Another structural issue that I have discussed in previous lectures is the nature of the unemployment that exists. The standard recession of the post-war United States found the economy with excess inventories of durable goods, and most of the unemployed were production workers temporarily laid off from manufacturing facilities. More recently, it seems to me that a lot of our imbalances are structural. In financial services, most of the people who are leaving jobs related to mortgage origination and securitization are not coming back. In autos, some of the decline in production is cyclical, but worldwide there is too much capacity in the industry, so that many unemployed auto workers are also not coming back.
I doubt that I would want to apply the same multiplier analysis to structural unemployment that I would to cyclical unemployment. To my knowledge, neither the old-fashioned macro engineers nor the modern academics have addressed this issue.
I see an additional problem: FDR entered 1932 with a country that had saved a lot. Barack Obama faces a country already drowning in debt. The collapse in aggregate demand doesn't merely reflect the wealth effect of falling asset prices or a credit contraction; it reflects a large underlying debt load that was only sustainable with rising asset prices. Until that debt load is worked off or inflated away, households are not going to be in a position to spend.
That's why the complaints that tax cuts are bad because consumers will save them instead of spend them seem very, very off to me. We are not looking at a small contraction in aggregate demand because of excess inventories or too-tight money. We're seeing consumers come to grips with the massive hole in their household balance sheets. Call me crazy, but wouldn't a nation of taxpayers saving $500 put us that much closer to sustainable growth in aggregate demand? Doing otherwise just seems to kick the can a little ways down the road. If our fiscal policy even has the strength to do that much.
More recently, it seems to me that a lot of our imbalances are structural.
This is my constant worry. What if there's just not enough jobs for the number of workers? A lot of people seem to want to just assume that problem away. But I think such a thing could easily happen, and I don't know how to fix it.
Over the long run, I don't think that this is possible; eventually the cost of labor will fall, people will retrain, etc. The belief that innovation will permanently shrink the labor force has been confidently made, and failed to be borne out, for two centuries.
Over the short run, however, all too possible.
"...until the debt load is worked off or inflated away..."
The stimulus money can come from taxes, borrowing, or the printing press. If it comes from taxes or borrowing, it's a wash and can't have any net effect.
If it's simply printed, the result will be some stimulus plus inflation, maybe quite a lot of inflation.
So who thinks that's the real strategy behind the stimulus - to devalue the dollar and inflate away the nation's debts?
They couldn't say that out loud of course. They have to pretend that make work is the path to riches but they couldn't really believe that, could they?
Bill R
If we're truly being honest with ourselves, any analysis rooted in those old cyclical downturns hasn't been relevant for 40 years or more. To the most recent two or three generations "layoff" means "downsize" i.e. "fired due to bad business", not a temporary leave with the expectation of return.
Any economic stabilization theory that presumes we should re-employ resources exactly where they were just employed is useless and should be discarded.
As for there not being enough jobs, there will always be enough jobs. Human wants are infinite and therefore the amount of work to be done is also infinite. The challenge is channeling it into and through the market.
"Until that debt load is worked off or inflated away, households are not going to be in a position to spend."
The inflation that's coming will impede the ability of households to spend, regardless of their debt load. Or, put differently, they'll be spending more dollars to buy the same amount of goods and services they're consuming now--or even less. There will be more dollars floating around, but less real consumption, thus less demand.
Dust off your leisure suits and disco balls--stagflation, here we come!
What if there's just not enough jobs for the number of workers?
There already aren't enough jobs for the number of workers, which is why we've been living in crap-based economy for so long. It takes so very few people to produce things we actually need that we have what amounts to make-work producing crap that nobody in any conceivable universe needs, and which I can't for the life of me figure out why anybody wants. Yes, I'm looking at you, fuzzy-dice-and-men's-thong-makers.
But more seriously, I recall seeing a film of a union agitator in the 30's who was rejoicing over the 8-hour workday as an anti-unemployment measure, because it limits the productive capacity of a single worker. He was also saying that they would immediately begin agitating for a 6-hour workday "until the slack of unemployment is taken up" or some such wording. Perhaps the 50's futurist dream of a leisure-rich society will soon come true.
I read now that Hustler and some others want a stimulus package for the adult video market. Does size matter?
Rob,
Wasn't the whole flowering of civilisation built on "make-work producing crap that nobody in any conceivable universe needs". Who needs music, art, literature, cusine, all the things that make life work living - no one "needs" them.
I would assume that only 5% of the US population is involved producing things we need. Do we "need" electricity - no. Do we "need" running water - no. Do you "need" anesthesia - no ( they could just tie you down and give you a bullet to bite on.) All we "need" is a small amount of food, a small amount of water, and some minimal amount of food and water. Who's for living in a world like that.
I think most of us are grateful that we live in a world where people are engaged in "make-work producing crap that nobody in any conceivable universe needs".
sorry,
" and some minimal amount of food and water"
Should read: "and some minimal amount of clothing and shelter."
Who needs music, art, literature, cusine, all the things that make life work living - no one "needs" them.
I think you "need" to visit Target sometime and figure out the percentage of what's on sale there counts as "making life worth living."
Rob,
Target - hum let see. Pots, pans, cups, dishes, silverware, sheets, towles, pillows, comfoters, cleaning supplies, shirts, pants, underware, socks, jackets, food, beverages, toys, dvd players, movies, cds...hum... all seems pretty usefull to me.
What are they selling that you don't agree with? Out of all the items they sell I'd say only 15% at most is totally useless. Do you think the % is higher?
Almost all of the toys are crap that will break or be ignored within days of purchase. Ditto many of the small electrics and electronics. In addition, much of the clothing is being sold to replace perfectly functional but no-longer fashionable items which don't actually require replacing (that is less of an issue at Target than Nordstrom's, in fairness). Most of the entertainment offerings are utter junk, hardly of the "make life worth living" variety. The food offerings are for the most part far less healthful than they could be, so they get at least a partial crap rating.
I'd bet the crap percentage at Target comes close to 75% in absolute terms, and maybe more like 50% if you don't count the replacement of a broken toy or appliance (a blender is useful, even if the cheap one you bought is total crap). And of course in the wider economy, most people sell their cars long before they cease to be useful, and many upgrade to stainless-steel kitchen appliances because it's fashionable.
Mind you, I'm not advocating stopping people from buying and selling whatever they want, nor do I claim to lead a crap-free existence myself. But Americans' actual quality of life need not drop much even if we bought and sold 25% less stuff every year, especially if we got 25% more leisure to enjoy the stuff we did buy.
@jmo:
I suggest that a lot of (>40%) what Target sells will help improve a standard of living, but is not really necessary. While 6000-count Egyptian cotton sheets are nice, I don't need to buy them.
We don't shop at Target (yet), but as I understand, it's a downmarket version of Gracious Home, and almost everything at Gracious Home counts as "making life worth living." Copper pots and pans, plus copper polish and a maid to do the polishing (she didn't come from Gracious Home)? Of course that makes life worth living. Cookie tins to send Christmas cookies to friends and relatives? Ditto. More linens! Plastic racks to hold CDs! New lamps to match our new sofa! Beeswax candles! Candle snuggers! (These are little pieces of foam that hold the candle upright when the candleholder is too big.) Brass ceiling hooks to hang plants in the dining room of the country house! It's endless. Every single of these items helps make life worth living.
Rob,
When you are emperor I can only imagine living in some Soviet Union circa 1983 dystopia. With everyone driving their 19 year old Ladas and wearing plastic shoes.
Also, "especially if we got 25% more leisure to enjoy the stuff we did buy." Do you really think Americans would do anything worthwile with 25% more leusure time. I'm willing to bet most of that time would be spent on Perez Hilton.com and watching Dancing With The Stars.
y81,
Target is a slightly upmarket wallmart. It sells food, clothes, lightbulbs, toilet paper, vacum cleaners, laundry detergent, etc.
I don't know what Rob buys at Target but I usually get a decent price on gym socks, laundry detergent, lightbulbs, a clothes iron, you know...usefull stuff....
I have no desire to be emperor, but I do reserve the right to call crap what it is. The fact that the Soviet Union produced crap nobody wanted does not in any way relate to our massive overproduction of crap that people, for mysterious reasons of their own, do want, and are willing to work for.
I'm willing to bet most of that time would be spent on Perez Hilton.com and watching Dancing With The Stars.
That is quite possibly true, but I fail to see how spending the money on panties that say "Official Boy Watching Club" (actual Target item from a few years ago) is a step up. Perhaps the real choice in our lives is exactly what form our crap takes.
So if the problem is that people are in too much debt, won't giving them jobs with government spending help fill in the holes faster and make more people feel secure enough to buy again?
As I understand it, one of the many reasons behind the fall of the Soviet Union was it was run by people who put far too much emphasis on capital goods and far too little empahsis on consumer goods.
I think all the "crap" you decry plays a far more important role in driving humanity forward than you give it credit for.
Robb,
The crap produced in the Soviet Union that no one wanted has everything to do with our overproduction of crap that some people somewhere do want. The variety of goods produced here is vital to the personal and market exploration that produces the things that you personally don't consider crap.
As my father excoriated me when as a child I was trashing a band that was playing a music festival he was gracious enough to expose me to: "the thing about taste that you have to remember is that it only exists in your mouth."
How many "Number 1 Dad" trucker caps have lighten'd the step of young hip lads as they ring the buzzer of their steady's apartment? That's human experience that you can't predict in advance or discount as not worthy of expression.
jmo, my mistake. But in that case I don't see what Lyman is driving at. Obviously toilet paper and light bulbs are necessities. As are underpants.
BTW, it isn't true that the Soviet Union produced things no one wanted. People waited in lines for hours to get wilted lettuce and erratic, ugly automobiles. And plain white underwear. They absolutely wanted those things, and more besides.
The variety of goods produced here is vital to the personal and market exploration that produces the things that you personally don't consider crap.
There is very, very little that I don't consider crap, even in my own home. And in fairness, I include in my definition of "crap" a large number of well-made products which are completely unnecessary or wildly overbuilt for their contemplated purposes, such as Hummers and Prada handbags.
I think all the "crap" you decry plays a far more important role in driving humanity forward than you give it credit for.
Hmm, I suppose that depends on what you mean by "forward." But it does mesh well with my assertion that we live in a crap-based economy. If everyone adopted my spending habits, we'd find out what "depression" really means.
Rob,
It seems you would consider anything beyond subsistance farming to be a "a crap-based economy." And am I correct that you define "crap" as anything you personally don't find wortwhile.
I know there are tons of things I would call crap, but just because I think it is doesn't make it so.
Just as a suggestion I'd say that maybe Rob's critics are making the common mistake of confusing "capitalism is good" with "the products of capitalism are good."
"the common mistake of confusing "capitalism is good" with "the products of capitalism are good."
I don't understand what you mean - how can you have one without the other?
The products of capitalism are not good or bad, but varied. Some people want Kindles, some people want volumes of Emerson's verse, and some people want underpants with risque slogans on them. Tolerant people, like me, let others buy what they want, and admire a system that allows so many to satisfy their varied longings. The intolerant rage that others are buying the "wrong" thing. Fortunately, the intolerant can do very little in our system.
It seems you would consider anything beyond subsistance farming to be a "a crap-based economy."
Of course not. I rather enjoy living in a dysentery-free city.
I know there are tons of things I would call crap
Well, what's stopping you? Certainly not me.
My fundamental point, stripped of loaded language, is that a 25% reduction in spending, if made in the right areas, would probably not much impact most Americans' quality of life, and certainly not impact it by 25%. We are so outrageously productive that we have long since past the point where marginal returns to our spending are much smaller than the spending itself (I'm sure it goes negative if the spending is based on debt). That is, we have channeled our excess productivity into crap production rather than the increased leisure predicted 50 years ago.
If Americans realize this, the economy is in very serious trouble, because we simply don't need a big chunk of what we produce.
Rob,
While I agree that the marginal returns to our spending are already small and diminishing, I think the more serious problem is that we're buying all of this crap with borrowed money . Our economy would be humming along just fine if we used the borrowed money to increase our capacity to build more crap (assuming that it was crap that consumers would buy).
Re: If it comes from taxes or borrowing, it's a wash and can't have any net effect.
This is only half true. Taxation of course takes money out of the economy first then puts it back in. That's a wash. But borrowing puts money in first then pays it back gradually. That time lag allows the money to have an effect since causation propagates only from past to future, not future to past.
Rob,
Your theory wouldn't work in practice because not everyone thinks like you, I know I don't.
Take me for example - I like going out, good food, nice clothes, nice cars, having money, etc. So I've always worked a lot - in college I worked three jobs and when I graduated I ended up working two full time jobs. For me it was worth it to be able to do all the things I wanted.
Now I have a friend who is 32 yo works as an admin and is totally into his music, playing music, going to concerts and shows, spending countless hours downloading and organising his music. which is great. But, I don't really think it is morally superior to spending ones time working.
To me consuming leisure is the same as any other form of consumption - no better and no worse.
It's not your grandfather's 'tax cut' either as the money goes to people who don't earn money, viz. the large fraud of prisoners collecting money on the earned income tax credit which Obama will expand.
Re: the stimulus, my nightmare is that it will be used to produce a Don Quixote theme park with windmills and ethanol production at twice the world price, and that what we really could produce at net benefit to ourselves and the world, e.g. nuclear energy we will have difficulty borrowing for when we finally get real.
To me consuming leisure is the same as any other form of consumption - no better and no worse.
I have said nothing about any moral issue here. You do whatever you want, I don't care. Heck, you're sustaining people like me, who make a living off of consumer product companies! But the economy is certainly exposed to systemic risk due to our substantial crap overcapacity and the widespread use of debt to buy crap.
Minus friction going through the government. It's hardly a wash.
If we need to pay down our debt, and we need to get banks lending again, why in the world is the Federal Reserve holding interest rates down?
If a banker thinks a borrower is risky, classically he charges a higher interest rate. The Federal Reserve has made itself the lender of last resort, and is holding down interest rates.
I think that actual inflation has been much higher than reported. It's just better hidden than by shrinking coffee cans and the like. (Does anyone remember when a 1 pound coffee can held 16 ounces?)
It hasn't been worth saving because the rates of return have been at or below the actual inflation rate. And then they tax it.
Where is Paul Volker when we need him?
Isn't the real problem described in the quoted article that there aren't enough people in the US with employable, value-adding skills anymore? I mean, the financial people aren't coming back because their jobs were bullshit-- They created wealth entirely on paper and didn't actually add any value to anything.
Awh, Rob come on - you don't get just a little bit of a kick out of lording your anti-consumerist moral superiority over everyone?
I think you secretly do...
"Of course not. I rather enjoy living in a dysentery-free city"
But wouldn't that just require a well and a latrine located the recommended distance apart? I mean, you wouldn't be able to s**t in your house, does anyone really "need" to sh*t indoors?
In all honesty I find your concept of "crap" very fascinating.
BobW is an idiot..really.This country is fuked just hasnt had to eat the bitter fruit yet.
Megan:
$500 is a puny amount of money, and tying it to the April 15 tax cycle is slow, and has less impact for behavioral reasons.
It would be much better to announce and immediate payroll tax holiday. $1B a month to businesses and workers. That's a 7% raise to you and me, which we get in our pocket next week. That would make a difference.
Re: Minus friction going through the government.
That friction ultimately leaks money back out into the economy as well. Ever Gov Blagojevich would have spent any bribes he got for Obama's Senate seat on some frippery or other.
Re: If a banker thinks a borrower is risky, classically he charges a higher interest rate.
Last I checked there are no usury laws (at least no effective ones) preventing lenders from charging what the market will bear for interest rates. And yes, riskier borrowers are charged more.
Re: I think that actual inflation has been much higher than reported.
I basically agree, though I'm not sure about "much"-- that's a fairly subjective word.
Re: Isn't the real problem described in the quoted article that there aren't enough people in the US with employable, value-adding skills anymore?
There are plenty of people with such skills. Problem is, we don't want to pay them US-market rates for their labor. Instead we want to pay China-market or India-market rates. And don't blame finance workers-- the vast majority are not multi-millionaire hedge-fund managers. And why shouldn't people gravitate toward jobs that pay decent middle class wages and offer a chance for advancement?
Re: But wouldn't that just require a well and a latrine located the recommended distance apart?
In a crowded city it requires sewage systems (that was true, and understood, even in Roman times). There just isn't enough space for septic systems.
With the tremendous increase in 'tax cuts' to people who don't make money, how about hiring some finance people into the IRS to give Uncle Sugar a clue?
Winterspeak,
"It would be much better to announce and immediate payroll tax holiday."
Nice idea, but practially impossible as most corporate payroll systems wouldn't be able to handle it without, the customs would require at least 3 months of coding, development and testing.
I'm sure you could imagine what havoc a misplaced decimal could wreak in a payroll application.
JonF,
"In a crowded city it requires sewage systems "
And why do people "need" to be crowded into cities? Cities are where they make crap.
Sorry:
that should be "Nice idea, but practially impossible as most corporate payroll systems wouldn't be able to handle it. The customs would require at least 3 months of coding, development and testing."
The collapse in aggregate demand doesn't merely reflect the wealth effect of falling asset prices or a credit contraction; it reflects a large underlying debt load that was only sustainable with rising asset prices. Until that debt load is worked off or inflated away, households are not going to be in a position to spend.
The US is blessed (for now) with low interest rates and tremendous debt capacity. (Reserve status and a large economy backed by the world's largest military will do that for you.) We know this because the planet is falling all over itself to borrow money from us for next to nothing. The key to recovery will be to increase the velocity of money so that there is spending to feed growth, which will create employment and encourage more credit.
There will be a day sometime in the future when this will no longer work, at which point we will become the United States of Iceland. But for now, encouraging spending and more credit are the best ways out. If we go on a savings spree, then we will end up with our own version of Japan's lost decade, which would not be an enviable position to be in.
(Since I personally plan on saving quite a bit, you'll need to spend more to make up for my frugality. Ironic, I know.)
Correction to above: I meant to say that the world is falling all over itself to lend money to us. Obviously, we are the debtor nation par excellence here.
jmo, I really don't get what your driving at. People can use different definitions of need, but you seem to want to use a particularly silly one that's not that interesting.
I agree with Rob that most of what we buy is crap. I will go further and say that I do care what american's are buying, because people like me will be forced to pay for their retirement and health care. Maybe this is one of the best ways to see that what they are buying is crap.
Crap is not just in the eye of the beholder, if you believe something is simply worth what someone else is willing pay for it, then houses were not over priced 2 years ago. Just because you can't perfectly value things, doesn't mean things don't have fundamental values.
Awh, Rob come on - you don't get just a little bit of a kick out of lording your anti-consumerist moral superiority over everyone?
Nobody who has seen the mountains of crap in my house and garage would think I was anti-consumerist.
And if people didn't buy crap, I'd lose my job.
Re: And why do people "need" to be crowded into cities?
Human nature. Not all of us, maybe, but the majority of us prefer to live as social animals, not solitary hermits. Cities are as natural to humankind as hives are to bees.
Friction of taxes is secondary. As stated above, that money will be spent somewhere. The real concern is deadweight loss - profitable activity that doesn't happen because taxes make it infeasible. Or, for that matter, profitable activity that doesn't happen because the people who would have done it normally are working for H+R Block and the IRS instead. That doesn't come back out at the end of the day.
The thing that bother me most about this thread is that y81 has no concept of target. It's like those cultures still living in the stoneage that are uncovered in the depths of the rainforest every do often. Is it really possible that someone could not be familiar with Target?
"Crap is not just in the eye of the beholder, if you believe something is simply worth what someone else is willing pay for it, then houses were not over priced 2 years ago. Just because you can't perfectly value things, doesn't mean things don't have fundamental values."
There are two distinct uses of the word value which are often conflated. **Use value** which is what you can do with a thing, what you can use it to accomplish, which is mostly a personal thing. And **market value** which is what you can sell it for, which is mostly a collective, statistical value.
Most consumer items are crap by my use values.
Most of what I value (books and tools) would be crap to those who can't use them.
Oops, I need to finish.
Though my books and tools are mostly more expensive (market value) than most consumer goods.
BrianF: I live in Manhattan. I don't own a car. During the summer we go to Fire Island. There are no Targets around here, or Wal-Marts either, nor are there any on Fire Island. There must be some on Long Island, or in New Jersey, but I have no way to get to one without a car. (I mean, we could hire a car and driver, like we do when we get invited to a party in the suburbs, but that seems a bit much to go to a Target store, no?)
Let me note that my carbon footprint is about one-tenth that of everyone who has been to Target or Wal-Mart. So maybe I am actually the future, not the stone age. Or maybe just part of a very tiny and idiosyncratic elite.
jmo, three months??
That must be what "there aren't enough people in the US with employable, value-adding skills anymore" means. In the UK we'd make changes like that in a few days - a recent tax change was announced one week before it took effect, and we got it implemented in 2 days. Maybe you could outsource your payroll systems. Not sure if that would help with the stimulus, though.
I never meant to be a Kling sympathiser, but his point this time makes sense. My posting here on the stimulus tries to take account of the skills of unemployed people but probably doesn't reflect the extent of the structural issues.
Megan: "Until that debt load is worked off or inflated away, households are not going to be in a position to spend."
That provides exactly the (short-term) argument for government spending. Businesses aren't going to invest in expansion if there's no demand for their products and services.
Freddie: "What if there's just not enough jobs for the number of workers?"
Now *there's* the long-term nub. With phenomenal and increasingly increasing productivity and efficiency (resulting from technology and corporate capitalism), how many people can make a living producing the highest-utility goods (roughly, food, clothing, and shelter)? That production only requires a small percentage of the work force.
But if the largest percentage can't make enough money to buy stuff, there's not enough demand to support and incentivize the high-producers. The log stops rolling.
So what's the answer? Transfers.
Looking at all the prosperous countries in the world, every single one of them has major government transfer programs (in which I would include not just payments but education, research, infrastructure, etc.).
Is this just a coincidence? Why is there not a single exception? Does the lack of a single exception make libertarian/small-government theories look...cloud-cuckoo-ey when juxtaposed to the facts on the ground?
Or, is it possible that such transfers are a systemic necessity in order for a high-productivity economy to thrive--and avoid meltdowns?
Marx was proven wrong about collective ownership. But he's been proven right about collective distribution--for (a la Keynes) technical rather than moral reasons.
Re: Looking at all the prosperous countries in the world, every single one of them has major government transfer programs
The problem is, how to do transfers that the public does not resent but will support? Social Security is accepted (indeed, is cherished) by the public because advanced age is an acceptable reason for not working and because almost everyone will receive it eventually (and many people have parents and grandparents receiving it). Disability transfers are also accepted, albeit more grudgingly because most people do not become disabled and a certain class of demagogue is not above claiming that large numbers of cheaters are gaming the system. Unemployment payments-- sure, but only at poverty level rates and for very short periods of time. Beyond that, the public simply does not tolerate transfer payments to people who are young enough and healthy enough to work. So I don't think we can go much further in that direction. At some point we are going to hav to figure out a way that we can transfer not money but work itself. A shortening of the work week might help, and overtime laws with real teeth that apply to almost everyone, though such measures would be vociferously opposed by employers.