So Really, What’s Wrong With This Economy?

July 10th, 2011 at 12:41 am

Expectations for better results are continuously dashed; GDP growth never reaches escape velocity; housing is at best bumping along the bottom; the engine of job growth has shifted from first gear to neutral; unemployment is UP, not down, from 8.8% in March to 9.2% last month.

Perhaps it would be useful to take a moment and just catalogue what’s going wrong.

–Liquidity trap/zero lower bound; fading stimulus: As Paul Krugman and Brad DeLong point out, this is key.  The usual anti-recessionary move by the Federal Reserve is to lower the interest rate until they get some traction in investment, home buying, etc.  But what if that doesn’t work, because industry has so much excess capacity (including cash reserves), there’s huge supply excess in the job and housing markets, and after binging on debt, folks want to deleverage?

Well, the Fed can keep jacking down rates, but they can’t go below zero (or else lenders would be paying you to borrow their money). And that’s where things have stood for a while now. So traditional monetary policy is ineffective.

That leaves fiscal policy, i.e., stimulus, which is facing two big problems right now.  First, the Recovery Act is winding down, so no help there.  But worse, the realization that we need to do more in this space is under attack by politicians of all stripes.  The R’s want to argue the Recovery Act failed, and prominent D’s either seem to largely agree or at least don’t want to get near anything Keynesian.  I haven’t seen such a lack of stimulus since my days of dating back in high school.

–The weak job market: It’s a 70% consumption economy, and if jobs and paychecks are scarce and fiscal/monetary stimuli are fading, ain’t much good gonna happen.  It’s a self-reinforcing weak demand cycle.

–Productivity and technology: There used to be something called “labor hoarding” where even when demand faltered, firms would hold on to many of their workers, either because of union contracts or because they wanted to make sure their workforce was around when things began to pick up (imagine that?!).

Now, firms engage in a “just-in-time-inventory” approach to hiring.  It’s a more lean approach, hiring up when demand spikes and laying off when it tapers.  You squeeze more productivity out of the folks you keep, and avoid committing to permanent hires for as long as you can.

There might be something else going on here too.  I’ve heard anecdotes that lead to me wonder whether the pace of “labor-saving technology” is accelerating, especially in manufacturing.  It’s been going on forever, of course, but I have a feeling that the capital intensivity of production is increasing at a faster rate.  More to come on this in later posts as I learn more about it.

--China’s absorbing what little demand we can muster.  When countries go all mercantile at a time like this, managing their currency to grab export share here and block imports over there, it makes it that much harder for us to tap an important escape hatch: a lower dollar stimulating exports.

–Bad tax incentives that encourage overseas production often in emerging economies that manage their currencies (see above).

--Destabilizing uncertainty in the business community based on page 745 of the Affordable Care Act, which phases in on July 17, 2092…kidding!

–Actual uncertainty regarding the debt ceiling.

–Headwinds: Oil, Japan supply disruptions, Greek debt—these are all fading to one degree or another, but with all these other fragilities, even little bumps on the road can break an axle.

–The absence of union power in tandem with high unemployment, leads to weak bargaining power so that whatever growth there is bypasses the broad middle class and goes right to the top of the income scale, where demand ends up narrowly concentrated.

I’m sure I’m forgetting other aspects of the problem and if I come up with more, I’ll update.

But the funny thing is that when I hear most people talk about this stuff, or when I go on TV to do so, hardly any of these reasons come up.  Instead, it’s all debt and deficits, too much gov’t spending, the absence of business confidence, high taxes, regulations, the Recovery Act (and not that it was too small!), the Fed (and not that they haven’t done enough!).

We’re into some deep misdiagnosis, which does not bode well for the cure.

 

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39 comments in reply to "So Really, What’s Wrong With This Economy?"

  1. Kevin Rica says:

    “China’s absorbing what little demand we can muster. ” mischaracterizes the problem.

    China is transferring (withdrawing) aggregate demand equivalent to the amount of reserves it is accumulating. While China will not disclose how much this is, it more than offsets the effect of the stimulus.


  2. Dave J says:

    Just wanted to say I’ve really appreciated your blog the last few months. The current economic/political situation has been quite interesting/mortifying even for the regular Joe Sixpack like myself. You, Krugman, and others are doing a great service.


  3. chris says:

    You forgot to mention the most important reason for our failing economy…

    a failed Democratic Party, led by the FRAUD Barack Obama..

    Yeah, sorry JB, but the team you were playing for was uninterested in a serious game. All Obama ever cared about was being re-elected and yet, strangely, everything he has done pretty much assures that a real republican, not Obama’s ersatz version, will prevail in 2012.

    Pathetic Democrats… how do you spell W-H-I-G?


    • MCullen NE says:

      Oh your Bush did such a great job ruining are country you have some nerve. Your right though Obama is a Repug in sheeps clothing and I would think you would like that.


  4. The Raven says:

    Leeches, that’s the ticket…


  5. fausto chavez says:

    you forget real estate…people being foreclosed, the shadow inventory, the drop in home values, the people upside down unable to move, the 2 million back log of homes in some stage of foreclosure, the banks not doing anything to help anyone deserving after we bailed them out.

    you also forget credit card companies raising rates on everyone ahead of the card act, they haven’t lowered 1 single apr for me and i never paid late. this raised rates on everyone and made things hard on anyone who was on the edge back then.

    you also forget scapegoating gov workers, because its their fault!


  6. foosion says:

    Zero lower bound. Nominal rates on shorter treasuries have gone slightly below zero. Only the shorter treasury rates are currently zero. Real rates can easily go below zero, see TIPS to about 6 years.

    Doesn’t this show that monetary policy can work?

    Destabilizing uncertainty – how about the possibility of Republican induced default on the US debt?

    Lack of demand. Shouldn’t this be first on the list? Businesses aren’t expanding or hiring because there isn’t enough demand for their products or services.

    Fixing the deficit (especially cutting spending but also increasing taxes), further reduces demand. The resulting slowdown in the economy reduces tax receipts and increases safety net spending, worsening the deficit.

    Reduced govt workforce, especially at the local and state levels directly reduces employment and reduces demand for private business products, indirectly reducing overall employment.

    Deleveraging – consumers want to save to repair their balance sheets, so they don’t buy as much.

    Housing – both reduces the wealth of existing owners and paying down mortgage debt is a major part of deleveraging.

    Lack of safe assets – a favorite of Brad DeLong. People want to invest in safe assets, but the govt isn’t producing enough (i.e., isn’t selling as many treasuries as wanted), leading to increased savings rather than consumption.

    High unemployment (and cuts to safety net programs) reduces workers bargaining power, reducing wages


    • foosion says:

      Most individuals can get FDIC insurance at non-negative nominal rates for all of their holdings.

      Large holders need treasuries to get govt guaranteed investments, and those have gone zero or below recently. FDIC insurance isn’t big enough for them.


  7. Virgil Bierschwale says:

    One last attempt as it is obvious to me that you are not interested in fixing the problem.

    Yes, most of the things that you discussed above have a very big part, but you are missing the balance part.

    http://www.BuriedWhere.com

    http://keepamericaatwork.com/?p=189611

    The only way capitalism and democracy will work is if the 4 components are in balance:

    1. A government comprised of the people that understands that it is up to them to be the facilitator using tax revenue to take us into the future and to be the mediator between the businesses eternal quest to squeeze profit and the peoples quest for a better life for themselves and their families

    2. A business community

    3. The people of any country

    4. An independent media that will utilize its resources to watch for corruption between the government, people and business and report it to the people

    In our current situation, the business community believes it has no responsibility to the people, or its country and I can fix that in five minutes by telling them the following.

    Fine, you want to move your factories overseas, here are the ground rules:

    1. None of your employees will live or work here in America.
    2. None of your products will be sold as a finished good, or as a component of a finished good in America.
    3. Enjoy your Freedom in your new country.
    4. Don’t let the door hit you in the ??? on the way out.

    Trust me, they will come to the table and do the right thing because if they don’t, somebody that is willing too will step up to the plate and take their place and they know it.


  8. Avedon says:

    What’s wrong with this economy, first and foremost, is low taxes on the rich and corporations added to low tariffs and few restrictions on conditions under which we do business with companies based outside of the United States.

    Restore the old taxes, tariffs, and restrictions and you are automatically in much better shape all around – jobs, deficits, debt. Prosecute the criminals who violated what we have left of finance laws and then reinstate the old SEC regulations and now we’re talkin’.

    Of course, this won’t happen because both parties are now committed to allowing the US economy to fail.


  9. Geoff Freedman says:

    Prior to the current expansion caused by the housing bubble our 70% consumptive spending rate historically was only 65%. The extra 5% was caused by increased spending due to borrowing by the public because of the lack of income growth in the middle – lower income levels in the preceeding decade. That extra 5% is not comming back on a macro level – there are no asset values left to support this extra 5%, and this needs to be addressed strucurally.

    You also haven’t mentioned our high cost of health care, which is a drag on the economy as well.

    Also our astronomical increase in military spending at a time we cut taxes. Its not just the military budget per se, its the increase in all the associated areas like Dept of Vet Affairs, Etc. which adds up to an aggrigate 600 trillion in increases per year for military, spy effort and diplomatic efforts at a time when we cut tax rates. We are now spending over one trillion dollars per year on these items. That also puts a huge drag on resources for economic expansion. We need to start scaling back military spending now.

    Few outside of a small group of economists talk as much about the wealth inequity. The lower 80% have only 15% of the net wealth in this country now. With no assets, and high unemployement rates, there will be only marginal spending for survival comming from most of the people in this country.

    The biggest problem we have isn’t addressed by economists yet. And that is the ineffectiveness and disfunction in our government system, which can’t even deal with the short term issues let alone long term entitlement problems and appropriate government regulations. The political divide is too great. This is the real problem. And we are too passive a poulation, remaining on the sidelines while Rome (er America) burns to the ground.


  10. Jim says:

    Hello? Law of diminishing returns anyone? We’ve practiced this same form of capitalism for 30 plus years now. It’s only natural that we’ve reached the mature phase of the cycle so growth will be limited at this point.

    The real issue is the income disparity in this country. Trickle down economics has run it’s course. Continually allowing wealth to be concentrated in the hands of the few and hoping they share enough crumbs with the rest of us worked well for 20 years but it’s obviously petering out. There is such a thing as enough being enough.

    If only Obama could put the nail in the coffin of Reaganomics by making such an argument. Instead he continues this insane policy and lets the Republicans off the hook when they defend it. Populism has never had a more conducive atmosphere than right now. Now is the time to play the class warfare game because it’s a winning strategy.


  11. pjr says:

    What’s wrong is that GDP is higher today than it was in 2007 but now all the money is going to the wealthy and they no longer pay taxes or use the money to pay salaries. (They do use it to influence politicians.)

    Oh, please stop contributing to this use of imprecise language to obfuscate with the word “uncertainty.” If you mean “fear of another recession” or “fear of long-term depressed demand” then say so. I don’t think we want businesses to become more certain of these things.


  12. wasabi says:

    This is a good article. I won’t repeat several good additional reasons given by posters but simply mention one. It is that I think most consumers and employers expect the economy to get worse before it gets better. Part of this is because the president refuses to defend the stimulus in robust terms and thus leaves the widespread impression that it mostly failed and so he has washed his hands of stimulus in general after believing for a few months that deficit spending would work. Further, Obama has now actively embraced Republican voodoo economics and contradicts himself by saying that engaging in austerity while the recovery is stalled will create more jobs. Only Ryan and the tea-baggers believe this, and it doesn’t inspire consumer confidence in the future. Frankly, if the president is flip-flopping and sounds as if he doesn’t have a clue about the economy, many people become nihilistic, while the right gloats and dreams of a great economic disaster that will gut the government and destroy the Dem party.

    It is simply impossible to embrace massive austerity and at the same time give positive-sounding speeches that will inspire worried consumers to spend more money that they would rather save against future trouble. Austerity is a message of warning and punishment, and the emotional message is about enduring pain. It’s a variation on old-style Calvinist drink-your-bitter-medicine-to-save-your-soul message. It tells people to constrict and protect themselves with all their might. All this makes consumers even less likely to spend, lowers demand and hurts employment, and makes the inevitable economic damage caused by austerity even worse — ironically increasing the deficit. The president is facing a crisis. He simply cannot continue to send two diametrically opposite messages at once and win reelection. He must choose which side he’s on.

    How about if Vice President Biden had a man-to-man talk with the the president and told him flatly that it is impossible to expect economic recovery and a drop in unemployment if he embraces austerity now? The president’s present advisors seem to be giving him very bad advice, and he apparently believes he can have his cake and eat it too. He can’t. Making a “pivot,” as you’ve said, and defending more deficit spending on jobs programs in the face of a Republican lie-barrage would be difficult, but it can and must be done. There is no other option if the president wants to win next year. It would also help the economy, of course!


  13. John says:

    Thank you, Dr. Bernstein. This is a good start, and I’m especially glad that you recognize there isn’t just one thing going on here.

    When there are multiple causes to a problem, the first challenge is to identify them so as to clearly identify interdependencies. But that’s easier said than done; confounding of factors can make analysis next to impossible. Still, it’s important to separate symptoms from causes; both are kinds of problems, but attention paid to symptoms at the expense of ignoring causes leaves problems unsolved (although addressing symptoms is useful as well).

    Regarding productivity and technology, I especially applaud you for (finally…) taking the issue seriously. I wanted to mention one thing, that there’s a kind of structural issue that happens via what I’ll call “skills indirection.” Given a production task that can be augmented by information technology, the human operator’s skills are different from the skills actually needed for the task. An almost infinite range of production tasks can fit this model, but the range of operator skills is actually very small: an operator is an operator, the technology itself does the rest. The result is what I’ve called “skill compression:” employers tend to look for the narrow operator skill in their hiring instead of the broader production skill which is now taken up by the technology the operator just accompanies.

    Employers want to minimize labor costs, so they don’t want to hire and train for these operator skills, but they also don’t want to hire (now) overqualified workers who have the production skills (that are now performed by the technology) that are no longer needed in an operator – overqualified operators are more expensive than they need. And what you’ll hear from the employers is that these now very narrow “skill windows” are very hard to fill, but they won’t consider that it would be easy both to hire less skilled worker and train them, or to hire overskilled workers and simply pay them less, commensurate with the need.

    But even though they may indeed find these narrower jobs harder to fill, supply and demand doesn’t work to force wages up, since the whole point of the narrowing is to keep them low. It’s not that there’s a shortage of labor, it’s that the employers are being picky; they insist on the price for labor that they want to pay.

    I may have mentioned this, but I spoke to a tech recruiter a few months ago now, and asked him what he thought of the stat that there were 5 applicants for every job posting. He laughed. “It’s way higher than that,” was his response.

    This is only part of what are now called “best fit” hiring practices; there’s lots more. If you want to understand what’s happened to labor demand, don’t look at financial data – employers have now gotten good at hiding things like a preference for temp workers over permanent, blatant age discrimination, and more. Talk to recruiters and HR folks about their practices. They’ll tell you what’s been going on, and I’m sure you’ll be able to see what impact it’s had over the past decades.

    Thanks again, Dr. Bernstein. 8^)


    • John says:

      Along with this, another (hopefully quick) observation.

      HR is computerized these days, and the software is really terrible. The HR software industry really has never taken its challenge seriously, and its product across the board works on a too-simple model of what I’ll call “specific skills matching.” The functional person requesting a new hire has to make a list of specific things they’re looking for in the form of “keywords”, largely so that the HR person operating the search software doesn’t even have to know what these things are. Their selection criteria can then only be a quantitative number of matches against the list of keywords.

      The basic failing of this simple method is that it doesn’t attempt a “specific to general” skills mapping. E.g., a candidate may be expert or highly proficient at a very closely related skill or a more general skill than is being sought, but may have mentioned the more general or variant skill on their resume instead of the specific skill against which the match will be performed. And the result is no match, even though such a person might be perfect for the position, better even that the less skilled “ideal” candidate being sought.

      There are other issues well with this practice of computerized HR, not to mention the general problem that the people doing the hiring have no functional knowledge about what they’re hiring for, so they can’t do this kind of specific to general mapping using their own “human” intelligence – their own jobs are one of the narrowed “operator” skills, they simply can’t do any better at matching than the software itself does, and it doesn’t do very well at all.

      It seems to me that this kind of thing is exactly what economists mean by “structural unemployment,” and it’s not just widespread, it’s now ubiquitous. But there’s no mention of it by the “powers that be.” Prof. Krugman and others of your colleagues launch into rants at the mere mention of structural unemployment – he did so just yesterday. That, to me, is heads in the sand. I would like to think economists are capable of better. But your post today is one of the few glimmers of hope I’ve seen in the years now that I’ve been trying to make these issues known.


    • John says:

      I apologize for the serial commenting, but I hope you find all this useful. (And, I hope you have your recent boss’ ear, and he has his boss’ ear, to more of an extent than I do…)

      Another subtle but very important point about technology, and this is follows from the first thought I ever had on the subject. As technology becomes more advanced, fewer are its masters; more and more become its slaves. This is particularly true when hiring has to be done for technology-related work.

      In the worst case – which is more the typical case as well – a firm that needs to introduce certain new technologies to compete will have no expertise in that technology in-house. They don’t even know how to ask for help, and that is a structural unemployment issue. They may have heard of or been pitched a vendor’s product, and they then look for people with experience with that specific product, and guess what, they won’t find it, even though they may get tons of applications from people who know enough to help them; simply put, they don’t know enough to know how to select help, and they end up thinking no one who’s applied is qualified to help, when the real problem is that they’re not qualified enough to know how to judge applicants. So the structural issue is not with the laborers, it’s with the employers themselves.

      I’ve been involved with web technology since within weeks of its origin. I helped port the original web server to Linux. Even before that, I was involved in a project that built software to map programming languages to each other, using SGML – the common parent of the web’s HTML and its younger and more general sibling XML, as a research project in grad school. I recall as a grad student looking for jobs, that a company that wanted to be an early adopter of the new technology was looking for help, but their posting was for a very specific subset of the new technology, a subset I had not been exposed to but could have developed myself. And I could not convince them that I could do the job they needed doing – despite the fact that the work they wanted to do was based on work I had myself been involved in.

      So I want to bang my head against a wall sometimes, when I hear people talk about a lack of skills in the labor force being a source of structural unemployment, and when people like Prof. Krugman respond by ranting against their being any structural unemployment at all. There is a structural issue – but it’s not in the workforce, it’s in the hiring process itself. And the glut of labor that results, and the fact that the technology is applicable to just about every industry still viable in this age, seems to hide it from economists; there’s no lack of labor supply, and there’s no lack in specific industries where there’s a labor mismatch. The issue is in the HR industry itself, as much as anywhere, and employers of all sorts have fallen into this sort of trap.


      • John says:

        Finally, I might mention that it’s a standing joke in the software industry that job postings will ask for experience with a vendors product or a technology that exceeds the lifetime of said product or technology. E.g., “5 years experience with X,” when X has only existed for 3 years. Yeah, that’s a structural issue, alright, but not with those people who apply, who could only possibly have 3 years of experience with X.

        I can’t even remember how long ago I first saw this happening – it’s been close to 20 years now, for sure.


        • readerOfTeaLeaves says:

          Ding!

          And the other hiring dynamics that John mentions are things that I’ve spotted either briefly, or from afar.

          I have in the past had to explain to recruiters what they are supposed to be talking about: they are charged with hiring technical skills that some of them have a hard time assessing.

          And that’s when they know what to look for, which is not a given. I don’t know how endemic it is, but I’ve certainly encountered it.


    • John says:

      I have to mention one other thing.

      There is and no longer can be a meaningful financial market for computer software. That cow has left the barn. There’s Microsoft’s vendor network – Microsoft is a monopoly – and there’s open source software. Open source is free (and it’s what I do, and the reason no one wants to pay for what I do).

      This very blog runs on free software. From a Linux terminal window:

      > curl -IS http://jaredbernsteinblog.com/
      HTTP/1.1 200 OK
      Date: Sun, 10 Jul 2011 18:57:15 GMT
      Server: Apache/1.3.42 (Unix) mod_fastcgi/2.4.6 mod_log_bytes/1.2 mod_bwlimited/1.4 mod_auth_passthrough/1.8 FrontPage/5.0.2.2635 mod_ssl/2.8.31 OpenSSL/0.9.8e-fips-rhel5
      Cache-Control: max-age=3, must-revalidate
      Vary: Accept-Encoding,Cookie
      WP-Super-Cache: Served supercache file from PHP
      X-Powered-By: PHP/5.2.17
      Content-Type: text/html; charset=UTF-8

      Apache is the workhorse web server of the Internet, and the descendent of the web server I mentioned above, that I helped port originally to Linux. Version 1.3.42 is an old but stable version of Apache (I’m running 2.2.17 on my laptop here). Your blog is running on Red Hat Enterprise Linux release 5, on a MIPS processor, likely in a server farm (my laptop is running Fedora 14; Fedora is Red Hat’s “community” edition, the development version of what later becomes their enterprise releases). You might be paying a service provider for the blog service – it might be free, but many folks like me have never made a dime from the software you’re using, even though we helped develop it and are still helping develop it.

      Consider how much of the technology-enabled productivity improvement that’s happened in the past two decades, and how much of it has been based on an entirely free factor of production, and you might begin to get a sense of how deep – and how deeply ignored – this issue really has become.

      It’s almost an insult to have economists rant against my suggestion that technology devalues labor and that there are structural issues related to its use, when their very blogs are using the software developed by people like me without compensation and at absolutely no cost to them. I’m glad you’re no longer on that list, Dr. Bernstein.


      • John says:

        Correction – I saw ‘mips’ – it’s ‘fips’. MIPS is a processor architecture, FIPS is “Federal Information Processing Standards’, in this case, FIPS-140, against which OpenSSL has been validated as an encryption standard.

        RPM is Red Hat’s software packaging standard, and that form matches its package signatures: name-arch-vendor. But it’s an ambiguous signature, since in some cases (as in this one) a package name can have a “-” in it.

        This level of detail is useful, I hope, because it’s exactly the kind of thing I was describing. It would be way over the head of a hiring staffer – but even hard for an expert to keep track of in all possible variations, let alone list comprehensively on a resume’. I’ve contributed to OpenSSL in the past, and it’s been a thorn in the side of Linux distributions for its poor adherence particularly to library conventions.

        The level of posting that would deal with this particular thing would be titled something like “Linux Sys Admin”; I’m not a Linux Sys Admin, my skills are in most ways a superset of a sysadmin’s skills, but in minor ways a subset. So I don’t get called for interviews for sysadmin postings. Besides, I have a PhD, and no one wants to pay a PhD the relevant discipline for an operator’s job (a sysadmin is the poster case of an operator).


        • readerOfTeaLeaves says:

          On a smaller, far less technical scale, I’ve also worked on Open Source stuff.

          Partly because during the GWBush era, whatever surveillance mojo Cheney put in place did not protect some of us from intellectual theft. I threw up my hands and said, “What the heck, if people are only going to steal it and the government can’t take cybersecurity seriously, someone like me is better off with Open Source.” But it is not reliable, predictable income.

          But I’ll leave my related comment at the bottom of the comment heap down below, because it is a somewhat separate issue.

          However, what John is saying is absolutely true: many of us have done work for no income. Partly for that reason, watching the whingey nonsense out of DC about debt ceilings and other completely irrelevant nonsense is beyond aggravating.

          I feel fortunate to have had a chance to contribute the miniscule bits that I’ve been able to toss in the mix, but it has not thickened my so-called ‘portfolio’.


  14. Bob Wyman says:

    The issue isn’t “uncertainty” but rather that businesses are *certain* that there isn’t much demand in the economy. If there was strong consumer demand and lots of folk lined up in stores to buy products, then no amount of “uncertainty” over the debt ceiling would have much impact.

    The only reason why the debt ceiling uncertainty does have impact is that without consumers being able to buy things, producers must look to the government as the buyer of last resort. It is bad enough that consumer’s credit cards have been exhausted. If we take away the government’s credit card too, businesses will be even more certain that demand won’t increase any time soon.

    Also:
    If the Republicans really want to reduce federal spending and the debt, then they should support reductions to or redirection of federal expenditures — i.e. federal *tax expenditures*… A subsidy for ethanol or private jets is not a “tax cut”; it is a *tax expenditure* — no different from any other spending other than the way payments are made. Today, we have massive amounts of “tax expenditures” that are drastically less stimulative than available alternatives (like infrastructure spending, FAST, etc….) If the Republicans can’t get behind the idea of reducing government spending (tax expenditures) then, at least, they should be able to see the wisdom in using those expenditures more wisely and in a more stimulative fashion.


  15. Misaki says:

    Divide and conquer. It is a classic strategy.

    You must exploit the companies who feel they are not profitable right now to attack the ones who feel they are profitable. Realize that the “unprofitable” companies reside in the middle of the quality spectrum for products, with the top occupied by profitable companies and the bottom occupied by imports from China.

    In series:
    “So traditional monetary policy is ineffective. . . . The R’s want to argue the Recovery Act failed, and prominent D’s either seem to largely agree or at least don’t want to get near anything Keynesian. I haven’t seen such a lack of stimulus since my days of dating back in high school.”

    Monetary and fiscal policy are not the only options available.

    “It’s a self-reinforcing weak demand cycle.”
    This works both ways. Low incomes mean more demand for products in the middle of the quality spectrum instead of the top, while at the same time much of the existing demand is for the highest quality products due to their utility as signals. This can be exploited due to the different goals of companies in the middle compared to upper spectrum.

    “Now, firms engage in a “just-in-time-inventory” approach to hiring.”
    Many of the firms that do this are doing it out of a desire to remain profitable, due to the concentration of purchases at the low and high ends of the quality spectrum or diffusion away from the middle.

    –The absence of union power in tandem with high unemployment, leads to weak bargaining power so that whatever growth there is bypasses the broad middle class and goes right to the top of the income scale, where demand ends up narrowly concentrated.”
    This is true on a national level, but is irrelevant to the perceptions and desires of many of the voters in the US.

    This is why “when … most people talk about this stuff … hardly any of these reasons come up”.

    Reducing the average wage of permanent employees working full time, but giving the option of retaining the original wage rate by working part-time, is the solution to unemployment. It gives the appearance of addressing the concerns of companies in the middle of the quality spectrum, but selectively increases the wage cost for companies at the top of the quality spectrum, while causing employees of those companies to be more thoughtful of their purchases and boosting demand for the middle of the quality spectrum which is, by definition, the only area where “low consumer demand” is being experienced.


  16. John says:

    An example of the problem:

    http://economistsview.typepad.com/economistsview/2011/07/historical-patterns-okuns-law-and-the-great-recession.html

    “Okun’s Law” isn’t a “law in any sense of the word – it’s an unproven rule of thumb. All Arin Dube has done is demonstrate how little predictive utility it has. But that should be obvious from looking at the scatter plot, where anyone who knows how to analyze scatter plots even visually would have to conclude that there no useful information there beside a general but weak central tendency and the slightest hint regarding the slope of a differnt but also very weak relationship. And those two, by the way, suggest nothing except that there’s a confounding of factors underlying the data, so much so that the only conclusion to be drawn is that more useful and more detailed data is called for instead of this data.

    There’s simply no way this data could say the anything reliable about the issue of structural unemployment. Sheesh. Excuse me while I go puke again.

    This is what we computer scientists call “garbage in, garbage out.”

    And folks like this actually get both advanced degrees and jobs doing this kind of nonsense?

    Mene. Mene. Tekel. Parsin.


    • John says:

      BTW, I’d post this on Dr. Thoma’s blog, but he blocks my comments. Which, of course, is his privilege.


  17. TV says:

    Jared — How about those Fed Appointments?

    Also, I think you should make clear that you mean that while traditional monetary policy (short-term interest rates) has lost traction, there are still a bevy of non-standard things the Fed could do, and that our best indication is that QE2 did do something, although we may not know precisely the magnitude of the impact (not that we ever know the precise magnitude of the Fed Funds rate changes either).

    Even though, for example, QE2 was expected before it was announced, it did move markets, interest rates and the exchange rate. Fed could also cut the discount rate (small potatoes, yes, but our economy is starving), cut the rate it pays on reserves, lower the discount rate all the way to zero, target the 6 month and 1 year rates to .25%, or get more specific on the ‘extended period’ language. The Fed is not completely impotent.

    This labor report stands in stark contrast to what the Fed was expecting — after all, they ended QE2 on the grounds that we were in danger of a wage-price spiral. Now it’s clear that we were in danger of nothing of the sort. And yet, the Fed will stand pat.

    Beauty of more monetary policy is that it will tend to help revalue the dollar, even if nothing else…

    Keep up the great work, Jared!


  18. David Kaib says:

    You should add “strengthen unions” to your list of things the Admin can do to improve the economy. Specifically, the use of the contracting power to ensure union rights are respected, and for workers who lack union rights (i.e. agriculture workers who work for federal contractors, but who are not covered by the NLRA) the extension of union rights to them.


  19. Taryn H. says:

    First off, I’l just mention that the joke about stimulus and high school made me laugh.

    Second, since – as you point out – no one is taking about stimulus, I wanted to ask you about something I remember being discussed all of the time that seems to have completely disappeared. In the weeks leading up to the stimulus, there was a lot of talk about how certain types of spending and/or tax cuts produced certain stimulative effects – in general, money into the hands of the least well off had the most stimulative effect (largest multiplier) because that money is spent in the economy, which is also why tax breaks for the rich aren’t particularly stimulative.

    As I understood it at the time, the idea that this occurred was uncontroversial. There was some disagreement about the effect of certain actions (for example, I think Christina Romer and her husband wrote a paper suggesting tax cuts were more stimulative than previously thought – a paper Rs loved to cite). But the idea itself – that spending and tax cuts had an expansionary effect and that the opposite would have a contractionary effect – seemed well-accepted.

    How then can we – Rs and Ds alike – now be assuming that deep cuts are what this economy needs? Are people assuming spending cuts will be expansionary? Is there any sound economics backing this up? Or is it just confidence fairy stuff?

    And why isn’t anyone making noise about the stuff the proposed budgets are cutting? Why aren’t we hearing about the multipliers and the effects this will have on the economy? It can’t be good to be cutting aid to the poor – morally, of course, but I’m talking about it strictly on the level of economics.

    OK, I’m obviously a lay person – am I seeing this wrong?


    • Taryn H. says:

      Also, Dr. Bernstein, could you explain how big of a stimulus we would need to restore full employment? I know it’s politically impossible, but I’m having a hard time finding anyone who is saying what it would take and why.


  20. readerOfTeaLeaves says:

    There might be something else going on here too. I’ve heard anecdotes that lead to me wonder whether the pace of “labor-saving technology” is accelerating, especially in manufacturing. It’s been going on forever, of course, but I have a feeling that the capital intensivity of production is increasing at a faster rate. More to come on this in later posts as I learn more about it.

    I look forward to what you may elaborate upon about this topic.

    I’ve just picked up Zuboff’s “In the Age of the Smart Machine” (1988) to re-read because I thought that it might answer a problem nagging at me. I had forgotten that Zuboff points out that computer-aided technologies **informate** as well as *create*.

    In other words, AS THEY create products they also *create information about what they are creating* — whether a blog post, or a robotic process, or a computer scan in the grocery store. All of these processes create information, and in this respect they “INFORMATE”.

    They create data.
    They create data about what they’ve just created.
    (This is often called ‘metadata,’ although the term has other meanings.)

    John above has provided an example of ‘informated content’ in his paste of the server code related to the Apache server Dr Bernstein’s Open Source blog software is running on. Again, to reiterate, this is an example of ‘informated’ content. Its source *is* a technical process; it was created by the processes involved in serving up web pages.

    This was not a product that was created for sale.
    It was a by-product of the process of creating content.
    But that by-product, that ‘informated content’ has value in and of itself.

    I’ve been thinking about where some of the really big pots of money have come from the last 20 years — apart from the Shadow Banking System (which informates constantly, but that’s not my main point).

    Google ads are an example of monetizing the ‘informating capabilities’ of the Web. Google ads are metadata, about metadata. Metadata is all created to enable the processes of ‘informating’, to use Zuboff’s term.
    It’s ‘information about information’, if you will.

    It’s my hunch, and I still have to muddle this around my little mind here on the dumb donut stack, in the peanut gallery… but it’s my hunch that the profits from “INFORMATING” all got siphoned to the top 1% of the top %5 of the income levels.

    This happened through a variety of disastrous methods and misjudgments — starting with general failure to really think through the nature of computing technologies and what they’d mean for employment, labor, etc, etc.

    The people, like those smart folks at Google, who best thought about and understood the nature of the technology,those folks identified the ‘informating’ potential that emerged from the ‘new’ economy, and did some cool things while making loads of money. Their efforts were primarily directed at the ‘informating processes’ that evolved out of computing technologies, and then the Web. But these dynamics are also present in production processes — and by creating (or ‘informating’) about the production processes, you affect those processes. The dynamic builds over time.

    It certainly seems that federal policy makers were mostly used to thinking about employment and economic policies within the framework of manufacturing industrial and ‘real goods’, and mostly seem to have missed some fundamental implications about the forces unleashed by the ‘informating’ properties and capabilities of computerizing industrial processes, as well as service sector employment.

    In other words, the economists seem to have thought of productive processes as creating end products. They taxed those products and the labor that enabled their creation.

    Meanwhile, a whole other emerging sector of potential wealth and employment was misunderstood, ignored, or overlooked: the ‘informating’ streams of revenue were co-opted by a very tiny portion of economic actors.

    Because informated content is constantly expanding exponentially, this wealth from ‘informated content’ grew significantly. Then it began streaming across computer networks into tax havens, etc, and the policy process was left behind like a chump in a logged-off forest, as near as I can tell.

    All the profits from ‘informating’ appears to have been siphoned off into managerial and ‘investment’ pools of money — which expanded at unprecedented, but unpredictable rates; to the wealthiest, because it was mostly invisible to policy makers. At least, that’s a quick working hypothesis at this point.

    This has large implications for a number of topics listed in this post, but mostly ‘technology’ and definitely ‘tax policy’.

    It kind of puts the manufacturing processes a bit topsy-turvy, but it helps explain why for many companies, the most valuable assets have been ‘information’.

    But this has led, IMVHO, to a tragic loss in craft knowledge, in what I would call ‘embodied knowledge’ — the carpenter who really knows how to shape a cabinet top, etc, etc. People with craft knowledge are a key part of any economy, yet they’re discarded as if what they do is so much less important than someone clicking a few buttons on Wall Street. It has led to a tremendous amount of disrespect for the nature of physical labor and craft knowledge, in my view.

    If you ‘informate’ a process, you don’t need craftsmen.
    And when you don’t identify, or properly tax that ‘informated content’ then you can’t pay a craftsman to go work on a new school, which could be designed for better learning environments as well as more efficient energy use.


  21. Steve Osborne says:

    We not only have a liquidity-trap problem but also a carry trade problem. The $600 Billion stimulus that was created out of thin air last fall ended up in foreign banks reserves and redirected overseas where money could be lent at a higher rate. We need to engineer ways of channeling credit to local economies.


  22. Main Street Muse says:

    I hear you about high unemployment and stagnant wages hindering demand. However, I keep seeing stories about high profits. Looks like corporations have figured out how to profit without consumers….


  23. Peter McCabe says:

    One reader touched on a big cause – deleveraging.
    Last year I came across Richard Koo’s book “The holy grail of macro economics” which explained the concept of a “Balance Sheet Recession”, and it pretty much explains what’s been going on since 2008. If the theory is correct then it would suggest that most remedies for our current woes that are being discussed are either irrelevant, useless, naive or duplicitous. I recommend googling “Richard Koo balance sheet recession” for mor information, including Krugman’s review of the above mentioned book in the NYRB (October 2010).


  24. Tom Simon says:

    Reader of tea leaves is on to it:

    ” but it’s my hunch that the profits from “INFORMATING” all got siphoned to the top 1% of the top %5 of the income levels.”

    Fully agree – Steve Jobs is a prime example. I think there is a sector of the economy who now have keys to the vault – not unlike Pharaohs, Kings and Dictators of the past. This inequality of access to capital, resources and now complete control of the Internet was the great fear of the early web pioneers – who were way too altruistic and trusting.

    Diversity makes for healthy eco systems. There is now less diversity in access to capital – fewer companies can survive – there is also now more competition among workers – a predatory ethos is now embedded in the workplace – commuting costs are now higher than ever @ $13,000 per year (based on 30 miles each way), education certificates to get entry to jobs what once were called degrees have sky rocketed, all costs borne by workers who often use high interest credit cards to finance day to day working expenses…

    There is little fairness in the economy now. The system is broken.


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