Enough with the Present—I’m Looking Ahead

July 21st, 2011 at 7:34 am

Hey…did you hear that??  It sounded like something just snapped.

It’s the sound of America finally getting fed up with the high-stakes craziness going on here in the nation’s capital.  I could be wrong, but my read of the national mood is changing and that enough people are both paying attention to the debt ceiling debate and are “taking names” such that we might see Congress shamed into some action.

I’ll continue to track this of course, and I’ll weigh in on parts that I believe are of interest, but frankly, it’s not worth it to follow every wiggle.  So let’s put aside “the-gang-of-six-and-their-bag-of-tricks” for a moment and assess where we are and where we might be headed, political-economy wise.

[Note: Read in the NYT this AM re the gang’s plan: “…Representative Eric Cantor, the No. 2 Republican, and others like Representative Paul D. Ryan of Wisconsin, the Budget Committee chairman, warned that the most specific proposal to be made public so far — and the one that has done the most to reopen the possibility of a bipartisan accord — relied far too much for them on higher revenues to cut projected deficits.”  Like I said, don’t get too attached to this or any other plan right now…I still think we’ll lurch and muddle our way to avoiding default, but it’s one ugly process.]

The Present: The US economy’s stuck in something like neutral, with both consumption and investment in weakened states.  The former remains 70% of the show, so if consumers are retrenching, absent policy help, we’re stuck.

Conventional monetary policy is bound by zero (the Fed can’t lower interest rates below zero) and less conventional stuff, like quantitative easing, might not even help much.  The cost of capital is not a constraint right now, at least for larger firms, and corporate cash reserves are flush.

That leaves fiscal stimulus, which are two naughty words.

So the present is wracked with real problems—the fallout from the housing bubble, financial collapse, deleverage cycle, weak demand, high joblessness—strongly reinforced by self-inflicted handcuffs on policy relief and an invented debt ceiling crisis.

That’s here—in Europe, they’ve got their own version of dithering, refusing to rip the band aid off and restructure Greek debt, amplifying the threat of contagion and deeper sovereign debt crises in much larger economies.

The upside of the present: deleveraging is winding down in the household sector (debt service ratios are back to pre-recession levels), corporations have high levels of cash reserves and could create economic activity if they saw profitable opportunities, the housing correction is largely over (it ain’t helping but it’s not hurting as much), and the private sector has been adding jobs, though far too few.

The forecast is for slow improvement.  We need a V-shaped recovery; we’re getting an L.

The Future: As is the case by definition, this is where hope lies so it’s where I’d like to focus for a while.  It’s not just that the present is depressing; it’s that policy analysts like myself need to envision and articulate a better plan forward.  It’s of course entirely possible that any such path will be blocked by the same destructive politics on one side and hyper-cautious response on the other.  But if there are no positive alternative paths out there, we’re that much less likely to follow them.

Therefore, in coming days, I hope to post on post-debt-ceiling-debacle ideas for moving the economy forward, both “coulds” and “shoulds.”

A number of us are continuing to develop the FAST! idea (Fix America’s Schools Today), avoiding air-pockets (continuing some version of the payroll tax break and unemployment benefits), nudging the GSEs toward loan mods and putting their foreclosed housing stock on the rental market, pushing back on international currency managers to boost our exports, and other ideas in this space, including President Obama’s forward-looking investment agenda, which has the potential to help our manufactures move from contracting (eg, autos) into expanding sectors (eg, clean energy).

It’s also important to get back to bigger, structural job creation questions.  Once the economy recovers, we’ll need to be mindful of not just the quantity of job creation, but the quality.  This means wage policies like the Earned Income Credit (which is interestingly protected in the gang of six plan), minimum wages, and union organizing (remember this—it’s still alive), will need attention.

And then there’s the productivity challenge.  This is the structural shift toward capital versus labor intensivity in sectoral job creation that I was fretting about a few weeks ago.

Labor saving technology has gone on forever, and I’m not at all a Luddite alarmist—I always remind myself that there’s no long term negative correlation productivity and job growth.  Demand is the intervening variable and that makes all the difference, offsetting and absorbing higher output per hour.

But this warrants close analysis so more to come on all of the above.

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14 comments in reply to "Enough with the Present—I’m Looking Ahead"

  1. Sandwichman says:

    I was shocked! I thought you wrote, “Enough with the President — I’m Looking Ahead.”

  2. Fred Donaldson says:

    While the factories in China employ hundreds of thousands in just one location, producing goods once made in the U.S., we have a government talking about things like “Made in North America”, which means Canada and Mexico and U.S.

    There are many, many Americans who will never qualify as software engineers or CEOs. To base an economy on only the elite, sitting around a table talking about their investments, is ignoring the bulk of the population.

    We need jobs making things. Not just houses, but planes, trains and automobiles for export. The reason China has so much of our debt is because of trade imbalance, which leaves them with so much money they have to invest somewhere.

    I am afraid that there has become a royal class in America, folks who really think they have all the answers because of an education which made them adopt many of the same ideas of elite entitlement that we revolted against in the 18th century.

    If you want to know how bad it is, consider the small example that the Army Corps of Engineers doesn’t build or repair anything, it just issues contracts to private companies, who I am sure have their campaign contributions ready at the right time for the right people.

    • John says:

      Fred, I can’t speak for CEOs, but as a software engineer, things are as bad for us as for anyone else. Yours truly included.

      I see news report about heavy new hiring in Silicon Valley, but I also hear of continued layoffs there (e.g., Cisco, this week). There are a handful of hotbeds of technology, but not all software engineers live in those areas; those of us who don’t have been having problems for well more than a decade.

      Reports of job demand in technology should be taken with a spoonful of salt, not just a grain.

      There are indeed multi-millionaire software engineers. But there are multi-millionaire recording artists and athletes as well; the larger culture seems to accept those as anomalies. They’re anomalies in software engineering also, but the larger culture doesn’t see that (yet). The rare software engineer has been able both to commercialize their work product and to personally benefit from that commercialization; but that’s the rare exception. Most are laborers on the default permanent work-for-hire basis, or are contractors on a temporarily basis. Those who are employed do relatively well, certainly, but many are not employed at all. In areas like where I am, I’m told that there are far more than 5 applicants for every job posting for software engineering jobs.

      • Fred Donaldson says:

        I totally agree with you, and my family has been involved with Olin College in Needham, MA. The pay of software engeers with a Master’s is half the salary of an MBA, and the former is twice as smart as the latter.

        Outsourcing code to India and bringing in foreign workers at lower prices has caused average salaries to drop in real terms in recent years, and yet the President mumbles about more tech grads needed.

        If you are smart, why kill yourself to be an engineer, when you can make twice the money pushing a pencil?

        In Japan the engineers are the CEOs. In America they try to pay them $45k and expect them to work free overtime.

  3. Sandwichman says:

    “Demand is the intervening variable and that makes all the difference, offsetting and absorbing higher output per hour.”

    Well, no. Demand has always been one of TWO intervening variables, the other being the reduction of working time. Up until the post-war era, the secular decline in average annual hours worked per worker absorbed a fair proportion of productivity gains. In the post-war economy, though, the decline in average hours stalled and then even reversed, on a household basis.

    Since the 1980s, demand has indeed been the sole intervening variable — and look where that has gotten us in terms of income inequality, debt, ecological unsustainability and economic instability. For demand to resume it’s solo performance would require the introduction of new, populist, must-have, high-ticket, low environmental impact, made-in-America consumer goods. Not to put too fine a point on it, the new goods must have entirely different characteristics from the planned-obsolescence, “borrow, spend, buy, waste want” goods of the “affluent society,” 1950s to 2000s.

    There is indeed a need for an energy infrastructure sustainability retrofit. But that would constitute a substitute for, not a supplement to current demand. The future has got to be something radically different from a greener present.

    Towards a Labor Commons: Considering Employment as a Common Pool Resource through Social Accounting.

  4. John says:

    “Labor saving technology has gone on forever, and I’m not at all a Luddite alarmist—I always remind myself that there’s no long term negative correlation [between] productivity and job growth. Demand is the intervening variable and that makes all the difference, offsetting and absorbing higher output per hour.”

    You economists do something that’s really annoying to people like me. You see data, attach a simple explanation to it, then call it a day. A more obvious explanation can be screaming in your ear, and you play like the three monkeys: deaf, dumb, and blind. It’s no wonder you have no serious ideas about solutions; you won’t even look deeply enough at the problems to find root causes, something that every good engineer does instinctively. Engineers distinguish between solutions and “workarounds” – workarounds are what gets applied to symptoms; solutions get applied to root causes, and actually resolve those root causes.

    Clearly, no so with macroeconomics.

    The way I see things, there’s optimistic, there’s pessimistic, and there’s objective. Objectivity is rational; optimism and pessimism are not – they’re distractions from rational. Enough practice with an engineering discipline teaches one the difference.

    I’m not a Luddite either – quite the contrary. I don’t blame technology for its effects, most of which are positive; I blame the prevailing economic model, which as Sandwichman will tell you, doesn’t take various issues and alternatives into account. Doesn’t even consider them; just seems to dismiss them. Economists give themselves that luxury. From my perspective, that makes the discipline next to useless, if not worse than useless.

    I mentioned math-illiteracy yesterday. Let me give an example. Economists look at GDP for economic growth rate. 1% or less is apparently bad news, 3% is apparently good news. So a difference of 2% seems to make all the difference in the world.

    In what I do, we routinely deal with time frames from nanoseconds up to seconds, where comparatively, seconds are like centuries if not millenia: 1s:1ns is 9 orders of magnitude. Not 2%; not 1.03:1.01, but 1,000,000,000:1.

    What the human brain may take seconds, minutes, days, weeks, or longer to do, even a smartphone might do in microseconds. That’s not a 1 to 3% improvement in productivity; it’s a 1,000,000:1 or improvement in productivity.

    If such technology replaces just 1% to 3% of human labor, it’s likely to make the work essentially instantaneous in human-perceptible time. It doesn’t have to fully automate human labor to have the scale of impact that economists seem to think is significant when applied to the question of economic growth, or the lack thereof. But it has another effect: it effectively changes the relationship of labor to output from fixed to highly variable.

    Past kinds of labor-saving technology effectively preserved the ratio of human input to produced output. Those kinds of technology didn’t effectively replace the human brain; they needed manual human operation, even if the effectively fixed ratio was 10:1 or 100:1. More output required more human labor as input. That’s no longer true.

    So even for the past few decades, we’ve had very large manufacturing facilities replaced by automated facilities, with human workforces of 10’s of thousands replaced by a small handful of human operators. Again, there is no fixed labor:output ratio in such cases. I suppose in economic-speak (correct me if I’m wrong), this makes labor itself a fixed and potentially a very small cost; it’s no longer a variable cost proportional in some ratio to output.

    Those cases are becoming more and more common; they will become the norm. But I can tell you, Dr. Bernstein, the economic effect is already way beyond a few percentage points. Way.

    So if labor becomes fixed cost, change supply and demand all you want, you won’t change labor demand proportionately, because the relationship of labor to output is not longer fixed.

    If you’re not seeing this, it’s because you don’t want to look for it; you’ve long since convinced yourself it’s not (yet) possible. What you don’t look for, you’ll not see.

    One needs careful empirical observation and measurement to see very small changes of only a few percentage points, in just about anything. Changes of orders of magnitude – even a single order of magnitude (10:1) – should be visible to the naked eye, if you know what you’re looking at. But I can tell you from experience, even bigger changes can be missed if you’re not looking for them.

    Every single explanation for the loss of the US manufacturing sector has its roots in technological improvements – primarily computers and communications. You shouldn’t need graphs and charts and such to see that. And if you use graphs and charts to try to deny it, you should be careful not to miss that as small as the changes are that your graphs and charts reflect and as few factors as the consider, they may just be GIGO – garbage in, garbage out, with nothing meaningful there to interpret.

    I like my technology; I’m proud of what’s been accomplished. But I try to be neither optimistic nor pessimistic about it; I try to be objective. And there’s a huge economic issue brewing, that technologists themselves are not equipped to deal with – they don’t think macroeconomically; they work in “heads-down mode.” If macroeconomists keep acting like climate change deniers where technology is concerned, there’s big trouble facing us. Now, in the present, not even in the future.

    • Jim Edwards says:

      Margin changes in technology and margin changes in social sciences are apples to humid comparisons. No computer can devise a poll that will produce results so precise a char wouldn’t suffice. None can predict the weather tomorrow with any more precision. Computers are very good at simple repetitive monotonous tasks, like trading stocks. In fact they are better because they are so fast.

      Computers cannot write Harry Potter, nor make the film, nor act, nor can it do hundreds of jobs required to produce a work of creativity. More people work in the film and television industry today because they have computers doing things in a day that took a week.

      Computers cannot research science or program themselves to do useful tasks except in very limited environments and very crude brute force methods.

      Computer technology is like a trading partner who discovers they can grow 10x the wheat you can. Do you leave your farmers sitting idle or do they grow or make something else?

      There is a technology impact on economics I have not seen addressed and that is the issue of marginal production. Once a film is made and digitized, marginal production becomes zero. We can look at this and think Hooray! free games and movies and music for everyone. But those people need to eat and by those people I mean me. How do we square that circle? Perhaps Capitalism has reached the end of its useful purpose just as Mercantilism and Feudalism did.

      Computers really are not at all different than the steam engine or interchangeable pieces. They have no greater impact nor less. The steam engine gave rise to Communism and interchangeable parts and the steam engine gave us Capitalism.

    • Jim Edwards says:

      One other point.

      “Every single explanation for the loss of the US manufacturing sector has its roots in technological improvements – primarily computers and communications.”

      Perhaps you overlooked the massive impact container shipping had on the shuffling of world wide jobs. It can be argued that that is a technological improvement, but then almost by definition everything becomes a technological improvement. But it is in no way computer or communications related. We were still using Ma Bell and Marconi’s radio.

  5. chris says:

    OT but here’s a poll you missed when writing your disingenuous article about “balance”


    “New WaPost/ABC Poll: 72% of Americans Opposed to Cutting Medicaid, Favor Raising Taxes on Rich People”

    not that your former boss gives a damn what the American people want…

  6. Taryn H. says:

    This makes me feel hopeful. It won’t last, but thanks anyway. If you’re thinking of ways to go forward, I thought this fairly short quote of Larry Summers was amazing: http://blogs.reuters.com/felix-salmon/2011/07/20/the-smart-and-charming-larry-summers/

    First, I thought Larry Summers did a great job of turning the word “deficit” in our favor – it’s a rhetorical point, but helpful.

    Second, the point Larry Summers makes at the end – that raising GDP will do more to reduce deficits than cutting spending – needs to be made. The Ronald Reagan “grow the pie” language comes to mind and invoking Reagan always stuns and confuses Rs.

    Third, Larry Summers’ other point – with interest this low and our infrastructure needs this high, we should be spending on infrastructure irrespective of the Keynesian reasons for doing so. This country desperately needs infrastructure and we can borrow at a rate that’s lower than projected inflation. We should be talking about the crumbling infrastructure and schools every time we get the chance.

    Glad to hear you’re all hopeful. Good luck and do what you can to help save the country.

  7. Steve Goldstraw says:

    I sent below a couple days ago

    I am going to PERSONALLY hold EVERY politician (Democrat and Republican)in Congress responsible for destroying this country if you arrogant assholes wont keep our AAA rating by passing the debt limit increase by the 22nd

  8. Jim Edwards says:

    I think there are two factors in productivity gains and one of them should not be considered. True productivity gains come from organizational restructuring and labor saving devices. Artificial gains come from pushing employees to work longer hours and not hiring new guys who haven’t yet learned the job. The first is a real value and the later is detrimental. It seems tough that both are combined.

    Real productivity change comes from High wages and demand for workers. Here in India there are very few traffic lights. There are no auto opening doors. There are no parking ticket dispensing machines. Why bother when you can pay a person $100 a month or less to do the work.

    When wages are low and there is high unemployment or underemployment there is a burst of entrepreneurial activity. If you combine that with low cost of living and a social safety net, either government or family, you have an ideal laboratory for new companies.

    Here in India there is both. Highly skilled workers can earn western salaries while enjoying very cheap living expenses, while low skilled or recent university graduates are very plentiful. I don’t make anywhere near what I used to make in the US, six figures, but my living expenses is less than $300 per month. I am growing a start up with others that only needs $6000 a month to keep running. We have 5 programmers, 2 artists, an office manager, one HR, one marketing guy, one IT guy, one office boy, and one janitor.

    Rather than looking at the rise or fall of the dollar, health care costs, labor unions demanding higher wages, and other issues, perhaps it is the wealth and power of the rentiers that has priced the US out of competitiveness?

    • Jared Bernstein says:

      I find that fascinating. So, you’re saying a combination of relatively high salaries (relative to national average) at the top of the skill scale, low salaries for young, skilled workers, and very low salaries for “unskilled” is a potent combination for incubating new companies, which by the way, is a real problem for the US right now, as start ups are way down.

      But mapping that model onto the US would be tough. In a way, the problem is not just the high end–I agree with your point re “rentiers”–it’s the low end. We would not want our low end workers to make the comparable relative wage to low-wage workers from India.

      One other point: my take on the wage data is that young college-educated workers are actually relatively cheap right now, so perhaps we’ve got that part working in the way you suggest.