Can America Self-Correct?

August 26th, 2011 at 5:50 am

I ran into a couple of articles today that got me thinking about a big, important topic: the mismatch between supply and demand in the labor market.  And not just the cyclical part since the Great Recession took hold, but the structural part the pre-dated it.

The first piece, by Bloomberg’s Mike Dorning, documents the long term decline in the employment rates (share of the population employed) of “prime-age”—25-54—men.  The employment rate is the economists’ first proxy for labor demand, and the long-term, structural decline for men suggests demand shifts against them, especially those without college degrees.

Economists tend to ascribe such trends to two factors: technology and trade.  Globalization and the ability to shift production abroad have surely hurt non-college educated prime-age men, both through increased labor supply and decreased labor demand.

Technology is trickier to assess.  There’s lots of talk about “skill mismatch”—employers’ skill requirements leaving such workers in the lurch, and while there’s something to that, the evidence is scarce.  Dorning cites interesting work by labor economist Larry Katz on technology’s impact as a “hollowing out” of the middle in terms of skill demands:

“The impact has been greatest on moderately skilled men, especially those without a college education, though even men with bachelor’s degrees from less selective schools are beginning to see their position erode. “There’s really been this polarization in the middle,” Katz says, as men at the top of the education and income scale see their earnings rise while those in the middle gravitate downward.”

The idea is that repetitive, mechanized tasks not involving human contact can be replaced by computers.  So at the low end of the pay scale, there is demand for child-care workers, home-health aids, and food prep workers; at the high end, for designers, systems analysts, physicians, lawyers, etc.  But in the middle, if you did repetitive work in a factory, for example (and the factory was by some miracle still here in the US), you could find yourself competing with a robot.

Here again, I’m sure there’s something to this, but it’s not obvious why growing fields like health care, office work, building (once we recover from the housing bubble), transportation, security, maintenance, can’t generate considerable demand for middle-skilled men.

The second piece, by Catherine Rampell, featured the recent, sharp decline in youth employment (age 16-24) using the same metric.  This looks somewhat more cyclical to me, though the decline predated the recession.  That’s a hint which I’ll come back to in a minute.

Source: NYT

Both of these articles led me to reflect on this next graph—one I’ve posted before showing the growth in productivity—output per hour of work—and employment, with both series from the private sector.  And I’m continuously and deeply troubled by the divergence between growing, even accelerating, productivity and stagnating job growth.

Source: BLS

The basic reason why these lines grow together over the long haul and why I believe they diverge at the end is a common concept, a common word you hear all the time, but is poorly understood these days, even (especially) by many economists: DEMAND.

I think, perhaps even more so than globalization or technology (and they’re all intertwined), this concept explains all three of the above figures.

Throughout our history, and that of other economies, while we were more productive, we also created more demand for goods, services, projects, trips, endeavors, energy, public infrastructure, moonshots, schools, music, knowledge…you name it.  That was the intervening variable that soaked up, if you will, the faster productivity growth, and enabled us to keep adding jobs, even as we could produce more output per hour.

But since the 2000s, when the split in last graph begins, the US economy simply hasn’t been creating enough demand to absorb productivity’s growth.  That been particularly acute and evident in the recession, of course, but it predates the downturn, especially, though not exclusively, for prime-age men.

And here is the teaser.  We can do something about this.  We can surely do something in the short run, as I hope and believe we’ll hear from President Obama in early September.  But we can also do something about it in the longer term, if we have the will.

I’ll elaborate soon, but for now, look at the end of that last figure and ask yourself the key, central, most critical question about the future of this country: are we capable of self-correction?  Because a system that cannot self-correct is a system in decline.

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11 comments in reply to "Can America Self-Correct?"

  1. perplexed says:

    We can & we must correct it! But to do so, we’ll need to recognize that the debt problem, the deficit problem, the wealth concentration problem and the TBTF banks problem are one in the same; same origins; same solutions.

    Rather amazing how “connected” all of this stuff is and how such a small group was able to put an effective stranglehold on such a large economy in a supposedly “representative” democracy.


  2. RMGHicks says:

    The solutions are obvious. Plain and simple – the concentration of wealth in the hand of so few is dangerous to the structure of a republic that is supposeed to be for the people and by the people…not for the oligarchs and by the oligarchs.

    But I don’t know that we can correct it. There is an unholy alliance between the oligarchs and the tea party and this “faction” has a stranglehold on our government. It has ceased to function as the representative entity that the founding fathers intended. In general we are in a lot of trouble.

    The voices of reason – such as Elizabeth Warren and Eric Schneiderman are being silenced and demonized. When even Warren Buffett’s words are twisted into a pretzel. When rational voices are so easily cast aside or discredited – the country is in a great deal of trouble.


  3. Patrick says:

    I am surprised by the “Productivity and Job Growth” graph. Here’s why:

    I thought that the housing bubble, and people taking out huge loans on their houses, was the method by which demand was kept high, until the bubble burst. If that is true, and if demand is the explanation for the divergence between job growth and productivity, I would have expected job growth to continue tracking productivity until the bubble crashed in 2008. Why did job growth diverge as early as it did?


  4. bakho says:

    Is there a negative relationship between demand for goods and services and wealth inequality?

    Higher wealth inequality = lower demand?

    The fix would seem simple but fighting the Wealthy Special Interests is difficult politically and becomes increasingly difficult as wealth concentration makes the wealthy more powerful politically.


  5. Geoff Freedman says:

    Good question. If all our politicians are bought in a corrupt system that favors special interest groups that buy influence via campaign contributions, I’m afraid the immediate answer is no, we cannot self correct. At least not until its too painful to do anything else but actually deal with the problems at which point draconian and very painful measures must be implimented.

    Another important question. Do we really understand the nature of the problem?

    Is this a typical recession or as some have suggested a ‘great contraction’ where the entire global economy is overleveraged?

    I belief this is a financial event, not a typical recession, and without some scheme to transfer wealth from creditors to debtors (such as debt restructuring, inflation, or other kinds of financial repression.) Typically this type of financial event takes years to unwind and do not respond well to economic interventions that are designed to deal with cyclical recession patterns.

    I suspect we are headed down much the same path as Japan in the 1990′s and 2000′s, because we are not addressing these issues and have propped up the TBTF banks financially rather than dealing directly with the debt probles they have.


  6. Dan Furlano says:

    I think wealth inequality is a political/social issue that will not be resolved anytime in the near future.

    The only real way to fix the economy in the short term is to supplement the loss of private sector demand via government spending.

    Everything is just nipping at the margins. Except for debt/deficit reduction which will push the economy closer to a recession.

    Again, classic MMT.


  7. perplexed says:

    “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious. But there are also two important respects in which it is relevant to the second.
    Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation — income tax and surtax and death duties — especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity. Our argument does not affect the first of these considerations. But it may considerably modify our attitude towards the second. For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital. Moreover, experience suggests that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.
    The existing confusion of the public mind on the matter is well illustrated by the very common belief that the death duties are responsible for a reduction in the capital wealth of the country. Assuming that the State applies the proceeds of these duties to its ordinary outgoings so that taxes on incomes and consumption are correspondingly reduced or avoided, it is, of course, true that a fiscal policy of heavy death duties has the effect of increasing the community’s propensity to consume. But inasmuch as an increase in the habitual propensity to consume will in general (i.e. except in conditions of full employment) serve to increase at the same time the inducement to invest, the inference commonly drawn is the exact opposite of the truth.
    Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed. I am not saying that there are no other reasons, unaffected by our theory, capable of justifying some measure of inequality in some circumstances. But it does dispose of the most important of the reasons why hitherto we have thought it prudent to move carefully. This particularly affects our attitude towards death duties: for there are certain justifications for inequality of incomes which do not apply equally to inequality of inheritances.
    For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today…”
    -J.M. Keynes

    The “old ideas” are more than adequate if properly implemented. Like “representative democracy” for instance. The existence of the wealth concentration we have in this country should be evidence enough that our system of representation has been seriously compromised. We must separate the money from the politicians and do whatever is needed to assure that each congressional representative is acting in the interest of his/her voting constituency, not his/her funding constituency. If our congress were made up people actually representing the interests of the population of the country, we would never be in this position – the self-correction would have been “automatic” – as designed. This likely means that campaign finance reform and publicly financed elections are necessary conditions of our ability to “correct” what went wrong here. Money funded lobbyists should be lobbying voters, not directly attempting to influence their “representatives.” If the voters had the power they should by design, this would already be happening. Congressional representatives should fear backlash from their voters from even being seen with anyone who would try to come between the interests of the voters and their elected representatives. But that doesn’t happen when the “moneyed interests” pre-screen the candidates and decide what options the voters have available to them. What’s really most amazing is the lack of outrage in the face of overwhelming evidence.

    Most of the people in this country want this fixed, that’s why they elected our current president. But they don’t want “change they can believe in,” they want change they can see and feel.


  8. Michael says:

    No, we cannot self-correct, and yes, we are in decline.

    Obama was our last chance to get through this without a profoundly painful spasm. He has chosen to fail, and now we all suffer.


  9. John says:

    I’ll wait to see where you’re going with this, but in the meantime, one thought – that I’ve expressed here before.

    You’re understating the impact of technology. It’s not just “automation will completely replace people.” That’s an asymptotic or end-stage effect, even though it’s already happening. Information technology would have a huge impact on labor demand without a single industrial or other kind of robot even existing.

    First, technology made globalization possible. Don’t imagine otherwise. Put another way, the technology that has evolved in the past 30 or so years – primarily data communications on its now-global scale – was and still is a necessary condition for globalization.

    Second, the real impact of information technology on labor demand is that its impact on productivity is not – and never was – solely to increase output. Before the demand crunch happened, something else was happening – technology was being used to reduce costs.

    Early information technology had little if any direct role in production. It wasn’t about new ways to make more cars and toothpaste, but about how to reduce the amount of time spent and intelligence required to do particular jobs that were mostly administrative. Simply put, it was about labor doing and costing LESS, not labor producing MORE. That hasn’t changed – it was and still is the basic purpose of information technology. All of its innovation serves this basic purpose, and in that regard, data communications, which is now global, is no exception.

    If a particular role can be made 10% more efficient, then an employer can use 10% fewer people to fill that role. Ceteris parabis.

    Don’t miss also that if a high school dropout can use a computer to do a job – because software does the difficult “thinking” parts – then a computer can save costs by allowing the hiring of such a high school dropout instead of a college graduate. That’s what looks like hollowing out, but it’s really a narrowing of requisite skills – toward a computer operator, away from both lower and higher skills. I’ve mentioned this here before.

    The issue is not applicants or a lack of skills in that regard, its a misperception on the part of employers.

    But there’s a more important thing happening that’s even more basic economically, regarding productivity. Companies don’t operate to produce more – they operate to make more profit – selling more is just one way to make more profit, but if there’s less demand, the other big way – reducing costs – still works. If there’s a tipping point where it’s more profitable to reduce costs than to increase output – regardless of demand, guess what they’ll do – they’ll reduce costs instead of increasing output. And lower taxes and better technology provide exactly that opportunity – again, that’s always been its basic purpose of both.


    • John says:

      Maybe that’s where you’re going…

      The Bush tax cuts provided the incentive to reduce costs and take profits instead of invest in increased capacity, to the extent that technology provides the opportunity, namely, to reduce the biggest cost – labor.

      If so, I couldn’t agree more, but the insight about taxes wasn’t mine – I think Angry Bear or someone else in the blogosphere suggested it a while ago – I don’t know if any economists have made the same observation. And I’ve commented to this overall effect various times, including here.

      BTW, Steve Jobs resigned, likely for the last time, two days ago, and yesterday was the 20th anniversary of the announcement of what became Linux (your own blog runs on Linux – CentOS – as do the majority of websites in the world) – I had read that announcement the same day, on a Usenet newsgroup, before the WWW existed (it’s not the whole Internet, though I think most people think it is). I was a grad student at the time, as was Linus Torvalds, and folks like us wanted to create a free Unix-like OS, which we did. We changed the world, in 20 short years.

      The most awesome and striking thing to me about the open source revolution – of which Linux is a centerpiece – was that it was NOT an economic phenomenon – there were no companies involved, and no money changing hands. As one popular “sig” used to say (it may have been Linus’): “Sacred cows make the best burgers…”


  10. Tom says:

    Thanks for your article on the importance of demand in the equation. Businesses exist to satisfy demand and that demand is not only a function of people wanting something, but having the money to buy it.

    China has tons of people wanting stuff but those people don’t have the money to buy those items. Russia had the same problem with their economy and empty Moscow shelves to prove it. A large middle class with the political policies that allowed a middle class to prosper gave the United States the best economy and largest demand in the world. A corporate policy (substitute state here) where the corporation is the center of demand instead of the people gives much the same result– a dysfunctional economy.

    As politicians are lured into the lowest cost at any cost, the costs add up. Having an economy where trade deficits run 60 billion a month and a global market tied not to the free market but the equivalent of international dumping as China’s mercantilist policy does, we won’t soon turn around the demand problem. The global mechanisms to turn around such imbalances are not in place when there is strategic currency manipulation.

    The Walmart’s of the world could care less as long as they make their dime. It is a destructive national policy and one that politiciains have been lullded into championing by the corporate rhetoric of globalism and “competition” of which they seem to know little about. The Chinese loaned them back their earnings at low rates so the politicians could continue to over spend and exploited a deep weakness in U.S. politicians–that of their self interests over the interests of their constituents. Poliicians readily billed the future economy instead of the present one. The future economy was sold out and tax policy was altered send the economic train on its biggest crash since the Great Depression.

    Will we stop politicians from selling to the highest bidder?— the answer is “NO” if we allow them to get away with it unscathed. They will continue working towards their self interests until the people hold them accountable. The knowledge to do that is being smothered with corporate propaganda and a fundamental misunderstanding of how the economy works.

    Tom


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