. We just have to reduce debt levels to restore normalcy to the decisionmaking processes of economic actors.
My prescription: http://alephblog.com/2009/01/15/what-i-would-do/
Tuesday ~ September 7th, 2010 at 11:15 pm
jazzbumpa
David -
What the hell? Really! To say that a Keynesian ideology got us into this mess is to deny the last 30 years of history. You either have not been paying attention, know nothing about Keynes, or more likely, both. What we have had is grotesque fiscal irresponsibility by Reagan, then the two Bushes.
You don’t have to like Keynes, but please, at least, get him straight.
Cheers!
JzB
Tuesday ~ September 7th, 2010 at 2:00 pm
Do Politicians Give a F**ck About the People Doomed to Chronic Unemployment? « SpeakEasy
[...] This post first appeared on Balloon Juice.Via Atrios, an excellent post about the recession:[Recession is] often taken as a big deal in the simple sense that the experience of recession [...]
Tuesday ~ September 7th, 2010 at 2:09 pm
Balloon Juice » Blog Archive » Payroll tax holiday vs direct government spending
[...] has had me reading through the last few posts by Karl Smith over at Modeled Behavior. From the one DougJ linked to, this particularly compelling [...]
Tuesday ~ September 7th, 2010 at 2:13 pm
Max Kaehn
Okay, if the problem is as obvious as the door being missing, what solution is so obvious as replacing the door? Personally, I would favor investing in infrastructure: there is a lot of it that has been neglected, fixing it should serve as a useful stimulus, it’s a public good, and once we’ve caught up on our backlog, we free up that capacity (hopefully to an economy that can put it to good use), so it’s a temporary measure. I don’t see fixing and upgrading our roads and bridges and sewer systems and reservoirs and electrical grid as some sort of eccentric liberal ideological quest.
Tuesday ~ September 7th, 2010 at 2:15 pm
hstad
Karl, I find your analysis interesting. However, lower capacity and lower utilization are the end result of collapsing demand. From 2000 – 2010 the U.S. has experienced two major economic (credit) bubbles. The first, was driven by the stock market and had a minor impact on the economy. The second was driven by real estate. This had a major impact on the economy. When the typical homeowner’s major wealth collapses, a major spending collapse follows. We’ve had several misconceived programs to help, which just delays the inevitable. A real estate bubble of this magnitude needs to clear out the underbrush, not by using a sickle, but by burning out the underbrush. Government intervention has made this a f*cking disaster. We have now duplicated the Japanese model of spending (of the ’90s) on worthless programs, which have nothing to do with generating demand or improving the middle class economic situation. Just like the Japanese, we will have a lost decade of declining real estate values, which translates to the middle class becoming very conservative toward spending their hard earned dollars. In addition, the credit availability has contracted tremendously, and with 100s of banks failing, and consolidating, the supply of credit has evaporated. In the future, we do need to hold the political class to task, especially when it comes to education and fair trade. The U.S. can no longer tolerate nor afford a large part of its population to go without training. Moreover, the U.S. also needs to become more aggressive in its trade relationship with the rest of the world. Without resolving these two issues, your observation and charts are just an interesting exercise in futility.
Tuesday ~ September 7th, 2010 at 2:25 pm
David Witt
I suppose what it comes down to is this: We are in a transitional period and those who are unwilling or unable to change will make the situation worse, not only for themselves, but for everyone. Those that are unable to change are more likely to be poor, and if so I tend to have sympathy for them. Businesses that are keeping their prices high to maintain the bottom line are playing a self-defeating strategy. They assume that all they have to do is hold out until the economy improves, but that isn’t going to happen any time soon. In the meantime, many businesses will fail because they can’t attract enough customers or induce them to pay their high prices.
Hold tight to the center, change is coming to the unwilling whether they like it or not. Rely on yourself and those that care for you, help others if you can, and don’t lose hope.
Tuesday ~ September 7th, 2010 at 2:37 pm
Mysticdog
“There is no money for socialism. We spent it all trying to rescue capitalism.”
Yes, there is lots of capacity… but they are old machines and factories which have been replaced by machines that require fewer people to run them. they have been replaced by the same machines in countries where people earn 1/10th of an american salary and live in dorms in factory cities.
You are focusing on a symptom, not the cause. The cause is that we designed the economic system to enhance wealth concentration, instead of wealth distribution. Wealth naturally accumulates; eventually the piles get so large that no one can spend it all in useful ways and it just creates investment bubbles. Wealth has to contantly be pumped back down to the bottom to keep the economic gears lubricated. Rich people shouldn’t worry so much, that money will always make it back up to the top eventually… thats what money does.
Instead we bailed out the banksters at the top
Tuesday ~ September 7th, 2010 at 2:38 pm
MikeBoyScout
Thank-you.
The science isn’t nearly as dismalas the head up the wazu policy debates are.
Tuesday ~ September 7th, 2010 at 3:00 pm
outofworkrunningoutofhope
This is a lovely rant. People, not companies need help at the moment.
IMHO the best thing to do immediately is to declare a payroll tax holiday for the rest of the year.
Let the people guide the policymakers by watching where the money gets spent. I suspect a big portion will go to pay off debt, which the banksters/bondholders/policymakers surely shouldn’t object to. The remainder will be spent. Bottom up stimulus will be felt immediately. No risk of ineffective stimulus programs when the stimulus money is spent on items the market demands today.
Next year grant a tax credit of equal size to the personal tax holiday amount funded by higher taxes on the top 1%. Continue to monitor the spending and tailor longer term govt funded investment programs. To the extent that a significant portion of the savings goes to freeing citizens from their debt traps, so much the better for the country.
The top 1% looted the bottom 99. Taking a small haircut in the form of a tax equal to the tax holiday for the bottom 99, shouldn’t be a tough pill for the looters to take, They’ll still be left with the lions share of their gain, the 99 might have a chance to get back on their feet, and everyone might feel a little less pain in the long run.
Targeted stimulus plans are a looters paradise. Broad based, individual consumer driven stimulus will be much less wasteful. And if it proves to be a ‘waste’ then at least the ‘waste’ of the 99%s tax dollars was wasted on the ones who provide it in the first place.
Tuesday ~ September 7th, 2010 at 5:04 pm
ginaswo
agree on the payroll tax holiday. but it is off Obama’s list of proposals. Likely b/c Scott Brown brought one to the floor and the Dems voted it down a few months ago. another issue is since GDP is 70% consumer spending and consumers are underwater on their largest asset, their home, they cannot or will not spend. They cannot move for work. We should have done HOLC as Hillary, and even McCain later, suggested in 08, but Obama is the Credit Suisse candidate and Summers and Tim are unwilling to let TBTF fail. We are right where we started only down a few trillion,. No demand, collapsing home prices and raging unemployment. Why not do the MorganStanley 1 pg instant refi to market rates for all? that would free up consumer $$ and create demand, creating a need for hiring. but hey I’m just a housewife whatdoIknow.
Tuesday ~ September 7th, 2010 at 6:43 pm
outofworkrunningoutofhope
I think you’re right they will not spend much of it on goods.
But the tax holiday idea shouldn’t be such a hard sell. It would sure buy a lot of votes. Last time I looked the 1% group is outnumbered in the voting booth. Besides, the cynic in me recognizes that its a win/win for lenders, since it would result in a(nother) stealth bailout of them as well. Bond vigilantes would holler, but their bluster is bullshit if the alternative is deflation and economic collapse.
If the holiday money were used to pay down debt, then effectively a token bailout would be provided to taxpayers, might even stabilize asset prices for a bit. I say token since it’d merely be a clawback of some bailout money provided to the banks by taxpayers (and a good chunk would end up in their pockets anyway).
As long as this gets funded in the future by the top 1-2%, the indirect beneficiaries of the bank bailout, or by taxing the banks/bondholders directly the govt would be on the right side of the redistribution bus for once. At a minimum they would appear to be on the right side during election season.
I object that my taxes were transferred through the banks to the folks who crashed the system. I’d like the govt to return that bit of my tax money that was used for that project. I didn’t cause this mess, I didn’t budget for this tax surcharge, I don’t want to pay for it. I might be able to accept the need to loan the govt some short term cash to stabilize the system. But I want my loan repaid.
Its a simple argument, hard to believe there are no clever politicians who can buy some votes , and do the right thing as an unintended consequence.
The reality is , even if I were willing to be taxed tomorrow for the banksters bailout today, I (and 10-20% of the population unemployed)won’t have the money tomorrow. But the top 1-2 do, and will continue to.
Its not that difficult to understand (unless your a self loathing Republican, in which case, the next round of layoffs needs to be heavily aimed at hanging by their fingernails Republicans)
Re the 1 pg MS plan, it benefits MS, not your family. Its a top down solution. Better to distribute the money widely for a bottom up solution. Housewives are no dummies, pols fear you. That’s a good thing.
Tuesday ~ September 7th, 2010 at 11:29 pm
jazzbumpa
Effectively increasing everyone’s take home pay by 7.65% from now to the end of the year is not going to do a lot. This idea sounds nice, but how much difference is it going to make to anyone. And it does NOTHING for the unemployed, who are in the greatest need of help.
JzB
Tuesday ~ September 7th, 2010 at 3:05 pm
Joseph Palmer
Mr. Smith, to pull but a small quote, you say; “The problem is that we are creating less, building less, making less”.
I suggest that the major reason for this is that we are dealing with less net energy. The cheap, easy to get to fossil fuels have passed their production peaks, and more of the energy resource once available to the economy as a whole must be dedicated to collecting the energy itself.
I understand your rant, and can agree with many of its points, but I can’t see how to get the old model of an ever growing economic pot back on the boil when the entire civilian infrastructure depends on cheap, abundant fossil fuel energy, a condition that is literally changing under our feet.
Of course the answer is obvious to anyone who wants to look just 100 years into the future. The economy will be based on renewable energy. The only question in my mind is how we will get there.
J.
Tuesday ~ September 7th, 2010 at 3:06 pm
Ryan
Oof, this stuff hurts my head. What Mr. Smith has pointed out is the predictable result of malinvestment on an economy-wide scale. Factories are sitting idle because they were designed to produce stuff that is only useful during a massive credit bubble (like cheap toys from Asia or the organic produce industry or the door-to-door financial services industry, or etc.).
The reason nobody wants to talk about it is because nobody wants to admit that this recession could have been avoided completely if the Fed had just not effectively printed so much money for the past 15+ years. It is the big white elephant in the room that no one wants to touch because we’ve all invested so much time and grant money into this New Keynesian garbage.
in hindsight, it’s hard to believe we all took this seriously. But there you go. Industries that we don’t need were created and are now being structurally purged. Welcome to what Mises called “the crack-up boom.”
Tuesday ~ September 7th, 2010 at 3:31 pm
MKS
“We have people who would be working but are instead watching Judge Judy.”
And we have adopted policies that led to watching Judge Judy, such as:
(1) funding over 40 years of failed social experiments in education, so that our young graduates cannot compete with international graduates in math and science, (2) passing regulations and tax laws that make it easier to start and maintain a business in other nations rather than in the U.S., and (3) continuing unemployment benefits which make it more profitable to watch Judge Judy than to ring up customers at the local restaurant or grocery store.
And we continue these policies.
Tuesday ~ September 7th, 2010 at 3:34 pm
stryx
Nothing keeps down wages like an abundant labor supply.
Foxconn will be our future.
Tuesday ~ September 7th, 2010 at 3:39 pm
Jim W
Seems to me the basic problem is demand. There’s no point in increasing production – it’s like pushing on a rope. It’s easy to increase demand – give the average worker a raise. He hasn’t had one in decades.
The bubbles that masked the redistribution of income toward a small percentage of the population are past. The sooner we engage in some honest Class Warfare the better.
Jim
Tuesday ~ September 7th, 2010 at 9:09 pm
purple
The U.S. is to disoriented or obsessed with ethnic issues to be interested in class. We have this mindset enforced into us from the very first state bubble test we take in school. It asks ethnicity, not income.
Because of this, I see no push back from the working class, an even further drift Right, and deeper political and economic malaise. The U.S. is in big trouble.
Tuesday ~ September 7th, 2010 at 3:41 pm
Where There’s Smoke… « Modeled Behavior
[...] Holland, Monetary, Money, policy, Recessions, Systems | by Niklas Blanchard In an update to his popular post, which is causing some interesting commentary on Twitter, my co-blogger Karl Smith has this to say: [...]
Tuesday ~ September 7th, 2010 at 3:48 pm
jane
but isn’t a pure gain of externals. We are not destroying increasingly burdened planetary resources. Why do we need more stuff, if we can live without it. It’s going to require a different way to live in the world, and that’s not necessarily a bad thing – instead of promoting “productivity” and “growth” as the only way to “prosper” why not start now.
Tuesday ~ September 7th, 2010 at 3:53 pm
Scott
You are oversimplifying the situation. Nominal GDP is back to pre-recession levels. But how can the same output be produced with several million fewer workers? Of course you know the answer is enhanced productivity, which has gone through the roof. You could have seen it in the numbers as businesses ramped investment in tech during 2009 and earlier this year. And that’s nothing new either. Firms always prefer substituting technology for labor whenever they can. Technology can work 24/7/365; it doesn’t demand overtime; it never calls in sick; it doesn’t demand paid vactions; there’s no learning curve where production is sub-optimal; employers don’t have to pay payroll taxes or medical insurance for tech, etc.
And yes, the new healthcare law asolutely has reduced the incentives to hire new workers. Add in the effects of globalization and what has been referred to as the “global wage arbitrage”, and it’s like a perfect storm. Our economy is flexible and will adjust, but it will take more time.
BTW, all this talk about Reagan exporting the middle class is non-reality based fictional gibberish. The U.S. is the largest manufacturing economy in the world by far. REAL manufacturing output nearly doubled in the 20 years between 1987 and 2007, going from $866 billion in 1987 to $1.6 trillion in 2007. And that doubling in output was accomplished with several million fewer manufacturing workers. Firms did shift investment away from producing products that required low skills (example: textiles) where they can’t compete globally, to a more highly skilled type of manufacturing (example: specialty semiconductors). Yet many of those low skilled manufacturing jobs that were displaced by globalization were absorbed into the workforce as evidenced by the unemployment rate at or near 5% during much of the Bush administration, among the lowwest on record.
Tuesday ~ September 7th, 2010 at 5:05 pm
Lucsav03
It is painfully obvious that the reagan tax cuts destroyed this nation and turned the U.S. into a third world country. Conservative economic policy has cost this nation greatly. reaganomics was a simple way to market gangster capitalism to the common man. How much more is this nation willing to sacrifice so that those of us who have so much do not have to pay their taxes??? When you slash capital gains taxes for the wealthy by 40%+ (for clarification purposes that is the first thing reagan did when he got into office and also the first thing w did, cut taxes for the wealthiest)all public funding will eventually come to an end. It was only a matter of time before government spending would dry up and that is the sole reason we are where we are at. It was by design that the economy was sabotaged by conservatives right before a democrat took the office of president. Why should someone who makes 25,000$ a year pay more takes than someone who makes 1,000,000$ a year???? When money lies fallow in personal and corporate accounts it is not flowing through the economy and it has gotten soooo bad that toooo much money is sitting in these type of accounts held by wealthy corporations and individuals. Conservatives love to disss the government and anything to do with the government. However, every one of them collect social security and participated in the cash for clunkers program. Irony is certainly the order of the day. Think about the absurdity of the coservative argument: The more money you make annually, the less you should pay in taxes.
Thursday ~ September 9th, 2010 at 2:31 pm
Rick
You’ve got only part of it right because you’re not comparing apples to apples when you look at our manufacturing growth. We have, over time, reclassified industries as manufacturing that arguably don’t belong there. Most of the restaurant industry has moved from service to manufacturing. Same thing happened with newspapers, a move that seems stupider all the time as the news and information business has evolved into digital distribution.
This isn’t to say manufacturing hasn’t grown. Only that its organic growth has been more limited than you suggest.
Tuesday ~ September 7th, 2010 at 3:57 pm
Olivier Blanchard
You had me at hello, on this one.
Tuesday ~ September 7th, 2010 at 4:10 pm
Zenobia
Actually, it’s Dr. Smith…or professor Smith if you prefer
Tuesday ~ September 7th, 2010 at 4:14 pm
Suburban Guerrilla » Blog Archive » Yep
[...] Atrios said: This is a righteous rant pointing out that what we have is a complete fucking fail. It’s a failure of our political [...]
Tuesday ~ September 7th, 2010 at 4:29 pm
BuzzKillz
The reason those machines are sitting idle is because those jobs were shipped overseas.The company owning those idle machines writes off their depreciated value while employing overseas workers with lower wages. It’s all about increasing their corporate bottomline. The only way this will ever change is if we stop allowing those corporations to ship US jobs and technology overseas and start manufacturing goods here in the USA.
Tuesday ~ September 7th, 2010 at 4:36 pm
Happyrabo
@Scott –
“REAL manufacturing output nearly doubled in the 20 years between 1987 and 2007, going from $866 billion in 1987 to $1.6 trillion in 2007.”
Are you adjusting for inflation? Because 866 billion 1987 dollars is exactly equal to 1.6 trillion 2007 dollars.
Tuesday ~ September 7th, 2010 at 4:45 pm
Rob
It seems to me that lowered aggregate demand is a necessary result of pooling the majority of wealth with a small minority of consumers. One person with a billion dollars consumes less than 10k people with 100k dollars.
Tuesday ~ September 7th, 2010 at 4:50 pm
Rebecca Burlingame
Just to let you know I have spent the better part of my long bone weary life thinking about this. And I do have reasons in my mind now why it has happened and at least three or four books of solutions if I can get published while I am still alive. Hopefully the first volume about direct economies will be finished soon. First, specifics as to what money can and cannot do. There are five economic activity disciplines, and money primarily works well through only one of them. Humans have always done the rest and only in the 20th century did governments try to make money do absolutely everything, which is impossible because profit is created by highly specific uses of resources. Then, some very specific ideas how to support capitalism, human capacity and all those underutilized resources that money continuously points us toward, but expects humans to follow through, what it shows us. We can get there through more precise uses of active, managed ownership of property and resources, and a better understanding as to which resources are finite, and infinite. Too much passive capital, property and resources are now caught in a terrible gridlock, which has to be broken. This can’t happen by economics alone, for economics also needs help from the legal profession. I don’t like books that promise solutions and then only tease with them, so I have spent years figuring out as many potential solutions as possible.
Tuesday ~ September 7th, 2010 at 5:00 pm
ginaswo
wonderful post. close the giant, gaping fxcking hole in the house THEN argue.
Tuesday ~ September 7th, 2010 at 5:00 pm
Scott
Happyrabo:
Yes, I had intended to include in my post that the REAL data are chained using the year 2000 as the base. That why I tried to emphasize the world REAL by using all upper case letters.
Tuesday ~ September 7th, 2010 at 7:18 pm
BenX
What do you propose we do about it, eh? Not such an easy answer. It’s not as though we can go to Home Depot and buy a replacement economy.
Tuesday ~ September 7th, 2010 at 7:26 pm
Anthony
The problem is a *giant* coordination problem. “Consumers” have more debt than they can reasonably pay off based on the recession-adjusted values of the underlying assets. (Consumers include lots of businesses for this discussion.)
The solution is to figure out some way to write down the values of various loans, liquidate the truly insolvent, and get back on with ordinary economic life. However, there are a couple of factors which prevent that: 1) It’s really, really complicated. The securitization of real-estate debt has made it rather harder than normal to write down loans, because there are far too many interested parties. 2) This write-down will hurt various politically-favored groups: Wall Street, pension funds, people working in uncompetitive businesses. 3) Writing down debts of the insolvent (or borderline insolvent) is “unfair” to those who are still solvent and who are still capable of making their payments. This creates a huge moral hazard down the road, as it encourages people to behave in socially-damaging ways down the road. And nobody is going to propose writing down, for example, *all* mortgages to reflect current assessments, because that would cause more even pain to the politically-favored.
Tuesday ~ September 7th, 2010 at 7:42 pm
selchietracker
We are in a depression, not a recession.
Ray Dalio coyly calls it a D-process.
Correct your assumptions, then rethink.
Tuesday ~ September 7th, 2010 at 8:10 pm
Top Posts — WordPress.com
[...] Rome is Burning There is a critical point that I fear the commentariat is just not getting. In my darker moments I fear that some of [...] [...]
Tuesday ~ September 7th, 2010 at 10:18 pm
Dave
looking at the huge gains in productivity, the lack of wage growth for the middle class, what would be the effect of something along the lines of mandating a 32 hour work week?
Tuesday ~ September 7th, 2010 at 11:01 pm
Melinda Romanoff
Dave-
How’s about 35 hours, just like the French used to have?
Deflation, displayed through this Credit Contraction, only comes around every so often on the wheel of time. You better have the stability, and growth, of income to power you through the next 15 to 20 years.
As fewer people work, their productivity, of course, will stay high, if not soar.
This isn’t rocket science, and you better own, or have access to, a set of Foxfire books.
Tuesday ~ September 7th, 2010 at 11:32 pm
Oh! Now, the panic sets in? « Re: The People
[...] Now, the panic sets in? Apparently, there is now at least one economist out there who has figured out he is clueless – more to follow in due [...]
Wednesday ~ September 8th, 2010 at 12:27 am
Dave
also, what about lowering the age for Social Security eligibility? like to 62.
Wednesday ~ September 8th, 2010 at 12:37 am
Brian
Hayek says you are wrong. You are obviously modeling your *ideal* economy after Keynes which is what has led us to the disaster we are currently in.
Take a deep breath, step back, and realize that we are insolvent. Subscribe to Kayek and deal with the pain that we have wrought on to ourselves.
Wednesday ~ September 8th, 2010 at 12:56 am
All income brackets fare better under Democratic Presidents than Republican
[...] think aggregate demand and consumer confidence are probably more to blame. Anyone care to comment? http://modeledbehavior.com/2010/09/07/rome-is-burning/ Rome is Burning Tuesday ~ September 7th, 2010 in Economics | by Karl Smith There is a critical [...]
Wednesday ~ September 8th, 2010 at 1:26 am
Links 9/8/10 « naked capitalism
[...] Rome is Burning Karl Smith (hat tip reader Michael C). A great rant and a must read. [...]
Wednesday ~ September 8th, 2010 at 6:37 am
Richard
Silly, emotive language. If you’re going to say “fucking”, just say it once, will ya? Otherwise it just becomes affected and loses its potency. Sorry but the content is old. We all know this. Try to offer something a little original, huh? (Like “Anthony” just above)
Wednesday ~ September 8th, 2010 at 8:23 am
Savage Henry
Perhaps a more forceful way to make the point would be to say whether or not the high unused capacity and high unemployment was not part of previous recessions/depressions. If so, then I can see why this would be such a different experience.
But it still seems almost axiomatic to the definition of recession to say “factories are not full of people making stuff, and there are lots people who’d like to get paid to make stuff”, which is all that you have done here.
I’m completely sympathetic to the argument that people worrying about potholes are essentially rearranging deck chairs on the titanic. That is, if we know we’re on the Titanic and not, say, just run aground temporarily (hah! I love metaphors).
Or, to transplant the argument, isn’t this exactly what is going on in the housing market (or went on, depending on your take)? That is, a lot of houses got built (capacity) that now no one can afford (unemployment)? Empty houses and people who aren’t living in houses that want to live in houses sounds, to me, like a bad housing market, not market failure. The reason I cherry-pick this example is that we have seen the effect of government action to “fix” the problem of not enough people owning homes. Guarantees to Fannie/Freddie, unchecked gambling on derivatives, etc. were all conscious government choices to get home ownership up. If the interest here is using government to “fix” the situation where there are unused factories and unemployed people, why then aren’t we back to just watching the government prop up unsustainable conditions?
For those talking about shipping jobs overseas, 35 hour work weeks, etc: i suggest looking up the “lump of labor” fallacy. The US now produces a tiny fraction of the food we once did, but the loss of farming jobs didn’t doom us to economic hell. Neither will it if we only manufacture a fraction of what we once did. Times, they are ‘a changin’.
Wednesday ~ September 8th, 2010 at 11:47 am
Corey Mutter
I’m well aware of the lump of labor fallacy. It’s only a fallacy if there is some other occupation to take up the slack from the one(s) shedding jobs. Exactly what would that be?
Maybe as a programmer I have a skewed perspective on how easy things are to offshore. But I see very little that can’t be offshored, in principle. Non-surgical medicine, primary care for example, could be done by telepresence from Hyderabad with minimum-wage technicians handling the parts requiring touching people.
A “next big thing” can’t save us either. If it’s R&D related, well, Indians can learn it as fast as we can, for 1/4 the price. If it’s manufacturing related, it’ll happen in China.
I’d love to be debunked, to think there’s some other future for me (and everyone else) other than desperate Third World-style poverty. Have at it…
Wednesday ~ September 8th, 2010 at 8:40 am
Daily Digest for September 8 » New Deal 2.0
[...] is Burning (Modeled Behavior) Karl Smith has some choice words for those politicians, pundits, and economists who fail to grasp [...]
Wednesday ~ September 8th, 2010 at 8:50 am
Dr. Frankie
This post at The 14th Banker blog:
http://thefourteenthbanker.wordpress.com/2010/09/08/witless-patsies/
may shed some light on why it is seemingly so difficult to get to repair the door.
Wednesday ~ September 8th, 2010 at 10:24 am
Charles Frith
I don’t get it. Capacity and demand aren’t similar? That’s no surprise.
The filleting of the US began a long time ago. Roger & Me is worth a revisit. Looks prescient now.
Wednesday ~ September 8th, 2010 at 10:45 am
mrblifil
Seems to me that the lesson from the breakdown of the investment companies/casinos from 2008 is that an entrenched battle has begun between the most influential and powerful entities. The battle is not over who has the most money. The battle seems to be over who is going to determine what money is. I think this battle was inevitable as the effects of computer technology on markets played out. A person can now live from cradle to grave without ever actually handling cash, theoretically. That means whoever controls the 0s and 1s is now the person that controls the means of production. Has anyone prepared for this new paradigm?
Wednesday ~ September 8th, 2010 at 11:05 am
What a recession really is | Economics of post-reform China
[...] Smith of Modeled Behavior makes crystal clear what a recession really is. There are machines waiting to be worked and people waiting to work them but they are not getting [...]
Wednesday ~ September 8th, 2010 at 11:22 am
mclaren
Karl Smith’s point isn’t just that the numbers are bad, it’s that the American economy is not supposed to work like this. It’s structurally broken.
Why?
Let me give three links that explain as clearly as possible why capacity utilization in America keeps going down:
“Logan’s Run,” Robert X. Cringely, 23 September 2009:
IBM’s proposed Platform for Capturing Knowledge describes how to use an immersive gaming environment to transfer expert knowledge held by employees “aged 50 and older” to 18-25 year-old trainees who find manuals “difficult to read and understand.”
IBM also discusses how its invention could be made available for customers’ use in return for “payment from the customer(s) under a subscription and/or fee agreement.”
What we’re talking about, then, is a possible revolution in workplace training, one where a lifetime of experience would ideally be sucked from the mind of an experienced worker to be injected into a trainee and then the older worker discarded.
“Europe:: The Big Squeeze,” Newsweek International edition, Richard Ernsberger Jr., 30 May 2010:
15 years after U.S. and European multinationals started shipping large numbers of manufacturing jobs overseas, experts are saying that the “second wave” of offshoring is at hand—and it promises to be bigger and more disruptive to the U.S. and European job markets than the first. In the years ahead, sizable numbers of skilled, reasonably well-educated middle-income workers in service-sector jobs long considered safe from foreign trade—accounting, law, financial and risk management, health care and information technology, to name a few—could be facing layoffs or serious wage pressure as developing nations perform increasingly sophisticated offshore work. The shift portends a dramatic realignment of wealth over the next couple of generations…
“The Coming Structural Unemployment Crisis,” Martin Ford, the Huffington Post:
The fact is that there will very soon be machines and software algorithms that can very effectively anticipate needs and perform increasingly complex (and high-paying) jobs that require higher and higher skill levels. The unwillingness to acknowledge this reality and confront its implications extends not just to impacted workers, but also to economists and policy makers–virtually all of whom are either in denial or oblivious to this issue.
Many mainstream economists are projecting that unemployment will remain high for years to come–but there is a near universal expectation that eventually, the problem will correct itself and we will gravitate back to something close to full employment. The problem with this assumption is that technology is not going to stop advancing while we are all waiting for the job market to recover.
Adam Turetzky and David Merkel and Ian S above all put their fingers on parts of the answer.
To put it bluntly, we have got declining capacity utilization in America because of global wage arbitrage + automation. (Where “automation” means computers as well as data-mining algorithms, robots, computer vision systems, neural nets, open source peer production like wikipedia replacing Brittanica and craigslist replacing newspaper classifieds, etc.)
America’s industrial capacity goes unused because everything costs too much compared to the third world or robots/computers that produce competing goods cheaper. It’s not just that American labor costs too much, which the conservatives love to harp on — American CEOs cost too much, American land costs too much, American health care costs too much, American buildings cost too much, American everything costs too much compared to the third world countries where competing factories are located, or compared to robots.
This isn’t just occurring because of evil Republicans and malevolent business leaders — they explain part of it, yes, but American everything costs too much in part also because machines are always much much cheaper than people in the long run. Replace an auto worker with a robot, bingo — no health care, no maternity leave, no disability payments for injuries on the job, no unions, no raises, nothing. That was 30 years ago. Now robots are replacing surgeons. Computer genetic design algorithms are replacing PhD engineers to design antennas and cars and airplane fuselages and they look like nothing a human would ever design…but they’re much more efficient.
That makes humans increasingly more expensive compared to computers/robots/algorithms/neural nets/data mining. And this process is accelerating, as Martin Ford points out. It’s moved from replacing blue collar workers like auto assembly line workers, to high-skill high-education white collar workers — PhD engineers and senior programmers and sysadmins and surgeons. Free dstributed peer production now uses an online screensaver running on millions of computers online to solve the structure of biological proteins. PhDs used to get paid big bucks to do that and they worked on it for 10 years. Now a distributed algorithm does it in 18 months and costs zero. You can’t compete with a cost of zero. Humans can’t get paid zero and continue to live. But algorithms can.
So we’ve got two ways to increase America’s capacity utilization and decrease America’s unemployment rate.
Method 1: reduce wages and prices until we compete on price with Bangalore, India. That means American workers and CEOs get paid Bangalore, India wages, 50 cents an hour. Americans will also have to live like workers in Bangalore, India — in huts with dirt floors and no running water and no electricity. No cars, no flat-screen TVs, no ipods, no Xboxes.
Method 2: erect tariff barriers to prevent foreign factories from stealing American jobs. That means America’s standard of living plummets. That iPod? Forget it, you can’t afford it because of retaliatory tariffs. That flatscreen TV? Before retaliatory tariffs it cost $700, now it’s $7000. No Japanese car for you, no cheap Chinese WalMart tchatsckes. Everything in America gets more expensive…and say goodbye to all those cheap Chinese goods and cool home electronics, including netbooks and PCs. DVDs go up to $75 each and Microsoft Windows now costs $2000.
Pick your poison. Which do you prefer? Door number one, or door number two?
I don’t mention the third way of increasing America’s capacity utilization because it’s not realistic. Shut down the internet worldwide and throw all the computers and robots ion earth in the landfills. Not gonna happen.
Wednesday ~ September 8th, 2010 at 11:29 am
Justin Weleski
I understand your frustration and have often felt that society (particularly Western society) has woefully, and perhaps even criminally, misallocated its resources, but I don’t think that 100% capacity utilization is necessarily a good thing – at least, not with regard to our present capacity.
Let’s face it, Western society produces and demands quite a bit of inane, useless junk. Yes, we may think we need the leopard-print candelabra or the vintage Warren Moon bobble-head doll, but do we really need it? Of course not! The same can be said for much of the junk (excuse me…objects) that are within the room you or I are presently sitting. If we boost capacity to 100% merely to produce more of these inane, useless, resource-intensive objects, I don’t think that is a good thing.
We live on a finite planet with finite resources, yet we presently live and spend like Mother Nature has prepared an endless, all-you-can-eat buffet for humanity. Conversely, thousands of human beings die each day because they lack access to clean water or food, and billions live on roughly $1 per day.
Again, I see where you are coming from, but I think it could be argued that much of our present capacity is “mal-capacity,” or capacity for superfluous, eminently disposable, and needless items. Yes, we need to greatly reduce (and perhaps even eliminate) unemployment, but we should do it in a smart and efficient manner.
Personally, I think that calls for “protectionism,” i.e., a return to the idea that a nation should build, support, and value its domestic economy. In a day and age where a handful of highly-mechanized factories and a few thousand workers can pump out enough toothpaste, cell phones, and tank-tops for the entire world, our production processes simply don’t need a lot of human labor. And, in a day and age where capitalists rush to the ends of the Earth in search of the cheapest, most pliable, most powerless and unprotected sources of labor (e.g., Bangladesh), the select few folks who actually have work very likely feel insecure, overworked, and significantly underpaid.
“Protectionism,” if carried out effectively and in an environmentally-conscious way, could enable nations to fully employ their populations while increasing their self-sufficiency. Universal food, water, shelter, education, and healthcare. These should be the top priorities of a nation (along with defense, unfortunately). Everything else – while certainly gratifying and luxurious – is mere icing on the cake.
Furthermore, resource scarcity and peak oil could (and most likely will) throw a giant wrench into the 100% present capacity utilization paradigm. Our present production systems and the entire global economy are enslaved to petroleum. If and when production of that resource falls significantly behind demand, modern life as we know it may be upended. Just take a look at the reports on the recently leaked German military analysis of peak oil; its conclusions are devastating.
Rome is burning, yes. But the fire will turn into an absolute conflagration if we don’t play our cards right as we enter the age of resource scarcity. Boosting present capacity for the sake of “making work” is a recipe for wasted resources and an utterly jarring – and perhaps even catastrophic – readjustment once oil prices skyrocket and the global economy as we know it begins to implode.
Unfortunately, there is absolutely no political will for such measures. None. It appears that our nation will blindly march toward the precipice and then stumble over the edge like a gaggle of overfed lemmings.
But what other Serious options remain? I mean, we are presently walking on solid ground. And we are surrounded by millions of other lemmings. And the largest, most well-spoken and admired lemmings are leading the charge (though their blindfolds are off). What’s there to worry about, right?
Um, right.
Wednesday ~ September 8th, 2010 at 11:42 am
Corey Mutter
The labor market cannot clear until our wages (and therefore standards of living) come into line with the rest of the world.
In the best case this would be the world average (about 1/4 of today’s USA standard of living, using cia.gov GDP per capita PPP numbers). In the worst case it would be China’s (half that) or India’s (half China’s). Ouch.
I have trouble even imagining how America would be structured with people living at Brazilian or Chinese standards. Vast swaths of unoccupied housing, while those of us lucky enough to have a minimum-wage job live 12 to a 1-bedroom apartment?
Even more depressing: It can’t be stopped.
If we tried to restrict offshoring, the big money would just route around the restrictions, and anyone who did abide by them would get their lunches eaten in the marketplace. If we closed the economic borders, that would probably do even more damage than globalization (but I haven’t numbers to back that up). There can’t be any “next big thing” to save us; if it’s “knowledge work” it will happen in India, if it’s manufacturing it will happen in China. We could support a higher standard of living in a globalized world by offering a competitive advantage, but does anyone actually think Americans are capable of that?
Sleep well.
Wednesday ~ September 8th, 2010 at 11:51 am
Ann Hedonic
I agree with your post that this is a disaster and not just a cyclical problem. However, I construe the term ‘infrastructure’ very broadly and do not think of it as potholes. (Perhaps I am using the wrong word; maybe I should call it ‘the means of production’.) If we were both repairing and building out *all* of our infrastructure–energy, transportation, technology, cultural, physical–most people would be employed doing useful things that would benefit us and future generations. Many problems would be solved simultaneously. I suspect private businesses would be willing to participate in such an effort.
Wednesday ~ September 8th, 2010 at 12:55 pm
lark
Joblessness is not just the recession.
We’ve lost 40% of our manufacturing jobs – since China joined the WTO.
Even as tech has slashed payrolls since the tech bubble, they have been hiring like gangbusters in India and China.
Many liberal economists don’t want to look at globalization when they advocate deficit spending to stimulate our way out of this recession.
If the jobs keep fleeing, all you will get from deficit spending is debt and unused infrastructure.
It is time to take action. Tariffs, tariffs, tariffs.
Wednesday ~ September 8th, 2010 at 1:41 pm
Bertrand
You interrupted Judge Judy to tell us this!?
Looks like capitalism doesn’t work. So what good is replacing the door? It’s just going to be ripped off again.
Wednesday ~ September 8th, 2010 at 2:20 pm
Rita Jasper
For those who feel there is no hope – there is but it is radical, yet logical.
I did a posting on another blog called “Lets become more inefficient to save the world.” Sub-title “Lets work less, produce less, waste less and live more!!!!”, after reading “Alternatives to Growth – Efficiency Shifting” By Conrad Schmidt. Conrad proposes interesting solutions to our hard economic times, such as:
1) reducing the work week
2) the intentions of Green Efficiency
2) motives regarding recycling
4) efficiency shifting (counterbalancing)
5) organic farming and why cheap food creates poverty.
6) Conrad also draws attention to racist education and automation resulting in and affecting job loss
7) He also talks about reducing efficiency to improve education and health care.
Synopsis of the above regarding his book can be found here.
http://ritajasper.wordpress.com/2010/09/06/lets-become-more-inefficient-to-save-the-world/
Thursday ~ August 30th, 2012 at 9:30 pm
Rayfield A. Waller
Hooray for Rita Jasper, because this is very smart and at this point in economic history very necessary—we need to break the zombie training and REDUCE efficiency while INCREASING quality of life.
Once upon a time in America, ‘efficiency’ functioned to create greater quality of life. That was the reason Americans tolerated the drastic paradigm shift away from small towns and agriculture and handmade furniture, and toward urban growth and factory production and interchangeable parts in the FIRST place: efficiency promised and at first even fulfilled the promise, of a greater quality of life for a greater number of citizens: eliminating consumption and rubella; providing indoor plumbing for the working class; mass production provided the rising quality of life that allowed the children of the working class to acquire literacy; the reduction of the (aggregate) infant mortality rates, and as with ME, the spread of literacy, access, and professional training for African Americans whose grandparents had been dirt farmers just a generation or two earlier.
Now, however, now that a loaf of bread is three dollars rather than five cents, and a gallon of petrol is four dollars instead of the ninety eight cents it was as recently as 1998, and the college Pell Grant is no longer sufficient to pay for a simple, basic BA degree for working class American ethnics. the efficacy of efficiency no longer correlates with the intensity of faith (the fanaticism that is) that Americans–particularly American youths, are brainwashed into feeling for this modern myth.
The mania, no, the HYSTERIA of ‘efficiency’ that I notice all the time in my students, is distracting and disruptive to the PROCESS of education that must proceed in a classroom in order to ensure that educational outcomes will produce QUALITY as well as almighty QUANTITY. Young Americans are converted by the mass media and by cottage industry public education into zealots who worship at the altar of this 1950′s god. They are jacked into the Matrix to the point where they attack me after classes demanding to know why we have fallen behind the syllabus by one day (or even ten minutes). It is unnerving. They have been brainwashed by a dead ideology that has been shorn of its original value.
The ideology was quite effective in the 50′s, the postwar period, at creating largess, increased access, and greater personal choices for an expanding middle class along with greater wealth, even greater freedom for women–along with the expansion of suburbs, the mass production of washing ‘machines’ and drying ‘machines’, automobiles, the building of the interstate highways, greater supply and greater diversity of choice in consumer goods, etc.
Now, however, the laws of global warming, non-sustainability, and loss of value accrued has kicked in. We are hot, suffering from diabetes, unemployed, and illiterate because we stand in front of microwave ovens shouting “HURRY UP!” like crazed crack addicts who can’t wait to get to the strip mall to drop three hundred dollars on a cell phone. That’s not what efficiency was supposed to lead to.
All this madness is due to the mania of bottom-line profit and other such insane corporate thinking (“we need to cut down this old growth forest and sell the timber and deposit the profit offshore in order to save the forest!)
I need to read this book, “Alternatives to Growth.”
Wednesday ~ September 8th, 2010 at 2:21 pm
Jon
Labor is clearing, it is just clearing in China, not in the U.S.
Here is what to do:
1. Create trade credits that exporters earn through export of manufactured goods and importers must purchase to import manufactured goods. This will create balanced trade in manufactured products bringing manufacturing jobs back to the U.S.
2. Rebuild infrastructure and focus on a sustainable energy system (including Thorium reactors, biodiesel, etc…) paid for with a Chartalist monetary system.
3. Expect government support of the economy for a generation.
WWII got us out of the Great Depression through massive government expenditures, forced reduction in demand, and massive investment in technology. The only way out of this is something similar, preferably without the war.
Wednesday ~ September 8th, 2010 at 2:43 pm
Carl
You want jobs? Stop treating employers like criminals. Duh. Employers are tasked to: posts notices of the law; screen out illegal immigrants; collect federal and state income tax and unemployment insurance; collect employer and employee portions of FICA and Medicare taxes; compute the Earned Income Credit allowance (ugh!); provide health insurance coverage; etc.
Simplify the task of employment and you will get more employers. Merge FICA, Medicare and the income tax into a single tax. Get rid of the employer health insurance deduction and instead just give everyone coupons for buying coverage on their own. Get rid of unemployment insurance and let the unemployed borrow against their future personal exemptions at a low interest rate. Encourage cash payments and discourage benefits. Cash is simple, fungible, and lowers the transaction costs of changing jobs.
Duh!
Wednesday ~ September 8th, 2010 at 2:47 pm
Johnnie Linn
Savage Henry’s objections to the original post have not really been dealt with. Just a glance at the charts shows that the economy is periodic. A large integrated system like the economy has a low natural frequency. The second derivative really says it all.
What I would like to see is whether there is anything in this recession that would signal a breakup, like an oscillating bridge that exceeds its engineering limits (for an example, google on “Galloping Gertie”. If there isn’t, we will ride it out.
Wednesday ~ September 8th, 2010 at 3:19 pm
hhhh
first, there can be goods that no one wants. that is why factories can, do, and sometimes should close.
second, we are entering a malthusian phase where manufacturing technology is cheapening, bu the raw materials are becoming more expensive. so, excess capacity is there, but it is an illusion.
the real problem is the lack of natural resources, evidenced by the grab for resources.
since the “market” is goosed by easy money and excess demand that it caused, which led to excess manufacturing capacity, it is the commodity prices have to adjust to allocate (limited, natural) resources.
There is excess of people and excess of know how. There is scarcity of “land” (natural resources).
Now deal with it. Keynesianism cannot.
Wednesday ~ September 8th, 2010 at 4:05 pm
Keating Willcox
I am a small business owner in MA.
1. I will do anything to avoid hiring a local employee, anything. The difficulty in hiring and firing, healthcare costs as we now have mandatory healthcare, COBRA and its administration, payroll, office expense, and retirement stuff.
2. I will outsource anywhere. No one mentions how easy it is to use outsourced telemarketers, executives, sales support using phone and internet.
3. It is easier to have fewer high productive workers than before. Check the drastic reduction in manhours to make a car. This is why the unions are being crushed. The numbers required to make cars are fewer and more technical, with higher pay.
4. It was hard to gear up the old plant to double output. Modern factories are more flexible and can have a faster adjustment to more output.
We have had an enormous influx of extremely poor people from Mexico. If you take them out of the picture, most middle class folks have been doing better. We are really becoming two societies, those with college degrees and those without. For those with degrees, unemployment is low. For those without, they may never find a decent job.
Wednesday ~ September 8th, 2010 at 5:41 pm
marc weiner
Your analysis is incorrect.
1. American low and medium skilled labor will never, never be able to compete against 50 cent an hour Asian labor. I can build the factory cheaper in China and my labor costs guarantee a profit if the products are sold in the West.
2. Unfortunately economists truly believe that manipulating fiat money can create wealth for a nation or the world. Hallucinatory.
3. The only method that has worked for my extended family for the last 80 years has been costly and time intensive education, master,doctorial, and post doc
degrees.
4. Advanced degrees don’t guarantee financial success but raises the probabilities tremendously.
5. In my opinion reeducating the population regardless of age would have the greatest payback. If we can fight make believe wars for trillions we can afford a massive reeducation program.
Thursday ~ September 9th, 2010 at 8:26 pm
Karen
I don’t think that is practical, for two reasons.
One, not all Americans are from Lake Woebegone and “above average” in our abilities. Trying to support our entire economy on the shoulders of only those who are suited for advanced degrees can’t work and would also be socially destructive, since it would leave so many Americans with no way to contribute and gain any self-respect.
Two, in this recession a lot of Americans have been doing what you advocate, accumulating a lot of student loans along the way. For-profit higher-ed firms like Strayer Education are now under threat of losing access to government-guaranteed student loan programs because a very high percentage of their graduates are failing to pay the loans back. I suspect they are not alone, and that this problem is affecting and will affect almost all universities and colleges to varying degrees. In a world where not enough people are buying, companies are not going to hire more people just because those people have more degrees.
We need to remember that there are plenty of smart people in India and China and everywhere else, so we won’t be able to monopolize the highest-value-added market niche for long, if at all. What we have to hope for is that all those people will be able to share in the wealth they are creating, rather than having elites in those countries – and in our country – siphon it all off. Then, eventually, they will earn the same wages as we do for the same work, and will be just as able to buy stuff we produce as we are to buy stuff they make.
But the world will go into crisis if the elites are allowed to monopolize too much wealth.
Thursday ~ September 9th, 2010 at 10:29 pm
Carl
The man who mows the grass for a medical doctor is allowing the medical doctor to spent more time using her degree. You cannot export lawn care to China. However:
1. If you have mass immigration from Mexico or even poorer countries, you can “outsource” the lawn care by importing low wage immigrants.
2. If you attach too many conditions on employment, then the medical doctor will mow the grass herself and we will pay more for medicine due to the reduced pool of doctor hours.
So yes, the Arizona government is doing more to reduce unemployment than the federal government is, ugly though the process may be.
Wednesday ~ September 8th, 2010 at 5:52 pm
Anthony
The main reason that American (and other “first-world”) workers get paid so much better than their third-world counterparts isn’t unions, or tariffs, or costs of international transport. It’s the amount of capital per worker, including both the capital that the employer owns, as well as the social capital (“infrastructure”) which the employer uses. That capital allows American workers to produce much more per hour than third-world workers can, even when those third-world workers are as smart and educated and harder-working than American workers.
For example, my father-in-law plants, grows, and harvests 500 acres of corn and soybeans, pretty much *by himself*. This is possible because he owns a fraction of a million dollars worth of farm equipment (combine, harvester, silos, sheds, etc.), and because there are good roads leading right to his farm so that he can take delivery of fertilizers and other supplies, and have someone pick up his harvests, and because there are producers of all the supplies he needs who have access to those roads, etc., etc.
The current financial crisis, like pretty much all crises in the past 150 or so years, has occurred because market signals about what returns on capital are expected, and which sectors should be invested in, were distorted by monetary policies. As a result, as existing capital wore down, the wrong kinds of capital were produced, and/or too many consumables relative to productive capital were produced. So now we’ve got the huge coordination problem I mentioned above, and once that is worked out, we’ll return to a “normal” growth pattern from a lower baseline, as the market responds to the fact of having the wrong sorts of (and/or not enough) productive capacity.
Wednesday ~ September 8th, 2010 at 6:20 pm
eradke
I think you can look even deeper. Charts are an output and rarely do they tell the whole story. I do not think you are completely wrong but what in your background tells you consumers or business owners are not worried about uncertainty.
Maybe this is the new normal.
Wednesday ~ September 8th, 2010 at 6:49 pm
john
This is not a new problem, we have simply spent our time since 1976 convincing ourselves that everything we learned from the Great Depression never happened. That hard won knowledge is still out there, but those who understand it have been systematically marginalized for the last 40 years. Here is a good place to re-enter what was learned from the depression:
http://www.interfluidity.com/v2/871.html
With regards to the politics of our conflagration, the same set of people who bankroll both parties, as aspiring politicians in the US system are required to solicit bribes, have very nearly achieved what Hayek warned against but rather than his fear of the state capturing the economy, monopolists and financiers have captured the state. They have done so to protect their monopolies which has the side effect of rendering the population and capital many goods obsolete. They happily pay for the military to protect their global interests, but would really prefer that the balance of the US simply cease to exist as it runs out of cash.
This is not a problem for them as they will simply move their trading companies, because that is all that’s left of US corporations, to other markets where they can corrupt officials into letting them loot the populations as they have done here since the Reagan administration.
Erroneously these folks still believe that money is “out there” and that the “government takes it”. They are as wrong as the Chinese and the Germans who think the monetary gains they take from their mercantilist policies are real gains. Dollars, including vast hoards held by sheiks and authoritarian governments, are nothing but a bet on future US productivity and they are issued at will by the government of the US and if that government does not figure out a way to make the US productive, that money will be difficult to spend, as they are discovering.
The Japanese model is a neo-feudalism of fiat currency where the elite holds on to its position while the rest of the population dies off. The government spends just enough each year to keep the population sedate, but not enough to free its citizens from a penury the elites quite enjoy. This is what the two parties are attempting to create here as well.
Wednesday ~ September 8th, 2010 at 9:48 pm
Michael
Not sure if this has been said but people can’t move to work on these machines if they can’t sell their house (or afford to move).
Wednesday ~ September 8th, 2010 at 10:52 pm
Rome is Burning « Sukingmarrow
[...] http://modeledbehavior.com/2010/09/07/rome-is-burning/ [...]
Wednesday ~ September 8th, 2010 at 11:40 pm
More linky, less thinky « Blunt Object
[...] Rome is burning (Modeled Behavior) We have very low capacity utilization (75%) and very high unemployment (10%). [...]
Thursday ~ September 9th, 2010 at 10:27 am
Tim Spinotter
Trillions of dollars of goods not being produced. Well, maybe we don’t need those goods after all. It would be a better world if we only produced, and consumed, things that were truly needed.
Thursday ~ September 9th, 2010 at 1:33 pm
Karen
Well, what’s your idea for how to put the door back on? Don’t have one? Join the club! I think that’s the real reason we’re having such a dumb public discussion – nobody knows what to do!
All my ideas are way too radical for today’s political environment:
(1) I would redistribute wealth. People who are extremely rich just sit on their money, so the most obvious way to reignite demand is to find a way to give their money to “normal” people who actually need it. The morally right way to do this is through a 100% estate tax – you have a right to what you earn, but “you” means you, not your dad or your mom or your Uncle George. This is also a great way to make our economy more competitive, since poor kids will know they CAN do well if they take the effort seriously and rich kids will know that goofing off will make them poor. Of course, an estate tax is not the quick fix we seem to need right now. I haven’t come up with anything brilliant on that yet.
(2) I would massively overhaul the corporate incentive system. Step one would be ensuring no more government bailouts of private companies. GM’s factories would still be there if it went out of business – they’d just belong to Ford or Toyota or whoever. Not the end of the world for most of us. The CEO would be jobless and hopefully shamed, the Board of Directors would lose those board seats and hopefully be shamed, and the shareholders would be poorer. Which is why shareholders should have plenty of real power over the way the company is run. As long as they’re in it for real and not playing games like using their votes to kill the company so they can make a killing on CDS’s. Which brings me to:
(3) I would outlaw all financial innovations whose advocates couldn’t make a clear, convincing, unambiguous case that they do more good than harm to the real economy. Not just a little more good than harm, either. A lot more good than harm. To me, that even rules out regular, plain-vanilla short-selling (why we’re even having a discussion about allowing NAKED short-selling is way beyond me). Somebody please tell me what sort of market signal a short-covering rally sends!
I just read a great article in The Economist magazine (August 7 issue) about Japanese businesses making the adjustments necessary to sell more products in rising new markets around the world. That’s what American businesses need to do. Some of them are – but the problem at those firms is that too many of them are also moving production (jobs) abroad. We need to figure out how to get that to change without being coercive about it. But we also definitely need more American businesses to compete successfully abroad – especially in the trade-surplus countries.
Maybe instead of going back to college and getting a degree, more of us should try spending a year living and working in an up-and-coming foreign country full of the consumers of tomorrow. Or in Germany or Japan, where they have their problems but seem to go year after year selling more abroad than they spend, so obviously SOMEONE in those countries is sitting on a growing pile of wealth that is built on IOUs from countries like ours.
Thursday ~ September 9th, 2010 at 1:39 pm
Capitalism, Anarchy & War | The League of Ordinary Gentlemen
[...] devotes a bit of time to snarking at that Karl Smith post everyone’s been linking to and talking about: When people say that the job, purpose, goal, [...]
Thursday ~ September 9th, 2010 at 4:35 pm
freemarketanticapitalist
You’re quite right that the excess capacity and unemployment are a disaster from the standpoint of the 20th century model of capitalism.
The problem is, your Schumpeterian/Chandlerian perspective is clouding your picture of what the real problem is and what should be done about it.
Mass-production capitalism has always tended toward overaccumulation and excess capacity, and required some combination of state capitalism and push distribution to dispose of the product in order to keep the wheels turning.
With the introduction of electrical power in the late 19th century, the primary rationale for large-scale production — the need to economize on prime movers by running as many belts as possible off the drive shaft from a single steam engine — disappeared. It was possible to build a prime mover, scaled to the flow of production, into each machine and situate it as close as needed to the point of consumption.
The natural production model for capitalizing on these new possibilities would have been to integrate small-scale, general-purpose machinery into craft production, producing in small batches and frequently switching between products, for distribution in the local market.
Instead the U.S. government, with the railroad land grants, enforcing patent cartels, high protective tarrifs, dollar diplomacy, etc., encouraged artificially large firm size and market areas and made the Sloanist model of mass production artificially profitable compared to the lean, distributed model. This meant enormous factories with extremely expensive, capital-intensive, product-specific machinery, that required large-batch production to fully utilize capacity in order to amortize the capital outlays.
But it’s never been possible to dispose of the full product of the machines running at full capacity, without the government buying it up either by creating new industries (the auto-highway complex, civil aviation and jumbo jets, etc.) or maintaining a perpetual warfare state. The crisis of overaccumulation was postponed for a generation by WWII, which helpfully blew up most plant and equipment outside the U.S. But it came back around 1970 or so, when the capital stock of Europe and Japan had been restored and consumer demand was saturated. Since then, state capitalism has resorted to one expedient after another to absorb surplus capital — financialization the latest among them. But the tendency for the past forty years has been toward higher permanent unemployment and higher idle capacity.
The problem with using the Keynesian “Consensus Capitalism” model to restore sufficient consumer demand is that most of the output of those mass-production factories has always been the equivalent of fixing Bastiat’s broken windows. Most of the output of mass-production industry, when it runs at full capacity, is deliberately designed to be costly or impossible to repair, and thus go to the landfill after a brief detour through people’s living rooms, in order to keep the wheels turning at full speed.
“Consensus capitalism” amounted to a Rube Goldberg machine in which the goal was to add as many steps as possible, so that the population could be fully employed doing the equivalent of digging holes and filling them back in again, so they could earn the money to replace the cheap crap they kept throwing away, so more people could be employed earning the money to buy more cheap crap.
The simple fact of the matter is, in a sane society without planned obsolescence and supply-push distribution, and without waste and bureaucratic overhead on the model of “Brazil,” a comfortable standard of living would require only a fraction of the labor hours and capital expenditures currently wasted.
Our goal should be to shorten the average work week, liquidate mass-production capacity, and relocalize production on the model of Emilia-Romagna.
One thing preventing this is the prevalence throughout the system of artificial scarcity and rents on artificial property rights, and state-mandated capital outlays and overheads. We need to eliminate all these toll gates that prevent the expenditure of labor from being transformed directly into use-value, and keep us working 40 hours to meet needs that could be met with 15 hours’ work — just so the rentiers and bureaucrats can consume the surplus.
When a farm family got a washing machine that drastically reduced the time to do laundry, you’ll notice, the wife didn’t complain that the machinery was “putting her out of work.” The problem is that privileged classes are able to use artificial property rights to monopolize the increased productivity made possible by the machines, instead of letting labor receive the benefits of its increased productivity.
Thursday ~ September 9th, 2010 at 10:35 pm
Carl
Here here. I have a circular saw I use a few times a year. In Keynesian terms it is an “unemployed resource.” To my mind unemployed resources are another term for wealthy society. I don’t want the factories running at full capacity. I want a savings rate that supports idle factories so we can work when we feel like working.
Imagine factories filled by farm laborers during the down time of agriculture. Contrast this with full time factory workers and farms worked by migrant workers following the harvest.
Work should not be continuous or year round. This is drudgery, suitable for slaves. Cyclical work can be play. People garden or hunt for fun. No one becomes a migrant laborer for fun. And yes, people should be idle from time to time. The difference between being unemployed and on a sabbatical is how much you have saved.
Keynes hated savings. I hate Keynes.
Thursday ~ September 9th, 2010 at 11:42 pm
freemarketanticapitalist
That “hunt in the morning and criticize in the afternoon” stuff resonates with me, as well.
The beauty of it is, the lower the price of capital goods, the less costly idle capacity becomes — and at the same time, the less important savings and venture capital become.
There’s an essay by Doug Rushkoff on how the tech industry destroyed California’s economy (too lazy to look it up), in which he argues that the desktop revolution caused capital outlay requirements to implode by two orders of magnitude in the entertainment and information industries. As Yochai Benkler pointed out, the cost of a printing press or sound studio fell from a minimum of hundreds of thousands of dollars to a few thousand. As a result, the vast majority of venture capital that formerly went to those industries became superfluous.
We’re experiencing the same thing in physical production. A homebrew 3-axis CNC milling machine, 3-D printer, cutting table, etc., can be built for $1000 or less, compared to tens of thousands for the proprietary commercial versions. And the latter themselves, dating to the Japanese introduction of comparatively inexpensive small CNC tools in the late 1970s, had already created a shift in production from traditional mass production industry to small job shops.
It amounts to a reversal of the original shift from affordable general-purpose artisan tools to expensive machines, which originally justified the whole wage employment model. The wage/factory system came about because machinery was too expensive for anyone except the rich to own, and they had to hire people to work it. When two or three month’s income for a factory laborer is enough to equip a garage factory that used to require a plant costing $1 million or more, well… how ya gonna keep ‘em down in the factory?
The lower the capital outlays and overhead cost for undertaking production, the smaller the revenue stream (and hencee batch size) required to service them. The lower, in turn, is the cost of riding out periods of slow or no business. And during periods of good business, most revenue is free and clear. This means that workers can incrementally shift production to the household-informal sector, or to microenterprises using spare capacity of ordinary household capital goods (i.e. a microbakery using regular kitchen oven, home seamstress, unlicensed cab or hairdresser, neighborhood daycare operating out of homes, etc.).
Thursday ~ September 16th, 2010 at 11:57 pm
What’s A Little Data Between Friends « Modeled Behavior
[...] are few more heartbreaking, more disastrous economic calamities than observing men without machines at the very moment there are machines without men. If we can find some way to combine this capital and labor, some way to make productive good out of [...]
Monday ~ September 20th, 2010 at 7:25 pm
Inflation and Jobs: The Big Picture « Modeled Behavior
[...] continue my assault on the idea that we need to look under every rock for the causes of our current economic tragedy. Lots of things are going on for sure. There are trade imbalance, skill mismatches, Wall Street [...]
Sunday ~ September 26th, 2010 at 8:38 am
Inflation and Jobs: The Big Picture |
[...] continue my assault on the idea that we need to look under every rock for the causes of our current economic tragedy. Lots of things are going on for sure. There are trade imbalance, skill mismatches, Wall Street [...]
Wednesday ~ September 29th, 2010 at 6:44 pm
Rome is Burning « Modeled Behavior « Sophistick
[...] is Burning « Modeled Behavior Rome is Burning « Modeled Behavior Source: modeledbehavior.com There is a critical point that I fear the commentariat is just [...]
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Don’t Stop That Growing Feeling « Modeled Behavior
[...] As I have mentioned before, we are conditioned to think of 3 – 4% growth as strong. However, that is in a world where there are few slack resources. This is not our world. Our world has plenty of idle resources. [...]
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