Thursday, January 2, 2014

Brian's Bubbles

This post is in response to Brian Williams' piece in The Militant. (I knew Brian well in our Chicago days. Mr. Williams sounds too formal, so I'll address him by his first name. No disrespect intended.) Brian has become The Militant's economics reporter, and as such he does a creditable job. At least he knows enough to follow the business pages, and there are no bonehead howlers in his article. He successfully maintains The Militant's professional standard.

For all that, he's got it completely wrong, as the lede paragraph illustrates.
As Ben Bernanke, chairman of the Federal Reserve, prepares to hand over the appointed post to Obama administration pick Janet Yellen, he announced Dec. 13 plans to taper the Fed’s “quantitative easing” monetary scheme, whose stated purpose was to “stimulate” economic activity following the world financial crisis of 2008-2009. Meanwhile, working people continue to bear the brunt of a capitalist crisis for which the propertied rulers have no solution.
Of course a Trotskyist economist will be pessimistic about the economy. Much of what Brian writes is borrowed from the permanent bears over at ZeroHedge. Here's the rap sheet in bullet points:
  • He says recovery is nowhere near as strong as the talking heads on CNBC would have us believe. Despite temporary ups & downs, we're still stuck in the mud of the recession. He describes it using Larry Summers' phrase secular stagnation.
  • While Mr. Summers was arguing against the existence of bubbles (Paul Krugman has an excellent summary, here), Brian maintains the Fed is inflating bubbles. He suggests the stock market is in a bubble. But it's not much of a bubble--today's PE ratio is about 20, slightly above the long term average of 15. By comparison, in 2008 the ratio was 67--that's a bubble! There is no evidence of bubbles anywhere in the economy: commodities, real estate, bonds--all seem typically priced.
  • Brian accurately notes the decline in labor force participation. But he attributes it entirely to demand side problems, i.e., businesses not hiring enough people. This is consistent with the Summers/Krugman theory, but inconsistent with the bubble model Brian wants to believe.
  • Brian claims that retail sales are down in the fourth quarter--likely true in the brick & mortar world.  Holiday on-line sales were up 10% year over year in 2013. 
  • Brian repeats the standard error of Trotskyism--that this is the final economic crisis of capitalism from which no recovery is possible. The SWP was wrong with that prediction in 1932, in 1975, in 2001, and it's wrong today. Our problems are modest compared with any alternatives, such as represented by North Korea or Cuba.
I think he errs most on that last bullet. Not only is the US economy recovering, it is booming. Working people are not experiencing a declining standard of living, but just the opposite. Among other reasons, that's because of new and cheaper fossil fuel resources, a resurgence of domestic manufacturing, pent-up demand for things like houses and cars, and lower prices for almost every manufactured item or service. More and more services are available for free.

Brian hits closest to the mark with this paragraph: 
But more than five years since the so-called recovery from the 2008-2009 recession began, there’s been no recovery for working people. The proportion of the population with a job remains at record-low numbers, production has only recently reached pre-recession levels and living standards for working people continue to decline. To the degree the bosses are reaping profits despite the world economic crisis, it’s off our backs.
There is a lot of debate about the cause of the declining labor force, especially among men. Brian just assumes it is a demand side problem--that is, if businesses would just let go of their cash hoard then all would be well. Krugman--another demand-sider--thinks the government should run a bigger deficit and just hire more people, regardless of how inefficiently they're employed. The increased payroll would induce spending, from which the economy could naturally recover.

But others (including me) believe there are larger, structural changes in the economy which have fundamentally altered the nature of the employment market. Here are some ideas--they could all be partly true.

The Great Stagnation theory says that we've consumed the great technical and social advances of the 20th Century. There are no further, large, economic gains to be made from electrification, mass education, putting women into the workforce, etc. Thus economic growth will stagnate until something new comes along. (I don't subscribe to this theory.)

Productivity increases have rendered labor less valuable. If capital and labor are both factors of production, capital is getting a bigger share than labor. (This is an empirical fact, but whether it is a cause or an effect of low employment is not clear.)

More people are voluntarily leaving the workforce. Some polls indicate that only a small percentage of people classed as not in the labor force are actually there involuntarily. Instead, they'd rather be unemployed than working at some minimum wage job. The rise in disability rolls is taken as evidence, as is the large number of young men who prefer to live in their parents' basement, or be house-husbands. (This is certainly partly true. Some of the permanently unemployed are members of a new leisure class.)

A skills mismatch theory argues that technology has changed so dramatically in the past decade that people no longer have the skill sets necessary to be gainfully employed. The evidence for this is strong: there is a severe shortage of qualified employees in many industries. And recent college graduates have not learned skills necessary for today's workplace, since higher education has not kept up with the economy. Hence there is high youth unemployment.

Personal lifestyle choices make investment in human capital difficult. For example, the rise of single motherhood means that neither the mother nor her children will be as economically adept as one would like. So young women are making a personal choice not to put up with men, but at an economic cost. That is, we're investing part of our GDP in more privacy and freedom. (This one seems to be a stretch.)

"End of average" organizational changes mean that employment in the traditional sense is no longer how work is structured. More and more people will work as independent contractors, and entrepreneurs will contract out work as needed rather than hiring permanent employees. Workers will more and more have to demonstrate how their specific task adds value to the business. Each person will be a profit center. (I think this is undeniably true long-term. The Internet makes narrowly contracted piecework a much more efficient form of organization.)

I'm willing to grant a small role for demand-side causes for low employment. But I just don't think the demand side plays a very large role. My own views are given in this post from last summer, and fit mostly into the skills mismatch and end of average categories.

I think Brian's prediction of doom and gloom is wrong.

Further Reading:

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