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UncleNasty -> RE: Where is the economy? (10/6/2009 7:41:21 AM)
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quote:
ORIGINAL: InvisibleBlack
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ORIGINAL: ThatDamnedPanda
You're not hijacking; that's the subject of the thread! Personally, I vote for you posting a lot more of what you're saying here. It's always been pretty obvious that you know a lot more about economics than most of the rest of us, and you communicate it very well. Plus, I almost always agree with you; I just can't say it as well as you can. So for all those reasons and more, I say post away!
Why, thank you. Generally when I start talking economics people's eyes start to glaze over. Okay. I'll post the essay. Don't say you weren't warned.
A big part of the problem these days is that statistics are unreliable. Much of what passes for science today (and not just in economics) is really just coming up with something that supports a pre-defined agenda. To this end, a lot of the numbers they throw around are either misleading or doctored in some way to help prove a point, not to actually validate a theory. Two examples:
Recently I've read in a number of places that "productivity has increased". That sounds good, right? Well ... think about it. If I lay off 50% of my staff and make the remaining half work double shifts for no extra pay - productivity has doubled - only I'm employing less people and I'm not actually producing any more than I was previously. Is this a good thing? Well ... if my company was 50% staffed with useless wastrels, then yes. If my employees burn out, resign or have nervous breakdowns since they cannot maintain a double-shift workload indefinitely, then no. During recessionary periods, productivity always increases - people get laid off or fired and their co-workers are asked to do more. Increased productivity right now isn't an achievement - it's a result of reducing the workforce and making your staff work harder. If productivity increased because we developed a new process that enables one person to do the work of three, then it's a positive. If it's a result of forcing employees to sacrifice their own time to maintain output after a layoff, then no, it isn't. So, saying that "productivity has increased" is irrelevant to the current situation. It's not a useful statistic to measure how well we're doing right now.
Another good one is the "unemployment numbers" quoted in the media. These typically come from the Bureau of Labor Statistics (BLS). The problem with these figures is that at various time in history how they are calculated was changed (Reagan did it in 1983 and Clinton did it in 1994, for example). This means that the current unemployment figures aren't actually comparable to those from earlier periods. We currently understate unemployment. To compare them, you have to make certain normalizing assumptions. This is where it gets tricky. Depending on what assumptions you make, you can show the current unemployment rate, as compared to the Great Depression, as anything from about 14% to over 20%. Obviously, if I want to make things look bad, I'd say the unemployment rate was over 20%. If I want to make things look better, I won't even make any assumptions and I'll just quote the rate straight from the BLS at 9.7%.
This distortion of figures allows the pundits and the prognosticators to pretty much make any point they want to - which is why you can watch five different programs and draw five different conclusions about where we are. To figure out what's actually going on, you have to hunt down the raw data and then make your own normalizing assumptions to look at things. This is a tedious process so not many people do it. The simpler solution is to pick someone whose opinion you trust and just believe what they tell you - trusting that they've done an actual analysis.
It's not difficult to come up with a theory and a way to validate or disprove it. The challenging part is in finding actual good data to use. And this assumes you're actually TRYING to honestly figure something out, as opposed to just trying to justify an existing opinion.
You can tap dance all over the place with extremely convoluted theories but the boil down goes something like this - the United States doesn't produce enough and consumes too much. We've been taking on debt to do this and as a result, the standard of living in the U.S. has been falling for some time. When the amount of debt in the system became unsustainable, things crashed. This isn't particularly any one individual's or Administration's or party's or philosophy's fault. It's been going on for some time now.
In 1970 the typical household consisted of four people - two parents and two children. It had one wage earner, was well on its way to owning its own home, and had likely paid off the family car. Aside from a mortgage, it had no debt. In 2005 the typical household was still four people but now it required two wage-earners, had cashed most of the equity out of the home when it re-financed its mortgage and so owned almost none of its home, and had leased the family car and so actually didn't own it, and was carrying debt equaling something around 50% of its yearly income - not including the mortgage. In those 35 years, you can see the amount of resources lost by the typical American household and the amount of debt accumulated. It just wasn't sustainable. It had to end.
A lower level of consumption - one consistent with our actual productive output - means that the world has more productive capacity then it does demand for products and services. If supply exceeds demand, then prices fall, businesses fail, and things contract until they're in equilibrium again. That level of equilibrium is lower than it was previously. Currently, the system is trying to contract and the majority of governments are trying to prevent it from contracting by pumping debt-backed money into the banking and finance system. Why are they doing this?
Well, part of it is probably greed - those finance guys have a lot of money to throw around and they have a lot of influence (I can spend days (weeks... months... years...) discussing the evils of Goldman Sachs) - but it's also because there's a sort of systemic misunderstanding of certain economic theories. What do I mean?
In order to stimulate the economy in the Great Depression, Roosevelt attempted to follow the theories of John Maynard Keynes. Entire books have been written on this so it's not something that can be covered without a lot of simplification but basically, what they were trying to do is get things going again by putting a lot of money in the hands of consumers. Either by employing people at any job that could be created, or by outright handouts. The underlying assumption is that if the government gives people a lot of money, they will go and spend it. This will reduce inventories. Producers will then hire and pay employees to create more goods to re-stock those inventories. Those employees will then go and spend their pay. This will reduce inventories again. Voila! The business cycle is restored.
The problem is - while as a theory it sounded good - it didn't really work (although this can and has been debated). Whether you believe it worked or not, in the circles that the Treasury Department and the Federal Reserve and the IMF run in, they don't believe it worked. So that's not what they're doing this time around.
Milton Friedman (who with Anna Schwartz won the Nobel Prize in 1976) argued against Keynesian theories. Among other things, he stated that the reason why the Crash of 1929 became a Depression was due to the horrifically bad actions of the Federal Reserve. When the Crash occurred the Fed *reduced* the money supply, creating a shortage of money. This meant that banks were unable to lay their hands on any cash, liquidity disappeared from the system, and everything locked up. He argued (and reasonably so) that this was a disastrous mistake and either was directly the cause of the Depression or significantly contributed to it.
The stimulus bill back in October was a direct attempt at preventing this from happening again. I would have to say that it more or less worked. I didn't like that bill - I think it was incredibly poorly designed - but it did keep liquidity in the credit system. The problem now is - the theory they seem to be operating under is that if you push *more* liquidity into the banking system it will resolve the contraction of the economy. This is *not* what Milton Friedman said. The fact that a lack of liquidity would make the recession worse does not necessarily mean that excess liquidity will make it go away. Look at it this way. Money can be viewed as the grease which keeps the axle of the economy turning. Lack of grease means the axle will lock up. A lot of extra grease doesn't mean the axle will spin faster. I suspect that a hundred years from now they will look back to today as proving that you cannot stimulate the economy by pushing massive amounts of debt-driven money into the banking system, much as we look back to the Depression and say that you cannot stimulate the economy by pushing massive amounts of debt-driven money to the consumer.
Understand, "Helicopter Ben" Bernake outright said in 2002: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." He earned the nickname "Helicopter Ben" by saying that in the event of a crisis he would use a "helicopter drop" of money to avert recession. It shouldn't come as a huge surprise that's what he's doing now. Last time I checked the Federal government had spent something in the neighborhood of fourteen trillion dollars (this was back in March or April).
We need to produce more. All this debt is only useful if it results in an increase in productive output and that productive output is only useful if you're actually making things that people want to buy. Being "consumer-driven" isn't a viable model if that consumption is all based upon debt and it's worse if that debt is actually funded by foreign nations. Using that debt to save AIG or Citigroup or whoever is a waste of time if they don't in turn stimulate other businesses to grow and hire people. I suspect most of that money is simply wasted and we'll never see it again.
Fourteen trillion dollars is a massive amount of money. You can achieve anything you want with fourteen trillion dollars. Anything. Build another Panama Canal. Put bases on Mars. Cure AIDS. End oil dependence. Whatever floats your boat. Fourteen trillion dollars is approximately 25% of the entire world's productive output for an entire year. Think about that.
Okay. Wow. This is too long and it veers all over the place like a drunken rhino at a polka party.
Bottom line: The problem is that no one in the their right mind would go on a hiring spree or make a massive capital investment right now. If you want the economy to recover, you need to change that to where people feel safe or even encouraged to do so. Until then, no matter what the stock market does or what the news stations tell you, things aren't going to get better.
[Edited for typos. I make a lot of them.]
IB,
What tripe. You couldn't be more wrong!
Rhinos neither drink alcohol nor dance.
Uncle Nasty
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