Sunday, October 20, 2013

Unprecedented Times

There's the old Jewish joke:
We live in unprecedented times! Why, there are people dying today who've never died before.
It is precisely this kind of precedent that The Militant twists into the latest crisis. Not for them is the normal warp and woof of daily life. Instead, every event, however trivially novel, is an argument for the end of life as we know it.

The latest cause for panic--according to Brian Williams in this front page article-- is that Janet Yellen has been appointed Chair of the Federal Reserve. Why the cause for fright?

Here's Mr. Williams' argument:
  • The economy is doing poorly.
  • As a result, unemployment is high.
  • The Fed pretends to be fixing that.
  • In reality, the Fed is just trying to maintain profit margins for the fat cats.
  • What is really needed is a depression-era public works program that "actually put[s] millions to work building and repairing things workers need — at the expense of capitalists’ profits."
The Militant's case for a poor economy is pretty thin.
Yet all evidence points to the conclusion that the monetary fiddling has no effect on bosses’ hiring. The world crisis of capitalism is rooted in a slowdown of production and trade, which is not affected by government policies. Over the past year through mid-2013, world trade volume “has lost its mojo,” remaining virtually stagnant, reported the Financial Times.
So there are many reasons why world trade could stagnate without necessarily indicating a bad economy. I'll cite two:
  1. North America is now a major oil and gas producer, resulting in diminished trade between our continent and the Middle East.
  2. Manufacturing is increasingly automated. Therefore there is less reason to move it offshore, and indeed, ever more reason to bring it back home. America's booming textile industry is an example of that. This reduces shipping costs.
Production isn't slowing down. It is just becoming cheaper, and therefore more of it is being done locally. This is not an indicator of a weak economy.

So then why is unemployment so high? Actually unemployment really isn't all that high--in August, 2013, it was 7.3%. But Mr. Williams is correct that most of the recent decline is due to shrinking of the labor force rather than a recovery of the economy. In other words, more and more people are dropping out of work.

That is not good news no matter how you spin it. But is it due to economic weakness or to some other factors? That's a matter of much debate, but I side with the folks who suggest other factors, also known as a structural change in the economy. Jobs that used to exist (e.g., lawyers) are being rapidly automated, and the biggest effect of the 2007-08 recession was to speed up that automation. That means that workers' skill sets no longer match what the economy requires. Jobs as a laborer on an assembly line don't exist anymore, and people who used to earn a living doing that are either unemployed, or earning substantially lower wages.

Couple that with excessive government regulations, and low wage work is rapidly becoming uneconomic. Between minimum wage, payroll taxes, new Obamacare regulations, and various licensing requirements, hiring somebody for less than $10/hour doesn't make much sense. Briefly, a large number of people can no longer earn enough to keep them in the labor force.

That means Mr. Williams is right to say that the Fed can't do much about unemployment. Monetary policy is effective for cyclical unemployment--and indeed, the reduction from 10% to the current value may very well be due to Fed actions. But structural unemployment is a different beast, and requires a much larger change in government policy and workers' skills.

So why is the Fed printing money? Gee, there are probably as many answers to that question as there are people. Mr. Williams (along with some at ZH) argue that they're in cahoots with the crony capitalists, such Goldman-Sachs and Chase-Manhattan. Maybe. There are others (e.g., Paul Krugman) who disagree with the structural change hypothesis and simply argue that the stimulus isn't big enough. ("Stimulus" and "Fed easing" are two different things, but Mr. Williams conflates them and I'll go along for the ride.)

Others argue that the Fed action is too small to be consequential--a theory at odds with the popularly used descriptor, mega-printing. My opinion is that production costs are relentlessly going down, and the result is a long-term deflationary trend. The Fed is doing its best to keep nominal prices approximately constant.

Whatever. Outside of the ZH world and Mr. Williams' imagination, none of these models imply that the Fed is building a crisis for the future. We are not in an economic crisis.

So we come to Mr. Williams' proposed solution to the non-crisis--a massive, depression-era public works program. Doing what, exactly? Back in the 1930s men still built roads with picks and shovels. Today one worker can do the job previously done by dozens. We've got two such make-work projects here on my own campus--construction of new academic buildings--both at union scale. The one now under construction probably never has more than 30 guys working on site at any one time.

The problem with these infrastructure, welfare projects is not only do they waste money, but they don't employ very many people. And worse--they are not going to employ the structurally unemployed. The number of unskilled laborers required at today's construction sites is pretty small. And people with skills already have jobs--they don't need the welfare work.

Like most Marxists, Mr. Williams can't resist a slander of the financial markets. He says
But with the slowdown, it’s not profitable for the great majority of bosses to invest in equipment and labor to expand production. Instead, they mostly tend to sit on hoards of cash reserves or seek higher returns through investing it in stocks or other forms of speculative bets, such as on the rise or fall of various kinds of commercial paper.
This plays to the Marxist conceit that Wall Street is just a casino. But it isn't--companies need capital in order to operate. That capital can come in two ways--equity or debt. Equity is sold through the stock market, and debt is acquired through "commercial paper." Investing in stocks or commercial paper is investing in the "equipment and labor to expand production." The rise of the stock market is, in fact, a very good indicator that the economy is doing fine.

I know Brian Williams well from my time in Chicago. We nicknamed him "Brainy" because he was pretty sharp. And his piece is well-written and as cogently argued as is possible for a Marxist. But at the end of the day, it's just wrong.

We live in precedented times.

Further Reading:

No comments:

Post a Comment