As noted in Bailout Nation,
reliance on garbage data was one of the contributing factors in one of the world’s greatest economic
catastrophes of all time. "Garbage in -- garbage out" rule holds in economics as well as in natural
sciences.
One of the largest enablers of recent financial crisis were compromised data that distorts the true
facts. In old days the word "data" usually has a meaning "raw data". If it was already massaged
for some reason it was considered output of some model. The more it was massaged,
the more exceptions were introduced to the model, the further they got away from what the raw data was
initially conveying.
With the advent of computers this situation dramatically changed. As a result, a supposedly informed
investor is not really informed at all, if the "data" he is basing his decisions on has been changed
in ways the investor is unaware of. As a result, the "data" becomes useless; however, damage is done
because people continued making decisions based on the "data" available, making faulty decisions
on defective data. This is a scary situation considering where we are financially and economically,
not only in the USA, but also around the world.
In
Proofiness- The Dark Arts of Mathematical DeceptionCharles Seife introduces term "proofiness"
as symmetric form of the term "truthiness" — the Word of the Year in 2005, according to the American
Dialect Society, which defined it as "the quality of preferring concepts
or facts one wishes to be true, rather than concepts or facts known to be true." The
term was popularized by
Stephen Colbert in the first episode of "The Colbert Report."
Proofiness id"the art of
using bogus mathematical arguments to prove something that you know in your heart is true — even when
it’s not."
Falsifying numbers is the crudest form of proofiness. Seife lays out a rogues’ gallery of more subtle
deceptions.
"Potemkin numbers" are phony statistics based on erroneous or nonexistent calculations.
Justice
Antonin Scalia’s assertion that only 0.027 percent of convicted felons are wrongly imprisoned was
a Potemkin number derived from a prosecutor’s back-of-the-envelope estimate; more careful studies suggest
the rate might be between 3 and 5 percent.
"Potemkin numbers" are phony statistics based on erroneous or nonexistent
calculations.
One of the largest enablers to the economic crisis we find ourselves in today is compromised data
that distorts the true facts. For example Greenspan's adherence to 'core CPI' took the asset inflation
out of the picture. the latter was one of the major contribution of Fed to the dot-com crush and later
housing bubble.
I have always viewed the word "data" as meaning raw data. It is whatever it is period. In my mind,
it is no longer considered "data" if someone has already massaged it for some reason or another.
The "data" should always remain as raw data; because the more it is massaged to take in more and
more exceptions to the model, it gets further and further away from what the raw data was initially
conveying.
As pointed out in this post, a supposedly informed investor is not really informed at all, if the
"data" he is basing his decisions on has been changed in ways the investor is unaware of. As a result,
the "data" becomes useless; however, damage is done because everyone making decisions based on that
"data" is making faulty decisions on defective data. This is a scary thought considering where we are
financially and economically, not only in this Country but around the world.
Most large enterprise statistics also can't be trusted and margin of error is at least 20% (if not more
;-). And large corporations do fudge numbers as a matter of policy (bonus preservation strategy ;-),
no question about it. The situation essentially became much like in the USSR. All tricks from Gerstner
book of games with pension fund, 401K contributions and health insurance premiums (and more) are used.
For example quality of earlining is typically very low. Based on my very limited experience large companies
are still cutting everything to the bones to preserve profitability. Short-termism prevails. As a result
customer service often became third world class. Or you can navigate the maze of automatic voice menus'
until you drop without reaching human operator.
‘mathiness’ is economists' misuse of mathematics to
justify their pet theories. Any paper that cites game theory or the Euler consumption equation to
promote public policy should be regarded as fraudulent until shown to be otherwise. Mathematics
serves the same function for academic economists as Latin theology did for medieval clerics: both provide
an aura of erudite wisdom where there is no wisdom at all to be found.
kbaa, The Irate Plutokrat
It is good to see Krugman write in opposition to
‘mathiness’, economists' misuse of mathematics to justify their pet theories. And his suggestion
that ‘behavioral economics doesn’t provide anything like as much guidance as it should’ is probably
as close to an admission as we are ever likely to get from an academic economist that it’s human
psychology that drives the economy after all, and that all of the various high minded macroeconomics
theories are nothing more than propaganda to be used by lobbyists who present them as scholarship.
Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is
always the possibility of misusing mathematics to intimidate. Any paper that cites game theory
or the Euler consumption equation to promote public policy should be regarded as fraudulent until
shown to be otherwise. Mathematics serves the same function for academic economists as Latin
theology did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom
at all to be found.
NB For those who have never studied Calculus, “Euler” is pronounced “oiler”, but there’s no connection
with the price of oil or any other commodity, and don’t let any academic economist try to tell you
otherwise.
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
And we're seeing rising prices all over the place, from the grocery store to the gas station. Even
the government numbers flash
warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we
realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI
through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6%
in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't
think it does.
The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment.
And they always tweak the numbers to produce a better result as a report card. "
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher
used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always
wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they
want to find ways to make those numbers little and the good numbers big."
The CPI is calculated by analyzing
the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9%
of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make
up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even
the Bureau of Labor Statistics
(BLS) admitted the changes were "sweeping."
According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new
products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme
of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called
the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly,
it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes
to CPI were meant to address this "issue."
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government
can basically create an index that outputs whatever it wants.
I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how
we calculate it."
Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."
They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really
trying to do is get the go-ahead to produce more inflation, which is printing money."
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price,
or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up
on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where
the quality is diminished."
The bottom line is we can't trust CPI to tell us the truth about inflation.
If we are to believe authorities the USA. added 916K jobs in March, and the official
unemployment rate is at 6% (note the word official; the current official U6 unemployment rate as
of March 2021 is 10.70%; so the real number is probably much higher than 10%)
Fudging data became as prominent as it was in the USSR. The neoliberal empire can't afford objective stats.
Notable quotes:
"... monthly data is collected over a brief timeframe - just a few days - and that the calculations are seasonally adjusted. ..."
"... Yes, at least half the sheep population think they are real. It's insane how dumb people are today. ..."
I spent the last 2 weeks digging into the numbers - especially timing of the surveys and
data collection. I get the fact that weekly claims don't reflect new hires. I also realize
that monthly data is collected over a brief timeframe - just a few days - and that the
calculations are seasonally adjusted.
But let's be reasonable - how is it possible to have 700K - 800K initial jobless claims
every week and create nearly a million new jobs? Does anyone really believe any of these numbers?
Globalistsaretrash
Yes, at least half the sheep population think they are real. It's insane how dumb people
are today.
How many people are really out of work? The answer is surprisingly difficult to ascertain.
For reasons that are likely ideological at least in part, official unemployment figures greatly
under-report the true number of people lacking necessary full-time work.
That the "reserve army of labor" is quite large goes a long way toward explaining the
persistence of stagnant wages in an era of increasing productivity.
How large? Across North America, Europe and Australia, the real unemployment rate is
approximately double the "official" unemployment rate.
The "official" unemployment rate in the United States, for example, was 5.5 percent for
February 2015. That is the figure that is widely reported. But the U.S. Bureau of Labor
Statistics keeps track of various other unemployment rates, the most pertinent being its "U-6"
figure. The U-6 unemployment rate includes all who are counted as unemployed in the "official"
rate, plus discouraged workers, the total of those employed part time but not able to secure
full-time work and all persons marginally attached to the labor force (those who wish to work
but have given up). The actual U.S. unemployment rate for February 2015, therefore, is 11 percent .
Canada makes it much more difficult to know its
real unemployment rate. The official Canadian
unemployment rate for February was 6.8 percent, a slight increase from January that
Statistics Canada attributes to "more people search[ing] for work." The official measurement in
Canada, as in the U.S., European Union and Australia, mirrors the official standard for
measuring employment defined by the International Labour Organization -- those not working at
all and who are "actively looking for work." (The ILO is an agency of the United Nations.)
Statistics Canada's closest measure toward counting full unemployment is its R8 statistic,
but the R8 counts people in part-time work, including those wanting full-time work, as
"full-time equivalents," thus underestimating the number of under-employed by hundreds of
thousands,
according to an analysis by The Globe and Mail . There are further hundreds of
thousands not counted because they do not meet the criteria for "looking for work." Thus
The Globe and Mail analysis estimates Canada's real unemployment rate for 2012 was
14.2 percent rather than the official 7.2 percent. Thus Canada's true current unemployment rate
today is likely about 14 percent.
Everywhere you look, more are out of work
The gap is nearly as large in Europe as in North America. The official European Union
unemployment rate was 9.8
percent in January 2015 . The European Union's Eurostat service requires some digging to
find out the actual unemployment rate, requiring adding up different parameters. Under-employed
workers and discouraged workers comprise four percent of the E.U. workforce each, and if we add
the one percent of those seeking work but not immediately available, that pushes the
actual unemployment rate to about 19 percent.
The same pattern holds for Australia. The Australia Bureau of Statistics revealed that its
measure of "extended labour force under-utilisation" -- this includes "discouraged" jobseekers,
the "underemployed" and those who want to start work within a month, but cannot begin
immediately -- was
13.1 percent in August 2012 (the latest for which I can find), in contrast to the
"official," and far more widely reported, unemployment rate of five percent at the time.
Concomitant with these sobering statistics is the length of time people are out of work. In
the European Union, for example, the long-term unemployment rate -- defined as the number of
people out of work for at least 12 months --
doubled from 2008 to 2013 . The number of U.S. workers unemployed for six months or longer
more than tripled from
2007 to 2013.
Thanks to the specter of chronic high unemployment, and capitalists' ability to transfer
jobs overseas as "free trade" rules become more draconian, it comes as little surprise that the
share of gross domestic income going to wages has declined steadily. In the U.S., the share has
declined from 51.5 percent in 1970 to about 42 percent. But even that decline likely
understates the amount of compensation going to working people because almost all gains in
recent decades has gone to the top one percent.
The increased ability of capital to move at will around the world has done much to
exacerbate these trends. The desire of capitalists to depress wages to buoy profitability is a
driving force behind their push for governments to adopt "free trade" deals that accelerate the
movement of production to low-wage, regulation-free countries. On a global basis, those with
steady employment are actually a minority of the world's workers.
Using International Labour Organization figures as a starting point, professors John Bellamy
Foster and Robert McChesney calculate that the "global reserve army of labor" -- workers who
are underemployed, unemployed or "vulnerably employed" (including informal workers) -- totals
2.4 billion. In contrast, the world's wage workers total 1.4 billion -- far less! Writing in
their book The Endless
Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to
China , they write:
"It is the existence of a reserve army that in its maximum extent is more than 70 percent
larger than the active labor army that serves to restrain wages globally, and particularly in
poorer countries. Indeed, most of this reserve army is located in the underdeveloped
countries of the world, though its growth can be seen today in the rich countries as well."
[page 145]
The earliest countries that adopted capitalism could "export" their "excess" population
though mass emigration. From 1820 to 1915, Professors Foster and McChesney write, more than 50
million people left Europe for the "new world." But there are no longer such places for
developing countries to send the people for whom capitalism at home can not supply employment.
Not even a seven percent growth rate for 50 years across the entire global South could absorb
more than a third of the peasantry leaving the countryside for cities, they write. Such a
sustained growth rate is extremely unlikely.
As with the growing environmental crisis, these mounting economic problems are functions of
the need for ceaseless growth. Once again, infinite growth is not possible on a finite planet,
especially one that is approaching its limits. Worse, to keep the system functioning at all,
the planned
obsolescence of consumer products necessary to continually stimulate household spending
accelerates the exploitation of natural resources at unsustainable rates and all this
unnecessary consumption produces pollution increasingly stressing the environment.
Humanity is currently consuming the equivalent of one and a
half earths , according to the non-profit group Global Footprint Network. A separate report
by WWF–World Wide Fund For Nature in collaboration with the Zoological Society of London
and Global Footprint Network, calculates that the Middle East/Central Asia, Asia-Pacific, North
America and European Union regions are each consuming about double their
regional biocapacity.
We have only one Earth. And that one Earth is in the grips of a system that takes at a pace
that, unless reversed, will leave it a wrecked hulk while throwing ever more people into
poverty and immiseration. That this can go on indefinitely is the biggest fantasy.
For decades, governments and central banks have always identified the problems of the
economy as demand problems, even if it was not the case . If there was a crisis or a recession,
governments immediately believed that it must be due to lack of demand, and subsequently decide
that the private sector is not willing or able to fulfill the real demand needs of the economy,
even if there was no real evidence that companies or citizens were investing or consuming less
than what they needed. T he entire premise was that companies were not investing "enough".
Compared to what and decide by whom? Obviously by central planners who benefit from bubbles and
overcapacity but never suffer the consequences.
Governments and central banks never perceive risks of excess supply and even less predict a
bubble. Why? Because most central planners see debt, oversupply, and bubbles as small
collateral damages of a greater good: recover growth at any cost.
Behind the mistake in diagnosis is the obsession to maintain or grow Gross Domestic Product
(GDP) at any cost regardless of the quality of its components. GDP is relatively easy to
inflate. I always explain to my students that GDP is the only economic calculation in which you
add what you spend with what you earn. GDP can be inflated through government spending and with
higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to
finance productive investment and allow the economy to grow, while efficiency, innovation, and
technology allow us to be more productive and receive more and better goods and services at
cheaper prices. It is a virtuous cycle.
The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we
incentivize malinvestment and prevent technology substitution by implementing massive
government stimuli and liquidity injections.
@Chinaman me obsolescent with the disappearance of home-ec from our high schools. Economy
means to economize, to save and to make do. Credit cards in hand, suburban Americans spend
like drunken Irish sailors on shore leave.
BTW Chinaman: Those you apparently consider as deplorable, are the ones who do the actual,
real productive work. Most of the rest of employed Americans are keystrokers and
button-pushers, ordered around by governmental administrators and corporate bureaucrats.
Squatting atop the economic scrotumpole are various types of parasites, include
coupon-clipper sons of riches and those who get their ill-gotten gains from the FIRE sector:
Finance, Insurance and Real Estate speculation.
Note: since the Chinese working class' average wage has been doubling in real terms
every ten years since the CPC took over, I'm assuming you're talking about the victimization
of the American working class only (specially, but not only, the white working class from the
Rust Belt).
Some math.....
From US Census Data...
Total US Population = 331,002,651
Average US Per Capita Income (USD 2019) = $35,977.
From World Odometer
Population of China = 1,442,055,798
Chinese Per Capita Income (USD - 2020) = $10,276
US Population X Per Cap Income = 11.9 USD$(trillions) = 54% of US - GDP
PRC population X Per Cap Income = 14.8 USD$(trillions) = 96% of PRC - GDP
By this metric......
Chinese Main Street GDP is 124% of USA Main Street GDP
This means that 46% of US GDP consists of financial manipulation in the FIRE sector, while
the FIRE sector in China is only 4% of the Chinese economy.
The Jewish consortium behind Biden is almost identical in its financial composition to
that behind Trump which, as I've explained previously, was notable for its embodiment of
"usury and vulture capitalism, bloated consumerism, and the sordid commercial exploitation
of vice."
GDP figures hide rents, and unearned income as if they are GDP gains.
Let's take the housing bubble years up to 2008 as an example. Thought experiment:
Everybody in the West sells their home to their neighbor.
New bank credit was created due to loan formation to buy and sell homes. There was
activity as new finance paper was created in the form of new debt instruments to transfer
your home to your neighbor. All the new interest collected by banks is seen as profit.
GDP goes up by the profits and new finance activity.
The physical housing stock does not change at all.
Hudson and PCR explains how GDP is a false metric for measuring economic activity. People
cannot understand things if they don't have words for it, or if they don't have a way of
measuring.
Clown world is formed purposefully.. rents, unearned income, usury are a feature of the
system, not a bug. It is not you going crazy, you have become Allice in wonderland, where
reality is unreal.
According to official US government economic data, the US economy has been growing for
10.5 years since June of 2009. The reason that the US government can produce this false
conclusion is that costs that are subtrahends from GDP are not included in the measure.
Instead, many costs are counted not as subtractions from growth but as additions to
growth . For example, the penalty interest on a person's credit card balance that results
when a person falls behind his payments is counted as an increase in "financial services" and
as an increase in Gross Domestic Product. The economic world is stood on its head.
For a fictional character, homo economicus has had a pretty good run
.
Since the 1950s,
this mono-motivated, self-seeking figure has stalked the pages of economics textbooks, busy deciding each
action according to a rational calculus of personal loss and gain. But more recently his territory has
shrunk as experts on human nature have demonstrated what any decent novelist could have told them: our real
selves are nothing like this.
Unfortunately, many economists still plug this flawed view of people into computer models that determine
all kinds of things that impact our lives, from how much workers get paid to how we value life or common
goods, such as a clean environment. The results can be disastrous.
Typically, economists aren't that keen on admitting that their work is deeply connected to morality --
never mind that Adam Smith himself was a moral philosopher. But if you ask a question as simple as how to
price a used car, you quickly find that moral concerns and economic activity happen together all the time.
In his 2012 book,
The Righteous Mind
, New York University social psychologist Jonathan Haidt
explored why so many perfectly intelligent people have misread human nature– and not just economists, but
plenty of psychologists and even (shocker!) people who identify as politically liberal. For him, the key to
getting to know ourselves properly lies with moral psychology, a newish strain that pulls together
evolutionary, neurological, and social-psychological research on moral emotions and intuitions.
As Haidt sees it, we are creatures driven by moral intuition and attuned to both our personal interests
as well as what's good for the groups with which we identify. He points out that in order to thrive, we have
to appreciate our complex, interactive natures and see each other more clearly and empathetically – an
observation that may be especially useful at a time when threats like climate change and the concentration
of money and power threatens all of us, no matter who we are or what groups we belong to. At the moment, we
aren't doing such a good job of this.
In Haidt's view, the conscious mind is like a press secretary spewing after-the-fact justifications for
decisions already made. Thinkers like David Hume and Sigmund Freud were certainly hip to this idea, but
somehow a lot of economists missed the memo, as did psychologists following dominant rationalist models in
the 1980s and '90s.
Haidt invites us to consider ourselves as a rider (our analytical, rational part) and an elephant (our
emotional, intuitive part). The rider holds the reins, but the beast below is in charge, urged on by the
complex interaction of genetic influence, neural wiring, and social conditioning. The rider can advise the
elephant, but the elephant calls most of the shots.
Fortunately, the elephant is quite intelligent and equipped with all sorts of intuitions that are good
for conscious reasoning. But elephants get very stubborn when threatened and like to stick to what's
familiar. The rider, for her part, is not exactly a reliable character. She's not really searching for
truth, but mostly for ways to justify what the elephant wants.
That's why a rebel economist challenging conventional thinking about subjects like human nature faces a
heavy lift. Experts have to see a lot of evidence accumulating across many studies before they reach a point
where they are finally forced to think differently. Scientific studies are even less helpful in persuading
the general public.
When I asked Haidt how the mavericks could help their cause, he noted that humans are social creatures
more influenced by people than by ideas. So, it matters
who
says something as much as
what
they say. It also makes a difference how they say it: elephants don't like to be insulted, and they lean
towards arguments made by people they like and admire. Not very rational, perhaps, but likely true.
Homo Duplex
The notion that human beings are social creatures is another strike against homo economicus. We are
selfish much of the time, but we are also "groupish," as Haidt puts it, and perhaps better described as
"homo duplex" operating on two levels. Here he offers another animal analogy, suggesting that we're 90%
chimp and 10% bee, meaning that from an evolutionary perspective, we are selfish primates with a more
recently developed a "hivish" overlay that lets us occasionally devote ourselves to helping others, or our
groups.
This helps explain why you can't predict how someone is going to vote based on their narrow
self-interest. Political opinions are like badges of social membership. We don't just ask what's in it for
us, but also what it means to our groups. Having a kid in public school doesn't tell you that a person will
support aid to public schools, probably because there are group interests in play. What unifies us in
groups, Haidt argues, are certain moral foundations that allow us to share emotionally compelling worldviews
that we can easily justify and defend against any attack by outsiders who don't share them. And we can get
pretty nasty about those outsiders.
This begins to sound like ugly tribalism, the kind of stuff that leads to war. But Haidt reminds us that
this propensity also prepares us to get along within our groups and even to cooperate on a large scale -- our
human superpower. We differ from other primates because we exhibit shared intentionality: we're able to plan
things together and work together towards a common goal. You never see two chimps carrying a log – they just
don't act in concert that way. We do, and in our groups we've developed mechanisms to suppress cheaters and
free riders and reap the benefit of division of labor. Groups of early humans may well have triumphed over
other hominids not because they smashed them with clubs , but because they out-cooperated them.
To better understand how we operate in political groups, which have lately become more antagonistic,
Haidt created a map of our moral landscape called Moral Foundations Theory which delineates multiple
"foundations" we presumably use when making moral decisions, including care/harm, fairness/cheating,
loyalty/betrayal, authority/subversion, sanctity/degradation, and liberty/oppression. (Some scholars have
challenged
his system, offering alternative maps). His research indicates that liberals and
conservatives differ in the emphasis they place on each of these foundations, with conservatives tending to
value all six domains equally and liberals valuing the first two much more than the other three.
Haidt argues that liberals tend to home in on care and fairness when they talk about policy issues, which
can put them at a disadvantage vis-à-vis conservatives, who tend to activate the whole range of foundations.
Republicans are thus better able to talk to elephants than Democrats because they possess more ways to go
for the gut, as it were. If Democrats want to win, Haidt warns, they need to think of morality as more than
just care and fairness and to try to better understand that foundations more important to conservatives,
like deference to authority or a reverence for sacredness, are not pathological, but aspects human social
evolution that have helped us survive in many situations.
When he wrote
The Righteous Mind
, Haidt noted that Democrats had espoused a moral vision that
did not resonate with many working class and rural voters. In the current presidential race, he sees some
progress on economic populism from the Bernie Sanders wing, in part because Occupy Wall Street got people
attuned to issues of fairness and the oppression of the 1%. When politicians talk about the abuse of
political and economic power, they can activate not only care and fairness concerns, but also the
liberty/oppression foundation which people respond to across the political spectrum.
But this line is also tricky because, as Haidt pointed out to me, "Americans don't really hate their
rich." (One
recent study
suggested only 25% of Americans have a negative view of the rich, though a majority said
they should be taxed more).
Haidt also worries that many Democrats, particularly elites, are currently engaging with cultural issues
by embracing a what he called a "common enemy" form of identity politics which "demonizes people at the
intersectional point of evil (white men)" rather than focusing on a "common humanity" story which "draws a
larger circle around everyone. (Haidt plunged into controversial territory with his 2018 book,
The
Coddling of the American Mind
, which argues that college campuses are shutting down useful debate
through "safetyism" that protects students from ideas considered harmful or offensive).
He observed to me that while the polarizing Donald Trump may have turned off the younger generation "for
the next few decades," Democrats may be failing "to look seriously at the ways that their social
policies -- and their messengers -- alienate many moderates." Newly "woke" white elites, for example, who see
racism as the driver of nearly every phenomenon, may be having an unintended negative effect in his view.
When they ascribe Trump's victory to racial resentment and ignore the concerns of those who fear sliding
down the economic ladder, for example, they may turn off potential allies. Call a person or a group racist
and you won't be able to convince them to support your view on anything. Their elephants aren't listening.
Haidt acknowledges that our moral matrices are not written in stone; they can and do evolve, sometimes
quite rapidly within a couple of generations. Economic forces surely act to shift attunement to moral
foundations, making people more susceptible, for example, to anti-immigration arguments. If you fail to
consider the economic influence on this kind of moral activation, you'll be less equipped to address
problems like ethnic conflict. Being able to step outside our own moral matrix is essential to persuasion.
We not only have to talk to the elephant, but see the beehive.
We also have to remember the truth is not likely to be something held by any one individual, but rather
something that emerges as a large number of flawed and limited minds exchange views on a given subject. Our
smarts and flexibility are increased by our ability to cooperate and share information. Economists, for
example, improve their understanding of human nature by opening up to other social sciences and the
humanities for insight.
There is evidence that economists are paying attention to moral psychology. In their book
Identity
Economics
, Nobel laurate
George
Akerlof
and Rachel Kranton argue that people identify with "social categories," and that each category,
whether it be Christian, mother, or neighbor, has associated norms or ideals to which people want to aspire.
Sam Bowles'
The Moral Economy
shows that monetary incentives don't work in many situations and that
policies targeting our selfish instincts can actually weaken the institutions which depend on our more
selfless impulses– including financial markets. At the Institute of New Economic Thinking (INET), the
connection between economics and morality has been explored by
INET president Rob
Johnson and political philosopher Michael Sandel
as well as thinkers like
economic historian Robert Skidelsky
and
economist Darrick Hamilton
.
All of this rather bad news for homo economicus. But pretty good news for humanity.
we're 90% chimp and 10% bee, meaning that from an evolutionary perspective, we are selfish primates
with a more recently developed a "hivish" overlay that lets us occasionally devote ourselves to helping
others, or our groups.
Well if one wants to take an "evolutionary perspective" (works for me) then obviously our instincts are
shaped to promote survival of the species and not just the individual. And if that's true then the
Randian/economics version of rational isn't rational at all. Perhaps it would be clearer to talk about this
problem in terms of rational versus irrational rather than appealing to some "altruism gene" that will
supposedly save us. IMO only that rational, intelligent, creative aspect of humans will save us from that
irrational side that is indeed totally instinctive. Somehow we've gotten this far–despite everything–"by the
skin of our teeth." Here's hoping those minds will find a path.
Over what? Carol's point about the sociology of Ayn Rand?
In point of fact, Carol, altruism is always secondary (where it appears) in nature. Selfishness
ensures the fittest genes survive to carry on the species. Only in the face of catastrophe does
altruism at
the individual level become more valuable than selfishness. So, indeed it is because of our
selfishness, because we've struggled by the skin of our teeth, that we as a species have survived and
prospered.
but, but erik, that leaves out all the energy saving advantage we get from a cohesive group
which is also determined to survive and carry on centuries of knowledge on just how to do so .
Just a quick jab: why does Haidt, and others, assume that feelings are inferior to logic and intellect?
Seems to me they are inter-twined, separate-able, but equal in value, if not dimension.
It could be a three way set-up instead of a two way (like markets, which are commonly spoken of as two:
buyer and seller, but are three: buyer, seller, and banker /money man). Man's consciousness could be 1)
feelings, 2) logic /intellect, and 3) the decider (call out to ex-prez W, so got political jab in too!).
In fairness to Haidt, I think he's more nuanced than "rationality good; feelings bad"
I have encountered more of that rather rigid approach among those who have read "Thinking Fast and
Slow" perhaps because that book doesn't do as good a job of outlining as crucial the capacity to
recognize which situations favor System 1 thinking and those which favor System 2 -- a problem compounded
by the emphasis in the book on the rather narrow range of circumstances in which System 2 is clearly
superior.
Jeez – I spent years getting an Econ degree in the homo economus/monetarist era (dark times), when I
should've been making my way through my D&D Dungeon Master's sci fi collection!
I always thought that the Professors who thought up homo economus never went with their wives (as
it was back then) to the grocery store.
The rational choice, always, was the store brand. DelMonte and all other such brands owed their
very existence to non-rational, emotional choices–by tons of people.
'Rational' just means 'consistently following an internally sound logic.' A machine does that –
following the logic of its mechanics. A computer does that – following the logic of code. An animal does
that – following the logic dictated by emotion. And an animal certainly does that better than we humans
whose behaviors become muddled by ideas. Truly, by this measure animals are better machines than humans –
more mechanical, more emotional, more logical, more rational.
That's why a rebel economist challenging conventional thinking about subjects like human nature faces
a heavy lift. Experts have to see a lot of evidence accumulating across many studies before they reach a
point where they are finally forced to think differently.
As an ex-organic chemist, I was astonished to find that more than a few scientists cling to outdated
paradigms with a tenacity that would shame the most rigid religious fundamentalist. Cf. heliobacter,
continental drift, even the heliocentric solar system.
While "continental" drift was first proposed in about 1600 AD it was not completely wrong. Like many
initial geologic theories it was partially correct. It is now known that it is not the "continents" that
move across the earth, but tectonic plates, on which the continents are located, that is creating
movement. The convection of the earths interior magma is thought to be the movement vector for the
plates.
"this propensity also prepares us to get along within our groups and even to cooperate on a large scale --
our human superpower"
Yuval Harari's central point revolves around this. Humans, like other primates, engage in "grooming"
activities to maintain group cohesion. With the development of language, this "grooming" went from picking
lice out of each other's hair (fun!) to gossiping about each other. But this behavior seems to be unable to
maintain a group size larger than 150 individuals, not surprising considering the person-to-person contact
necessary.
To gather a larger group around common goals requires myth, Harari says. Early myths involved gods, often
imagined as living in a separate world with structures parallel to our own. In a polytheistic society, the
head god related to the lesser gods as a king related to his human subjects. In the henotheistic Ancient
Near East, nations like Babylon, Assyria and even the southern Israelite kingdom of Judah envisioned a
parallel war occurring in "heaven" between the national gods when two countries went to war. These days,
there are new, completely secular myths like what Harari calls "Money" that orient our world around
materialism, competition and power.
William H. McNeill also noted the almost universal human behaviours of mass marching/dancing (which
requires and reinforces cooperation) as indicative of a social behaviour rooted in a biological need
We also have "mirror neurons" for a reason -- one that baffles the proponents of "homo economicus"
I was more interested in this article from the political perspective; i.e. what liberals get wrong.
Like many who read this site, I'm interested in the primary elections and want Bernie to win.
But Bernie's message could be better by being more attuned to some of the "Moral Foundation" issues Haidt
raises.
Take Medicare for All which, by most accounts, is the leading issue to most voters:
Talking more about Medicare being a simple and successful 50+ year program appeals to authority. Medicare
Advantage plans can be framed as subversion. Or loyalty / betrayal. Also consider sanctity / degradation.
Talking more about the 80/20 aspect of coverage addresses fairness / cheating and "free stuff"
Not talking about eliminating private insurance shows concern for liberty / oppression. I would actually
make a joke about people who would still want private insurance after M4A becomes available
Just food for thought in terms of how the ideas contained in the article could be applied.
And the next time some nefarious reporter asks how we will pay for this or that; I wish someone will just
say "Mexico will pay for it".
As an economist (M.A. in Econ), I am elated to see Jonathan Haidt's work receive this kind of attention
from serious thinkers. In addition to the reasons cited by Lynn Parramore, I believe Professor Haidt's work
validates, by building on, the work of Humanistic Economics by Professor Mark Lutz (Ph.D. UC-Berkeley) and
Dr. Kenneth Lux. Moreover, Professor Haidt's work appears, to me, to further validate the astute criticisms
of Dean Baker and Mark Weisbrot for neoclassical Marxists' use of "Rational Economic Man" in their
paradigm's modls (no "e"). Having obtained my degree about 25 years ago, basically in humanistic economics,
I am sure that adoption of such thinking by grad students in economics can help rescue humanity from its
current barbaric state. I just hope there's still time left.
On hate and having negative view on the rich
: this article mentions that "only" 25% of
Americans have a negative or very negative view of the rich". Only is the proper word? I would say that is a
lot of bad feelings. Hate is not a sane feeling and we are inclined to hate in stressful situations. So, if
25% of Americans, have these negative feelings (8% very negative) about the rich this spells quite a lot of
despair/stress. It would be interesting a comparison with other countries to evaluate if this is normal by
international standards.
I mention this because stress & despair might explain, at least partially, the relative low turnout in
general elections in the US compared with other OECD countries. Does anybody here know the evolution of
electoral turnout in the US since 1950? Has turnout declined with time?
I remembered an old David Brooks column mentioning that Americans vote their aspirations.
I'm not a fan of Brooks, but this 20 year old column may explain some USA citizens' current
attitudes..
Here is a sample quote (about a proposed Al Gore estate tax):
"The most telling polling result from the 2000 election was from a Time magazine survey that asked
people if they are in the top 1 percent of earners. Nineteen percent of Americans say they are in the
richest 1 percent and a further 20 percent expect to be someday. So right away you have 39 percent of
Americans who thought that when Mr. Gore savaged a plan that favored the top 1 percent, he was taking a
direct shot at them."
While it has been 20 years since this was published, one might suspect American "I'll be rich"
aspirations have taken a beating during this interval.
The economics profession has ridden the hydrocarbon energy spend of the last 100+ years as hydrocarbon
energy has been pulled from the ground and converted into "economic growth".
It will be interesting to see how the profession responds to future events with climate change, peak
human population and peak energy inexorably (in my view) arriving.
One thing that has happened is that over the past several decades so- called liberals have agreed with
conservatives that the market represents freedom and efficiency and the government represents the opposite.
Some younger people are rebelling, but older voters have been hearing this their whole lives without
challenge until Sanders came along.
I just read a description of a Trump rally at the NYT and I think it was accurate. The reporters just
repeated what ordinary people said there. One guy claimed the Democrats have just swung so far left he can't
support them anymore, yet on economics this simply isn't the case. Sanders just represents what Democrats
used to be on economic issues.
I enjoyed the article, and agree with the main ideas, but he was a little rough on our primate cousins.
Chimps may not cooperate by "carrying logs", but, like a lot of social animals, they work together when,
say, hunting other primates. And most social animals have a pretty well-developed sense of fairness (watch
what happens if you give one of your dogs a treat and ignore the other one).
Yes I am trying to think about what chimps would actually need to transport a log for. That famous
jocular saying by one of the researchers "we were beginning to think the difference between us was merely
cultural".
Is that a sense of fairness or a sense of competition or perhaps a sense of both? Each dog would
prefer being the favorite but will accept being the equal.
Dogs are an interesting analogy because in my observation they are, as social animals, so much like
us. Perhaps the main takeaway from the above article is the belief that there is such a thing as "human
nature" and that we have a kinship with the other species. Needless to say such a view was once anathema
in an intellectual climate dominated by religion and a human centric world view. Even now people like
Pence are "dominionists" and believe that humans have been given dominion over the planet and all its
other species because of what it says in the Bible. Power always needs to justify itself–perhaps because
of that innate sense of fairness/competition that you mention.
Haidt got me thinking about language too. His thesis could be talking about the evolution of
language itself. The evolution of rationalization. Since he seems to premise his insights on human
intuition and a certain bedrock of morality that all animals seem to have. Pre language. Can we
attribute the morality of animals to a lack of rationalization? They do seem to lack immorality. If we
were mute, but very intuitive as we are, what effect would our intuition have on our communication
skills and our actions? Raising the question here, Is language the emotional middleman that is always
(duplex) less than rational and causing all this confusion? Sort of thinking here about someone giving
an over-the-top sermon, like an economics professor claiming that we are all homo-economicus.
Morality traditionally implies conscious choice so I'm not sure that's relevant to the animal
world. Guess what I'm saying is that we are similar to certain animals in our instincts, not our
intelligence.
However the language of economic profs is deceptive since they should be saying "irrational self
interest" rather than "rational self interest." Pure selfishness usually ends up being bad even for
the selfish.
Also on this very subject, last night on Nova, the one about dogs, their domestication (or
ours?) and their amazing ability to relate – communicate. They attribute a dog's ability to
communicate to oxytocin – because they thrive on love and friendship. I do believe that because
I've only had one aloof dog and he was very wolf-like. A throwback. Indicating that evolution
tends toward love – not to be too corny. Maybe Oxytocin will save us ;-)
If by "pack animals" you mean species that live in societies I never said they didn't. But
obviously there is also cooperation on some level and social bonding. I do think this is a very
complicated subject and not easily reduced to simplifications by yours truly–not a biologist–or the
above article. But arguably the above is correct in asserting that economists themselves are
ignoring the complications.
And for those interested, here is
a paper published in 2008
that empirically demonstrates that the "Homo economicus" approach in this case
disguised in the form of "median-voter model" is bullshit regarding inequality, redistribution and public
opinion, though they regard it as intelectually compelling. Economists!
>Experts have to see a lot of evidence accumulating across many studies before they reach a point where
they are finally forced to think differently.
Ummm, the whole, underlying maybe, point of the rest of the article is that the dominant economic thought
of our age has nothing to do with evidence. Yet they overthrew Keynes. "Trust us, We're Experts" or
something like that right?
I just finished slogging through The Master and His Emissary by Iain McGilchrist, which harmonizes with
this article. Instead of the rider on an elephant, McGilchrist writes of the functions of the left and right
hemispheres of the brain, which are significantly different. The left brain is verbal, analytical, and task
oriented. It likes straight lines. (This strikes me as a description of the pseudo-accuracy and busyness of
economics.) The right brain sees a larger picture, is less talky, and is generally better at perceiving the
world around us. It is the hemisphere that can attain greater knowledge even if it is not as adept at
expressing such knowledge in words. (The "bee" part of the brain–and more than 10 percent.)
McGilchrist's book is good, but way too long, which is an irony given that he asserts that the left
brain, the emissary, is trying to subvert the master, the part of the brain less likely to go on and on and
on in words.
But this era of too many easy paradigms (economics, "free markets"), too much flimsy analysis (critical
studies, queer studies, economics, New York Times op-ed columnists), and too much talk (social media) is
very much left-brained. I think that what is wearing all of us out is the endless tsunami of word salad.
Economics, with its insistance on rationality rather than reasonableness (left brain rather than right
brain), fell into the salad bowl a long time ago.
Yes. I, too, think this is a very important book. Being retired, I don't think it's too long. I revel
in how much stuff I got for only thirty bucks (or whatever it was -- something like that.)
The neurological case is complete after 94 very dense pages. (535 citations. Pleasantly readable prose,
though, and that bizarre experiment that "proves" that porcupines are monkeys.) After that he traces the
effects and footprints of the two independent modes of thought through philosophy, art, music, and,
generally, the working of our societies from ancient to post-modern.
There's a strong parallel to Daniel Kahneman's Fast and Slow thinking, the right hemisphere being the
fast one. The one wrinkle is that language is the province of the left hemisphere, but Kahnemann finds
that fast thinking is perfectly adept at small-talk, as long as it doesn't get too abstract.
Worst for me is that now that I've read it, I've got to go back into Heidegger, all the other modern
Germans, John Dryden, classical and modern painting, religion
So how would homo economicus work out in anything other than a modern industrial system? In earlier
times, I would say that at the least they would be shunned as a danger to the community or maybe even thrown
out altogether as being incapable of working in a close-knit community. Want a modern example instead? How
about the fact that you cannot have a military based on the idea of homo economicus unless you are talking
about a band of mercenaries. This whole stupid idea is why every relationship these days whether for work,
employment, government, etc is defined by contracts. In short, it is a cookie-cutter idea that come in only
one shape.
"Since the 1950s, this mono-motivated, self-seeking figure has stalked the pages of economics
textbooks, busy deciding each action according to a rational calculus of personal loss and gain."
Advertising gave up with that sort of approach years ago.
Advertisers appeal to deep seated wants and desires and this works really well, so they haven't looked back.
Are the wealthy much more rational?
Let's have a look at adverts targeted at wealthy people.
Are they a long list of specifications and comparisons saying why these products are better?
No.
An advert for a Sunseeker luxury yacht conveys luxury, elegance, being able to get away from it all and
there is usually a young woman in the back in a bikini; the less said about that the better.
What about PR and propoganda?
How do they work?
The same as advertising really, and it's got nothing to do with appealing to rational human beings.
It works; they are not going to be doing it differently anytime soon.
A propos of nothing, long, long ago there was an ad during the Superbowl placed by Cadillac. It was
all about authority, power, celebrity, and it hardly mentioned cars at all, if it even did. Blog
commenters had to work very hard to explain how this was selling Cadillacs. IMHO, it didn't sell
Cadillacs. It told the top Cadillac executives all the things about themselves that they most longed to
hear. It didn't sell cars to wealthy people, it sold the ad itself to the Cadillac C-suite. It worked
like a charm.
Y-axis – top to bottom
X-axis – Across genders, races, etc ..
As long as the Democrats wealthy donors keep them focussed on identity politics and the X-axis, the
donors should be able to keep making progress in the reverse direction on the Y-axis.
and he's MUCH better than Haidt. I recommend this book and lots
of his earlier work, much of it done with Herbert Gintis.
Their 1976 "Schooling in capitalist America" is no less necessary
reading now than it was then, and their 1986 "Democracy & capitalism"
is maybe even more relevant now (Milanovic credits it as a forerunner
to his current "Capitalism, alone", which it is–and much more than that).
More recent stuff is referenced in "The moral economy" and pretty
much always worthwhile.
Morality is a big part of decision making, but I'll argue that is secondary to our cognitive biases that
exist at an even lower level of consciousness to enable us to retain function and decision making in the
face of an overwhelming number of variables.
The opposite of cognitive bias or perhaps the antidote is critical thinking, which must be
taught/learned, so yeah it is preposterous to assume people use solid reasoning that could only come about
with the use of critical thinking, which vasts swaths of society almost never exercise.
The article to me is all over the place, which builds on Haidt's views that seem all over the place too.
Interesting though. Comments too. The experimental data about Haidt's classifications of moral decision
making elements, and where self-described liberals and conservatives rank them in importance was
interesting. I suppose the liberals regarding only two of the six as important could be due to their college
educations. As a math professor I had once observed about a smart student in his class: "he learned his
subject too well". Or to paraphrase Othello: "One that learned not wisely but too well".
The most important takeaway from this is that we should not let economists guide the economy. Not the
economists believing in homo economicus anyway (and, while we are at it, believing in equilibrium as
well). The reason for existence of such a concept is clearly to replace ethics and morality as a guiding
principle of human economic activity with a pseudo- "natural law" (humans by nature are "economicus" –
i.e. self-interested and materialistic – phew!), which once entrenched, relieves those in power from
moral obligations because it safely explains away almost any economic outcome as result of "natural"
forces – i.e. no one to blame (globalization=natural force). It's a great tool for them. Down with it.
The asumption of rationality has been defeated by many economists, as well as psychologists,
sociologists, etc.. Carrying on about this is unncessary. Assuming that humans worry about "care and
fairness' is true. The "12" prophets of the Tanakh (Old Testament") raised this concern numerous times, and
one can find it as a major issue in the Synoptic Gospels. Smith also worried about this in his first book on
economocs, "The Theory of Moral Sentiments." The only reason for any further consideration of "rationality"
in economics is due to the attemprt by economists to treat economics as a "science" like physics. There are
also numerous misguided attempts to mathemaize economics.
But one insidious reason to pretend that economics is a "science" is to justify the idea of a "Nobel
Prize" in economics, or to give a "halo" to economists that win the "Swedish Central Bank Prize in Economic
Scholarship in Memory of Alfred Nobel."
Avner Offer and Gabriel Söderberg have written a good book about the creation of this prize, "The Nobel
Factor." Please note, the words "Nobel Prize" do not seem to appear on either the certificates or medal
awarded.
Daniel Kahneman who won the prize (justifiably, (and John Nash a famous mathematicin who won many real
prizes) notd that giving labels often transfers a false aura to those being labeled. Offer and Söderberg
noted that this is true of the label "winner of the Nobel Prize." Given that there is no decent
encompasssing theory of economics similar to Newton's Laws and how often the prizes are awarded to
economists who don't produce anything like such a theory, we should once and for all abandone the pretense
that economis is a science. It is an attempt to describe social behaviour in a very restricted context.
Leaving it to psychologists, sociologists and others has produce better undertandings of human behaviour.
In my golden days, I did manufacturing throughput analysis, cost modeled parts, and
reviewed component and transportation distribution. I am curious. Forget all that
neoliberal stuff . . .
Ohh, those golden days
Measurement has its place and is the cornerstone of science, but it is not equal to
pattern recognition. And when applied to social phenomena with their complexity it is
more often a trap, rather then an insight.
You need to understand that.
Deification of questionable metrics is an objective phenomenon that we observe under
neoliberalism.
A classic example of deification of a questionable metric under neoliberalism is the
"cult of GDP" ("If the GDP Is Up, Why Is America Down?") See , for example
For example, many people discuss stagnation of GDP growth in Japan not understanding
here we are talking about the country with shrinking population. And adjusted for this
factor I am not sure that it not higher then in the USA (were it is grossly distorted by
the cancerous growth of FIRE sector).
So while comparing different years for a single country might make some limited sense,
those who blindly compare GDP of different countries (even with PPP adjustment) IMHO
belong to a modern category of economic charlatans. Kind of Lysenkoism, if you wish
That tells you something about primitivism and pseudo-scientific nature of neoliberal
economics.
We also need to remember the "performance reviews travesty" which is such a clear
illustration of "cult of measurement" abuses that it does not it even requires
commentary. Google has abolished numerical ratings in April 2014.
Recently I come across an interesting record of early application of it in AT&T at
Brian W Kernighan book UNIX: A History and a Memoir at late 60th, early as 70th.
When doing GDP-PPP comparisons there is one very important thing your guys do not take into
account at all and that's a given country's infrastructure.
I mean what each and every citizen "own" just because he lives in that country : roads,
highways, schools, hospitals etc etc.
If you take that into account then the US is in a worse shape then many many third world
countries....
I don't have the exact numbers in head right now but for example, having a kid in the US
costs 10s of thousands of USD (like 40 or 50.000 USD) that you have to pay from your own
pocket.
The same thing in Russia costs more like 3-5.000 USD.
In most of the European countries (guess it's the same thing in Russia), if you want to go
to school, you'll have to pay a few hundred USD a year to enroll and that's it (of course you
have to pay for housing and food just like anybody else). Schools are free and payed by the
state, so every citizen "own" them.
If you add up all the things that are private (i.e. that you have to pay for) in the
States, compared to what is just "given" to you, I guess, just with school & healthcare,
you'll end up easily with 1/2 million dollars per citizen (think about old age healthcare...
mamamia, I'm glad I'm not american).
Which means that every Russian is 500.000$ richer that every american at birth...
Then you can start bitching about the few thousand dollars more or less that someone makes
in this or that country...
@ Danny 16
Yah, the "numbers" do not show the quality of life. Rarely mentioned for the US is that half
the adult population makes $30K or less and cannot afford simple emergencies under $500.
Russia now was better maternal survivor rates than the United States. Looks like Canada is
suffering the same problem with homelessness. (Homeless problem will get worse as the US
Supreme Court ruled that the homeless have a right to camp on sidewalks if no shelters. While
maybe compassionate sounding, it removes from local governments the ability to regulate
homeless camps.)
By contrast, around 17% of Americans don't have enough to eat (about 24x higher than the
Russian figure). But, as the US has a larger middle class, we can assume there's a higher
percentage of families there with disposable income beyond essentials.
Erelis , Dec 23 2019 20:58 utc | 47
I agree with you. It's impossible to live in the USA with USD 30,000.00. You're literally a
homeless person if you have that wage level.
Nowadays, you can live in the USA with a USD 50,000.00-60,000.00 household wage. But you
live badly and one cyclical business crisis or minor heath problem away to be completely
bankrupt. And forget about retiring: you'll work until you drop dead.
If you want to consider yourself "middle class" in America, you're probably talking about
USD 120,000.00 household earnings. Hence the term "six figure wage/salary" you hear so often in
the USA: this is a codename for middle class wage. Americans don't like to describe
themselves as a class-based society, for historical reasons that go since its very foundation,
so they avoid the word "class" whenever they can.
To be in the "solid" American middle class, you need to be earning (by household) around USD
300,000.00. That generally means both husband and wife are middle class (i.e. earn the famous
"six-figure"). In that band of earnings, the family is in a secure position and will be able to
send up to two children to a top college. Only a major financial crisis or a catastrophic
health tragedy (one of the breadwinners dying prematurely) would be able to knock this family
out of the middle class.
From USD 720,000.00 up, you're already in the "upper" middle class territory. At this level,
we're probably talking about a household located in downtown New York and Los Angeles, plus
second houses to spend the summer, winter or both. These are the households who have a
participation (albeit minor) on the Wall Street pie, and who get richer and richer (albeit on a
lower pace and smaller scale) as inequality rises. Only a series of very unfortunate events
could knock an upper middle class family off its class. The upper middle class also makes up
most of the Ivy League elites (in number terms) and serve as a genetic reserve for the American
capitalist class (the elite per se), since they are essentially the only
Let that sink in for a moment. Over the same period, the CPI for new vehicles (green
line, right scale in the chart below) rose just 22%:
Note that from 1990 through 1998, the CPI for new vehicles closely tracked the price
increases of the F-150. But this surge in CPI was too disturbing, apparently, and so the CPI
methodology was enhanced with aggressive hedonic quality adjustments and other methods to
bring CPI down, and it actually fell from 1997 through 2009, even as new vehicle prices were
soaring.
Note the inherent class warfare aspect of the dynamic here: Technological advances are
inherently deflationary, in that they allow a manufacturing worker to produce ever-more
value-add per hour. In a fair world, said workers would share in that increased value-add via
salary gains, which would largely offset the price increases of the higher-value-add products
they and others produce.
"Note the inherent class warfare aspect of the dynamic here: Technological advances are
inherently deflationary, in that they allow a manufacturing worker to produce ever-more
value-add per hour. In a fair world, said workers would share in that increased value-add via
salary gains, which would largely offset the price increases of the higher-value-add products
they and others produce."
I entered the workforce in ~1984, and I have yet to see the workers get a share in
anything.
In Eric Weinstein's podcast with Tyler Cowen they have an argument about the CPI and the
hedonic adjustment. Cowen claims that the finance markets are totally cool with CPI as is and
if you think it is messed up then you have the basis for an investment play that will make
you a ton of profits if you are correct.
This is the kind of argument that has given rhetoric a bad name for 2500 years.
If you do not have the patience to listen all the way to the end (I am not proud to say
that I did) you will learn that Cowen and Weinstein are sure that they have impeccable taste
in music. They sound like one of those cartoon characters like Phineas Whoopie the man who
knows everything.
First problem is that in order to be comparable they are converted into the same currency,
typically dollars. That's a problem because things don't cost the same in different
countries. If you want to measure strength of economy you need to measure the purchasing
power based on where the money is spend and not based on the costs of goods and services in
the US (which you inadvertently do when you convert GDP's in US dollar values).
Second problem is that GDP does not measure the 'size' of the economy. It measures how
much money is being pumped around within an economy and how often it is being pumped around
and then the assumption is made that this represents the size of the economy. It's very easy
to artificially increase this pumping around to inflate the apparent size of an 'economy'.
Companies do this routinely before IPO's for example. The perversions we now have
masquerading as stock markets are another. But mostly it is done by creating debt. When you
get a loan, you get money that mostly did not exist prior to you getting it. It's not
backed by anything but the expectation of profits (in the sense that you're expected
to manage to leverage the money into creating at least enough real economic value to back not
just the issue of your loan but also the interest, representing costs for the providers, and
provide your share of the compensation for those loan receivers who fail in this task, ie
provide backing for the previously non-existing money they received).
So in order to get a genuine measure of the economic power of an economy you need to rate
their GDP in terms of local purchasing power which puts Russia equal to Germany. But you also
need to account for the amount of debt in an economy as the money issued as debt for the most
part does not represent actual existing economic value but at best expected economic value
and at worst will not be recouped at all in which case you need to detract it from the GDP
numbers.
That gets far too complicated for most people who just want simple, reassuring numbers,
like comparing economies on GDP numbers based on dollar values. Dream on.
Here are some facts on the Russian economy:
– in 2018 approx. 82% of GDP was spend domestically and only about 18% exported (see
why purchasing power matters?)
– of that 18% exports about a third represented raw materials, so 6% of GDP
– oil and natural gas represented between 35% and 40% percent of raw material exports,
which means between 2% and 2,5% of GDP consisted of oil and gas exports.
– in 2018 Russia achieved a rare economical feat, a triple surplus. The total
government debt (which was only a few percent of GDP) was less than the surpluses on the
government bank accounts meaning there was no net debt. Instead there was a modest net
surplus. The second surplus was the annual government budget. In 2018 Russian government
spending was less than the government revenues that year. And thirdly, they had a trade
surplus, exporting more than they imported.
In case you failed to notice, they exported more than they imported even though only 18%
of GDP consists of exports. Given the other two surpluses they could import a lot more than
that if they wanted to or if they needed to .
They don't because they don't need to. Russia does not depend on the rest of the world to
keep its economy going. It is about as autarkic as it is nowadays possible to be.
(cnbc.com) 139In a speech last week, Fed Chairman Jerome
Powell raised the possibility that the problem is with the data itself. GDP measures the value
of products and services that are bought and sold. But many of the greatest technological
innovations of the internet age are free. Search engines, e-mail, GPS, even Facebook -- the
official economic statistics are
not designed to capture the benefits they generate for businesses and consumers . "Good
decisions require good data, but the data in hand are seldom as good as we would like," Powell
said. Instead, Powell cited recent work by MIT economist Erik Brynjolfsson, one of the leading
academics on the intersection of technology and the economy. In a paper with Avinash Collis of
the National Bureau of Economic Research and Felix Eggers of the University of Groningen in the
Netherlands, the authors conducted massive surveys to estimate the monetary value that users
place on the tools of modern life.
The results? The median user would need about $48 to give up Facebook for one month. The
median price of giving up video streaming services like YouTube for a year is $1,173. To stop
using search engines, consumers would need a median $17,530, making it the most valuable
digital service. The authors also conducted more limited surveys with students in Europe on
other popular platforms. One month of Snapchat was valued at about 2.17 euros. LinkedIn was
just 1.52 euros. But giving up WhatsApp? That would require a whopping 536 euros. Twitter,
however, was valued at zero euros.
"... The real unemployment rate is probably somewhere between 10%-12%. ..."
"... The U-6 also includes what the labor dept. calls involuntary part time employed. It should include the voluntary part time as well, but doesn't (See, they're not actively looking for work even if unemployed). ..."
"... But even the involuntary part time is itself under-estimated. I believe the Labor Dept. counts only those involuntarily part time unemployed whose part time job is their primary job. It doesn't count those who have second and third involuntary part time jobs. That would raise the U-6 unemployment rate significantly. The labor Dept's estimate of the 'discouraged' and 'missing labor force' is grossly underestimated. ..."
"... The labor dept. also misses the 1-2 million workers who went on social security disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment insurance. That number rose dramatically after 2008 and hasn't come down much (although the government and courts are going after them). ..."
"... The way the government calculates unemployment is by means of 60,000 monthly household surveys but that phone survey method misses a lot of workers who are undocumented and others working in the underground economy in the inner cities (about 10-12% of the economy according to most economists and therefore potentially 10-12% of the reported labor force in size as well). ..."
"... The SSDI, undocumented, underground, underestimation of part timers, etc. are what I call the 'hidden unemployed'. And that brings the unemployed well above the 3.7%. ..."
The real unemployment rate is probably somewhere between 10%-12%. Here's why: the 3.7% is
the U-3 rate, per the labor dept. But that's the rate only for full time employed. What the
labor dept. calls the U-6 includes what it calls discouraged workers (those who haven't looked
for work in the past 4 weeks). Then there's what's called the 'missing labor force'–i.e.
those who haven't looked in the past year. They're not calculated in the 3.7% U-3 unemployment
rate number either. Why? Because you have to be 'out of work and actively looking for work' to
be counted as unemployed and therefore part of the 3.7% rate.
The U-6 also includes what the labor dept. calls involuntary part time employed. It
should include the voluntary part time as well, but doesn't (See, they're not actively looking
for work even if unemployed).
But even the involuntary part time is itself under-estimated. I believe the Labor Dept.
counts only those involuntarily part time unemployed whose part time job is their primary job.
It doesn't count those who have second and third involuntary part time jobs. That would raise
the U-6 unemployment rate significantly. The labor Dept's estimate of the 'discouraged' and
'missing labor force' is grossly underestimated.
The labor dept. also misses the 1-2 million workers who went on social security
disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment
insurance. That number rose dramatically after 2008 and hasn't come down much (although the
government and courts are going after them).
The way the government calculates unemployment is by means of 60,000 monthly household
surveys but that phone survey method misses a lot of workers who are undocumented and others
working in the underground economy in the inner cities (about 10-12% of the economy according
to most economists and therefore potentially 10-12% of the reported labor force in size as
well). The labor dept. just makes assumptions about that number (conservatively, I may
add) and plugs in a number to be added to the unemployment totals. But it has no real idea of
how many undocumented or underground economy workers are actually employed or unemployed since
these workers do not participate in the labor dept. phone surveys, and who can blame them.
The SSDI, undocumented, underground, underestimation of part timers, etc. are what I
call the 'hidden unemployed'. And that brings the unemployed well above the 3.7%.
Finally, there's the corroborating evidence about what's called the labor force
participation rate. It has declined by roughly 5% since 2007. That's 6 to 9 million workers who
should have entered the labor force but haven't. The labor force should be that much larger,
but it isn't. Where have they gone? Did they just not enter the labor force? If not, they're
likely a majority unemployed, or in the underground economy, or belong to the labor dept's
'missing labor force' which should be much greater than reported. The government has no
adequate explanation why the participation rate has declined so dramatically. Or where have the
workers gone. If they had entered the labor force they would have been counted. And their 6 to
9 million would result in an increase in the total labor force number and therefore raise the
unemployment rate.
All these reasons–-i.e. only counting full timers in the official 3.7%;
under-estimating the size of the part time workforce; under-estimating the size of the
discouraged and so-called 'missing labor force'; using methodologies that don't capture the
undocumented and underground unemployed accurately; not counting part of the SSI increase as
unemployed; and reducing the total labor force because of the declining labor force
participation-–together means the true unemployment rate is definitely over 10% and
likely closer to 12%. And even that's a conservative estimate perhaps." Join the debate on
Facebook More articles by: Jack Rasmus
Jack Rasmus is author of the recently published book, 'Central Bankers at the End of
Their Ropes: Monetary Policy and the Coming Depression', Clarity Press, August 2017. He blogs
at jackrasmus.com and his twitter handle
is @drjackrasmus. His website is http://kyklosproductions.com .
In response to a weakening in the yearly growth rate of key economic indicators such as
industrial production and real gross domestic product (GDP)
some commentators have raised
the alarm of the possibility of a recession emerging.
Some
other commentators are dismissive of this arguing that the likelihood of a
recession ahead is not very high given that other important indicators such as consumer outlays
as depicted by the annual growth rate of retail sales and the state of employment appear to be in
good shape (see charts).
Most experts tend to assess the strength of an economy in terms of real gross domestic product
(GDP), which supposedly mirrors the total amount of final goods and services produced.
To calculate a total, several things must be added together.
In order to add
things together, they must have some unit in common. It is not possible, however, to add
refrigerators to cars and shirts to obtain the total amount of final goods.
Since total real output cannot be defined in a meaningful way, obviously it cannot be
quantified. To overcome this problem economists employ total monetary expenditure on goods, which
they divide by an average price of goods. However, is the calculation of an average price possible?
Suppose two transactions are conducted. In the first transaction, one TV set is exchanged for
$1,000. In the second transaction, one shirt is exchanged for $40. The price or the rate of
exchange in the first transaction is $1000/1 TV set. The price in the second transaction is $40/1
shirt. In order to calculate the average price, we must add these two ratios and divide them by 2.
However, $1000/1 TV set cannot be added to $ 40/1 shirt, implying that it is not possible to
establish an average price.
On this Rothbard wrote in
Man, Economy, and State
:
Thus, any concept of average price level involves adding or multiplying quantities of
completely different units of goods, such as butter, hats, sugar, etc., and is therefore
meaningless and illegitimate.
Since GDP is expressed in dollar terms, which are deflated by a dubious price deflator,
it is obvious that the so called real GDP fluctuations mirror fluctuations in the amount of dollars
pumped into the economy.
Hence, various statements by government statisticians regarding the growth rate of the real
economy are nothing more than a reflection of the fluctuations in the growth rate of the money
supply.
Now, once a recession is assessed in terms of real GDP it is not surprising that the
central bank appears to be able to counter the recessionary effects that emerge.
For
instance, by pushing more money into the economy the central bank's actions would appear to be
effective since real GDP will show a positive response to this pumping after a time lag. (Remember
that changes in real GDP reflect changes in money supply).
This means that if the economy can be expressed through indicators such as GDP, then
this will allow the central bank to appear to be able to navigate the economy (i.e., GDP) by means
of a suitable policy mix. In addition, it makes sense to demand that the central bank should
interfere in order to help the economy.
Why Business Cycles Are Recurrent
Even if one were to accept that real GDP is not a fiction and depicts the so-called true economy
there is still a problem as to why recessions are of a recurrent nature. Is it possible that it is
only external shocks that cause this repetitive occurrence of recessions? Surely, there must be a
mechanism here that gives rise to this repetitive occurrence?
In a free market, we could envisage that the economy would be subject to various shocks but it
is difficult to envisage a phenomenon of recurrent boom-bust cycles. According to Rothbard,
Before the Industrial Revolution in approximately the late 18th century, there were no
regularly recurring booms and depressions. There would be a sudden economic crisis whenever some
king made war or confiscated the property of his subjects; but there was no sign of the
peculiarly modern phenomena of general and fairly regular swings in business fortunes, of
expansions and contractions.
1
The boom-bust cycle phenomenon is somehow linked to the modern world. But what is the link? The
source of recurrent recessions turns out to be the alleged "protector" of the economy -- the central
bank itself.
We suggest that the phenomenon of recessions is not about the weakness of the economy as such
but about the liquidation of various activities that sprang up on the back of the loose monetary
policies of the central bank. Here is why.
A loose central bank monetary policy, which results in an expansion of money out of
"thin air" sets in motion an exchange of nothing for something, which amounts to a diversion of
real wealth from wealth-generating activities to non-wealth-generating activities.
In the
process, this diversion weakens wealth generators, and this in turn weakens their ability to grow
the overall pool of real wealth.
The expansion in activities that emerge from the loose monetary policy is what an economic
"boom" (or false economic prosperity) is all about. Note that an increase in the monetary pumping
due to loose monetary policy of the central bank lifts the monetary turnover and hence GDP.
Once this monetary turnover is deflated by the so-called average price index this will manifest
itself in terms of a strengthening in real GDP. Most experts and commentator are likely to proclaim
that the central bank's loose monetary policies were successful in growing the economy.
Once however, the central bank tightens its monetary stance, this slows down the diversion of
real wealth from wealth producers to non-wealth producers. Activities that sprang up on the back of
the previous loose monetary policy are now getting less support from the money supply - they fall
into trouble and an economic bust or recession emerges in terms of the monetary turnover deflated
by the average price index i.e. the growth rate of real GDP comes under downward pressure.
Activities that emerged on the back of previous loose monetary policy cannot now divert real
wealth to support themselves. This is because these activities were never economically viable –
they could not support themselves without the diversion of real wealth to them by means of an
expansion in money supply. Consequently, most of these activities are likely to perish or barely
survive.
Could these activities escape the consequences of a bust if they are well managed and have solid
appearance? For instance, as a result of the loose monetary stance on the part of the Fed various
activities emerge to accommodate the demand for goods and services of the first receivers of newly
injected money.
Now, even if these activities are well managed, and maintain very efficient inventory control,
this fact cannot be of much help once the central bank reverses its loose monetary stance. These
activities are the product of the loose monetary stance of the central bank and they were never
approved by the market as such. They emerged on account of the increase in money supply, which gave
rise to an increased demand for goods.
Once the central bank monetary stance is reversed, regardless of efficient inventory
management, these activities will come under pressure and run the risk of being liquidated. The
supply of real savings is not large enough to support these activities.
From what was said we could conclude that recessions are about the liquidation of economic
activities that emerged on the back of the loose monetary policy of the central bank . This
recessionary process is set in motion when the central bank reverses its earlier loose stance. Note
that recession is good news for wealth generators since less real wealth is now being taken from
them.
This means that central bank's ongoing policies that are aimed at mitigating the
consequences that arise from its earlier attempts at stabilizing the so-called economy, i.e., real
GDP, are key factors behind the repetitive boom-bust cycles.
Because of the variable time
lags from changes in money to changes in prices and changes in real GDP, Fed policy makers are
confronted with economic data that could be in conflict with the Fed's targets. Hence, this forces
central bank officials to respond to the effects of their own previous monetary policies.
Note that Fed policymakers regard themselves as being responsible to bring the so-called economy
onto a path of stable economic growth and stable price inflation. Consequently, any deviation from
the stable growth path as outlined by policy makers sets the Fed's response in terms of either
tighter or looser stance. These responses to the effects of past policies give rise to fluctuations
in the growth rate of the money supply and in turn to recurrent boom-bust cycles.
In fact, the downtrend in the yearly growth rate in the adjusted money supply (AMS) during 2002
to 2007 was responsible for the economic slump of 2008. An uptrend in the growth rate of AMS during
2008 to 2011 provided a support for the strengthening in economic activity until very recently. A
visible decline in the annual growth rate in AMS since 2012 has set in motion an economic slump.
This slump is likely to strengthen as time goes by.
Even if the Fed were to lift aggressively its monetary pumping it will not be possible
to reverse the downtrend in the AMS growth rate instantly.
The state of the pool of real
wealth is going to determine the severity of the downturn. We suggest that prolonged reckless
monetary and fiscal policies have likely severely undermined the process of real wealth generation.
This in turn raises the likelihood that the pool of real wealth is hardly growing. Consequently, it
will not surprise us that the likely emerging economic downturn is going to be quite severe by most
historical standards.
It is now popular to blame the policies of the US President Trump in particular his
trade war with China as the key factor behind a possible recession ahead.
While President
Trump's policies are not in the spirit of the free market, we suggest that the downtrend in the AMS
annual growth rate since 2012 has nothing to do with President Trump's policies but with the
policies of the Fed.
Conclusions
Recessions, which are set in motion by a tight monetary stance of the central bank, are
about the liquidations of activities that sprang up on the back of the previous loose monetary
policies.
Rather than paying attention to the so-called strength of real GDP to ascertain
where the economy is heading, it will be more helpful to pay attention to the growth rate of the
money supply.
By following the growth rate of the money supply, one can ascertain the pace of damage to the
real economy that central bank policies inflict. Thus, the increase in the growth momentum of money
should mean that the pace of wealth destruction is intensifying. Conversely, a fall in the growth
momentum of money should mean that the pace of wealth destruction is weakening.
Real GDP growth rate does not measure the real strength of an economy but rather
reflects monetary turnover adjusted by a dubious statistic called the price deflator.
Obviously then the more money is pumped, all other things being equal, the stronger the economy
appears to be. In this framework of thinking one is not surprised that the Fed can "drive" the
economy since by means of monetary pumping the central bank can influence the GDP growth rate. By
means of the real GDP statistic Fed policy makers and government officials can create an illusion
that they can grow the economy. In reality the policy of intervention of the Fed and the government
can only deepen the economic impoverishment by weakening wealth generators.
It now seems to be the consensus that the key factor behind a possible recession ahead
would be the policies of the US President Trump
in particular his trade war with China as.
However we suggest that a key cause behind the possible recession had already been set in motion by
the downtrend in the AMS annual growth rate since 2012.
This downtrend has nothing
to do with President Trump's current policies but with the past policies of the Fed.
"Real GDP growth rate does not
measure the real strength of an
economy but rather reflects monetary
turnover adjusted by a dubious
statistic called the price
deflator."
The above
quoted from the authors post , and
below the definition of the price
deflator. We all know the Fed is the
primary inflator.
"What Is the GDP Price
Deflator? The GDP price deflator
measures the changes in prices for
all of the goods and services
produced in an economy. Gross
domestic product or GDP represents
the total output of good and
services. However, as GDP rises and
falls,
the metric doesn't
consider the impact of inflation or
rising prices on the GDP results.
The GDP deflator shows the extent of
price changes on GDP by first
establishing a base year, and
secondly, comparing current prices
to prices in the base year. The GDP
deflator shows how much a change in
GDP relies on changes in the price
level. The GDP price deflator is
also known as the GDP deflator or
the implicit price deflator."
John Williams of Shadowstats wrote about the GDP almost 20 years
ago. What he had to say was this:
The U.S. government has been
throwing in upward growth biases into GDP modeling ever since the
early 1980s, which have rendered this important series nearly
worthless as an indicator of economic activity and reality. As a
consequence, the distortions from bad GDP reporting have major
impact within the financial system.
"With reported growth moving up and away from economic reality,
the primary significance of GDP reporting now is as a political
propaganda tool and as a cheerleading prop for Pollyannaish
analysts on Wall Street".
Basically to say: trash anything you see about U.S. GDP
figures. It's not real world.
Don't forget all the borrowed money spent into the economy which
is measured as GDP . On the micro level it looks like this : I
made $100k last year in wages and spent all of it. I also spent
$50k with Credit Cards. Of which I still carry that debt. I have a
personal GDP of $150K ...isn't that a neat trick ?
Simply put, "money-pumping" is equivalent to credit creation and
ultimately is the creation of usury based debt, which is of
course, impossible to repay. It is the means to an end, and that
'end' is worldwide slavery.
The money printing creates a fake GDP. The GDP is adjusted for
inflation, measured by CPI. However, the CPI is much higher for
everything people buy: housing (prices and rent), health care,
education, food and transportation.
The CPI published if fake to
control government entitlements adjustments. Therefore, from the
nominal GDP they subtract less inflation and the GDP seems
higher.
If the real inflation would be used, the GDP would have been
negative for the past 10 years - economy in contraction. That is
what people on main street experience - continuing depression.
I am all for the ending of the Fed, the income tax and fiat
currency -and the sooner the better.
However, we still need to
address the problem with capitalism that eventually a tiny few own
all the assets.
In the 1870-1910 period, the US experienced a lot of the same
problems we see today: massive income and wealth inequality,
political fighting over immigration, tariffs, monopolies/
anti-trust and taxation. As a result, several significant changes
came to the country: the creation of the Fed, the income tax,
social security, new tariffs, anti trust legislation, New Deal. I
would argue that many of these things came in response to the
problems of the day. It's important to note that all of these
problems occurred in a free market capitalist system before the
Fed, income tax, etc came into existence!
I believe the system needs a debt and asset reset like the
Jubilee called for in the Bible.
Each boom and bust cycle is purposefully designed to make the
banks and the Fed more powerful and helps destroy America's middle
class. That's been the plan for decades. Besides big government,
the Fed is a foreign enemy and privately owned institution that
wants to destroy America from within. It's not China, it's not
Russia, it's not Iran or Venezuela. It's the Fed that gets more
powerful every time more debt is issued. Their plan is inequality
with a two tier system in order to get rid of the middle class.
This is their banking manifesto. It's all there. How they planned
the great depression and how this foreign entity controls politics
through money corruption by debt.
In the real estate boom, new money pours into the economy from
mortgage lending, fuelling a boom in the real economy, which feeds
back into the real estate boom.
The Japanese real estate boom of the 1980s was so excessive the
people even commented on the "excess money", and everyone enjoyed
spending that excess money in the economy.
In the real estate bust, debt repayments to banks destroy money
and push the economy towards debt deflation (a shrinking money
supply).
Japan has been like this for thirty years as they pay back the
debts from their 1980s excesses, it's called a balance sheet
recession.
GDP is as misleading as average income & unemployment rate used by
economists and policy makers to manipulate the crowd in order to
enrich and reward themselves.
Fun with numbers. Recently I discussed the falsity of stated GDP since it counts transactions
that ought not to be counted as additions but rather as subtractions. I'd like to take this a
step further with GDP/capita, which is about $61,000/yr within the Outlaw US Empire. Yes, as
previously discussed, that figure's overstated due to the errors in GDP accounting. But
there's another realm that must be considered and that the fact that the
3 richest people within the USA own more wealth than the bottom 50% combined, or more
than 160 million people. In other words, the income disparity is so skewed in favor of just
those 3 that there's no possible way GDP per capita can be $61,000/yr.
Here annual personal
median income for USA is cited as $31,099 in 2016, well below the stated
$57,467 GDP/capita for that year. Clearly, the economic position of the USA in contrast to
other nations is much worse that depicted just as are the statistics provided by the USG to
show the economy isn't as bad as it is actually.
@d dan What people
have to understand is the the 2.1% GDP growth is "paper" growth. Every stock bought or sold
is a "service" for the purposes of GDP growth. Trumps corporate tax cuts were supposed to
allow companies to invest in R&D, and re-open manufacturing plants. What has happened is
a massive stock buyback by corporations, which artificially inflates stock value, as well as
artificially increases the GDP. This is not to say that China's 6.1% growth does not include
a sizeable chunk of "paper" GDP growth. Even if it were equal to the US's entire 2.1% GDP
growth, it would still be 3times as large.
"... “Any US claims to economic stability – the stock market is roaring like a chained tiger, unemployment is at near-record lows – must be balanced against the fact that the country owes its entire GDP plus a considerable amount in accumulated debt. ..."
“Any US claims to economic stability – the stock market is roaring like a chained tiger, unemployment is at near-record
lows – must be balanced against the fact that the country owes its entire GDP plus a considerable amount in accumulated debt.
And growing, if the source is reliable, at 36% faster than the US economy.”
Acknowledging and pricing macroeconomic uncertainties - Hansen and Sargent
False pretences of knowledge about complicated economic situations have become all too
common in public policy debates. This column argues that policymakers should take into
account what they don't know in their decision making. It describes a tractable approach for
acknowledging, characterising, and responding to different forms of uncertainty, by using
theories and statistical methods available at any particular moment.
---------
Yes, starting about 10,000 years ago.
After our current MMT, we will get the same false pretence, we will have a bunch of AOC
geeks on this blog explaining things have been fixed,'We won't do it again' to quote Ben,
among the many thousands of false pretencers. We will hear from the 'Uncle can fix it later'
crowd. "This time is different' chants another tribe. Someone will put up a blog, and we will
recite talking points absent any evidence.
The delusionals and their preachers do not go away, and neither do their followers. It is
like a religion, we know it is BS, but it keeps our hysteria in check.
A large part of the US GDP is FIRE business and that alone makes the USA GDP fake metric of
economic growth. .
Notable quotes:
"... The conclusion was that the US GDP was something between $5 to $10 trillion instead of $15 trillion as officially reported by the USG . We assume that the official data, especially economic, released by governments is fake, cooked or distorted in some degree. ..."
As you can see from the soon collapse of the western financial system, the valuation
metrics that we have looked to for stability and "the truth" have been mostly fake and
gamed.
Inflation, currency supply, housing data, economic growth or lack thereof, all of these
data points are manipulated, faked and gamed. Just like the Soviet Union was known in the
West to be "faking" their econ data, so too is the west engaged in the same practice.
For example, several years ago Dagong, the Chinese ratings agency, published a report
analyzing the physical economy of the States comparing it with those of China, Germany and
Japan.
The conclusion was that the US GDP was something between $5 to $10 trillion instead of
$15 trillion as officially reported by the USG . We assume that the official data,
especially economic, released by governments is fake, cooked or distorted in some
degree.
Historically it is well known that the former Soviet Union was making up fake statistics
years before its collapse. Western as well as other countries are making up their numbers
today to conceal their real state of affairs.
We are sure that many people out there can find government statistics in their own
countries that by their own personal experience are hard to believe or are so optimistic
that may belong to a different country.
Well, the old boys are back at their old tricks again.
FASAB 56 has made government financial reporting unreliable. They can hide financial
statements. It gives them the right to move around money to hide where money is spent or not
report spending at all. I think they used it's loop holes to hide the 17 trillion in drug
money.
FASAB is a dream come true for Bank money laundering and embezzlers. The Fed is a joke all
these Bank are crooked the way things are set up they can say what ever they want and just
screw Nations of the world. End the Fed go to MMT Hybrid system for the sake of the living
now, each Nation with it's Own money.
"... To extract meaning from GDP trends we have to break it into its components: consumption, investment, government spending, the trade balance. Consumption is by far the largest of these, and the main driver of the economy, but its level is precariously underpinned by unsecured private debt. It is broadly accepted that real investment (in new productive capacity) is dismally inadequate for the continued growth of a modern economy; much of what does take place goes into buying paper assets. ..."
"... focusing on GDP is even more absurd than "prioritising short-term growth over long-term sustainability". ..."
"... a passage spells out the absurdity: "Anything that causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better it is for GDP." ..."
"... He goes on and finally shows that "after a country's GDP per capita reaches a moderate level there is no correlation between the wealth of a country and the reported happiness of its population". ..."
As an economist I endorse Dan Button's article ( Stop
obsessing about GDP: we should focus on wellbeing , 11 June). The most we can say is that a
succession of GDP figures over months should indicate whether the economy is growing or moving
into recession. Also aggregate GDP statistics tell us nothing about how national wealth and
income are distributed: globalisation in recent decades has increased the size of the cake, but
the main beneficiaries have been the already better-off.
To extract meaning from GDP trends we have to break it into its components: consumption,
investment, government spending, the trade balance. Consumption is by far the largest of these,
and the main driver of the economy, but its level is precariously underpinned by unsecured
private debt. It is broadly accepted that real investment (in new productive capacity) is
dismally inadequate for the continued growth of a modern economy; much of what does take place
goes into buying paper assets.
As for government expenditure, most of us are crying out for more on education, health,
social care, police, early childhood services, to name a few, but as a nation we want "big
state" levels of public services financed by "small state" levels of taxation. Last, we have a
massive balance-of-payments deficit: we are exporting too little to pay for our imports; we are
living beyond our means. We can only continue this by selling capital assets (such as water
companies) to overseas investors, thus losing the dividends and tax revenue that they
generate.
Lawrence Lockhart Bath
• Spot on, Dan Button. But focusing on GDP is even more absurd than "prioritising
short-term growth over long-term sustainability". In Jeremy Lent's The Patterning Instinct (a
magnificent book
recently recommended by George Monbiot ) a passage spells out the absurdity: "Anything that
causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for
example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better
it is for GDP."
He goes on and finally shows that "after a country's GDP per capita reaches a moderate level
there is no correlation between the wealth of a country and the reported happiness of its
population".
Trouble is, this is hard for free-market "wealth creators" to swallow and, as Lent
observes: "the mainstream media unquestionably accept the mantra of our locked-in ideology that
economic growth, measured by GDP, is the social objective to be pursued above all else". So
well done Dan Button and the Guardian for questioning the mantra. Keep it up.
John Airs Liverpool
• Although the measurement of "personal wellbeing" introduced by David Cameron's
government in 2010 is a welcome addition to crude GDP measures, it relies heavily on subjective
assessments of life satisfaction, personal happiness, perception of financial situation, level
of anxiety and a strange "worthwhile rating". It would be more useful to measure the wellbeing
of society as a whole using objective criteria.
These could include, along with GDP per head, medical factors such as infant mortality,
longevity, incidence of mental illness, numbers of doctors per head and access to hospitals;
social factors such as crime rates, percentage of population in prison, stability of marriages
and partnerships, working hours, holidays, homelessness and unemployment; cultural factors such
as human rights and access to the arts; and environmental factors such as pollution and carbon
footprint.
Such a measure, if internationally agreed, could be used to rate the success or otherwise
over time of governments, and to compare wellbeing between countries.
Peter Wrigley Birstall, West Yorkshire
• It is increasingly accepted that continued economic growth is a short route to
eventual disaster for anyone not protected by high wealth: the decline in biodiversity, global
heating, air pollution, water stress, soil deterioration and rising sea levels are all trends
directly linked to the increase in the amount of the natural world's resources going to fuel
consumption. The only way we can protect the mass of human populations is to abandon economic
growth altogether and concentrate on better using what we have. This will include changing the
numerous ways in which human societies channel the profits of economic activity into the
pockets of a few, and challenging the immense pressure exerted by those few on governments
whether democratic or other.
Jeremy Cushing
The right-wing libertarian gold-currency types hate the 2% target. They call the Fed
"economic illiterates" for having a 2% inflationary target. After all, "why would anyone think
it's a good thing to have prices go up on purpose?"
That is the end of their analysis.
But these boneheads completely miss the point: the 2% target isn't about an intentional
effort to create inflation and make things constantly more expensive for people. It's instead
about stability.
The 2% target came about almost by accident and fairly unintentionally when it was first set
by
New Zealand . So this isn't about an intentional effort by the diabolical (((Fed))) to make
things more expensive for everyone, or to prevent inflation from becoming lower.
Before, the Fed would just say they want to "lower" inflation, or "increase" inflation
without a real target other than to stave off run away inflation. You had chairman like Volker
just let the interest rate rip in order to break the back of inflation in a reactionary way.
What we ended up with were massive inflationary and deflationary swings and the Central Bankers
became tired of it.
So instead of reacting to swings, they decided to just set the target at 2%, that way you
are trying to hit the target rather than trying to react to economic indication of rising or
lowering inflation.
This isn't all good news. Because when you see the 2% target for what it is, an artificial
target that Central Bankers are hell-bent on hitting, you can see why the Fed is getting really
anxious these days.
The Central Bankers have pulled out all the tricks out of the bag, QE, ZIRP, rock bottom
interest, and even negative interest in Europe, and for a while in 2018 they pretty much hit
their 2% target (at least in the US). And we were all styling. Home prices were growing in a
stable way. Jobs numbers were great. Stock Market was high. The Trump tax cut scam pumped the
economy up even further.
But then December 2018 hit. The sugar high from the Trump tax cut wore off. Wall Street took
a 20% bear-market nose dive. Housing prices slowed growth and sales slowed. And now we are
seeing manufacturing indexes, initial jobs reports showing things have slowed.
Now they can't keep it at the target and they aren't sure what to do about it. You don't cut
interest rates in a strong economy (which is what we supposedly have), but at the same time
Wall Street is screaming for further rate cuts. And when Wall Street threw its temper tantrum
in December 2018, the Fed rewarded them with putting a stop to the three anticipated rate hikes
this year.
If the current CPI stats are an indication of where things are going, it sounds like Wall
Street had it right and the Fed had it wrong–the Fed wanted to increase interest rates,
which would have had a deflationary effect. Wall Street wanted the cut to get an inflationary
effect that helps the market. Wall Street won.
The problem is now that the pause in interest rates didn't have the inflationary effect Wall
Street wanted (even though the Fed is still holding on to hope that deflation is "transitory")
and so now they are demanding more cuts. At the same time the Fed is scratching its head saying
it's "open" to more cuts, but showing some genuine misgivings about cutting rates when they
were certain just 7 months ago that rate hikes were what the economy needed.
This is on top of a mixed bag of data suggesting the economy isn't really coming or going at
this point, it's just frothy. What we are seeing is paralysis. he only thing left is more cuts.
J-Rome knows it.
The other problem is that CPI is also largely a contrived number. It's based on funny math.
Don't like the swings in the price of gas? Just take it out of the CPI! Don't like the price of
food in there, take it out! Don't like the price of houses, take it out!
If you are trying to manage an economy by hitting an artificial inflationary target of 2%
based on artificial inflationary data that doesn't give you the whole picture, an observer
could see why you'd be a little confused when your decisions don't lead to your intended
outcome.
The reality is for the vast majority of Americans, the price they pay at the pump has
direct, immediate and visible impact on their bills, spending and outlook. The price of food
does too, and so does the price of the roof over their head. People notice when the price of
the big mac extra value meal shoots up a dollar. This is probably also why we have the
cognitive dissonance of a "great" economy while people are buried in credit card debt, student
loan debt and corporate debt and while a majority ( https://www.cnbc.com/2017/06/19/heres-how-many-americans-have-nothing-at-all-in-savings.html
) of Americans don't have $1,000 liquid money to tap in case of an emergency.
So if CPI is going lower, but CPI doesn't take into account the basic costs of living that
are actually extremely volatile and not just smoothly going down, and the Fed is chasing a 2%
CPI number that doesn't include these inflationary variables, the Fed could be targeting an
inflationary target that is actually deflationary when all the gimmicky math is taken out of
the equation.
Now we see why the fed is struggling, CPI is going down. Consumers are feeling the pain
of higher prices none-the-less, along with stagnant wages and more debt. What the consumers
are experience aren't being taken into consideration by the Fed because those numbers "don't
count." You have the market demanding further cuts because the lower the interest rate, the
more likely people are to dump their money into the market searching for some investment
returns that at least are par with inflation that is probably a lot higher in reality for the
average Joe than core CPI lets on.
Why bother saving when you get no return and you can't save anyway because your cost of
living is out of control?
No wonder the Fed is being indecisive. They don't want to believe their lying
eyes.
"... Current Establishment Survey (CES) Report ..."
"... Current Population Survey (CPS ..."
"... The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35 hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs are growing by 155,000. So which report is accurate? How can full time jobs be declining by 191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small number of full time jobs as a share of the total labor force appears as a fall in the unemployment rate for full time workers. Looked at another way, employers may be converting full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time jobs increase. ..."
"... The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of 646,000 in April in the category, 'Not in the Labor Force', reported each month. That 646,000 suggests large numbers of workers are dropping out of the labor force (a technicality that actually also lowers the U-3 unemployment rate). 'Not in the Labor Force' for March, the previous month Report, revealed an increase of an additional 350,000 added to 'Not in the Labor Force' totals. In other words, a million–or at least a large percentage of a million–workers have left the labor force. This too is not an indication of a strong labor market and contradicts the 263,000 and U-3 3.6% unemployment rate. ..."
"... Whether jobs, wages or GDP stats, the message here is that official US economic stats, especially labor market stats, should be read critically and not taken for face value, especially when hyped by the media and press. The media pumps selective indicators that make the economy appear better than it actually is. Labor Dept. methods and data used today have not caught up with the various fundamental changes in the labor markets, and are therefore increasingly suspect. It is not a question of outright falsification of stats. It's about failure to evolve data and methodologies to reflect the real changes in the economy. ..."
"... Government stats are as much an 'art' (of obfuscation) as they are a science. They produce often contradictory indication of the true state of the economy, jobs and wages. Readers need to look at the 'whole picture', not just the convenient, selective media reported data like Establishment survey job creation and U-3 unemployment rates. ..."
The recently released report on April jobs on first appearance, heavily reported by the
media, shows a record low 3.6% unemployment rate and another month of 263,000 new jobs created.
But there are two official US Labor dept. jobs reports, and the second shows a jobs market much
weaker than the selective, 'cherry picked' indicators on unemployment and jobs creation noted
above that are typically featured by the press.
Problems with the April Jobs Report
While the Current Establishment Survey (CES) Report (covering large businesses)
shows 263,000 jobs created last month, the Current Population Survey (CPS ) second
Labor Dept. report (that covers smaller businesses) shows 155,000 of these jobs were
involuntary part time. This high proportion (155,000 of 263,000) suggests the job creation
number is likely second and third jobs being created. Nor does it reflect actual new workers
being newly employed. The number is for new jobs, not newly employed workers. Moreover, it's
mostly part time and temp or low paid jobs, likely workers taking on second and third jobs.
Even more contradictory, the second CPS report shows that full time work jobs actually
declined last month by 191,000. (And the month before, March, by an even more 228,000 full time
jobs decline).
The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35
hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs
are growing by 155,000. So which report is accurate? How can full time jobs be declining by
191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full
time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small
number of full time jobs as a share of the total labor force appears as a fall in the
unemployment rate for full time workers. Looked at another way, employers may be converting
full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time
jobs increase.
And there's a further problem with the part time jobs being created: It also appears that
the 155,000 part time jobs created last month may be heavily weighted with the government
hiring part timers to start the work on the 2020 census–typically hiring of which starts
in April of the preceding year of the census. (Check out the Labor Dept. numbers preceding the
prior 2010 census, for April 2009, for the same development a decade ago).
Another partial explanation is that the 155,000 part time job gains last month (and in prior
months in 2019) reflect tens of thousands of workers a month who are being forced onto the
labor market now every month, as a result of US courts recent decisions now forcing workers who
were formerly receiving social security disability benefits (1 million more since 2010) back
into the labor market.
The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further
questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of
646,000 in April in the category, 'Not in the Labor Force', reported each month. That 646,000
suggests large numbers of workers are dropping out of the labor force (a technicality that
actually also lowers the U-3 unemployment rate). 'Not in the Labor Force' for March, the
previous month Report, revealed an increase of an additional 350,000 added to 'Not in the Labor
Force' totals. In other words, a million–or at least a large percentage of a
million–workers have left the labor force. This too is not an indication of a strong
labor market and contradicts the 263,000 and U-3 3.6% unemployment rate.
Bottom line, the U-3 unemployment rate is basically a worthless indicator of the condition
of the US jobs market; and the 263,000 CES (Establishment Survey) jobs is contradicted by the
Labor Dept's second CPS survey (Population Survey).
GDP & Rising Wages Revisited
In two previous shows, the limits and contradictions (and thus a deeper explanations) of US
government GDP and wage statistics were featured: See the immediate April 26, 2019 Alternative
Visions show on preliminary US GDP numbers for the 1st quarter 2019, where it was shown how the
Trump trade war with China, soon coming to an end, is largely behind the GDP latest numbers;
and that the more fundamental forces underlying the US economy involving household consumption
and real business investment are actually slowing and stagnating. Or listen to my prior radio
show earlier this year where media claims that US wages are now rising is debunked as well.
Claims of wages rising are similarly misrepresented when a deeper analysis shows the
proclaimed wage gains are, once again, skewed to the high end of the wage structure and reflect
wages for salaried managers and high end professionals by estimating 'averages' and limiting
data analysis to full time workers once again; not covering wages for part time and temp
workers; not counting collapse of deferred and social wages (pension and social security
payments); and underestimating inflation so that real wages appear larger than otherwise.
Independent sources estimate more than half of all US workers received no wage increase
whatsoever in 2018–suggesting once again the gains are being driven by the top 10% and
assumptions of averages that distort the actual wage gains that are much more modest, if at
all.
Ditto for GDP analysis and inflation underestimation using the special price index for GDP
(the GDP deflator), and the various re-definitions of GDP categories made in recent years and
questionable on-going GDP assumptions, such as including in GDP calculation the questionable
inclusion of 50 million homeowners supposedly paying themselves a 'rent equivalent'.
A more accurate 'truth' about jobs, wages, and GDP stats is found in the 'fine print' of
definitions and understanding the weak statistical methodologies that change the raw economic
data on wages, jobs, and economic output (GDP) into acceptable numbers for media promotion.
Whether jobs, wages or GDP stats, the message here is that official US economic stats,
especially labor market stats, should be read critically and not taken for face value,
especially when hyped by the media and press. The media pumps selective indicators that make
the economy appear better than it actually is. Labor Dept. methods and data used today have not
caught up with the various fundamental changes in the labor markets, and are therefore
increasingly suspect. It is not a question of outright falsification of stats. It's about
failure to evolve data and methodologies to reflect the real changes in the economy.
Government stats are as much an 'art' (of obfuscation) as they are a science. They
produce often contradictory indication of the true state of the economy, jobs and wages.
Readers need to look at the 'whole picture', not just the convenient, selective media reported
data like Establishment survey job creation and U-3 unemployment rates.
When so doing, the bigger picture is an US economy being held up by temporary factors (trade
war) soon to dissipate; jobs creation driven by part time work as full time jobs continue
structurally to disappear; and wages that are being driven by certain industries (tech, etc.),
high end employment (managers, professionals), occasional low end minimum wage hikes in select
geographies, and broad categories of 'wages' ignored.
Jack Rasmus is author of the recently published book, 'Central Bankers at the
End of Their Ropes: Monetary Policy and the Coming Depression', Clarity Press, August 2017. He
blogs at jackrasmus.com and his twitter
handle is @drjackrasmus. His website is http://kyklosproductions.com .
The jobs reports are fabrications and that the jobs that do exist are lowly paid domestic
service jobs such as waitresses and bartenders and health care and social assistance. What has
kept the American economy going is the expansion of consumer debt, not higher pay from higher
productivity. The reported low unemployment rate is obtained by not counting discouraged workers
who have given up on finding a job.
I was listening while driving to rightwing talk radio. It is BS just like NPR. It was about
the great Trump economy compared to the terrible Obama one. The US hasn't had a great economy
since jobs offshoring began in the 1990s, and with robotics about to launch Americans are
unlikely ever again to experience a good economy.
The latest jobs report released today claims 236,000 new private sector jobs. Where are the
jobs, if they in fact exist?
Manufacturing, that is making things, produced a mere 4,000 jobs.
The jobs are in domestic services. There are 54,800 jobs in "administrative and waste
services." This category includes things such as employment services, temporary help
services, and building services such as janitor services.
"Health care and social assistance" accounts for 52,600 jobs. This category includes
things such as ambulatory health care services and individual and family services.
There are a few other jobs scattered about. Warehousing and storage had 5,400 new
jobs.
Real estate rental and leasing hired 7,800.
Legal services laid off 700 people.
Architectural and engineering services lost 1,700 jobs.
There were 6,800 new managers.
The new jobs are not high value-added, high productivity jobs that provide middle class
incomes.
In the 21st century the US economy has only served those who own stocks. The liquidity that
the Federal Reserve has pumped into the economy has driven up stock prices, and the Trump tax
cut has left corporations with more money for stock buybacks and dividend payments. The
institute on Taxation and Economic Policy reports that 60 Fortune 500 companies paid no taxes
on $79 billion in income, instead receiving a rebate of $4.3 billion. https://itep.org/notadime/
The sign of a good economy is when companies are reinvesting their profits and borrowed
money in new plant and equipment to meet rising demand. Instead, US companies are spending more
on buybacks and dividends than the total of their profits. In other words, the companies are
going into debt in order to drive up their share prices by purchasing their own shares. The
executives and shareholders are looting their own companies, leaving the companies less
capitalized and deeper in debt. https://systemicdisorder.wordpress.com/2016/10/26/work-harder-for-speculators/
Meanwhile, for the American people the Trump regime's budget for 2020 delivers $845 billion
in cuts to Medicare, $1.5 trillion in cuts to Medicaid, and $84 billion in cuts to Social
Security disability benefits.
History is repeating itself: Let them eat cake. After me the deluge.
economic welfare cannot be adequately measured unless the personal distribution of income is
known. And no income measurement undertakes to estimate the reverse side of income, that is,
the intensity and unpleasantness of effort going into the earning of income. The welfare of a
nation can, therefore, scarcely be inferred from a measurement of national income as defined
above.
Thanks as always for the valuable posts. I am curious about your opinion on something.
Once oil production peaks and plateaus, then inevitably declines, do you think world GDP will
start declining afterwards? I'd assume it would lag behind it by a short period of time
possibly (obviously depending on country etc but overall).
If that was to happen and no energy source can cover the decline rate, wouldn't the world be
pretty fucked economically thereafter? Hence one can assume or take a wild ass guess that the
decline after peak would resemble something like Venezuela. So not a smooth short % decline
rate.
I hope what i am asking makes sense.
Mike, in all honesty, I have no idea. The problem is there are so many other things going on
at the same time. The world is getting warmer, water tables are falling everywhere, rivers
are drying up, fisheries are disappearing, and I could go on for an hour explaining how
everything is falling apart. And now we hear that the insect population is declining very
fast. Why?
So as fossil energy starts to decline and renewables will not help very much, what will
happen. Will that exacerbate all our other problems. Yes, it most likely will. Look at
Venezuela. Is that what almost every nation will look like in 50 years? Well, probably not
every nation but a lot of them for sure.
So, the world is going to hell in a handbasket. But I am 80 years old. I will be safely
dead when the shit hits the fan. Lucky me.
"... Buying beautiful clothes at full retail price was not a part of my childhood and it is not a part of my life now. It felt more illicit and more pleasurable than buying drugs. It was like buying drugs and doing the drugs, simultaneously."" ..."
"... "Erie Locomotive Plant Workers Strike against Two-Tier" [ Labor Notes ]. "UE proposed keeping the terms of the existing collective bargaining agreement in place while negotiating a new contract, but Wabtec rejected that proposal. Instead it said it would impose a two-tier pay system that would pay new hires and recalled employees up to 38 percent less in wages, institute mandatory overtime, reorganize job classifications, and hire temporary workers for up to 20 percent of the plant's jobs. ..."
"... Workers voted on Saturday to authorize the strike." • Good. Two-tier is awful, wherever found (including Social Security). ..."
"[S]hopping with T was different. When she walked into a store, the employees greeted her by name and began to
pull items from the racks for her to try on. Riding her coattails, I was treated with the same consideration, which is how I
wound up owning a beautiful cashmere 3.1 Philip Lim sweater that I had no use for and rarely wore, and which was eventually
eaten by moths in my closet.
Buying beautiful clothes at full retail price was not a part of my childhood and it is not a part of my life now. It
felt more illicit and more pleasurable than buying drugs. It was like buying drugs and doing the drugs, simultaneously.""
"Erie Locomotive Plant Workers Strike against Two-Tier" [
Labor
Notes ]. "UE proposed keeping the terms of the existing collective bargaining agreement in
place while negotiating a new contract, but Wabtec rejected that proposal. Instead it said it
would impose a two-tier pay system that would pay new hires and recalled employees up to 38
percent less in wages, institute mandatory overtime, reorganize job classifications, and hire
temporary workers for up to 20 percent of the plant's jobs.
Workers voted on Saturday to
authorize the strike." • Good. Two-tier is awful, wherever found (including Social
Security).
x Ignored
says: 02/26/2019
at 3:27 pm I think not all
followed the link
article is big.
Maybe someone will be interested
I will write here in several posts.
I hope someone will be interested.
I continue:
The fluctuations of this second parameter, associated with economic crises and recessions
observed in the period under review, make it possible to evaluate the contribution of the
notorious "energy efficiency" to the global increase in energy consumption. In a situation of
almost "zero growth" of the world economy, which occurred in the period 2008–2009, the
consumption of primary energy decreased by 0.8% per year. At the same time, for each percent of
economic growth, it is necessary to "pay off" by increasing the consumption of primary energy
by about 0.6%.
In an expected way, an improvement in energy efficiency was reflected in monetary
indicators: in 2017, each TOE of consumed energy generated $ 8,617 of global GDP, which
corresponds to 1.7% of annual growth over the period 2007–2017.
Of course, the world's primary energy is not evenly distributed across countries. Even the
top five leaders in the use of primary energy: China, the United States, the European Union,
India and Russia – have completely different consumption patterns, which are associated
with the historical, geographical, economic and political differences of these countries.
Thus, as of 2017, China has already been the largest global consumer of primary energy: its
energy consumption has reached 3.132 billion TOE, which is equal to 23% of the global
consumption of primary energy. The growth of Chinese energy consumption is also impressive: in
the period from 1990 to 2013, per capita energy consumption in China increased from 0.602 TOE
to 2.14 TOE -- that is, almost four times. Since then, energy consumption growth in China has
somewhat slowed down, and by 2017, per capita energy consumption there was only 2.26 TOE, which
is not only still significantly lower than per capita energy consumption in countries with
developed capitalist economies, but and corresponds to an increase in energy consumption of
about 1.5% per year (and an economic growth of 2% per year).
If we consider the inertia of this historical trend and additionally take into account the
fact that the new policy of the ruling CPC implies a transition to stimulating consumer demand
within the country, then we can assume that by 2050 per capita energy consumption in China
should reach 5-5.5 TOE. This figure takes into account, in addition, the observed impact of
energy efficiency (the same 0.8% per year), but suggests that GDP per capita in China will grow
to about the equivalent of $ 50,000 by 2050. At the same time, it should be understood that in
a part of the population, a conservative forecast is adopted, according to which the population
of China will reach a peak by 2030 and decrease to 1.36 billion by 2050. Taking into account
these factors, China's energy demand in 2050 will exceed 7,000 million TOE, i.e., it will grow
2.23 times and make up more than half of the current volume of primary energy production.
Information that, according to fertility data, the population of China in 2018 decreased by
1.27 million people, has not yet been officially confirmed, and it is clear that the above
figure can be significantly adjusted downward, but in any case, China will pull the world
energy "blanket" on themselves.
The United States is the second largest consumer of primary energy in the world. In 2017,
the US energy consumption amounted to 2,235 million TOE, which corresponds to 17% of world
primary energy consumption. US per capita energy consumption peaked at 8.01 TOE in 2000, which
was a historic peak. For the period from 2007 to 2009, per capita energy consumption in the
United States decreased from 7.7 to 7.04 TOE, and in 2017 it reached the level of 6.87 TOE.
Nevertheless, the United States continues to be the most "voracious" consumer of primary energy
per capita, and their ability to further reduce the achieved level is very slim if they are not
linked to the global restructuring of their economic and social structure, which is highly
unlikely without a deep national crisis. An additional factor is the steady growth of the US
population, which has no tendency to slow down until 2050.
Reply
Still continuing (3):
The European Union is the third largest consumer of primary energy in the world. In 2017, the
energy consumption of the European Union amounted to 1,689 million TOE, which is equivalent
to 13% of world primary energy consumption. Historically, EU per capita energy consumption
was the highest before the onset of the 2008 crisis and amounted to 3.71 TOE in 2006. In the
future, the European Union immediately fell into a double crisis: the global economic year
2008–2009 and its own financial one, connected with the debts of the Mediterranean
countries, first of all – Greece. This led to the fact that energy consumption per
capita in the EU was reduced to a minimum of 3.2 TOE in 2014. By 2017, per capita energy
consumption in the EU was only partially recovered and reached 3.29 TOE. At the same time,
its value has a very pronounced country differentiation, and if for Germany in 2017 this
figure was 3.86 TOE, for France – 3.61 TOE, then for the UK – 2.72 TOE, for
Poland – 2.71 TOE, for Portugal – 2.23 TOE, and for Romania – 1.69 ToE. In
general, this level of per capita energy consumption quite adequately reflects the EU's
longstanding efforts towards supporting energy efficiency, but also vividly shows the limits
of what can be achieved within the framework of a concept combining a set of measures for
energy saving and green energy replacement. As we see, as a result of the implementation of
such programs, the European Union did not become "European China" at all, although it became
less like "European America" in the energy issue.
Thus, it can be assumed that in the long-term trend, the per capita energy consumption of
EU countries will decrease slightly, only by copying the general trend of slow increase in
energy efficiency.
India is the fourth largest consumer of primary energy in the world. In 2017, energy
consumption in India increased to 754 million TOE, which is 5.6% of the world. India, like
China, is characterized by very rapid economic growth, which was expressed in terms of per
capita energy consumption: more than twice since 1990, when it amounted to 0.225 TOE, to
0.562 TOE in 2017. If per capita energy consumption in India continues to follow the same
pace, by 2050 it should reach a mark of 1.21 TOE, while India's GDP per capita will reach
approximately 19 thousand dollars. It is expected that by 2050 the population of India will
grow to 1.72 billion people. That is, it can be expected that by 2050 India's energy demand
will exceed 2 billion THN – or it will grow 2.65 times, overtaking even China in terms
of relative growth, and in absolute figures ahead of the European Union.
And finally, the Russian Federation, which is the fifth of the world's largest energy
consumers. In 2017, primary energy consumption in Russia amounted to 698 million TOE, which
accounted for 5.2% of world primary energy consumption. In 1990, when Russia was still part
of the USSR, per capita energy consumption in Russia was 5.8 TOE. Over the past years, Russia
has already passed its historic low, when the economy of the new country was torn to shreds
by neoliberal "shock therapy", the short-sighted policy of rapid privatization and the total
introduction of the "wild" market – including in the energy sector. This was reflected
in the fact that the minimum energy consumption per capita in Russia was achieved by 1998 and
amounted to 4.03 TOE. Smaller values of per capita consumption, apparently, are
simply impossible in a cold and harsh Russian climate, since heat supply is a vital function
in it – therefore, a value of 4.03 TOE can be considered the level of "basic survival"
in Russia. An interesting fact: in Canada, where the climate is very similar to that of
Russia, per capita energy consumption is 9.5 TOE as of 2017. At the same time, no one in
Canada speaks of "cheap electricity" or "too high costs for heat supply," realizing that this
is the necessary conditions for the survival of the country's population.
Since 1998, per capita energy consumption in Russia has been steadily growing and reached
a level of 4.83 Toe in 2017, which corresponds to about 0.8% per year. Most likely, this
trend will continue in the future, since the living standards of the Russian population are
still lower than the living standards in the European Union or the United States, and the
Russian level of per capita consumption lags behind the level of the late USSR, even taking
into account the accumulated "bonuses" in energy efficiency.
World energy: forecast
As noted above, the parameters of GDP and total energy consumption – just as the
parameters of per capita GDP and per capita energy consumption – in the current economy
have a strong correlation.
Moreover, almost all the leading countries of the world fit into a very clearly traceable
ratio, which corresponds to 10 thousand dollars of per capita GDP for every one TOE per
capita consumption. Smaller values of this parameter are characteristic of a
number of underdeveloped and developing countries, which leads to a "average" value of $
8,617 per 1 TOE for global GDP.
There are deviations and "up" on the scale of specific energy – this is already
mentioned in the text of Russia, Canada and the United States.
For Canada, Russia and the Scandinavian countries, you can build a separate branch of the
graph, on which for the "northern" economies it turns out that for every 10 thousand dollars
of per capita GDP they need to spend about 2 TOE per capita consumption – twice as much
as for those living in tropical or subtropical climate of China or India.
The phenomenon of "overconsumption" of the United States, as is clear, has a different
nature – it is associated with the actual "imperial" energy tax for the whole world,
which allows the United States to still maintain excessive energy consumption, which is in no
way connected with the country's climate the political structure of the United States, which
is the world hegemon.
It is important to emphasize that, if we exclude from consideration the "imperial" United
States and "northern" Russia and Canada, then the correlation between oil consumption and the
GDP of a particular country acquires almost 100% of its character. For example, Japan, not
mentioned above, was the sixth largest energy consumer in the world in 2017 and surpassed
most EU countries in terms of both per capita GDP and per capita oil consumption! Although,
it would seem, the southern conditions of Japan, almost completely located in the subtropical
and tropical zones, suggest lower figures for per capita oil consumption.
In 2017, energy consumption in Japan amounted to 456 million TOE, which amounted to 3.4%
of world primary energy consumption. Historical peak energy consumption per capita in Japan
reached in 2005 and amounted to 4.15 TOE. Since then, energy consumption in Japan has tended
to decline, as the country's national economy fluctuated between a hidden recession and sheer
economic stagnation. The effect of the largest nuclear accident at the Fukushima nuclear
power plant in 2011 is indicative in this respect: despite the radical restructuring of the
energy sector in Japan caused by this catastrophe and the almost complete closure of nuclear
power plants in the country, the consumption of primary energy in the Land of the Rising Sun
has not undergone such a sharp falls: almost all the "fallen out" volumes of atomic energy
were promptly replaced by increased consumption of oil and natural gas. And the general trend
of growth or reduction of primary energy consumption still showed a correlation with only
three parameters: the country's population, the level of per capita GDP of the national
economy and the general trend of improving energy efficiency, which in the case of Japan
describes the same energy saving parameter of 0.8% per year .
By 2016, per capita energy consumption in Japan decreased to 3.55 TOE, which was even
lower than per capita consumption in 1990, with a fundamentally higher GDP and a practically
stable population (an increase of only 3 million people with 123 million in 1990). In 2017,
per capita energy consumption in Japan grew only slightly to 3.6 TOE, which is quite
consistent with the very modest growth of the national economy.
As already mentioned, the practical economic result of "green" energy, observed for the
period 2007–2017, can be optimistically described as "zero" or "poorly distinguishable
from statistical error". Of course, one can complain that the sun and wind today give only 2%
of the global primary energy production and you need to "just give them more time (and
money)", but the sad reality is this: supposedly "promising" new energy sources affect the
economy. Their implementation in the countries of the European Union did not affect the
picture of energy efficiency and did not alter the ratio between GDP and tons of oil
equivalent spent on its production, while the global crisis and the debt crisis of the EU
itself turned out to be much more significant factors.
Still continuing (4):
A simple forecast follows from these sad conclusions: even if over the next decade the volume
of "green" energy again grows 4 times, then its share will reach only 8%. However, even this
level is an almost unrealizable dream: according to most forecasts – for example, the
IEA in 2017 and the Energy Information Administration (EIA) in 2018 – the actual
relative growth of renewable energy sources will be only about 2–20 years before 2030.
2.5 times. Unknown conclusion: even by 2030, the share of oil, natural gas and coal will be
at least 75% of the total primary energy level, which will be related to nuclear and
hydropower and the continuing relative waste from the use of wood energy and biomass. During
the years 2030-2040, the year can be almost fantastic, and all this will be due to the
difficulties that must be achieved in the field of oil, gas and coal in the balance sheet.
energy.
An extremely unpleasant situation with such a pessimistic forecast is expected with world
oil production. At the moment, its growth was concentrated in only nine oil-producing
countries. As an example, oil production in China is expected in 2015, after which it was not
even possible to achieve an increase in Chinese oil production.
Today, this "growing oil subsoil" includes the following countries (the estimated year of
oil production and data source are shown in brackets): Canada (peak in 2049, BP), USA (2042,
EIA), Iraq (2042, BP) , Kuwait (2040, BP), Iran (2039, BP), United Arab Emirates (2037, BP),
Russia (2033, IEA), Saudi Arabia (2030, BP), Brazil (2024, BP).
The exit from almost all the "growing" sources of oil production in the world is caused by
a drop in production from 2030 to 2040, which means the global energy crisis of humanity. and
there is "tasty", and there is energy, and all this economic strategy of modern
civilization.
Of course, partial replacement with liquid motor fuel, which is easily obtained from
petroleum, can be carried out using natural gas, as well as using chemical reforming in
various types of liquid hydrocarbons and molecular hydrogen.
However, this situation is hardly optimistic. In 2015, the world's peak production was
observed. Currently, natural gas production growth is concentrated in only ten countries (the
estimated year of natural gas production and data source are shown in parentheses): Canada
(2074, IEA), USA (2063, EIA), Iran (2046, BP), Qatar (2043 , BP), Saudi Arabia (2037, BP),
Algeria (2027, BP), China (2027, BP), Australia (2026, BP), Russia (2026, BP), Norway (2023,
IEA).
It is easy to see that already after 2030, the natural gas market will, like the oil
market, be practically monopolized by four or five countries, each of which will be able to
easily manipulate prices by simply adjusting its own production, since other players simply
will not have any -or free capacity. Unfortunately, in the case of Russian oil, and when
analyzing the prospects for Russian gas in such an oligopolistic market, it can be noted that
Russia will be in the "first echelon" of losers, at whose expense they will try to solve
world problems with the energy balance.
Of course, a partial replacement of natural gas and oil can be expected in the form of a
return to more "dirty" and expensive coal. By the way, it was precisely such a strategy that
China and India chose in the 1990s, who, without having wide access to the oil and natural
gas market, relied on their own deposits of hard coal. The incidental damage to ecology and
human health in this case was the price paid for the rapid industrialization paid by Indian
and Chinese society.
However, even on the "coal" path, humanity has its own problems. Today, the rapid growth
of coal production is possible only in four (!) Countries of the world. All other countries
have already passed their peak of hard coal mining, some of them more recently, such as the
USA (2008), China (2013) or South Africa (2014).
According to estimates by international energy agencies, today, growth in coal production
is possible only in the following countries (in brackets is the expected year of peak coal
mining and source of data): Russia (2112, BP), India (2052, BP), Australia (2032, IEA) ,
Indonesia (2031, BP).
I apologize for
posting an article here
– It was designed for a reader in Russia.
Ending:
Mirovaya energiya: stsenariy
I
World Energy Scenario
The inertial scenario of the development of mankind suggests that by 2050 the world
consumption of primary energy will increase one and a half times and will be about 20 billion
TOE. This indicator takes into account both the observed effects of energy conservation and a
very conservative estimate of future economic growth – within 2–2.5% of the
annual increase in global GDP.
However, crisis tendencies will be waiting for us much earlier than in 2050: it seems that
the gap between supply and demand on the global energy market will be formed by the early
2030s, when global energy consumption will approach the level of 16-17 billion TNE . As
already mentioned, peak years for world production of oil, natural gas and coal are coming in
the very near future. According to the IEA, the peak of world oil production will come as
early as 2022, when all of humanity will be able to provide about 4,530 million TOE with oil.
According to the same forecast, coal will be at its peak in 2028, when at the expense of it
it will be possible to get about 6 billion THE (which corresponds to about 8.4 billion tons
of physical coal mining, due to its lower energy value). And finally, global natural gas
production will peak in 2036, when this energy carrier can provide 3.9 billion ToE.
It is easy to understand that, taking into account the predicted share of oil, coal and
natural gas in primary energy of about 75% by 2030, the sum of peak production (14,430 TOE)
almost fully corresponds to ¾ the lower bar of estimated consumption in 2030 (16,000
TOE) . It should be understood that the peak values for oil and hard coal in
the world will be reached before 2030, after which these energy carriers will only decrease
in the volume of physical production. In part, this effect can be compensated for through the
involvement of more low-margin fields (as it happened with shale oil and gas), but the limits
of such compensatory mechanisms are not unlimited. In addition, a significant increase in the
price of primary energy in itself is a sign of the crisis of the existing economic structure,
which clearly links social stability with economic growth, and economic growth is fueled
precisely by the available (both physically and in price) energy.
Of course, the increase in the price of oil, natural gas and coal will improve the
economic prospects of "green" energy (simply due to the banal high cost of any energy
available to humanity), but this also means that within future economies huge amounts of
energy will simply be spent on maintaining the internal structure economies and the
livelihoods of the critically needed primary energy sector.
An idea of this kind of economic structure may well be given by the economic
model of the USSR, where such a bias towards the enterprises of "Group A" was dictated by
military and state construction, while consumer goods of the enterprises of "Group B" were in
short supply. However, in the USSR this mechanism was a reflection of the planned economy, in
the case of the supposed "peak" scenario of 2030, it would be formed by purely market
mechanisms within the framework of the "classical" capitalist economy.
It is clear that this implies a "contraction" of the final consumption of the population,
which will be caused by the forced flow of capital to the high-yielding primary energy
production sectors, forced and natural in the framework of the capitalist economy. At the
same time, the "welfare society" of the model countries of the "collective West", such as the
European Union and, in particular, the United States, will collapse. Faced with this kind of
crisis, the "overconsuming" Western countries will unambiguously join the battle for the
remnants of mineral energy resources. Such events and wars are likely to surpass even the
current "oil conflicts" in the Middle East, North Africa and Latin America, in which the
United States and its European allies are directly involved.
Probably, Russia will again be hit, which remains the "last natural storeroom" for large
reserves of sufficiently cheap oil, natural gas and coal. Most likely, the "energy predators"
will try once again to control the richest natural resources of our country, which, under
various pretexts, will strive to declare "the heritage of all mankind". In fact, we will talk
about the banal energy robbery of our country, which will hide behind the fig leaf of
propaganda.
Another disappointing conclusion follows from the energy "poverty" of the "world of the
future": Russia today has to prepare for the fact that our "four hard-earned oil equivalent
per capita", which, as noted above, is the basic condition for survival in Russia's severe
climate should be in the future provided for the population of the country from sources other
than oil, natural gas and coal. The challenges facing the world are facing Russia, but what
the United States is the reason for the rejection of overconsumption turns out to be another
challenge for Russia in the face of cold and death by starvation.
Unfortunately, the "world of the future" does not promise to be a pleasant and comfortable
place to live. And we should prepare for such a negative scenario today.
Thank you for the thought provoking thoughts Opritov Alexander.
It is useful to hear these ideas from the perspective of those from various countries, such
as yours.
The data dovetails closely with what has been presented from other sources, by and large.
The geopolitical ramifications of these challenges is obviously paramount.
I am concerned that countries will be pressured to go to war over the shortfall in energy,
through desperation.
A few points about different countries-
The USA could likely decrease it energy use/capita considerably (perhaps 30%), without severe
economic repercussion. But it is not taking the issue seriously.
Some countries like Korea will have a very hard time decreasing consumption. They are cold,
and heavily industrialized. And rely almost entirely on imported fossil fuel.
I expect India, and China, to lean heavily toward suppliers of fuel as they plan their
position in the world and choose allies. Iran and Australia both seem to be prime suppliers
considering proximity.
Concerns over global warming will be swamped by concerns over energy shortage, despite the
severity of the change, such as food supply disruption and forced migration. These climate
problems will likely be much more severe after energy shortage problems develop due to the
lag in CO2 effects.
Mostly I agree with you.
It's hard to imagine the future.
Much will depend on politicians and the willingness of peoples to reduce consumption for the
sake of an acceptable standard of living in the future.
Passing the peak of energy consumption will lead to a decrease in global GDP.
This means a decrease in per capita consumption.
Reduced consumption = reduced demand = industrial workload = crisis.
I believe that in order to save people, they will live in multi-storey buildings, perhaps
without an elevator (of course, it may not be soon for 50 years), the transport will be
public, there will not be enough private cars.
In addition to the peak of hydrocarbons, the peak of copper, gold, silver, tin, and a lot
more is coming. How to solve these problems I don't want to dream
Post scriptum. The problem of CO2 and the problem of global warming in Russia is not a
popular topic. So much that everyone refuses to discuss it and even think about it.
Approximately as an alien topic.
from what I recall the global debt to GDP ratio is about 320% in Q4 2018. GDP growth will cease when debt expansion ceases (FWIW
I suspect widely acknowledged peak oil in the rear view mirror, so to speak, will likely play a role in the realization that event)
In 2008 the size of the US economy was $14.5 trillion. A decade later, the size of the economy is $19.7 trillion, so about
36% greater.
Over the same ten years the national debt has grown from $9.4 trillion to over $21 trillion- about 123% greater.
It's hard to pretend that's not a problem, but people still do try.
Interestingly enough .
Census Bureau, Treasury, EIA Detail American Insolvency
"And comparing the US primary energy consumption versus the Wilshire 5000 (representing the value of all publicly traded US
equity), a funny thing shows up. Flat to declining energy consumption vs. surging asset valuations this is typically understood
as a red flag for phony wealth creation via market manipulation, monetization, and banana republic central banking."
Is a slow recession a tragedy, with chaos necessarily baked into the equation?
If we are lucky, that will be the global challenge.
If not so lucky, recession will be depression.
Some places more than others, of course.
Russia may be be looking more solid than most in the 2030's.
Western Europe, not so good.
Overall, I was referring to the conditions that will likely ensue after peak fossil.
As very well stated in the post by Opritov Alexander above (and by Ron so many times), the hurdles to replace fossil energy are
insurmountable, by and large.
As you have pointed out before, there is a big risk for economic contraction around the time of peal oil.
I expect it to be severe in degree, especially among countries that are elderly, heavily indebted, and heavily dependent on imported
energy. And many of these places are your trading partners, no matter what country you hail from.
Indebtedness is not just a transitory or 'paper' issue, IMHO. The cost to attempt transition to non-fossil energy will be huge
(beyond huge). How do you buy a second home (renewable energy on a countrywide basis), when you are already maxed out on your
credit for the 30 yr loan on your current one (maintenance of your current economic activity and dependents)?
As a slight aside, GDP is not very useful when determining the wealth of a country, since it includes frivolous activity that
will evaporate in tough times. Financial transactions, hair dressers, restaurants, sports and music entertainment, weddings, luxury
items such as fancy cars, boats and fashion, advertising , are examples of GDP components that can evaporate almost immediately
when the times get tough and the velocity of money heads towards zero.
GDP considers natural disasters like earthquakes, floods, tsunamis and hurricanes as being favorable to the economy. Add to this
the fact that these disasters are hated by the common people who rightly pray that this destruction happens as seldom as possible.
Once again, due to the poor fundamentals of the GDP system, the entire science of economics is branded as being anti social. Once
again, the true economic fundamentals are not being considered or else the question of economics being an anti-social science
does not arise. In this article we will first consider the prevalent viewpoint and then we will debunk the myths pertaining to
it.
When a metric values natural disasters as favorable to the economy then you know somethings being missed. I would suggest that
repairing after a storm is not growth. GDP makes no distinction between Construction and Reconstruction.
"... While the Tea Party was critical of status-quo neoliberalism -- especially its cosmopolitanism and embrace of globalization and diversity, which was perfectly embodied by Obama's election and presidency -- it was not exactly anti-neoliberal. Rather, it was anti-left neoliberalism-, it represented a more authoritarian, right [wing] version of neoliberalism. ..."
"... Within the context of the 2016 election, Clinton embodied the neoliberal center that could no longer hold. Inequality. Suffering. Collapsing infrastructures. Perpetual war. Anger. Disaffected consent. ..."
"... Both Sanders and Trump were embedded in the emerging left and right responses to neoliberalism's crisis. Specifically, Sanders' energetic campaign -- which was undoubtedly enabled by the rise of the Occupy movement -- proposed a decidedly more "commongood" path. Higher wages for working people. Taxes on the rich, specifically the captains of the creditocracy. ..."
"... In other words, Trump supporters may not have explicitly voted for neoliberalism, but that's what they got. In fact, as Rottenberg argues, they got a version of right neoliberalism "on steroids" -- a mix of blatant plutocracy and authoritarianism that has many concerned about the rise of U.S. fascism. ..."
"... We can't know what would have happened had Sanders run against Trump, but we can think seriously about Trump, right and left neoliberalism, and the crisis of neoliberal hegemony. In other words, we can think about where and how we go from here. As I suggested in the previous chapter, if we want to construct a new world, we are going to have to abandon the entangled politics of both right and left neoliberalism; we have to reject the hegemonic frontiers of both disposability and marketized equality. After all, as political philosopher Nancy Fraser argues, what was rejected in the election of 2016 was progressive, left neoliberalism. ..."
"... While the rise of hyper-right neoliberalism is certainly nothing to celebrate, it does present an opportunity for breaking with neoliberal hegemony. We have to proceed, as Gary Younge reminds us, with the realization that people "have not rejected the chance of a better world. They have not yet been offered one."' ..."
In Chapter 1, we traced the rise of our neoliberal conjuncture back to the crisis of liberalism during the late nineteenth and
early twentieth centuries, culminating in the Great Depression. During this period, huge transformations in capitalism proved impossible
to manage with classical laissez-faire approaches. Out of this crisis, two movements emerged, both of which would eventually shape
the course of the twentieth century and beyond. The first, and the one that became dominant in the aftermath of the crisis, was the
conjuncture of embedded liberalism. The crisis indicated that capitalism wrecked too much damage on the lives of ordinary citizens.
People (white workers and families, especially) warranted social protection from the volatilities and brutalities of capitalism.
The state's public function was expanded to include the provision of a more substantive social safety net, a web of protections for
people and a web of constraints on markets. The second response was the invention of neoliberalism. Deeply skeptical of the common-good
principles that undergirded the emerging social welfare state, neoliberals began organizing on the ground to develop a "new" liberal
govemmentality, one rooted less in laissez-faire principles and more in the generalization of competition and enterprise. They worked
to envision a new society premised on a new social ontology, that is, on new truths about the state, the market, and human beings.
Crucially, neoliberals also began building infrastructures and institutions for disseminating their new' knowledges and theories
(i.e., the Neoliberal Thought Collective), as well as organizing politically to build mass support for new policies (i.e., working
to unite anti-communists, Christian conservatives, and free marketers in common cause against the welfare state). When cracks in
embedded liberalism began to surface -- which is bound to happen with any moving political equilibrium -- neoliberals were there
with new stories and solutions, ready to make the world anew.
We are currently living through the crisis of neoliberalism. As I write this book, Donald Trump has recently secured the U.S.
presidency, prevailing in the national election over his Democratic opponent Hillary Clinton. Throughout the election, I couldn't
help but think back to the crisis of liberalism and the two responses that emerged. Similarly, after the Great Recession of 2008,
we've saw two responses emerge to challenge our unworkable status quo, which dispossesses so many people of vital resources for individual
and collective life. On the one hand, we witnessed the rise of Occupy Wall Street. While many continue to critique the movement for
its lack of leadership and a coherent political vision, Occupy was connected to burgeoning movements across the globe, and our current
political horizons have been undoubtedly shaped by the movement's success at repositioning class and economic inequality within our
political horizon. On the other hand, we saw' the rise of the Tea Party, a right-wing response to the crisis. While the Tea Party
was critical of status-quo neoliberalism -- especially its cosmopolitanism and embrace of globalization and diversity, which was
perfectly embodied by Obama's election and presidency -- it was not exactly anti-neoliberal. Rather, it was anti-left neoliberalism-,
it represented a more authoritarian, right [wing] version of neoliberalism.
Within the context of the 2016 election, Clinton embodied the neoliberal center that could no longer hold. Inequality. Suffering.
Collapsing infrastructures. Perpetual war. Anger. Disaffected consent. There were just too many fissures and fault lines in
the glossy, cosmopolitan world of left neoliberalism and marketized equality. Indeed, while Clinton ran on status-quo stories of
good governance and neoliberal feminism, confident that demographics and diversity would be enough to win the election, Trump effectively
tapped into the unfolding conjunctural crisis by exacerbating the cracks in the system of marketized equality, channeling political
anger into his celebrity brand that had been built on saying "f*** you" to the culture of left neoliberalism (corporate diversity,
political correctness, etc.) In fact, much like Clinton's challenger in the Democratic primary, Benie Sanders, Trump was a crisis
candidate.
Both Sanders and Trump were embedded in the emerging left and right responses to neoliberalism's crisis. Specifically, Sanders'
energetic campaign -- which was undoubtedly enabled by the rise of the Occupy movement -- proposed a decidedly more "commongood"
path. Higher wages for working people. Taxes on the rich, specifically the captains of the creditocracy.
Universal health care. Free higher education. Fair trade. The repeal of Citizens United. Trump offered a different response to
the crisis. Like Sanders, he railed against global trade deals like NAFTA and the Trans-Pacific Partnership (TPP). However, Trump's
victory was fueled by right neoliberalism's culture of cruelty. While Sanders tapped into and mobilized desires for a more egalitarian
and democratic future, Trump's promise was nostalgic, making America "great again" -- putting the nation back on "top of the world,"
and implying a time when women were "in their place" as male property, and minorities and immigrants were controlled by the state.
Thus, what distinguished Trump's campaign from more traditional Republican campaigns was that it actively and explicitly pitted
one group's equality (white men) against everyone else's (immigrants, women, Muslims, minorities, etc.). As Catherine Rottenberg
suggests, Trump offered voters a choice between a multiracial society (where folks are increasingly disadvantaged and dispossessed)
and white supremacy (where white people would be back on top). However, "[w]hat he neglected to state," Rottenberg writes,
is that neoliberalism flourishes in societies where the playing field is already stacked against various segments of society,
and that it needs only a relatively small select group of capital-enhancing subjects, while everyone else is ultimately dispensable.
1
In other words, Trump supporters may not have explicitly voted for neoliberalism, but that's what they got. In fact, as Rottenberg
argues, they got a version of right neoliberalism "on steroids" -- a mix of blatant plutocracy and authoritarianism that has many
concerned about the rise of U.S. fascism.
We can't know what would have happened had Sanders run against Trump, but we can think seriously about Trump, right and left
neoliberalism, and the crisis of neoliberal hegemony. In other words, we can think about where and how we go from here. As I suggested
in the previous chapter, if we want to construct a new world, we are going to have to abandon the entangled politics of both right
and left neoliberalism; we have to reject the hegemonic frontiers of both disposability and marketized equality. After all, as political
philosopher Nancy Fraser argues, what was rejected in the election of 2016 was progressive, left neoliberalism.
While the rise of hyper-right neoliberalism is certainly nothing to celebrate, it does present an opportunity for breaking
with neoliberal hegemony. We have to proceed, as Gary Younge reminds us, with the realization that people "have not rejected the
chance of a better world. They have not yet been offered one."'
Mark Fisher, the author of Capitalist Realism, put it this way:
The long, dark night of the end of history has to be grasped as an enormous opportunity. The very oppressive pervasiveness
of capitalist realism means that even glimmers of alternative political and economic possibilities can have a disproportionately
great effect. The tiniest event can tear a hole in the grey curtain of reaction which has marked the horizons of possibility under
capitalist realism. From a situation in which nothing can happen, suddenly anything is possible again.4
I think that, for the first time in the history of U.S. capitalism, the vast majority of people might sense the lie of liberal,
capitalist democracy. They feel anxious, unfree, disaffected. Fantasies of the good life have been shattered beyond repair for most
people. Trump and this hopefully brief triumph of right neoliberalism will soon lay this bare for everyone to see. Now, with Trump,
it is absolutely clear: the rich rule the world; we are all disposable; this is no democracy. The question becomes: How will we show
up for history? Will there be new stories, ideas, visions, and fantasies to attach to? How can we productively and meaningful intervene
in the crisis of neoliberalism? How can we "tear a hole in the grey curtain" and open up better worlds? How can we put what we've
learned to use and begin to imagine and build a world beyond living in competition? I hope our critical journey through the neoliberal
conjuncture has enabled you to begin to answer these questions.
More specifically, in recent decades, especially since the end of the Cold War, our common-good sensibilities have been channeled
into neoliberal platforms for social change and privatized action, funneling our political energies into brand culture and marketized
struggles for equality (e.g., charter schools, NGOs and non-profits, neoliberal antiracism and feminism). As a result, despite our
collective anger and disaffected consent, we find ourselves stuck in capitalist realism with no real alternative. Like the neoliberal
care of the self, we are trapped in a privatized mode of politics that relies on cruel optimism; we are attached, it seems, to politics
that inspire and motivate us to action, while keeping us living in competition.
To disrupt the game, we need to construct common political horizons against neoliberal hegemony. We need to use our common stories
and common reason to build common movements against precarity -- for within neoliberalism, precarity is what ultimately has the potential
to thread all of our lives together. Put differently, the ultimate fault line in the neoliberal conjiuicture is the way it subjects
us all to precarity and the biopolitics of disposability, thereby creating conditions of possibility for new coalitions across race,
gender, citizenship, sexuality, and class. Recognizing this potential for coalition in the face of precarization is the most pressing
task facing those who are yearning for a new world. The question is: How do we get there? How do we realize these coalitional potentialities
and materialize common horizons?
Ultimately, mapping the neoliberal conjuncture through everyday life in enterprise culture has not only provided some direction
in terms of what we need; it has also cultivated concrete and practical intellectual resources for political interv ention and social
interconnection -- a critical toolbox for living in common. More specifically, this book has sought to provide resources for thinking
and acting against the four Ds: resources for engaging in counter-conduct, modes of living that refuse, on one hand, to conduct one's
life according to the norm of enterprise, and on the other, to relate to others through the norm of competition. Indeed, we need
new ways of relating, interacting, and living as friends, lovers, workers, vulnerable bodies, and democratic people if we are to
write new stories, invent new govemmentalities, and build coalitions for new worlds.
Against Disimagination: Educated Hope and Affirmative Speculation
We need to stop turning inward, retreating into ourselves, and taking personal responsibility for our lives (a task which is ultimately
impossible). Enough with the disimagination machine! Let's start looking outward, not inward -- to the broader structures that undergird
our lives. Of course, we need to take care of ourselves; we must survive. But I firmly believe that we can do this in ways both big
and small, that transform neoliberal culture and its status-quo stories.
Here's the thing I tell my students all the time. You cannot escape neoliberalism. It is the air we breathe, the water in which
we swim. No job, practice of social activism, program of self-care, or relationship will be totally free from neoliberal impingements
and logics. There is no pure "outside" to get to or work from -- that's just the nature of the neoliberalism's totalizing cultural
power. But let's not forget that neoliberalism's totalizing cultural power is also a source of weakness. Potential for resistance
is everywhere, scattered throughout our everyday lives in enterprise culture. Our critical toolbox can help us identify these potentialities
and navigate and engage our conjuncture in ways that tear open up those new worlds we desire.
In other words, our critical perspective can help us move through the world with what Henry Giroux calls educated hope. Educated
hope means holding in tension the material realities of power and the contingency of history. This orientation of educated hope knows
very well what we're up against. However, in the face of seemingly totalizing power, it also knows that neoliberalism can never become
total because the future is open. Educated hope is what allows us to see the fault lines, fissures, and potentialities of the present
and emboldens us to think and work from that sliver of social space where we do have political agency and freedom to construct a
new world. Educated hope is what undoes the power of capitalist realism. It enables affirmative speculation (such as discussed in
Chapter 5), which does not try to hold the future to neoliberal horizons (that's cruel optimism!), but instead to affirm our commonalities
and the potentialities for the new worlds they signal. Affirmative speculation demands a different sort of risk calculation and management.
It senses how little we have to lose and how much we have to gain from knocking the hustle of our lives.
Against De-democratization: Organizing and Collective Coverning
We can think of educated hope and affirmative speculation as practices of what Wendy Brown calls "bare democracy" -- the basic
idea that ordinary' people like you and me should govern our lives in common, that we should critique and try to change our world,
especially the exploitative and oppressive structures of power that maintain social hierarchies and diminish lives. Neoliberal culture
works to stomp out capacities for bare democracy by transforming democratic desires and feelings into meritocratic desires and feelings.
In neoliberal culture, utopian sensibilities are directed away from the promise of collective utopian sensibilities are directed
away from the promise of collective governing to competing for equality.
We have to get back that democractic feeling! As Jeremy Gilbert taught us, disaffected consent is a post-democratic orientation.
We don't like our world, but we don't think we can do anything about it. So, how do we get back that democratic feeling? How do we
transform our disaffected consent into something new? As I suggested in the last chapter, we organize. Organizing is simply about
people coming together around a common horizon and working collectively to materialize it. In this way, organizing is based on the
idea of radical democracy, not liberal democracy. While the latter is based on formal and abstract rights guaranteed by the state,
radical democracy insists that people should directly make the decisions that impact their lives, security, and well-being. Radical
democracy is a practice of collective governing: it is about us hashing out, together in communities, what matters, and working in
common to build a world based on these new sensibilities.
The work of organizing is messy, often unsatisfying, and sometimes even scary. Organizing based on affirmative speculation and
coalition-building, furthermore, will have to be experimental and uncertain. As Lauren Berlant suggests, it means "embracing the
discomfort of affective experience in a truly open social life that no
one has ever experienced." Organizing through and for the common "requires more adaptable infrastructures. Keep forcing the existing
infrastructures to do what they don't know how to do. Make new ways to be local together, where local doesn't require a physical
neighborhood." 5 What Berlant is saying is that the work of bare democracy requires unlearning, and detaching from, our
current stories and infrastructures in order to see and make things work differently. Organizing for a new world is not easy -- and
there are no guarantees -- but it is the only way out of capitalist realism.
Getting back democratic feeling will at once require and help us lo move beyond the biopolitics of disposability and entrenched
systems of inequality. On one hand, organizing will never be enough if it is not animated by bare democracy, a sensibility that each
of us is equally important when it comes to the project of determining our lives in common. Our bodies, our hurts, our dreams, and
our desires matter regardless of our race, gender, sexuality, or citizenship, and regardless of how r much capital (economic,
social, or cultural) we have. Simply put, in a radical democracy, no one is disposable. This bare-democratic sense of equality must
be foundational to organizing and coalition-building. Otherwise, we will always and inevitably fall back into a world of inequality.
On the other hand, organizing and collective governing will deepen and enhance our sensibilities and capacities for radical equality.
In this context, the kind of self-enclosed individualism that empowers and underwrites the biopolitics of disposability melts away,
as we realize the interconnectedness of our lives and just how amazing it feels to
fail, we affirm our capacities for freedom, political intervention, social interconnection, and collective social doing.
Against Dispossession: Shared Security and Common Wealth
Thinking and acting against the biopolitics of disposability goes hand-in-hand with thinking and acting against dispossession.
Ultimately, when we really understand and feel ourselves in relationships of interconnection with others, we want for them as we
want for ourselves. Our lives and sensibilities of what is good and just are rooted in radical equality, not possessive or self-appreciating
individualism. Because we desire social security and protection, we also know others desire and deserve the same.
However, to really think and act against dispossession means not only advocating for shared security and social protection, but
also for a new society that is built on the egalitarian production and distribution of social wealth that we all produce. In this
sense, we can take Marx's critique of capitalism -- that wealth is produced collectively but appropriated individually -- to heart.
Capitalism was built on the idea that one class -- the owners of the means of production -- could exploit and profit from the collective
labors of everyone else (those who do not own and thus have to work), albeit in very different ways depending on race, gender, or
citizenship. This meant that, for workers of all stripes, their lives existed not for themselves, but for others (the appropriating
class), and that regardless of what we own as consumers, we are not really free or equal in that bare-democratic sense of the word.
If we want to be really free, we need to construct new material and affective social infrastructures for our common wealth. In
these new infrastructures, wealth must not be reduced to economic value; it must be rooted in social value. Here, the production
of wealth does not exist as a separate sphere from the reproduction of our lives. In other words, new infrastructures, based on the
idea of common wealth, will not be set up to exploit our labor, dispossess our communities, or to divide our lives. Rather, they
will work to provide collective social resources and care so that we may all be free to pursue happiness, create beautiful and/or
useful things, and to realize our potential within a social world of living in common. Crucially, to create the conditions for these
new, democratic forms of freedom rooted in radical equality, we need to find ways to refuse and exit the financial networks of Empire
and the dispossessions of creditocracy, building new systems that invite everyone to participate in the ongoing production of new
worlds and the sharing of the wealth that we produce in common.
It's not up to me to tell you exactly where to look, but I assure you that potentialities for these new worlds are everywhere
around you.
Why Did Simon Kuznets Want to Leave Military Spending out of GDP?
Simon Kuznets (Nobel 1971) usually gets the credit for doing as much as anyone to organize
our modern thinking about what should be included in GDP, or left out. But I had not known
that Kuznets apparently argued for leaving military spending out of GDP, on the grounds that
it wasn't actually "consumed" by anyone, but should instead be treated as an intermediate
input that supported production and consumption.
=== end ===
In political terms, excluding national defense from GDP would create the impression that
the government's statistical agency supports "Peaceniks" -- the critics of "oversized"
America's defense budget. It was incompatible with the imperial ambitions of the USA in
post-WWII era.
Simon Kuznets (
Nobel 1971 ) usually
gets the credit for doing as much as anyone to organize our modern thinking about what should
be included in GDP, or left out. But I had not known that Kuznets apparently argued for leaving
military spending out of GDP, on the grounds that it wasn't actually "consumed" by anyone, but
should instead be treated as an intermediate input that supported production and consumption.
Here's how Hugh Rockoff tells the story in his
essay, "On the Controversies behind the Origins of the Federal Economic Statistics," in the
Winter 2019 issue of the Journal of Economic Perspectives . [Full disclosure: I work at
JEP as Managing Editor.] Rockoff writes:
Military spending presented another problem. In one of his last discussions of national
income and product before US entry in World War II, Kuznets (1941, pp. 19–20) explained
that his estimates included "dreadnoughts, bombing planes, poison gas, and patent medicines
because they are rated economic goods in our country today," even though they "might well be
considered worthless and even harmful" in a society organized differently. In a footnote,
Kuznets (p. 31, fn. 5) used an analogy with private spending to buttress his case for
including military expenditures: "If the activities of the private police used by many large
corporations are productive, why not those of the municipal police? And if of the domestic
police, why not of the international police, i.e., the armed forces of the nation?" During
World War II, however, Kuznets (1945) modified his thinking. He argued that military spending
should be counted in national product during a time of total war, but it should be excluded
during peacetime because military spending was then an intermediary good for producing a flow
of consumption to consumers. Other economists, including decisively those at the Department
of Commerce, thought otherwise (Gilbert, Staehle, Woytinsky, and Kuznets 1944).
A number of economists, however, have found Kuznets's concept of a Peacetime National Income
to be attractive. Higgs (1992), for example, argued that the then-current interpretation of
the impact of World War II on the American economy, that it created unprecedented prosperity,
was reversed when one used Kuznets's peacetime concept rather than the conventional measure.
Higgs even took exception to Kuznets's decision to include some military durables such as
aircraft in investment because Kuznets thought that they could later be turned to peacetime
purposes.
In retrospect, a number of concerns weighed against adopting Kuznets's concept of peacetime
national product. One reason, as Coyle (2014, p. 20) suggests, was the rise of Keynesian
economics. In principle, one could use Kuznets's peacetime version of national product to
analyze the macroeconomy, but the conventional measure fit more smoothly into the simple
Keynesian model taught to a generation of economics students in Samuelson and other
textbooks. Perhaps the most important reason for rejecting Kuznets's concept, however, was
the Cold War. In his famous study of productivity, Kendrick (1961, p. 25) chose to include
all defense spending in his estimates of national product partly on the grounds that
"national security is at all times [Kendrick's italics] a prime objective of economic
organization." In political terms, excluding national defense from national product would
create the appearance that the government's statistical agency was siding with the critics of
America's defense budget. Of course, no one was required, as Kuznets had pointed out, to use
only one measure of aggregate product. To the contrary, Kuznets thought that it would be best
to produce a series of measures, some specialized for one purpose and some for another. But
as we have learned, public attention does tend to focus on a single measure of national
product, so the decision to ignore Kuznets's peacetime concept may have had important
consequences.
I find myself in agreement with the views of Kuznets expressed back in 1941, that
if private security guards and municipal police are in GDP, the military should be, too.
But more broadly, the dispute serves as a useful reminder that GDP includes some categories
of expenditures that society would have preferred not to make. For example, GDP includes all
measures for home security and corporate security--not just guards but also locks, bars, and
electronic measures. In addition, GDP includes cleaning up after pollution spills and natural
disasters, although it would certainly have been preferable if such events had not happened in
the first place. It would also be socially beneficial if people got more exercise and at
healthier diets, and as a result a substantial proportion of health care spending didn't need
to happen.
For other comments on the relationship between GDP and social welfare, readers might be
interested in the well-known comments from "Robert
Kennedy on the Shortcomings of GDP in 1968" (January 30, 2012). My own sense is that
economists are well-aware of the shortcomings of GDP--indeed, probably better aware of the
shortcomings than many critics. But economists also point out that on a wide array of
dimensions, people who live in societies with higher GDP tend to live better lives. For samples
of these arguments, see "Why GDP Growth
is Good" (October 11, 2012) and "GDP
and Social Welfare in the Long Run" (April 6, 2015).
The bottom line is that this preoccupation with the 'headline number' for the current month
as a single datapoint that is promoted by Wall Street and the Government for official economic
data is misleading.
The effective method of considering a heavily adjusted and revised data series like this is
with a trend analysis of at least seven to twelve observations, and more if you can get
them.
But, that makes for a much less interesting and convenient narrative.
And as for the median wage and income -- it is still too weak to sustain an economic
recovery.
Stocks were a bit weak today, despite all this fabulous economic data, having exhausted the
sugar rush that was spoonfed to them by their friendly neighborhood Federal Reserve.
> It appears that GDP is not going to be published by the BEA either.
Nonpublishing of GDP might actually be positive ;-) One less " number racket" metric to
deal with. Once a year publication would be more than enough.
Of course, there will be some deprivation among addicted to GDP neoliberal economists, but
that's the price to pay for the progress. All "cult of GDP" folk needs to be sent to the dust
bin of history anyway, with their books and fake math (aka mathiness).
Subtracting from it 66% of financial sector contribution would also be a step in the right
direction.
"... "GDP provides measurements of output, income and expenditure quite well, and these are needed to understand and devise fiscal and monetary policies. But this measure flatly fails when it comes to well being." ..."
"... As Michael Hudson has pointed out GDP includes all sorts of figures that rightly should be subtracted from economic output since they represent a cost, a drain on productivity as opposed to actual production. Fees charged by financiers, monopoly prices extracted by big pharma, ever-increasing rents, all these things make our economy more expensive, less competitive, and less productive, They make us collectively poorer, not richer. Fix how GDP is calculated and we'd see the truth behind the cheery numbers. ..."
"... I am curious if there was an ulterior motive when US switched from GNP to GDP in 1991; does anyone know ..."
"... The United States used GNP as its primary measure of total economic activity until 1991, when it began to use GDP.[11] In making the switch, the Bureau of Economic Analysis (BEA) noted both that GDP provided an easier comparison of other measures of economic activity in the United States and that "virtually all other countries have already adopted GDP as their primary measure of production".[12] Many economists have questioned how meaningful GNP or GDP is as a measure of a nation's economic well-being, as it does not count most unpaid work and counts much economic activity that is unproductive or actually destructive.[13] ..."
"... Human capital. This word as well as any other captures the dehumanizing nature of capitalism. Just a factor of production. We don't have blood and bone and families. We have exploitable skills. Screw that. Leave not one stone upon another when you rise up and destroy the dystopian economy these swine have created. ..."
"... So the most elite of the global elite have just now figured out that averages can be skewed by extreme outliers? What any undergrad student in statistics could tell you? Man, they're really selling the need for global hierarchies. ..."
GDP provides measurements of output, income and expenditure quite well, and these are
needed to understand and devise fiscal and monetary policies. But this measure flatly fails
when it comes to wellbeing.
I guess that's news to no-one but the Davos crowd.
They continue:
Hence growing international interest in a tool that still captures financial and produced
capital, but also the skills in our workforce (human capital), the cohesion in our society
(social capital) and the value of our environment (natural capital).
Work has advanced on some of these elements. The UN Environment Programme-led
Inclusive Wealth Index shows the aggregation through accounting and shadow pricing of
produced capital, natural capital and human capital for 140 countries. The global growth rate
of wealth tracked by this index is much lower than growth in GDP. In fact, the 2018 data
suggests natural capital declined for 140 countries for the period of 1992 to 2014.
This is the chart:
Again, I guess that's news to no one, except the Davos crowd.
But what's scary is the conclusion:
People deserve an accurate sense of how well their economies are performing, with a view
to long-term sustainability. GDP has and always will have valuable short-term insights, but
to respond to 21st-century pressures we need a modern economic measure.
At that point I wanted to scream. What we, apparently, need is a measure of how badly Davos
mentality is screwing things up. We don't need to heed the warnings. Or give up a growth
obsession that fuels globalization and is supported by the myth of profit maximization driving
well-being to which the whole of Davis subscribes. No, we just need a better measure of the
damage that myth causes.
Bring on the Green New Deal, I say.
Will it be on the Davos agenda? I doubt it, somehow.
Fully elucidated about a quarter century ago in an October, 1995 article in the Atlantic
– "If the GDP is Up, Why is America Down?" – by Clifford Cobb, Ted Halstead, and
Jonathan Rowe.
"Human capital" is a deceptive way of saying "buy low, sell high". As an employee, you are
bought for as little as possible, and sold for as much as possible, with Davos Man collecting
that difference, making him filthy rich off the sweat of your brow. When you can no longer
sweat for Davos Man, you are no longer human capital, and Davos Man would prefer you die
quietly, so he can enjoy his jets and yachts without looking at the wreckage left behind.
"GDP provides measurements of output, income and expenditure quite well, and these are
needed to understand and devise fiscal and monetary policies. But this measure flatly fails
when it comes to well being."
While I suspect birds instinctively understand the problem with fouling their nests, GDP
promoters seem not as instinctively aware.
Much of the GDP industrial "output" pushes the world ever closer to the climate change
tipping point, suggesting those promoting GDP growth don't realize the sign on much of their
favored metric is negative, not positive, when it comes to the well being of the earth and
its inhabitants.
And concern about "well being" should not be limited to humankind.
As Michael Hudson has pointed out GDP includes all sorts of figures that rightly should be
subtracted from economic output since they represent a cost, a drain on productivity as
opposed to actual production. Fees charged by financiers, monopoly prices extracted by big
pharma, ever-increasing rents, all these things make our economy more expensive, less
competitive, and less productive, They make us collectively poorer, not richer. Fix how GDP
is calculated and we'd see the truth behind the cheery numbers.
I've been curious about the disappearance of the old Gross National Product, replaced by
GDP I thought the word National was just too impolitic to use in a globalized world and of
course "national" implies a clearer view of sovereignty, etc. Probably had a tendency to
nationalize all natural resources and other things no longer tolerable to globalization.
I am curious if there was an ulterior motive when US switched from GNP to GDP in 1991;
does anyone know?
The United States used GNP as its primary measure of total economic activity until
1991, when it began to use GDP.[11] In making the switch, the Bureau of Economic Analysis
(BEA) noted both that GDP provided an easier comparison of other measures of economic
activity in the United States and that "virtually all other countries have already adopted
GDP as their primary measure of production".[12] Many economists have questioned how
meaningful GNP or GDP is as a measure of a nation's economic well-being, as it does not count
most unpaid work and counts much economic activity that is unproductive or actually
destructive.[13]
Human capital. This word as well as any other captures the dehumanizing nature of
capitalism. Just a factor of production. We don't have blood and bone and families. We have
exploitable skills. Screw that. Leave not one stone upon another when you rise up and destroy
the dystopian economy these swine have created.
So the most elite of the global elite have just now figured out that averages can be
skewed by extreme outliers? What any undergrad student in statistics could tell you? Man,
they're really selling the need for global hierarchies.
Dec 3, 2018
Joseph E. Stiglitz
What we measure affects what we do. If we focus only on material wellbeing – on, say, the production of goods,
rather than on health, education, and the environment – we become distorted in the same way that these measures
are distorted; we become more materialistic.
INCHEON – Just under ten years ago, the International
Commission on the Measurement of Economic Performance and Social Progress issued its report,
Mismeasuring Our Lives: Why GDP
Doesn't Add Up
.The title summed it up: GDP is not a good measure of wellbeing. What we measure affects
what we do, and if we measure the wrong thing, we will do the wrong thing. If we focus only on material wellbeing
– on, say, the production of goods, rather than on health, education, and the environment – we become distorted in
the same way that these measures are distorted; we become more materialistic.
We were more than pleased with the reception of our report,
which spurred an international movement of academics, civil society, and governments to construct and employ
metrics that reflected a broader conception of wellbeing. The OECD has constructed a
Better Life Index
,
containing
a range of metrics that better reflect what constitutes and leads to wellbeing. It also supported a successor to
the Commission, the High Level Expert Group on the Measurement of Economic Performance and Social Progress. Last
week, at the OECD's sixth World Forum on Statistics, Knowledge, and Policy in Incheon, South Korea, the Group
issued its report,
Beyond
GDP: Measuring What Counts for Economic and Social Performance
.
The new report highlights several topics, like trust and
insecurity, which had been only briefly addressed by
Mismeasuring Our Lives
, and explores several others,
like inequality and sustainability, more deeply. And it explains how inadequate metrics have led to deficient
policies in many areas. Better indicators would have revealed the highly negative and possibly long-lasting
effects of the deep post-2008 downturn on productivity and wellbeing, in which case policymakers might not have
been so enamored of austerity, which lowered fiscal deficits, but reduced national wealth, properly measured, even
more.
Political outcomes in the United States and many other
countries in recent years have reflected the state of insecurity in which many ordinary citizens live, and to
which GDP pays scant attention. A range of policies focused narrowly on GDP and fiscal prudence has fueled this
insecurity. Consider the effects of pension "reforms" that force individuals to bear more risk, or of labor-market
"reforms" that, in the name of boosting "flexibility," weaken workers' bargaining position by giving employers
more freedom to fire them, leading in turn to lower wages and more insecurity. Better metrics would, at the
minimum, weigh these costs against the benefits, possibly compelling policymakers to accompany such changes with
others that enhance security and equality.
Spurred on by Scotland, a small group of countries has now
formed the
Wellbeing Economy Alliance
. The hope is
that governments putting wellbeing at the center of their agenda will redirect their budgets accordingly. For
example, a New Zealand government focused on wellbeing would direct more of its attention and resources to
childhood poverty.
Better metrics would also become an important diagnostic tool,
helping countries both identify problems before matters spiral out of control and select the right tools to
address them. Had the US, for example, focused more on health, rather than just on GDP, the decline in life
expectancy among those without a college education, and especially among those in America's deindustrialized
regions, would have been apparent years ago.
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Likewise, metrics of equality of opportunity have only recently
exposed the hypocrisy of America's claim to be a land of opportunity: Yes, anyone can get ahead, so long as they
are born of rich, white parents. The data reveal that the US is riddled with so-called inequality traps: Those
born at the bottom are likely to remain there. If we are to eliminate these inequality traps, we first have to
know that they exist, and then ascertain what creates and sustains them.
A little more than a quarter-century ago, US President Bill
Clinton ran on a platform of "putting people first." It is remarkable how difficult it is to do that, even in a
democracy. Corporate and other special interests always seek to ensure that their interests come first. The
massive US tax cut enacted by the Trump administration at this time last year is an example,
par excellence
.
Ordinary people – the dwindling but still vast middle class – must bear a tax increase, and millions will lose
health insurance, in order to finance a tax cut for billionaires and corporations.
If we want to put people first, we have to know what matters to
them, what improves their wellbeing, and how we can supply more of whatever that is. The
Beyond GDP
measurement agenda will continue to play a critical role in helping us achieve these crucial goals.
Under neoliberlaism the idea of loyalty between a corporation and an employee makes no more sense than loyalty between a motel and its guests.
Notable quotes:
"... Any expectation of "loyalty", that two-way relationship of employee/company from an earlier time, was wishful thinking ..."
"... With all the automation going on around the world, these business leaders better worry about people not having money to buy their goods and services plus what are they going to do with the surplus of labor ..."
"... This is the nail in the coffin. As an IT manager responsible for selecting and purchasing software, I will never again recommend IBM products ..."
"... The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The way I saw it, every time I received a paycheck from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything. The idea of loyalty between a corporation and an at-will employee makes no more sense than loyalty between a motel and its guests. ..."
"... The annual unemployment rate topped 8% in 1975 and would reach nearly 10% in 1982. The economy seemed trapped in the new nightmare of stagflation," so called because it combined low economic growth and high unemployment ("stagnation") with high rates of inflation. And the prime rate hit 20% by 1980. ..."
I started at IBM 3 days out of college in 1979 and retired in 2017. I was satisfied with my choice and never felt mistreated because
I had no expectation of lifetime employment, especially after the pivotal period in the 1990's when IBM almost went out of business.
The company survived that period by dramatically restructuring both manufacturing costs and sales expense including the firing
of tens of thousands of employees. These actions were well documented in the business news of the time, the obvious alternative
was bankruptcy.
I told the authors that anyone working at IBM after 1993 should have had no expectation of a lifetime career. Downsizing, outsourcing,
movement of work around the globe was already commonplace at all such international companies. Any expectation of "loyalty",
that two-way relationship of employee/company from an earlier time, was wishful thinking .
I was always prepared to be sent packing, without cause, at any time and always had my resume up-to-date. I stayed because
of interesting work, respectful supervisors, and adequate compensation.
The "resource action" that forced my decision to retire was no surprise, the company that hired me had been gone for decades.
With all the automation going on around the world, these business leaders better worry about people not having money to buy
their goods and services plus what are they going to do with the surplus of labor
I had, more or less, the same experience at Cisco. They paid me to quit. Luckily, I was ready for it.
The article mentions IBMs 3 failures. So who was it that was responsible for not anticipating the transitions? It is hard enough
doing what you already know. Perhaps companies should be spending more on figuring out "what's next" and not continually playing
catch-up by dumping the older workers for the new.
I was laid off by IBM after 29 years and 4 months. I had received a division award in previous year, and my last PBC appraisal
was 2+ (high performer.) The company I left was not the company I started with. Top management--starting with Gerstner--has steadily
made IBM a less desirable place to work. They now treat employees as interchangeable assets and nothing more. I cannot/would not
recommend IBM as an employer to any young programmer.
Truly awesome work. I do want to add one thing, however--the entire rhetoric about "too many old white guys" that has become so
common absolutely contributes to the notion that this sort of behavior is not just acceptable but in some twisted way admirable
as well.
Is anyone surprised that so many young people don't think capitalism is a good system any more?
I ran a high technology electronic systems company for years. We ran it "the old way." If you worked hard, and tried, we would
bend over backwards to keep you. If technology or business conditions eliminated your job, we would try to train you for a new
one. Our people were loyal, not like IBMers today. I honestly think that's the best way to be profitable.
People afraid of being unjustly RIFFed will always lack vitality.
I'm glad someone is finally paying attention to age discrimination. IBM apparently is just one of many organizations that discriminate.
I'm in the middle of my own fight with the State University of New York (SUNY) over age discrimination. I was terminated by
a one of the technical colleges in the SUNY System. The EEOC/New York State Division of Human Rights (NYDHR) found that "PROBABLE
CAUSE (NYDHR's emphasis) exists to believe that the Respondent (Alfred State College - SUNY) has engaged in or is engaging in
the unlawful discriminatory practice complained of." Investigators for NYDHR interviewed several witnesses, who testified that
representatives of the college made statements such as "we need new faces", "three old men" attending a meeting, an older faculty
member described as an "albatross", and "we ought to get rid of the old white guys". Witnesses said these statements were made
by the Vice President of Academic Affairs and a dean at the college.
This saga at IBM is simply a microcosm of our overall economy. Older workers get ousted in favor of younger, cheaper workers;
way too many jobs get outsourced; and so many workers today [young and old] can barely land a full-time job. This is the behavior that our system incentivises (and gets away with) in this post Reagan Revolution era where deregulation is
lauded and unions have been undermined & demonized. We need to seriously re-work 'work', and in order to do this we need to purge
Republicans at every level, as they CLEARLY only serve corporate bottom-lines - not workers - by championing tax codes that reward
outsourcing, fight a livable minimum wage, eliminate pensions, bust unions, fight pay equity for women & family leave, stack the
Supreme Court with radical ideologues who blatantly rule for corporations over people all the time, etc. etc. ~35 years of basically
uninterrupted Conservative economic policy & ideology has proven disastrous for workers and our quality of life. As goes your
middle class, so goes your country.
I am a retired IBM manager having had to execute many of these resource reduction programs.. too many.. as a matter of fact. ProPUBLICA....You
nailed it!
IBM has always treated its customer-facing roles like Disney -- as cast members who need to match a part in a play. In the 60s
and 70s, it was the white-shirt, blue-suit white men whom IBM leaders thought looked like mainframe salesmen. Now, rather than
actually build a credible cloud to compete with Amazon and Microsoft, IBM changes the cast to look like cloud salespeople. (I
work for Microsoft. Commenting for myself alone.)
I am a survivor, the rare employee who has been at IBM for over 35 years. I have seen many, many layoff programs over 20 years
now. I have seen tens of thousands people let go from the Hudson Valley of N.Y. Those of us who have survived, know and lived
through what this article so accurately described. I currently work with 3 laid off/retired and rehired contractors. I have seen
age discrimination daily for over 15 years. It is not only limited to layoffs, it is rampant throughout the company. Promotions,
bonuses, transfers for opportunities, good reviews, etc... are gone if you are over 45. I have seen people under 30 given promotions
to levels that many people worked 25 years for. IBM knows that these younger employees see how they treat us so they think they
can buy them off. Come to think of it, I guess they actually are! They are ageist, there is no doubt, it is about time everyone
knew. Excellent article.
Nice article, but seriously this is old news. IBM has been at this for ...oh twenty years or more. I don't really have a problem with it in terms of a corporation trying to make money. But I do have a problem with how IBM also
likes to avoid layoffs by giving folks over 40 intentionally poor reviews, essentially trying to drive people out. Just have the
guts to tell people, we don't need you anymore, bye. But to string people along as the overseas workers come in...c'mon just be
honest with your workers. High tech over 40 is not easy...I suggest folks prep for a career change before 50. Then you can have the last laugh on a company
like IBM.
From pages 190-191 of my novel, Ordinary Man (Amazon):
Throughout
it all, layoffs became common, impacting mostly older employees with many years
of service. These job cuts were dribbled out in small numbers to conceal them
from the outside world, but employees could plainly see what was going on.
The laid off
employees were supplanted by offshoring work to low-costs countries and hiring
younger employees, often only on temporary contracts that offered low pay and
no benefits – a process pejoratively referred to by veteran employees as
"downsourcing." The recruitment of these younger workers was done under the
guise of bringing in fresh skills, but while many of the new hires brought new
abilities and vitality, they lacked the knowledge and perspective that comes
with experience.
Frequently,
an older more experienced worker would be asked to help educate newer
employees, only to be terminated shortly after completing the task. And the new
hires weren't fooled by what they witnessed and experienced at OpenSwitch,
perceiving very quickly that the company had no real interest in investing in
them for the long term. To the contrary, the objective was clearly to grind as
much work out of them as possible, without offering any hope of increased
reward or opportunity.
Most of the
young recruits left after only a year or two – which, again, was part of the
true agenda at the company. Senior management viewed employees not as talent,
but simply as cost, and didn't want anyone sticking around long enough to move
up the pay scale.
This is the nail in the coffin. As an IT manager responsible for selecting and purchasing software, I will never again recommend
IBM products. I love AIX and have worked with a lot if IBM products but not anymore. Good luck with the millennials though...
I worked for four major corporations (HP, Intel, Control Data Corporation, and Micron Semiconductor) before I was hired by IBM
as a rare (at that time) experienced new hire.
Even though I ended up working for IBM for 21 years, and retired in 2013, because
of my experiences at those other companies, I never considered IBM my "family."
The way I saw it, every time I received a paycheck
from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything.
The way I saw it, every time I received a paycheck
from IBM in exchange for two weeks' work, we were (almost) even. I did not owe them anything else and they did not owe me anything.
The idea of loyalty between a corporation and an at-will employee makes no more sense than loyalty between a motel and its guests.
It is a business arrangement, not a love affair. Every individual needs to continually assess their skills and their value to
their employer. If they are not commensurate, it is the employee's responsibility to either acquire new skills or seek a new employer.
Your employer will not hesitate to lay you off if your skills are no longer needed, or if they can hire someone who can do your
job just as well for less pay. That is free enterprise, and it works for people willing to take advantage of it.
I basically agree. But why should it be OK for a company to fire you just to replace you with a younger you? If all that they
accomplish is lowering their health care costs (which is what this is really about). If the company is paying about the same for
the same work, why is firing older workers for being older OK?
Good question. The point I was trying to make is that people need to watch out for themselves and not expect their employer to
do what is "best" for the employee. I think that is true whatever age the employee happens to be.
Whether employers should be able to discriminate against (treat differently) their employees based on age, gender, race, religion,
etc. is a political question. Morally, I don't think they should discriminate. Politically, I think it is a slippery slope when
the government starts imposing regulations on free enterprise. Government almost always creates more problems than they fix.
Sorry, but when you deregulate the free enterprise, it created more problems than it fixes and that is a fact that has been proven
for the last 38 years.
That's just plain false. Deregulation creates competiiton. Competition for talented and skilled workers creates opportunities
for those that wish to be employed and for those that wish to start new ventures. For example, when Ma Bell was regulated and
had a monopoly on telecommunications there was no innovation in the telecom inudstry. However, when it was deregulated, cell phones,
internet, etc exploded ... creating billionaires and millionaires while also improving the quality of life.
No, it happens to be true. When Reagan deregulate the economy, a lot of those corporate raiders just took over the companies,
sold off the assets, and pocketed the money. What quality of life? Half of American lived near the poverty level and the wages
for the workers have been stagnant for the last 38 years compared to a well-regulated economy in places like Germany and the Scandinavian
countries where the workers have good wages and a far better standard of living than in the USA. Why do you think the Norwegians
told Trump that they will not be immigrating to the USA anytime soon?
What were the economic conditions before Regan? It was a nightmare before Regan. The annual unemployment rate topped 8% in 1975 and would reach nearly 10% in 1982. The economy seemed trapped in the new nightmare
of stagflation," so called because it combined low economic growth and high unemployment ("stagnation") with high rates of inflation.
And the prime rate hit 20% by 1980.
At least we had a manufacturing base in the USA, strong regulations of corporations, corporate scandals were far and few, businesses
did not go under so quickly, prices of goods and services did not go through the roof, people had pensions and could reasonably
live off them, and recessions did not last so long or go so deep until Reagan came into office. In Under Reagan, the jobs were
allowed to be send overseas, unions were busted up, pensions were reduced or eliminated, wages except those of the CEOs were staganent,
and the economic conditions under Bush, Senior and Bush, Jr. were no better except that Bush, Jr, was the first president to have
a net minus below zero growth, so every time we get a Republican Administration, the economy really turns into a nightmare. That
is a fact.
You have the Republicans in Kansas, Oklahoma, and Wisconsin using Reaganomics and they are economic disaster areas.
You had an industrial base in the USA, lots of banks and savings and loans to choose from, lots of mom and pop stores, strong
government regulation of the economy, able to live off your pensions, strong unions and employment laws along with the court system
to back you up against corporate malfeasance. All that was gone when Reagan and the two Bushes came into office.
Amazingly accurate article. The once great IBM now a dishonest and unscrupulous corporation concerned more about earnings per
share than employees, customers, or social responsibility. In Global Services most likely 75% or more jobs are no longer in the
US - can't believe a word coming out of Armonk.
I'm not sure there was ever a paradise in employment. Yeah, you can say there was more job stability 50 or 60 years ago, but that
applied to a much smaller workforce than today (mostly white men). It is a drag, but there are also lot more of us old farts than
there used to be and we live a lot longer in retirement as well. I don't see any magic bullet fix either.
Great article. What's especially infuriating is that the industry continues to claim that there is a shortage of STEM workers.
For example, google "claim of 1.4 million computer science jobs with only 400,000 computer science graduates to fill them". If
companies would openly say, "we have plenty of young STEM workers and prefer them to most older STEM workers", we could at least
start addressing the problem. But they continue to promote the lie of there being a STEM shortage. They just want as big a labor
pool as possible, unemployed workers be damned.
I've worked there 17 years and have worried about being layed off for about 11 of them. Moral is in the toilet. Bonuses for the
rank and file are in the under 1% range while the CEO gets millions. Pay raises have been non existent or well under inflation
for years. Adjusting for inflation, I make $6K less than I did my first day. My group is a handful of people as at least 1/2 have
quit or retired. To support our customers, we used to have several people, now we have one or two and if someone is sick or on
vacation, our support structure is to hope nothing breaks. We can't keep millennials because of pay, benefits and the expectation
of being available 24/7 because we're shorthanded. As the unemployment rate drops, more leave to find a different job, leaving
the old people as they are less willing to start over with pay, vacation, moving, selling a house, pulling kids from school, etc.
The younger people are generally less likely to be willing to work as needed on off hours or to pull work from a busier colleague.
I honestly have no idea what the plan is when the people who know what they are doing start to retire, we are way top heavy with
30-40 year guys who are on their way out, very few of the 10-20 year guys due to hiring freezes and we can't keep new people past
2-3 years. It's like our support business model is designed to fail.
Make no mistake. The three and four letter acronyms and other mushy corporate speak may differ from firm to firm, but this is
going on in every large tech company old enough to have a large population of workers over 50. I hope others will now be exposed.
This article hits the nail right on the head, as I come up on my 1 year anniversary from being....ahem....'retired' from 23 years
at IBM....and I'll be damned if I give them the satisfaction of thinking this was like a 'death' to me. It was the greatest thing
that could have ever happened. Ginny and the board should be ashamed of themselves, but they won't be.
Starting around age 40 you start to see age discrimination. I think this is largely due to economics, like increased vacation
times, higher wages, but most of all the perception that older workers will run up the medical costs. You can pass all the age
related discrimination laws you want, but look how ineffective that has been.
If you contrast this with the German workforce, you see that they have more older workers with the skills and younger workers
without are having a difficult time getting in. So what's the difference? There are laws about how many vacation weeks that are
given and there is a national medical system that everyone pays, so discrimination isn't seen in the same light.
The US is the only hold out maybe with South Africa that doesn't have a good national medical insurance program for everyone.
Not only do we pay more than the rest of the world, but we also have discrimination because of it.
This is very good, and this is IBM. I know. I was plaintiff in Gundlach v. IBM Japan, 983 F.Supp.2d 389, which involved their
violating Japanese labor law when I worked in Japan. The New York federal judge purposely ignored key points of Japanese labor
law, and also refused to apply Title VII and Age Discrimination in Employment to the parent company in Westchester County. It
is a huge, self-described "global" company with little demonstrated loyalty to America and Americans. Pennsylvania is suing them
for $170 million on a botched upgrade of the state's unemployment system.
In early 2013 I was given a 3 PBC rating for my 2012 performance, the main reason cited by my manager being that my team lead
thought I "seemed distracted". Five months later I was included in a "resource action", and was gone by July. I was 20 months
shy of 55. Younger coworkers were retained. That was about two years after the product I worked on for over a decade was off-shored.
Through a fluke of someone from the old, disbanded team remembering me, I was rehired two years later - ironically in a customer
support position for the very product I helped develop.
While I appreciated my years of service, previous salary, and previous benefits being reinstated, a couple years into it I
realized I just wasn't cut out for the demands of the job - especially the significant 24x7 pager duty. Last June I received email
describing a "Transition to Retirement" plan I was eligible for, took it, and my last day will be June 30. I still dislike the
job, but that plan reclassified me as part time, thus ending pager duty for me. The job still sucks, but at least I no longer
have to despair over numerous week long 24x7 stints throughout the year.
A significant disappointment occurred a couple weeks ago. I was discussing healthcare options with another person leaving the
company who hadn't been resource-actioned as I had, and learned the hard way I lost over $30,000 in some sort of future medical
benefit account the company had established and funded at some point. I'm not sure I was ever even aware of it. That would have
funded several years of healthcare insurance during the 8 years until I'm eligible for Medicare. I wouldn't be surprised if their
not having to give me that had something to do with my seeming "distracted" to them. <rolls eyes="">
What's really painful is the history of that former account can still be viewed at Fidelity, where it associates my departure
date in 2013 with my having "forfeited" that money. Um, no. I did not forfeit that money, nor would I have. I had absolutely no
choice in the matter. I find the use of the word 'forfeited' to describe what happened as both disingenuous and offensive. That
said, I don't know whether's that's IBM's or Fidelity's terminology, though.
Jeff, You should call Fidelity. I recently received a letter from the US Department of Labor that they discovered that IBM was
"holding" funds that belonged to me that I was never told about. This might be similar or same story .
The Ministry of Plenty ( Newspeak : Miniplenty ) is in control of
Oceania's planned
economy .
It oversees rationing of food , supplies , and goods . As told in Goldstein's book, the
economy of Oceania is very important, and it's necessary to have the public continually create
useless and synthetic supplies or weapons for use in the war, while they have no access to the
means of
production .
This is the central theme of Oceania's idea that a poor, ignorant populace is
easier to rule over than a wealthy, well-informed one. Telescreens often make reports on how Big Brother has been able
to increase economic production, even when production has actually gone down (see §
Ministry of Truth ).
The Ministry hands out statistics which are "nonsense". When Winston is adjusting some
Ministry of Plenty's figures, he explains this:
But actually, he thought as he readjusted the Ministry of Plenty's figures, it was not
even forgery. It was merely the substitution of one piece of nonsense for another. Most of
the material that you were dealing with had no connection with anything in the real world,
not even the kind of connection that is contained in a direct lie. Statistics were just as
much a fantasy in their original version as in their rectified version. A great deal of time
you were expected to make them up out of your head.
Like the other ministries, the Ministry of Plenty seems to be entirely misnamed, since it
is, in fact, responsible for maintaining a state of perpetual poverty , scarcity and financial shortages.
However, the name is also apt, because, along with the Ministry of Truth, the Ministry of
Plenty's other purpose is to convince the populace that they are living in a state of perpetual
prosperity. Orwell made a similar reference to the Ministry of Plenty in his allegorical work
Animal Farm
when, in the midst of a blight upon the farm, Napoleon the pig orders the silo to
be filled with sand, then to place a thin sprinkling of grain on top, which fools human
visitors into being dazzled about Napoleon's boasting of the farm's superior economy.
A department of the Ministry of Plenty is charged with organizing state lotteries . These are very popular among the
proles, who buy tickets and hope to win the big prizes – a completely vain hope as the
big prizes are in fact not awarded at all, the Ministry of Truth participating in the scam and
publishing every week the names of non-existent big winners.
"... You said that we're entering into a recession. That's just the flat wrong statement. The economy's been in a recession ever since 2008, as a result of what President Obama did by bailing out the banks and not the economy at large. ..."
"... The largest element of fakery is a category that is imputed – that is, made up – for rising rents that homeowners would have to pay if they had to rent their houses from themselves. That's about 6 percent of GDP right there. Right now, as a result of the 10 million foreclosures that Obama imposed on the economy by not writing down the junk mortgage debts to realistic values, companies like Blackstone have come in and bought up many of the properties that were forfeited. So now there are fewer homes that are available to buy. Rents are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and that means more people have to rent. When more people have to rent, the rents go up. And when rents go up, people lucky enough to have kept their homes report these rising rental values to the GDP statisticians. ..."
"... The other great jump in GDP has been people paying more money to the banks as penalties and fees for arrears on student loans and mortgage loans, credit card loans and automobile loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card companies make more money on arrears than they do on interest charges. This is counted as providing a "financial service," defined as the amount of revenue banks make over and above their borrowing charges. ..."
"... The statistical pretense is that they're taking the risk on making loans to debtors that are going bad. They're cleaning up on profits on these bad loans, because the government has guaranteed the student loans including the higher penalty charges. They've guaranteed the mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks are getting penalty charges on. So what's reported is that GDP growth is actually more and more people in trouble, along with rising housing costs. What's good for the GDP here is awful for the economy at large! This is bad news, not good news. ..."
Paul Sliker: So, Michael, over the past few months the IMF has been sending warning
signals about the state of the global economy. There are a bunch of different macroeconomic
developments that signal we could be entering into another crisis or recession in the near
future. One of those elements is the yield curve, which shows the difference between short-term
and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about
this, because since 1950 every time the yield curve has flattened, the economy has tanked
shortly thereafter.
Can you explain what the yield curve signifies, and if all these signals I just mentioned
are forecasting another economic crisis?
Michael Hudson: Normally, borrowers have to pay only a low rate of interest for a
short-term loan. If you take a longer-term loan, you have to pay a higher rate. The longest
term loans are for mortgages, which have the highest rate. Even for large corporations, the
longer you borrow – that is, the later you repay – the pretense is that the risk is
much higher. Therefore, you have to pay a higher rate on the pretense that the interest-rate
premium is compensation for risk. Banks and the wealthy get to borrow at lower rates.
Right now what's happened is that the short-term rates you can get by putting your money in
Treasury bills or other short-term instruments are even higher than the long-term rates. That's
historically unnatural. But it's not really unnatural at all when you look at what the economy
is doing.
You said that we're entering into a recession. That's just the flat wrong statement. The
economy's been in a recession ever since 2008, as a result of what President Obama did by
bailing out the banks and not the economy at large.
Since 2008, people talk about "look at how that GDP is growing." Especially in the last few
quarters, you have the media saying look, "we've recovered. GDP is up." But if you look at what
they count as GDP, you find a primer on how to lie with statistics.
The largest element of fakery is a category that is imputed – that is, made up
– for rising rents that homeowners would have to pay if they had to rent their houses
from themselves. That's about 6 percent of GDP right there. Right now, as a result of the 10
million foreclosures that Obama imposed on the economy by not writing down the junk mortgage
debts to realistic values, companies like Blackstone have come in and bought up many of the
properties that were forfeited. So now there are fewer homes that are available to buy. Rents
are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and
that means more people have to rent. When more people have to rent, the rents go up. And when
rents go up, people lucky enough to have kept their homes report these rising rental values to
the GDP statisticians.
If I had to pay rent for the house that I have, could charge as much money as renters down
the street have to pay – for instance, for houses that were bought out by Blackstone.
Rents are going up and up. This actually is a rise in overhead, but it's counted as rising GDP.
That confuses income and output with overhead costs.
The other great jump in GDP has been people paying more money to the banks as penalties
and fees for arrears on student loans and mortgage loans, credit card loans and automobile
loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card
companies make more money on arrears than they do on interest charges. This is counted as
providing a "financial service," defined as the amount of revenue banks make over and above
their borrowing charges.
The statistical pretense is that they're taking the risk on making loans to debtors that
are going bad. They're cleaning up on profits on these bad loans, because the government has
guaranteed the student loans including the higher penalty charges. They've guaranteed the
mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks
are getting penalty charges on. So what's reported is that GDP growth is actually more and more
people in trouble, along with rising housing costs. What's good for the GDP here is awful for
the economy at large! This is bad news, not good news.
As a result of this economic squeeze, investors see that the economy is not growing. So
they're bailing out. They're taking their money and running.
If you're taking your money out of bonds and out of the stock market because you worry about
shrinking markets, lower profits and defaults, where are you going to put it? There's only one
safe place to put your money: short-term treasuries. You don't want to buy a long-term Treasury
bond, because if the interest rates go up then the bond price falls. So you want buy short-term
Treasury bonds. The demand for this is so great that Bogle's Vanguard fund management company
will only let small investors buy ten thousand dollars worth at a time for their 401K
funds.
The reason small to large investors are buying short term treasuries is to park their money
safely. There's nowhere else to put it in the real economy, because the real economy isn't
growing.
What has grown is debt. It's grown larger and larger. Investors are taking their
money out of state and local bonds because state and local budgets are broke as a result of
pension commitments. Politicians have cut taxes in order to get elected, so they don't have
enough money to keep up with the pension fund contributions that they're supposed to make.
This means that the likelihood of a break in the chain of payments is rising. In the United
States, commercial property rents are in trouble. We've discussed that before on this show. As
the economy shrinks, stores are closing down. That means that the owners who own commercial
mortgages are falling behind, and arrears are rising.
Also threatening is what Trump is doing. If his protectionist policies interrupt trade,
you're going to see companies being squeezed. They're not going to make the export sales they
expected, and will pay more for imports.
Finally, banks are having problems of they hold Italian government bonds. Germany is
unwilling to use European funds to bail them out. Most investors expect Italy to do exit the
euro in the next three years or so. It looks like we're entering a period of anarchy, so of
course people are parking their money in the short term. That means that they're not putting it
into the economy. No wonder the economy isn't growing.
California – $2.751 trillion
Texas – $1.707 trillion
Russia – $1.578 trillion
Likbez:
@Winston July 28, 2018 at 10:00 am
Cult of GDP is a damaging mental disease. With the size of the USA financial sector it is grossly distorted.
The inflated costs of pharmaceutical and medical-industrial complex add another large portion of air into the US GDP.
Surveillance Valley (Amazon, Apple, Facebook, Google, Microsoft, etc ) firms valuations are also inflated and their
contribution to the USA economics is overestimated in GDP.
There is also such thing as purchase parity. To compare GDP between countries, you must use purchasing power parity. To
compare GDP without calculating in purchasing parity is just naïve.
I suspect that in real purchasing power Russia is close to Germany (which means it it is the fifth largest economy)
The USA still has dominance is key technologies and cultural influence.
This is a problem because, at 4.1 percent last month, U.S. unemployment is at the lowest
level since 2000 and companies from Dallas to Denver are struggling to find the right
workers. In some cases this is constraining growth, the Federal Reserve
reported last week.
Corporate America's search for an exact match is "the number-one problem with hiring in
our country," said Daniel Morgan, a recruiter in Birmingham, Alabama, who owns an Express
Employment Professionals franchise. "Most companies get caught up on precise experience to a
specific job," he said, adding: "Companies fail to see a person for their abilities and
transferable skills."
U.S. employers got used to abundant and cheap labor following the 2007-2009 recession.
Unemployment peaked at 10 percent in October 2009, and didn't return to the lows of the
previous business cycle until last year. Firms still remain reluctant to boost pay or train
employees with less-than-perfect credentials, though recruiters say that may have to change
amid a jobless rate that's set to dip further.
The way the article is cut off with the wage gains chart makes it seem that the article is
on the Dean Baker theme of "pay higher wages and they will come," in which he argues that
there is no shortage because you can hire workers away from your competitor, thereby merely
moving the deficit from one place to another without eliminating it and unintentionally
suggesting that there is actually is a shortage after all.
Immediately after that chart, however, the article segues into a pretty intelligent
discussion of employers learning to ascertain "how can your experience be used in my
application," making it unclear why the wage chart is even there.
The "lack of trained workers" complaint has long annoyed me, with its implication that it
is the public sector's responsibility to train workers for the private sector. Why? If a
company needs welders, why should that company not train its own welders?
J.Goodwin , January 29, 2018 11:39 am
Last week we were reviewing a job description we were preparing for a role in Canada. It
was basically a super senior description, they wanted everything, specific experience, higher
education, what amounts to a black belt project management certification but also accounting
and finance background.
At the bottom it says 5 years experience.
I almost fell off my chair. That's an indicator of the pay band they were trying to fill
at (let's say 3, and the description was written like a 10-15 years 6).
I tried to explain it to the person who wrote it and I said hey if we put this out there,
we will get no hits. There is no one with this experience who will take what you are
offering. I'm afraid we're going to end up with another home country expat instead. They're
often not up the same standard you could get with a local if you reasonably scoped the job
and gave a fair offer.
I think companies have forgotten how to compete for employees, and the recruiters are
completely out of touch. Or maybe they are aware of the conditions and HR just won't sign on
to fair value.
Mona Williams , January 29, 2018 1:09 pm
Before I retired 12 years ago, on-the-job training was much more common. Borders Books
(remember them?) trained me for a week with pay for just a temporary Christmas-season job.
Employers have gotten spoiled, and I hope they will figure this out. Some of the training
programs I hear about just make me sigh. Nobody can afford to be trained while not being
paid.
axt113 , January 29, 2018 1:26 pm
My Wife works as a junior recruiter, the problem she says is with the employers, they want
a particular set of traits, and if there is even a slight deviation they balk
She says that one recent employer she worked with wanted so many particulars for not
enough pay that even well experienced and well educated candidates she could find were either
unwilling to accept the offer, or were missing one or two traits that made them unacceptable
to the company.
rps , January 29, 2018 3:58 pm
This is exciting news for many of us who've been waiting for the pendulum to swing in
favor of potential employees after a decade of reading employers help wanted Santa wish list
criteria for a minimum wage job of 40+ hours. I'd argue the unemployment rate is not 4.1%;
rather, I know of many intelligent/educated/experienced versatile people who've been cut out
of the job market and/or chose not to work for breadcrumbs.
HR's 6 second resume review rule of potential candidates was a massive failure by
eliminating candidates whose skills, experience and critical thinking abilities could've
cultivated innovation across many disciplines. Instead companies looked for drone replacement
at slave wages. HR's narrow candidate searches often focused on resume typos or perceived
grammatical errors (highly unlikely HR recruiters have an English Ph.D), thus trashing the
resume. Perhaps, HR will be refitted with critical thinking people who see a candidate's
potential beyond the forgotten comma or period.
Neoliberalism as "Die-now economics." "Embodiment into lower class" or "the representation as a member the lower
class" if often fatal and upper mobility mobility is artificially limited (despite all MSM hype it is lower then in Europe). So just
being a member of lower class noticeably and negatively affects your life expectancy and other social metrics. Job insecurity
is the hazard reserved for lower and lower middle classes destructivly effect both physical and mental health. Too much stress
is not good for humans. Neoliberalism with its manta of competition uber alles and atomization of the workforce is a real killer.
also the fact that such article was published and the comments below is a clear sign that the days of neoliberalism are numbered.
It should go.
Notable quotes:
"... In our new book , we draw on an extensive body of scientific literature to assess the health effects of three decades of neoliberal policies. Focusing on the social determinants of health -- the conditions of life and work that make it relatively easy for some people to lead long and healthy lives, while it is all but impossible for others -- we show that there are four interconnected neoliberal epidemics: austerity, obesity, stress, and inequality. They are neoliberal because they are associated with or worsened by neoliberal policies. ..."
"... Neoliberalism operates through labor markets to undermine health not only by way of the financial consequences of unemployment, inadequate employment, or low wages, as important as these are, but also through chronic exposure to stress that 'gets under your skin' by way of multiple mechanisms. Quite simply, the effects of chronic insecurity wear people out over the life course in biologically measurable ways . ..."
"... Oh, and "beyond class" because for social beings embodiment involves "social production; social consumption; and social reproduction." In the most reductive definition of class -- the one I used in my crude 1% + 10% + 90% formulation -- class is determined by wage work (or not), hence is a part of production (of capital), not social consumption (eating, etc.) or social reproduction (children, families, household work ). So, even if class in our political economy is the driver, it's not everything. ..."
"... "Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning. ..."
"... Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve." ..."
"... As opposed to being champions of "self-actualization/identity" and "absolute relativism", I always got the impression that they were both offering stark warnings about diving too deeply into the self, vis-a-vis, identity. As if, they both understood the terrifying world that it could/would create, devoid of common cause, community, and ultimately empathy. A world where "we" are not possible because we have all become "I". ..."
"... Wonks like Yglesias love to mock working class concerns as "economic anxiety," which is at once belittling (it's all about f-e-e-e-lings ..."
"... "we have measurable health outcomes from political choices" So True!!! ..."
In our new book
, we draw on an extensive body of scientific literature to assess the health effects of three decades of neoliberal policies.
Focusing on the social determinants
of health -- the conditions of life and work that make it relatively easy for some people to lead long and healthy lives,
while it is all but impossible for others -- we show that there are four interconnected neoliberal epidemics: austerity, obesity,
stress, and inequality. They are neoliberal because they are associated with or worsened by neoliberal policies. They are
epidemics because they are observable on such an international scale and have been transmitted so quickly across time and space
that if they were biological contagions they would be seen as of epidemic proportions.
(The Case-Deaton study provides an obvious fifth: Deaths of despair. There are doubtless others.)
Case in point for
one of the unluckier members of the 90%:
On the morning of 25 August 2014 a young New Jersey woman, Maria Fernandes, died from inhaling gasoline fumes as she slept
in her 13-year-old car. She often slept in the car while shuttling between her three, low-wage jobs in food service; she kept
a can of gasoline in the car because she often slept with the engine running, and was worried about running out of gasoline. Apparently,
the can accidentally tipped over and the vapours from spilled gasoline cost her life. Ms Fernandes was one of the more obvious
casualties of the zero-hours culture of stress and insecurity that pervades the contemporary labour market under neoliberalism.
And Schrecker and Bambra conclude:
Neoliberalism operates through labor markets to undermine health not only by way of the financial consequences of unemployment,
inadequate employment, or low wages, as important as these are, but also through chronic exposure to stress that 'gets under your
skin' by way of multiple mechanisms. Quite simply, the effects of chronic insecurity wear people out over the life course in
biologically measurable ways .
... ... ...
Oh, and "beyond class" because for social beings embodiment involves "social production; social consumption; and social reproduction."
In the most reductive definition of class -- the one I used in my crude 1% + 10% + 90% formulation -- class is determined by wage
work (or not), hence is a part of production (of capital), not social consumption (eating, etc.) or social reproduction (children,
families, household work ). So, even if class in our political economy is the driver, it's not everything.
L.S. reminiscent of Ernst Becker's, "The Structure of Evil" – "Escape from Evil"? (..not to indicate good vs. evil dichotomy)
A great amount of perspective must be agreed upon to achieve "change" intoned. Divide and conquer are complicit, as noted .otherwise
(and as indicated by U.S. economic history) change arrives only when all have lost all and can therefore agree begin again.
There is however, Naomi Klein perspective, "Shock Doctrine", whereby influence contributes to destabilization, plan in hand
leading to agenda driven ("neoliberal"=market fundamentalism) outcome, not at all spontaneous in nature:
"Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers,
whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It
maintains that "the market" delivers benefits that could never be achieved by planning.
Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services
should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions
that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility
and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive
and morally corrosive. The market ensures that everyone gets what they deserve."
On Case-Deason: Sounds like home. I keep the scanner on(local news) ems and fire only since 2006(sheriff got a homeland security
grant). The incidence of suicide, overdose and "intoxication psychosis" are markedly increased in the last 10+ years out here
in the wilderness(5K folks in whole county, last I looked). Our local economy went into near depression after the late 90's farm
bill killed the peanut program then 911 meant no hunting season that year(and it's been noticeably less busy ever since) then
drought and the real estate crash(we had 30 some realtors at peak..old family land being sold off, mostly). So the local Bourgeoisie
have had less money to spend, which "trickles down" onto the rest of us.:less construction, less eating out even at the cheap
places, less buying of gas, and on and on means fewer employees are needed, thus fewer jobs. To boot, there is a habit among many
employers out here of not paying attention to labor laws(it is Texas ) the last minwage rise took 2 years to filter out here,
and one must scrutinize one's pay stub to ensure that the boss isn't getting squirrelly with overtime and witholding.
Geography plays into all this, too 100 miles to any largish city.
I'm not well versed in Foucault or Lacan but I've read some of both and in reading between the lines of their writing (the
phantom philosophy?) I saw a very different message than that often delivered by post-modern theorists.
As opposed to being champions of "self-actualization/identity" and "absolute relativism", I always got the impression that
they were both offering stark warnings about diving too deeply into the self, vis-a-vis, identity. As if, they both understood
the terrifying world that it could/would create, devoid of common cause, community, and ultimately empathy. A world where "we"
are not possible because we have all become "I".
Considering what both their philosophies claimed, if identity is a lie, and the subject is always generated relative to the
other, then how the hell can there be any security or well being in self-actualization? It is like trying to hit a target that
does not exist.
All potentially oppressive cultural categorizations are examples of this (black, latino, gay, trans, etc.). If the identity
is a moving target, both to the oppressor and the oppressed, then how can it ever be a singular source of political action? You
can't hit what isn't there. This is not to say that these groups (in whatever determined category) are not oppressed, just that
formulating political action based strictly on the identity (often as an essential category) is impossible because it does not
actually exist materially. It is an amalgamation of subjects who's subjectivity is always relative to some other whether ally
or oppressor. Only the manifestations of oppression on bodies (as brought up in Lambert's post) can be utilized as metrics for
political action.
I thought of a couple of other advantages of the "embodiment" paradigm:
Better Framing. Wonks like Yglesias love to mock working class concerns as "economic anxiety," which is
at once belittling (it's all about f-e-e-e-lings *) and disempowering (solutions are individual, like therapy or drugs).
Embodiment by contrast insists that neoliberalism (the neoliberal labor market (class warfare)) has real, material, physiological
effects that can be measured and tracked, as with any epidemic.
At 5:30 every morning, Tony Gwiazdowski rolls out of bed, brews a pot of coffee and carefully arranges his laptop, cell phone
and notepad like silverware across the kitchen table.
And then he waits.
Gwiazdowski, 57, has been waiting for 16 months. Since losing his job as a transportation sales manager in February 2009, he wakes
each morning to the sobering reminder that, yes, he is still unemployed. So he pushes aside the fatigue, throws on some clothes and
sends out another flurry of resumes and cheery cover letters.
But most days go by without a single phone call. And around sundown, when he hears his neighbors returning home from work, Gwiazdowski
-- the former mayor of Hillsborough -- can't help but allow himself one tiny sigh of resignation.
"You sit there and you wonder, 'What am I doing wrong?'" said Gwiazdowski, who finds companionship in his 2-year-old golden retriever,
Charlie, until his wife returns from work.
"The worst moment is at the end of the day when it's 4:30 and you did everything you could, and the phone hasn't rung, the e-mails
haven't come through."
Gwiazdowski is one of a growing number of chronically unemployed workers in New Jersey and across the country who are struggling
to get through what is becoming one long, jobless nightmare -- even as the rest of the economy has begun to show signs of recovery.
Nationwide, 46 percent of the unemployed -- 6.7 million Americans -- have been without work for at least half a year, by far the
highest percentage recorded since the U.S. Labor Department began tracking the data in 1948.
In New Jersey, nearly 40 percent of the 416,000 unemployed workers last year fit that profile, up from about 20 percent in previous
years, according to the department, which provides only annual breakdowns for individual states. Most of them were unemployed for
more than a year.
But the repercussions of chronic unemployment go beyond the loss of a paycheck or the realization that one might never find the
same kind of job again. For many, the sinking feeling of joblessness -- with no end in sight -- can take a psychological toll, experts
say.
Across the state, mental health crisis units saw a 20 percent increase in demand last year as more residents reported suffering
from unemployment-related stress, according to the New Jersey Association of Mental Health Agencies.
"The longer the unemployment continues, the more impact it will have on their personal lives and mental health," said Shauna Moses,
the association's associate executive director. "There's stress in the marriage, with the kids, other family members, with friends."
And while a few continue to cling to optimism, even the toughest admit there are moments of despair: Fear of never finding work,
envy of employed friends and embarassment at having to tell acquaintances that, nope, still no luck.
"When they say, 'Hi Mayor,' I don't tell a lot of people I'm out of work -- I say I'm semi-retired," said Gwiazdowski, who maxed
out on unemployment benefits several months ago.
"They might think, 'Gee, what's wrong with him? Why can't he get a job?' It's a long story and maybe people really don't care
and now they want to get away from you."
SECOND TIME AROUND
Lynn Kafalas has been there before, too. After losing her computer training job in 2000, the East Hanover resident took four agonizing
years to find new work -- by then, she had refashioned herself into a web designer.
That not-too-distant experience is why Kafalas, 52, who was laid off again eight months ago, grows uneasier with each passing
day. Already, some of her old demons have returned, like loneliness, self-doubt and, worst of all, insomnia. At night, her mind races
to dissect the latest interview: What went wrong? What else should she be doing? And why won't even Barnes & Noble hire her?
"It's like putting a stopper on my life -- I can't move on," said Kafalas, who has given up karate lessons, vacations and regular
outings with friends. "Everything is about the interviews."
And while most of her friends have been supportive, a few have hinted to her that she is doing something wrong, or not doing enough.
The remarks always hit Kafalas with a pang.
In a recent study, researchers at Rutgers University found that the chronically unemployed are prone to high levels of stress,
anxiety, depression, loneliness and even substance abuse, which take a toll on their self-esteem and personal relationships.
"They're the forgotten group," said Carl Van Horn, director of the John J. Heldrich Center for Workforce Development at Rutgers,
and a co-author of the report. "And the longer you are unemployed, the less likely you are to get a job."
Of the 900 unemployed workers first interviewed last August for the study, only one in 10 landed full-time work by March of this
year, and only half of those lucky few expressed satisfaction with their new jobs. Another one in 10 simply gave up searching.
Among those who were still unemployed, many struggled to make ends meet by borrowing from friends or family, turning to government
food stamps and forgoing health care, according to the study.
More than half said they avoided all social contact, while slightly less than half said they had lost touch with close friends.
Six in 10 said they had problems sleeping.
Kafalas says she deals with her chronic insomnia by hitting the gym for two hours almost every evening, lifting weights and pounding
the treadmill until she feels tired enough to fall asleep.
"Sometimes I forget what day it is. Is it Tuesday? And then I'll think of what TV show ran the night before," she said. "Waiting
is the toughest part."
AGE A FACTOR
Generally, the likelihood of long-term unemployment increases with age, experts say. A report by the National Employment Law Project
this month found that nearly half of those who were unemployed for six months or longer were at least 45 years old. Those between
16 and 24 made up just 14 percent.
Tell that to Adam Blank, 24, who has been living with his girlfriend and her parents at their Martinsville home since losing his
sales job at Best Buy a year and half ago.
Blank, who graduated from Rutgers with a major in communications, says he feels like a burden sometimes, especially since his
girlfriend, Tracy Rosen, 24, works full-time at a local nonprofit. He shows her family gratitude with small chores, like taking out
the garbage, washing dishes, sweeping floors and doing laundry.
Still, he often feels inadequate.
"All I'm doing on an almost daily basis is sitting around the house trying to keep myself from going stir-crazy," said Blank,
who dreams of starting a social media company.
When he is feeling particularly low, Blank said he turns to a tactic employed by prisoners of war in Vietnam: "They used to build
dream houses in their head to help keep their sanity. It's really just imagining a place I can call my own."
LESSONS LEARNED
Meanwhile, Gwiazdowski, ever the optimist, says unemployment has taught him a few things.
He has learned, for example, how to quickly assess an interviewer's age and play up or down his work experience accordingly --
he doesn't want to appear "threatening" to a potential employer who is younger. He has learned that by occasionally deleting and
reuploading his resume to job sites, his entry appears fresh.
"It's almost like a game," he said, laughing. "You are desperate, but you can't show it."
But there are days when he just can't find any humor in his predicament -- like when he finishes a great interview but receives
no offer, or when he hears a fellow job seeker finally found work and feels a slight twinge of jealousy.
"That's what I'm missing -- putting on that shirt and tie in the morning and going to work," he said.
The memory of getting dressed for work is still so vivid, Gwiazdowski says, that he has to believe another job is just around
the corner.
"You always have to hope that that morning when you get up, it's going to be the day," he said.
"Today is going to be the day that something is going to happen."
I collect from the state of iowa, was on tier I and when the gov't recessed without passing extension, iowa stopped paying
tier I claims that were already open, i was scheduled to be on tier I until july 15th, and its gone now, as a surprise, when i
tried to claim my week this week i was notified. SURPRISE, talk about stress.
This is terrible....just wait until RIF'd teachers hit the unemployment offices....but then, this is what NJ wanted...fired
teachers who are to blame for the worst recession our country has seen in 150 years...thanks GWB.....thanks Donald Rumsfeld......thanks
Dick Cheney....thanks Karl "Miss Piggy" Rove...and thank you Mr. Big Boy himself...Gov Krispy Kreame!
For readers who care about this nation's unemployed- Call your Senators to pass HR 4213, the "Extenders" bill. Unfortunately,
it does not add UI benefits weeks, however it DOES continue the emergency federal tiers of UI. If it does not pass this week many
of us are cut off at 26 wks. No tier 1, 2 -nothing.
The longer you are unemployed, the more you are effected by those factors.
Notable quotes:
"... The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they suffer few, and minor, ill effects. ..."
"... Worries about income, domestic problems, whatever, the list is as long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation over time. The chemistry of stress is complex, but it can be rough on the hormonal system. ..."
"... Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress. Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those affected, these are by now, at this stage, real crises. ..."
"... Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these conditions. Even that comes at a cost, and although under control, the stress remains a problem. ..."
"... One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress over the last decade. This is a common situation, and help is available. ..."
"... Depression is universally hated by anyone who's ever had it. ..."
"... Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either. ..."
"... You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic exercises, you're talking about 30-45 minutes a day. It's not hard. ..."
It's almost impossible to describe the various psychological impacts, because there are so many. There are sometimes serious consequences,
including suicide, and, some would say worse, chronic depression.
There's not really a single cause and effect. It's a compound effect, and unemployment, by adding stress, affects people, often
badly.
The world doesn't need any more untrained psychologists, and we're not pretending to give medical advice. That's for professionals.
Everybody is different, and their problems are different. What we can do is give you an outline of the common problems, and what
you can do about them.
The good news is that only a relatively small number of people are seriously affected by the stress of unemployment to the extent
they need medical assistance. Most people don't get to the serious levels of stress, and much as they loathe being unemployed, they
suffer few, and minor, ill effects.
For others, there are a series of issues, and the big three are:
Stress
Anger, and other negative emotions
Depression
Stress
Stress is Stage One. It's a natural result of the situation. Worries about income, domestic problems, whatever, the list is as
long as humanity. The result of stress is a strain on the nervous system, and these create the physical effects of the situation
over time. The chemistry of stress is complex, but it can be rough on the hormonal system.
Over an extended period, the body's natural hormonal balances are affected, and this can lead to problems. These are actually
physical issues, but the effects are mental, and the first obvious effects are, naturally, emotional.
Anger, and other negative emotions
Not at all surprisingly, people under stress experience strong emotions. It's a perfectly natural response to what can be quite
intolerable emotional strains. It's fair to say that even normal situations are felt much more severely by people already under stress.
Things that wouldn't normally even be issues become problems, and problems become serious problems. Relationships can suffer badly in these circumstances, and that, inevitably, produces further crises. Unfortunately for those
affected, these are by now, at this stage, real crises.
If the actual situation was already bad, this mental state makes it a lot worse. Constant aggravation doesn't help people to keep
a sense of perspective. Clear thinking isn't easy when under constant stress.
Some people are stubborn enough and tough enough mentally to control their emotions ruthlessly, and they do better under these
conditions. Even that comes at a cost, and although under control, the stress remains a problem.
One of the reasons anger management is now a growth industry is because of the growing need for assistance with severe stress
over the last decade. This is a common situation, and help is available.
If you have reservations about seeking help, bear in mind it can't possibly be any worse than the problem.
Depression
Depression is universally hated by anyone who's ever had it. This is the next stage, and it's caused by hormonal imbalances which
affect serotonin. It's actually a physical problem, but it has mental effects which are sometimes devastating, and potentially life
threatening.
The common symptoms are:
Difficulty in focusing mentally, thoughts all over the place in no logical order
Fits of crying for no known reason
Illogical, or irrational patterns of thought and behavior
Sadness
Suicidal thinking
It's a disgusting experience. No level of obscenity could possibly describe it. Depression is misery on a level people wouldn't
conceive in a nightmare. At this stage the patient needs help, and getting it is actually relatively easy. It's convincing the person they need to do something about it that's difficult. Again, the mental state is working against the person. Even admitting there's a problem is hard for many people in this condition.
Generally speaking, a person who is trusted is the best person to tell anyone experiencing the onset of depression to seek help. Important: If you're experiencing any of those symptoms:
Get on the phone and make an appointment to see your doctor. It takes half an hour for a diagnosis, and you can be on your
way home with a cure in an hour. You don't have to suffer. The sooner you start to get yourself out of depression, the better.
Avoid any antidepressants with the so-called withdrawal side effects. They're not too popular with patients, and are under
some scrutiny. The normal antidepressants work well enough for most people.
Very important: Do not, under any circumstances, try to use drugs or alcohol as a quick fix. They make it worse, over time, because they actually add stress. Some drugs can make things a lot worse, instantly, too, particularly
the modern made-in-a-bathtub variety. They'll also destroy your liver, which doesn't help much, either.
Alcohol, in particular, makes depression much worse. Alcohol is a depressant, itself, and it's also a nasty chemical mix with
all those stress hormones.
If you've ever had alcohol problems, or seen someone with alcohol wrecking their lives, depression makes things about a million
times worse.
Just don't do it. Steer clear of any so-called stimulants, because they don't mix with antidepressants, either.
Unemployment and staying healthy
The above is what you need to know about the risks of unemployment to your health and mental well being.
These situations are avoidable.
Your best defense against the mental stresses and strains of unemployment, and their related problems is staying healthy.
We can promise you that is nothing less than the truth. The healthier you are, the better your defenses against stress, and the
more strength you have to cope with situations.
Basic health is actually pretty easy to achieve:
Diet
Eat real food, not junk, and make sure you're getting enough food. Your body can't work with resources it doesn't have. Good food
is a real asset, and you'll find you don't get tired as easily. You need the energy reserves.
Give yourself a good selection of food that you like, that's also worth eating.
The good news is that plain food is also reasonably cheap, and you can eat as much as you need. Basic meals are easy enough to
prepare, and as long as you're getting all the protein veg and minerals you need, you're pretty much covered.
You can also use a multivitamin cap, or broad spectrum supplements, to make sure you're getting all your trace elements. Also
make sure you're getting the benefits of your food by taking acidophilus or eating yogurt regularly.
Exercise
You don't have to live in a gym to get enough exercise for basic fitness. A few laps of the pool, a good walk, some basic aerobic
exercises, you're talking about 30-45 minutes a day. It's not hard.
Don't just sit and suffer
If anything's wrong, check it out when it starts, not six months later. Most medical conditions become serious when they're allowed
to get worse.
For unemployed people the added risk is also that they may prevent you getting that job, or going for interviews. If something's
causing you problems, get rid of it.
Nobody who's been through the blender of unemployment thinks it's fun.
Anyone who's really done it tough will tell you one thing:
Don't be a victim. Beat the problem, and you'll really appreciate the feeling.
"... By Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity at the University of Newcastle, NSW, Australia. Originally published at billy blog ..."
"... The overwhelming importance of having a job for happiness is evident throughout the analysis, and holds across all of the world's regions. ..."
"... The pattern of human concerns ..."
"... The pattern of human concerns ..."
"... Journal of Happiness Studies ..."
"... The results show the differences between having a job and being unemployed are "very large indeed" on the three well-being measures (life evaluation, positive and negative affective states). ..."
"... Psychological Bulletin ..."
"... 1. "unemployment tends to make people more emotionally unstable than they were previous to unemployment". ..."
"... 2. The unemployed experience feelings of "personal threat"; "fear"; "sense of proportion is shattered"; loss of "common sense of values"; "prestige lost in own eyes and as he imagines, in the eyes of his fellow men"; "feelings of inferiority"; loss of "self-confidence" and a general loss of "morale". ..."
"... in the light of the structure of our society where the job one holds is the prime indicator of status and prestige. ..."
"... Psychological Bulletin ..."
"... Related studies found that the "unemployed become so apathetic that they rarely read anything". Other activities, such as attending movies etc were seen as being motivated by the need to "kill time" – "a minimal indication of the increased desire for such attendance". ..."
"... In spite of hopeless attempts the unemployed continually look for work, often going back again and again to their last place of work. Other writers reiterate this point. ..."
"... The non-pecuniary effects of not having a job are significant in terms of lost status, social alienation, abandonment of daily structure etc, and that has not changed much over history. ..."
"... I think what is missing from this article is the term "identity." If you meet new people, often the conversation starts with what you do for a living. Your identity, in part, is what you do. You can call yourself a plumber, a writer, a banker, a consultant, a reporter but the point is this is part of your identity. When you lose your job long term, your identity here loses one of its main anchor points. ..."
"... This is a crucial point that UBI advocates often ignore. There is a deeply entrenched cultural bias towards associating our work status with our general status and prestige and feelings of these standings. ..."
"... When unemployed, the stress of worry about money may suppress the creative juices. Speaking from experience. People may well 'keep looking for jobs' because they know ultimately they need a job with steady income. The great experience of some freelancers notwithstanding, not all are cut out for it. ..."
"... When considering the world's population as a whole, people with a job evaluate the quality of their lives much more favorably than those who are unemployed. ..."
"... Data like that provided by Mitchell is important to demolishing the horrid "economic anxiety" frame much beloved by liberals, especially wonkish Democrats.* It's not (a) just feelings , to be solved by scented candles or training (the liberal version of rugged individualism) and (b) the effects are real and measurable. It's not surprising, when you think about it, that the working class is about work . ..."
Posted on
November 21, 2017 by Yves Smith Yves here. Reader
UserFriendly sent this post with the message, "I can confirm this." I can too. And before you
try to attribute our reactions to being Americans, note that the study very clearly points out
that its finding have been confirmed in "all of the world's regions".
By Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment
and Equity at the University of Newcastle, NSW, Australia. Originally published at billy blog
Here is a summary of another interesting study I read last week (published March 30, 2017)
– Happiness at Work
– from academic researchers Jan‐Emmanuel De Neve and George Ward. It explores the
relationship between happiness and labour force status, including whether an individual is
employed or not and the types of jobs they are doing. The results reinforce a long literature,
which emphatically concludes that people are devastated when they lose their jobs and do not
adapt to unemployment as its duration increases. The unemployed are miserable and remain so
even as they become entrenched in long-term unemployment. Further, they do not seem to sense
(or exploit) a freedom to release some inner sense of creativity and purpose. The overwhelming
proportion continually seek work – and relate their social status and life happiness to
gaining a job, rather than living without a job on income support. The overwhelming conclusion
is that "work makes up such an important part of our lives" and that result is robust across
different countries and cultures. Being employed leads to much higher evaluations of the
quality of life relative to being unemployed. And, nothing much has changed in this regard over
the last 80 or so years. These results were well-known in the 1930s, for example. They have a
strong bearing on the debate between income guarantees versus employment guarantees. The UBI
proponents have produced no robust literature to refute these long-held findings.
While the 'Happiness Study' notes that "the relationship between happiness and employment is
a complex and dynamic interaction that runs in both directions" the authors are
unequivocal:
The overwhelming importance of having a job for happiness is evident throughout the
analysis, and holds across all of the world's regions. When considering the world's
population as a whole, people with a job evaluate the quality of their lives much more
favorably than those who are unemployed. The importance of having a job extends far beyond
the salary attached to it, with non-pecuniary aspects of employment such as social status,
social relations, daily structure, and goals all exerting a strong influence on people's
happiness.
And, the inverse:
The importance of employment for people's subjective wellbeing shines a spotlight on the
misery and unhappiness associated with being unemployed.
There is a burgeoning literature on 'happiness', which the authors aim to contribute to.
They define happiness as "subjective well-being", which is "measured along multiple
dimensions":
life evaluation (by way of the Cantril "ladder of life"), positive and negative affect to
measure respondents' experienced positive and negative wellbeing, as well as the more
domain-specific items of job satisfaction and employee engagement. We find that these diverse
measures of subjective wellbeing correlate strongly with each other
Cantril's 'Ladder of Life Scale' (or "Cantril Ladder") is used by polling organisations to
assess well-being. It was developed by social researcher Hadley Cantril (1965) and documented
in his book The pattern of human concerns .
You can learn more about the use of the 'Cantril Ladder' HERE
.
As we read, the "Cantril Self-Anchoring Scale consists of the following":
Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top. The
top of the ladder represents the best possible life for you and the bottom of the ladder
represents the worst possible life for you. On which step of the ladder would you say you
personally feel you stand at this time? (ladder-present) On which step do you think you
will stand about five years from now? (ladder-future)
[Reference: Cantril, H. (1965) The pattern of human concerns , New Brunswick,
Rutgers University Press.]
[Reference: Bjørnskov, C. (2010) 'How Comparable are the Gallup World Poll Life
Satisfaction Data?', Journal of Happiness Studies , 11 (1), 41-60.]
The Cantril scale is usually reported as values between 0 and 10.
The authors in the happiness study use poll data from 150 nations which they say "is
representative of 98% of the world's population". This survey data is available on a mostly
annual basis since 2006.
The following graph (Figure 1 from the Study) shows "the self-reported wellbeing of
individuals around the world according to whether or not they are employed."
The "bars measure the subjective wellbeing of individuals of working age" by employment
status .
The results show the differences between having a job and being unemployed are "very large
indeed" on the three well-being measures (life evaluation, positive and negative affective
states).
People employed "evaluate the quality of their lives around 0.6 points higher on average as
compared to the unemployed on a scale from 0 to 10."
The authors also conduct more sophisticated (and searching) statistical analysis
(multivariate regression) which control for a range of characteristics (gender, age, education,
marital status, composition of household) as well as to "account for the many political,
economic, and cultural differences between countries as well as year-to-year variation".
The conclusion they reach is simple:
the unemployed evaluate the overall state of their lives less highly on the Cantril ladder
and experience more negative emotions in their day-to-day lives as well as fewer positive
ones. These are among the most widely accepted and replicated findings in the science of
happiness Here, income is being held constant along with a number of other relevant
covariates, showing that these unemployment effects go well beyond the income loss associated
with losing one's job.
These results are not surprising. The earliest study of this sort of outcome was from the famous study published by Philip
Eisenberg and Paul Lazersfeld in 1938. [Reference: Eisenberg, P. and Lazarsfeld, P. (1938) 'The psychological effects of
unemployment', Psychological Bulletin , 35(6), 358-390.]
They explore four dimensions of unemployment:
I. The Effects of Unemployment on Personality.
II. Socio-Political Attitudes Affected by Unemployment.
III. Differing Attitudes Produced by Unemployment and Related Factors.
IV. The Effects of Unemployment on Children and Youth.
On the first dimension, they conclude that:
1. "unemployment tends to make people more emotionally unstable than they were previous to
unemployment".
2. The unemployed experience feelings of "personal threat"; "fear"; "sense of proportion is
shattered"; loss of "common sense of values"; "prestige lost in own eyes and as he imagines, in
the eyes of his fellow men"; "feelings of inferiority"; loss of "self-confidence" and a general
loss of "morale".
Devastation, in other words. They were not surprised because they note that:
in the light of the structure of our society where the job one holds is the prime
indicator of status and prestige.
This is a crucial point that UBI advocates often ignore. There is a deeply entrenched
cultural bias towards associating our work status with our general status and prestige and
feelings of these standings. That hasn't changed since Eisenberg and Lazersfeld wrote up the findings of their study in
1938.
It might change over time but that will take a long process of re-education and cultural
shift. Trying to dump a set of new cultural values that only a small minority might currently
hold to onto a society that clearly still values work is only going to create major social
tensions. Eisenberg and Lazarsfeld also considered an earlier 1937 study by Cantril who explored
whether "the unemployed tend to evolve more imaginative schemes than the employed".
[Reference: Cantril, H. (1934) 'The Social Psychology of Everyday Life', Psychological
Bulletin , 31, 297-330.]
The proposition was (is) that once unemployed, do people then explore new options that were
not possible while working, which deliver them with the satisfaction that they lose when they
become jobless. The specific question asked in the research was: "Have there been any changes of interests
and habits among the unemployed?" Related studies found that the "unemployed become so apathetic that they rarely read
anything". Other activities, such as attending movies etc were seen as being motivated by the
need to "kill time" – "a minimal indication of the increased desire for such
attendance".
On the third dimension, Eisenberg and Lazersfeld examine the questions – "Are there
unemployed who don't want to work? Is the relief situation likely to increase this number?",
which are still a central issue today – the bludger being subsidized by income
support.
They concluded that:
the number is few. In spite of hopeless attempts the unemployed continually look for work,
often going back again and again to their last place of work. Other writers reiterate this
point.
So for decades, researchers in this area, as opposed to bloggers who wax lyrical on their
own opinions, have known that the importance of work in our lives goes well beyond the income
we earn. The non-pecuniary effects of not having a job are significant in terms of lost status,
social alienation, abandonment of daily structure etc, and that has not changed much over
history. The happiness paper did explore "how short-lived is the misery associated with being out of
work" in the current cultural settings.
The proposition examined was that:
If the pain is only fleeting and people quickly get used to being unemployed, then we
might see joblessness as less of a key public policy priority in terms of happiness.
They conclude that:
a number of studies have demonstrated that people do not adapt much, if at all, to being
unemployed there is a large initial shock to becoming unemployed, and then as people stay
unemployed over time their levels of life satisfaction remain low . several studies have
shown that even once a person becomes re-employed, the prior experience of unemployment
leaves a mark on his or her happiness.
So there is no sudden or even medium-term realisation that being jobless endows the
individual with a new sense of freedom to become their creative selves, freed from the yoke of
work. To bloom into musicians, artists, or whatever.
The reality is that there is an on-going malaise – a deeply entrenched sense of
failure is overwhelming, which stifles happiness and creativity, even after the individual is
able to return to work.
This negativity, borne heavily by the individual, however, also impacts on society in
general.
The paper recognises that:
A further canonical finding in the literature on unemployment and subjective wellbeing is
that there are so-called "spillover" effects.
High levels of unemployment "increase fear and heighten the sense of job insecurity". Who
will lose their job next type questions?
The researchers found in their data that the higher is the unemployment rate the greater the
anxiety among those who remain employed.
Conclusion
The overwhelming conclusion is that "work makes up such an important part of our lives" and
that result is robust across different countries and cultures.
Being employed leads to much higher evaluations of the quality of life relative to being
unemployed.
The unemployed are miserable and remain so even as they become entrenched in long-term
unemployment. They do not seem to sense (or exploit) a freedom to release some inner sense of
creativity and purpose.
The overwhelming proportion continually seek work – and relate their social status and
life happiness to gaining a job, rather than living without a job on income support.
Modern Monetary Theory (MMT) allows us to understand that it is the government that chooses
the unemployment rate – it is a political choice.
For currency-issuing governments it means their deficits are too low relative to the
spending and saving decisions of the non-government sector.
For Eurozone-type nations, it means that in surrendering their currencies and adopting a
foreign currency, they are unable to guarantee sufficient work in the face of negative shifts
in non-government spending. Again, a political choice.
The Job
Guarantee can be used as a vehicle to not only ensure their are sufficient jobs available
at all times but also to start a process of wiping out the worst jobs in the non-government
sector.
That can be done by using the JG wage to ensure low-paid private employers have to
restructure their workplaces and pay higher wages and achieve higher productivity in order to
attract labour from the Job Guarantee pool.
The Series So Far
This is a further part of a series I am writing as background to my next book with Joan
Muysken analysing the Future of Work . More instalments will come as the research
process unfolds.
The blogs in these series should be considered working notes rather than self-contained
topics. Ultimately, they will be edited into the final manuscript of my next book due in 2018.
The book will likely be published by Edward Elgar (UK).
Perhaps I'm utterly depressed but I haven't had a job job for over 5 years. Plenty of
work, however, more than I can handle and it requires priorisation. But I am deliberately not part of the organized herd. I stay away from big cities –
it's scary how managed the herd is in large groups – and I suppose that unemployment
for a herd animal is rather distressing as it is effectively being kicked out of the
herd.
Anyway my advice, worth what you pay for it but let he who has ears, etc. – is to go
local, very local, grow your own food, be part of a community, manage your own work, and
renounce the energy feast herd dynamics. "Unemployment", like "recession", is a mechanism of
control. Not very practical advice for most, I realize, trapped in the herd as they are in
car payments and mortgages, but perhaps aspirational?
I think what is missing from this article is the term "identity." If you meet new people,
often the conversation starts with what you do for a living. Your identity, in part, is what
you do. You can call yourself a plumber, a writer, a banker, a consultant, a reporter but the
point is this is part of your identity. When you lose your job long term, your identity here
loses one of its main anchor points.
Worse, there is a deliberate stigma attached with being long term unemployed. In that article
you have seen the word bludger being used. In parts of the US I have read of the shame of
'living off the county'. And yes, I have been there, seen that, and got the t-shirt. It's
going to be interesting as mechanization and computers turn large portions of the population
from workers to 'gig' workers. Expect mass demoralization.
yes the lives many of us have lived, no longer exist though we appear not notice, as we
"can" live in many of same "ways" ..rather well known psychologist defined some 40 years ago, best to "drop through
cracks"
Well, you also lose money, maybe you become homeless etc. as you have nowhere else to turn
(if there are kids involved to support it gets even scarier though there are some programs).
Or maybe you become dependent on another person(s) to support you which is of course
degrading as you know you must rely on them to live, whether it's a spouse or lover when you
want to work and bring in money, or mom and dads basement, or the kindest friend ever who
lets you sleep on their couch. I mean these are the things that really matter.
Privileged people whose main worry in unemployment would be losing identity, wow out of
touch much? Who cares about some identity for parties, but the ability to have a stable
decent life (gig work hardly counts) is what is needed.
I normally wouldn't comment like this, but you have brought up some extremely important
points about identity that I would like to address.
Recently I had the most intense mushroom experience of my entire life–so intense
that my identity had been completely stripped and I was left in a formless state, at the
level of seeing my bare, unvarnished animal neural circuitry in operation. Suddenly with a
flash of inspiration I realized that the identity of everyone, all of us, is inextricably
tied up in what we do and what we do for other people.
Following from that, I understood that if we passively rely on others for survival,
whether it be relying on friends, family, or government, then we do not have an identity or
reason for existing. And the inner self, the animal core of who we are, will realise this
lack of identity (even if the concious mind denies it), and will continually generate
feelings of profound depression and intense nihilism that will inevitably destroy us if the
root cause is not addressed.
Before this experience I was somewhat ambivalent about my politics, but immediately after
I knew that the political right was correct on everything important, from attitudes on sex to
economic philosophy. People need a core of cultural stability and hard work to grow and
become actualized. The alternative is rudderless dissatisfaction and envy that leads
nowhere.
On the topic of giving "out of kindnes and goodwill", giving without demanding anything in
return is a form of abuse, as it deprives those who receive our feel-good generosity the
motivation to form a coherent identity. If the parents of a basement-dweller were truly good
people, instead of supporting said dweller they'd drag her out by the ear and make her grow
food in the yard or some such. Likewise, those who have supported you without also giving
concrete demands and expecations in return have been unkind, and for your own good I hope
that you will immediately remove yourself from their support. On the other hand, if you have
been thoughtlessly giving because it warms the cockles of your heart, then stop it now. You
are ruining other people this way, and if your voting habits are informed by this kind of
malevolence I'd encourage you to change those as well.
Anyway the original poster is right about everything. Working and having a purpose in life
is an entirely different animal from making money and being "successful" in the
government-sponsored commercial economy. Society and government deliberately try to conflate
the two for various reasons, primarily graft of labor and genius, but that is only a
deliberate mis-framing that needlessly harms people when the mainstream economic system is in
catastrophic decline, as ours is today. You should try to clear up this misconception within
yourself as a way of getting better.
Well, I hope this message can give you a few different thoughts and help you find your way
out of the existential angst you're caught in. Don't wallow in helplessness. Think of
something useful to do, anything, whether it earns you money or not, and go out and start
doing it. You'll be surprised at how much better you feel about yourself in no time.
The problem is you said – I – had an extreme experience [burning bush], the
truth was reviled to – I – and I alone during this extreme chemically altered
state. Which by the way just happens to conform to a heap of environmental biases I
collected. This is why sound methodology demands peer review. disheveled some people think Mister Toads Wild ride at Disneyland on psychotropics is an
excellent adventure too.
I think your observation about the importance of work to identity is most perceptive. This
post makes too little distinction between work and a job and glosses over the place of work
in defining who we are to ourselves and to others. I recall the scene in the movie "About a
Boy" when the hero meets someone he cares about and she asks him what he does for a
living.
I believe there's another aspect of work -- related to identity -- missing in the analysis
of this post. Work can offer a sense of mission -- of acting as part of an effort toward a
larger goal no individual could achieve alone. However you may regard the value in putting
man on the moon there is no mistaking the sense of mission deeply felt by the engineers and
technicians working on the project. What jobs today can claim service to a mission someone
might value?
Agreed on your points. Wage slavery is nothing to aspire to. Self-determination within a
context of an interdependent community is a much better way to live. We do our thing in the city, however.
Finding that "interdependent community" is the hard part. My experience has been that this
endeavour is almost chance based; Serendipity if you will.
Here Down South, the churches still seem to have a stranglehold on small and mid scale social
organization. One of the big effects of 'churching' is the requirement that the individual
gave up personal critical thinking. Thus, the status quo is reinforced. One big happy 'Holy
Circlejerk.'
This is a crucial point that UBI advocates often ignore. There is a deeply entrenched
cultural bias towards associating our work status with our general status and prestige and
feelings of these standings.
That hasn't changed since Eisenberg and Lazersfeld wrote up the findings of their study
in 1938.
It might change over time but that will take a long process of re-education and cultural
shift. Trying to dump a set of new cultural values that only a small minority might
currently hold to onto a society that clearly still values work is only going to create
major social tensions.
I would agree about the entenched cultural norms, etc. But not the pessimism and timeline
for change. An individual can communicate a complex idea to millions in seconds, things move
fast these days.
For me, it seems that what we (we being UBI/radical change proponents) are lacking is a
compelling easily accessible story. Not just regarding UBI (as that is but one part of the
trully revolutionary transformations that must occur) but encompassing everything.
We have countless think pieces, bits of academic writing, books, etc that focus on
individual pieces and changes in isolation. But we've largely abandoned the all-encompassing
narrative, which at their heart is precisely what religion offers and why it can be so
seductive, successful, and resilient for so long.
The status quo has this type of story, it's not all that compelling but given the fact
that it is the status quo and has inertia and tradition on its side (along with the news
media, political, entertainment, etc) it doesn't have to be.
We need to abandon the single narrow issue activism that has become so prominent over the
years and get back to engaging with issues as unseparable and intimately interconnected.
Tinkering around the edges will do nothing, a new political religion is what is
required.
Sorry, I disagree vehemently. Deeply held cultural attitudes are very slow to change and
the study found that work being critical to happiness examined a large number of
societies.
Look at feminism. I was a half-generation after the time when women were starting to get a
shot at real jobs. IIRC, the first class that accepted women at Harvard Law School was in the
1950 and at Harvard Business School, 1965. And the number of first attendees was puny. The
1965 class at HBS had 10 8 women out of a graduating class of over 800; my class in 1981 had
only 11% women.
In the 1980s, you saw a shift from the belief that women could do what men could do to
promotion of the idea that women could/should be feminine as well as successful. This looked
like seriously mixed messages, in that IMHO the earlier tendency to de-emphasize gender roles
in the workplace looked like a positive development.
Women make less than 80% of what men do in the US. Even female doctors in the same
specialities make 80% of their male peers.
The Speenhamland in the UK had what amounted to an income guarantee from the 1790s to
1832. Most people didn't want to be on it and preferred to work. Two generations and being on
the support of local governments was still seen as carrying a stigma.
More generally, social animals have strongly ingrained tendencies to resent situations
they see as unfair. Having someone who is capable of working not work elicits resentment from
many, which is why most people don't want to be in that position. You aren't going to change
that.
And people need a sense of purpose. There are tons of cases of rich heirs falling into
drug addiction or alcoholism and despair because they have no sense of purpose in life. Work
provides that, even if it's mundane work to support a family. That is one of the great
dissservices the Democrats have done to the citizenry at large: sneering at ordinary work
when blue-collar men were the anchors of families and able to take pride in that.
Regarding the large number of societies, we often like to think we're more different than
we actually are focusing on a few glaringly obvious differences and generalizing from there.
Even going back a few hundred years when ideas travelled slower we were still (especially the
"west" though the "east" wasn't all that much more different either) quite similar. So I'm
less inclined to see the large number of societies as evidence.
Generally on societal changes and movements: The issue here is that the leadership has not
changed, they may soften some edges here or there (only to resharpen them again when we're
looking elsewhere) but their underlying ideologies are largely unchanged. A good mass of any
population will go along to survive, whether they agree or not (and we find increasing
evidence that many do not agree, though certainly that they do not agree on a single
alternative).
It may be impossible to implement such changes in who controls the levers of power in a
democratic fashion but it also may be immoral not implement such changes. Of course this is
also clearly a similar path to that walked by many a demonized (in most cases rightfully so)
dictator and despot. 'Tread carefully' are wise words to keep in mind.
Today we have a situation which reflects your example re: social animals and resentment of
unfairness: the elite (who falls into this category is of course debatable, some individuals
moreso than others). But they have intelligently, for their benefit, redirected that
resentment towards those that have little. Is there really any logical connection between not
engaging in wage labor (note: NOT equivalent to not working) and unfairness? Or is it a myth
crafted by those who currently benefit the most?
That resentment is also precisely why it is key that a Basic income be universal with no
means testing, everyone gets the same.
I think we should not extrapolate too much from the relatively small segment of the
population falling into the the inherited money category. Correlation is not causation and
all that.
It also seems that so often individuals jump to the hollywood crafted image of the
layabout stoner sitting on the couch giggling at cartoons (or something similarly negative)
when the concept of less wage labor is brought up. A reduction of wage labor does not equate
to lack of work being done, it simply means doing much of that work for different reasons and
rewards and incentives.
As I said in the Links thread today, we produce too much, we consume too much, we grow too
much. More wage labor overall as a requirement for survival is certainly not the solution to
any real problem that we face, its a massively inefficient use of resources and a massive
strain on the ecosystems.
I am really gobsmacked at the sense of entitlement on display here. Why are people
entitled to an income with no work? Being an adult means toil: cleaning up after yourself,
cleaning up after your kids if you have them, if you are subsistence farmer, tending your
crops and livestock, if you are a modern society denizen, paying your bills and your taxes on
time. The idea that people are entitled to a life of leisure is bollocks. Yet you promote
that.
Society means we have obligations to each other. That means work. In rejecting work you
reject society.
And the touting of "creativity" is a top 10% trope that Thomas Frank called out in Listen,
Liberal. It's a way of devaluing what the bottom 90% do.
My argument with the article is that, to me, it smacks of Taylorism. A follow-on study
would analyze how many hours a laborer must work before the acquired sense of purpose and
dignity and associated happiness began to decline. Would it be 30 hours a week of
backbreaking labor before dignity found itself eroded? 40? 50? 60? When does the worker
break? Just how far can we push the mule before it collapses?
The author alludes to this: "The overwhelming proportion relate their social status and
life happiness to gaining a job"
Work equals happiness. Got it.
But, as a former robotics instructor, and as one who watches the industry (and former
students), I see an automated future as damn near inevitable. Massive job displacement is
coming, life as a minimum wage burger flipper will cease, with no future employment prospects
short of government intervention (WPA and CCC for all, I say). I'm not a Luddite, obviously,
but there are going to be a lot of people, billions, worldwide, with no prospect of
employment. Saying, "You're lazy and entitled" is a bit presumptuous, Yves. Not everyone has
your ability, not everyone has my ability. When the burger flipping jobs are gone, where do
they go? When roombas mop the floors, where do the floor moppers go?
We could use a new Civilian Conservation Corps and and a Works Progress Administration.
There's lots of work that needs doing that isn't getting done by private corporations.
The outrage at non-work wealth and income would be more convincing if it were aimed also
at owners of capital. About 30% of national income is passive -- interest, rents, dividends.
Why are the owners of capital "entitled to an income with no work?" It's all about the
morality that underlies the returns to capital while sugaring over a devaluation of labor. As
a moral issue, everyone should share the returns on capital or we should tax away the
interest, rents, and dividends. If it's an economic issue, berating people for their beliefs
isn't a reason.
The overwhelming majority do work. The top 0.1% is almost entirely private equity managers
who are able to classify labor income as capital gains through the carried interest loophole.
Go look at the Forbes 400.
The 1% are mainly CEOs, plus elite professionals, like partners at top law and consulting
firms and specialty surgeons (heart, brain, oncology). The CEOs similarly should be seen as
getting labor income but have a lot of stock incentive pay (that is how they get seriously
rich) which again gets capital gains treatment.
You are mistaking clever taking advantage of the tax code for where the income actually
comes from. Even the kids of rich people are under pressure to act like entrepreneurs from
their families and peers. Look at Paris Hilton and Ivanka as examples. They both could have
sat back and enjoyed their inheritance, but both went and launched businesses. I'm not saying
the kids of the rich succeed, or would have succeed to the extent they do without parental
string-pulling, but the point is very few hand their fortune over to a money manager and go
sailing or play the cello.
What's your take on Rutger Bergman's ted talk? i think most jobs aren't real jobs at all,
like marketing and ceo's. why can't we do 20 hour work weeks so we don't have huge amounts of unemployment? Note, I was "unemployed" for years since "markets" decide not to fund science in the US.
Yay Germany At least I was fortunate enough to not be forced to work at Walmart or McDonalds
like the majority of people with absolutely no life choices. Ah the sweet coercion of
capitalism.
Your hopes for a UBI are undone by some of the real world observations I've made over many
years, with regard to how a guaranteed income increase, of any measure, for a whole
population of an area, affects prices. Shorter: income going up means prices are raised by
merchants to capture the new income.
Examples: A single industry town raises wages for all employees by 2% for the new calendar
year. Within the first 2 weeks of the new year, all stores and restaurants and service
providers in the town raise their prices by 2%. This happens every year there is a general
wage increase.
Example: Medicare part D passes and within 2 years, Pharma now having new captive
customers whose insurance will pay for drugs, raise prices higher and higher, even on generic
drugs.
A more recent example: ACA passes with no drug price ceilings. Again, as with the passage
of Medicare part D, Pharma raises drug prices to unheard of levels, even older and cheap but
life saving drugs, in the knowledge that a new, large group will have insurance that will pay
for the drugs – a new source of money.
Your assumption that any UBI would not be instantly captured by raised prices is naive, at
best. It's also naive to assume companies would continue to pay wages at the same level to
people still employed, instead of reducing wages and letting UBI fill in the rest. Some
corporations already underpay their workers, then encourage the workers to apply for food
stamps and other public supports to make up for the reduced wage.
The point of the paper is the importance of paid employment to a person's sense of well
being. I agree with the paper.
For the vast majority, a UBI would be income-neutral – it would have to be, to avoid
massive inflation. So people would receive a UBI, but pay more tax to compensate. The effect
on prices would be zero.
The advantage of a UBI is mostly felt at the lower end, where insecure/seasonal work does
now pay. At the moment, a person who went from farm labourer to Christmas work to summer
resort work in the UK would certainly be working hard, but also relentlessly hounded by the
DWP over universal credit. A UBI would make this sort of lifestyle possible.
Davidab,
Good for you, but your perspicacity is not scalable. People are social animals and your attitude toward "the herd", at least as expressed here,
is that of a predator, even if your taste doesn't run toward predation. Social solutions will necessarily be scalable or they won't be solutions for long.
> the organized herd a herd animal trapped in the herd
I don't think throwing 80% to 90% of the population into the "prey" bucket is especially
perspicacious politically (except, of course, for predators or parasites). I also don't think it's especially perspicacious morally. You write:
Not very practical advice for most, I realize, trapped in the herd as they are in car
payments and mortgages, but perhaps aspirational?
Let me translate that: "Trapped in the herd as many are to support spouses and children."
In other words, taking the cares of the world on themselves in order to care for others.
Unemployed stay at home dad here. My children are now old enough to no longer need a stay
at home dad. Things I have done: picked up two musical instruments and last year dug a
natural swimming pond by hand. Further, one would need to refute all the increased happiness
in retirement (NBER). Why social security but not UBI? I get being part of the precariat is
painful and this is a reality for most the unemployed no matter where you live in the world.
A UBI is unworkable because it will never be large enough to make people's lives
unprecarious. Having said that, I am almost positive if you gave every unemployed person 24 k
a year and health benefits, there would be a mass of non working happy creative folks.
UBI seems to me to encourage non-virtuous behavior – sloth, irresponsibility,
fecklessness, and spendthriftness. I like the Finnish model – unemployment insurance is
not limited – except if you refuse work provided by the local job center. Lots of work
is not being done all over America – we could guarantee honest work to all with some
imagination. Start with not spraying roundup and rather using human labor to control weeds
and invasive species.
I do agree that universal health insurance is necessary and sadly Obamacare is not
that.
The crux of this problem is the definition used for "non-virtuous behaviour."
A new CCC is a good place to start though. (Your Tax Dollars At Work! [For some definition of
tax dollars.])
As for BJ above, I would suppose that child rearing was his "employment" for years. good so
far, but his follow-up is untypical. The 'Empty Nester' mother is a well known meme.
Spendthriftness on 24K a year? Seriously? If we are disgorging unprofessional opinions, I will add my own: sloth and
irresponsibility are more signs of depression rather than freedom from having to work. In
fact, I believe (and I think much of the stuff here) supports the idea that people want to be
seen as useful in some way. Doesn't include me! :) .. unfortunately, I have the charmingly named "dependents" so there
you have it.
I lived 6 years as a grad student on 24k a year and would say it was easy. Only thing I
would have to had worried about was awful health insurance. A two household each with 24k
would be even easier, especially if you could do it in a low cost area. So I am not sure what
you mean by spendthrift. But again it will never happen, so we will be stuck with what we
have or most likely an even more sinister system. I guess I am advocating for a JG with
unlimited number of home makers per household.
except if you refuse work provided by the local job center
And who's to say that the local "job center" has work that would be appropriate for every
person's specific talents and interests? This is no better than saying that you should be
willing to go work for some minimum-wage retail job with unpredictable scheduling and other
forms of employer abuses after you lose a high-paying job requiring special talents. I have
to call bullshit on this model. I went through a two-year stretch if unemployment in no small
part because the vast majority of the available jobs for my skill set were associated with
the MIC, surveillance state or the parasitic FIRE sector. I was able to do this because I had
saved up enough FY money and had no debts or family to support.
I can also attest to the negative aspects of unemployment that the post describes. Its all
true and I can't really say that I'e recovered even now, 2.5 years after finding another
suitable job.
The job center in the neighbouring Sweden had the same function. Had is the important
word. My guess is that the last time someone lost their unemployment insurance payout due to
not accepting a job was in the early 1980s. Prior to that companies might, maybe, possibly
have considered hiring someone assigned to them – full employment forced companies to
accept what was offered. Companies did not like the situation and the situation has since
changed.
Now, when full employment is a thing of the past, the way to lose unemployment insurance
payouts is by not applying to enough jobs. An easily gamed system by people not wanting to
work: just apply to completely unsuitable positions and the number of applications will be
high. Many companies are therefore overwhelmed by applications and are therefore often forced
to hire more people in HR to filter out the unsuitable candidates.
People in HR tend not to know much about qualifications and or personalities for the job so
they tend to filter out too many. We're all familiar with the skills-shortage .
Next step of this is that the companies who do want to hire have to use recruitment agencies.
Basically outsourcing the HR to another company whose people are working on commission.
Recruiters sometimes know how to find 'talent', often they are the same kind of people with
the same skills and backgrounds as people working in HR.
To even get to the hiring manager a candidate has to go through two almost identical and
often meaningless interviews. Recruiter and then HR. Good for the GDP I suppose, not sure if
it is good for anything else.
But back on topic again, there is a second way of losing unemployment insurance payout:
Time. Once the period covered has passed there is no more payouts of insurance. After that it
it is time to live on savings, then sell all assets, and then once that is done finally go to
the welfare office and prove that savings are gone and all assets are sold and maybe welfare
might be paid out. People on welfare in Sweden are poor and the indignities they are being
put through are many. Forget about hobbies and forget about volunteering as the money for
either of those activities simply aren't available. Am I surprised by a report saying
unemployed in Sweden are unhappy? Nope.
meanwhile NYTimes testimonials Friday, show average family of 4 healthprofit costs
(tripled, due to trump demise ACA) to be $30,000. per year, with around $10,000. deductible
end of any semblance of affordable access, "murKa"
Where does a character like Bertie Wooster in "Jeeves" fit in your notions of virtuous
behavior? Would you consider him more virtuous working in the management of a firm,
controlling the lives and labor of others -- and humorously helped by his his brilliant
valet, Jeeves, getting him out of trouble?
For contrast -- in class and social status -- take a beer-soaked trailer trash gentleman
of leisure -- and for sake of argument blessed with less than average intelligence -- where
would you put him to work where you'd feel pleased with his product or his service? Would you
feel better about this fellow enjoying a six-pack after working 8 hours a day 5 days a week
virtuously digging and then filling a hole in the ground while carefully watched and goaded
by an overseer? [Actually -- how different is that from "using human labor to control weeds
and invasive species"? I take it you're a fan of chain-gangs and making the poor pick up
trash on the highways?]
What about some of our engineers and scientists virtuously serving the MIC? Is their
behavior virtuous because they're not guilty of sloth, irresponsibility [in executing their
work], fecklessness, and spendthriftness? On this last quality how do you feel about our
government who pay the salaries for all these jobs building better ways to kill and maim?
It is a design by David Pagan Butler. It is his plunge pool design, deepend is 14 by 8 by
7 deep. I used the dirt to make swales around some trees. Win win all around.
The answer is yes my spouse works. So I do have a schedule of waking up to make her lunch
everyday, meeting her at lunch to walk, and making dinner when she gets home, but we do all
those things on her days off so .
But again we would need to explain away, why people who are retired are happier? Just
because they think they payed into social security? Try explaining to someone on the SS dole
how the government spends money into existence and is not paid by taxes or that the
government never saved their tax money, so there are not entitled to this money.
I hated working for other people and doing what they wanted. I began to feel some
happiness when I had a half acre on which I could create my own projects. Things improved
even more when I could assure myself of some small guaranteed income by claiming Social
Security at age 62. To arise in the morning when I feel rested, with interesting projects
like gardens, fences, small buildings ahead and work at my own pace is the essence of delight
for me. I've been following your arguments against UBI for years and disagree vehemently.
I feel I would behave the same as you, if I had the chance. *But* no statements about
human beings are absolute, and because UBI would work for either of us does not mean it would
work for the majority. Nothing devised by man is perfect.
first you had to buy the half acre in a suitable location, then you had to work many years
to qualify for social security, the availability of which you paid for and feel you deserve.
You also have to buy stuff for fences gardens and small buildings. At most that rhymes with a
ubi but is significantly different in it's make up.
> when I had a half acre on which I could create my own projects
That is, when you acquired the half acre, which not everyone can do. It seems to
me there's a good deal of projecting going on with this thread from people who are, in
essence, statistical outliers. But Mitchell summarizes the literature:
So for decades, researchers in this area, as opposed to bloggers who wax lyrical on
their own opinions, have known that the importance of work in our lives goes well beyond
the income we earn.
If the solution that works for you is going to scale, that implies that millions more will
have to own land. If UBI depends on that, how does that happen? (Of course, in a
post-collapse scenario, the land might be taken , but that same scenario makes the
existence of institutions required to convey the UBI highly unlikely. )
Very glad to hear that Bill Mitchell is working on the "Future of Work" book, and to have
this post, and the links to the other segments. Thank you, Yves!
I don't agree with this statement. Never will. I'm the complete opposite. Give me more
leisure time and you'll find me painting, writing, playing instruments and doing things that
I enjoy. I recall back to when I was a student, I relished in the free time I got (believe me
University gave me a lot of free time) between lectures, meaning I could enjoy this time
pursuing creative activities. Sure I might be different than most people but I know countless
people who are the same.
My own opinion is that root problem lies in the pathology of the working mentality, that
'work' and having a 'job' is so engrained into our society and mindset that once you give
most people the time to enjoy other things, they simply can't. They don't know what to do
with themselves and they eventually become unhappy, watching daytime TV sat on the sofa.
I recall back to a conversation with my mother about my father, she said to me, 'I don't
know how your father is going to cope once he retires and has nothing to do' and it's that
very example of where work for so many people becomes so engrained in their mindset, that
they are almost scared of having 'nothing to do' as they say. It's a shame, it's this
systemic working mentality that has led to this mindset. I'm glad I'm the opposite of this
and proud by mother brought me up to be this way. Work, and job are not in my vocabulary. I
work to live, not live to work.
I agree with Andrew. I think this data on the negative effects says more about how being
employed fundamentally breaks the human psyche and turns them into chattel, incapable of
thinking for themselves and destroying their natural creativity. The more a human is molded
into a "good worker" the less they become a full fledged human being. The happiest people are
those that have never placed importance on work, that have always lived by the maxim "work to
live, not live to work". From my own experience every assertion in this article is the
opposite of reality. It is working that makes me apathethic, uncreative, and miserable. The
constant knowing that you're wasting your life, day after day, engaged in an activity merely
to build revenue streams for the rich, instead of doing things that help society or that
please you on a personal level, is what I find misery inducing.
I agree. If financial insecurity is removed from the equation -- free time can be used creatively
for self-actualization, whatever form that may take: cultivating the arts, hobbies, community
activities, worthy causes and projects. The ideology wafting from Mitchell's post smells to me like a rationale for wage slavery
(market driven living, neo-liberalism, etc.)
Besides how are people supposed to spend their time "exploring other opportunities" when
unemployed anyway? To collect unemployment which isn't exactly paying that much anyway, they
have to show they are applying to jobs. To go to the movies the example given costs money,
which one may tend to be short on when unemployed. They probably are looking for work
regardless (for the income). There may still be some free time. But they could go back to
school? Uh in case one just woke up from a rock they were under for 100 years, that costs
money, which one may tend to be short on when unemployed, plus there is no guarantee the new
career will pan out either, no guarantee someone is just chomping at the bit to hire a newly
trained 50 year old or something. I have always taken classes when unemployed, and paid for
it and it's not cheap.
Yes to use one's time wisely in unemployment in the existing system requires a kind of
deep psychological maturity that few have, a kind of Surrender To Fate, to the uncertainty of
whether one will have an income again or not (either that or a sugar daddy or a trust fund).
Because it's not easy to deal with that uncertainty. And uncertainty is the name of the game
in unemployment, that and not having an income may be the pain in it's entirety.
Sadly this breaking down into a "good worker" begins for most shortly after they begin
school. This type of education harms society in a myriad of ways including instilling a
dislike of learning, deference to authority (no matter how irrational and unjust), and a
destruction of a child's natural curiosity.
I don't buy your premise that people are "creative". The overwhelming majority do not have
creative projects they'd be pursuing if they had leisure and income. Go look at retirees,
ones that have just retired, are healthy, and have money.
You are really misconstruing what the studies have found and misapplied it to your
situation. Leisure time when you have a job or a role (being a student) is not at all the
same as having time when you are unemployed, with or without a social safety net.
Work: that can be me hiring someone to cut my yard, or another type of one-off thing
filled with precariousness.
Job: that less temporary work, but by no means permanent. Just a step up from the
precariousness of work.
Career: that is work in the same field over a long period of time and it is more likely
that someone will develop an identity through performing the work. Still precarious, but
maybe more fulfilling.
Sense of purpose: I was always under the impression that is something you have to give
yourself. If it can be taken away by someone what was the purpose?
one often has a role when unemployed: finding work. But it's not a very fulfilling one!
But if one is trying to find work, it's not exactly the absence of a role either even if it
still leaves significantly more free time than otherwise, maybe winning the lottery is the
absence of a role.
But then it's also not like we give people a UBI even for a few years (at any time in
adult life) to get an education. Only if they take out a student loan approaching the size of
a mortgage or have parents willing to pony up are they allowed that (to pay not just for the
education but to live because having a roof over one's head etc. is never free, a UBI via
debt it might be called).
> Give me more leisure time and you'll find me painting, writing, playing instruments
and doing things that I enjoy.
Nothing to breed resentment of "the creative class" here! Blowback from Speenhamland
brought on the workhouses, so be careful what you wish for.
UBI won't happen and JG has been tried (and failed).
The argument that JG would allow the public sector to hire more people is demeaning to
people already employed in the public sector and demonstrably false – people are hired
into the public sector without there being a JG. It is most certainly possible to be against
a JG while wanting more people working in the public sector.
The way forward is to have a government acting for people instead of for corporations.
Increase the amount of paid vacations, reduce the pension age and stop with the Soviet style
worship of work: While some people are apparently proud of their friends and relatives who
died while at work it is also possible to feel sad about that.
The JG was tried in Communist countries in Europe, Asia and Americas. The arguments then
and there were the same as here and now, made by the same type of social 'scientists'
(economists).
Would a JG be different here and now as the Republicans and Democrats are representing the
best interests of the people? Or are they representing the same kind of interests as the
Communist parties did?
Data, please. The USSR fell because it was spending on its military to keep up with the
US, a much larger economy. Countering your assertion we have this:
As long as people argue that "it's not fair" to fix the inequality issue and employ things
like debt jubilee or student loan forgiveness, or if we fix the ridiculous cost of health
care what will all those insurance agents do then we will wind up with the real kind of class
warfare, rather than the current punching from the top down, the punching will come from the
bottom, because the situation is not fair now, it's just TINA according to those who profit
from it. In my own life there is a balance of creativity and work, and I find work enables my
creativity by putting some pressure on my time, i.e., I get up earlier, I practice at 8:30 am
instead of sleeping til 10 and winding up with S.A..D., I go to bed rather than watch tv or
drink to excess.. in other words i have some kind of weird schedule, I have days off sort of
When I've been unemployed I feel the way s described in the article. I find the arguments in
favor of ubi tend to come from people who already have assets, or jobs, or family who they
take care of which is actually a job although uncommonly described as such. The only truth I
see in real life is that the unemployed I am intimately familiar with first are mentally
oppressed by the notion that to repair their situation will require they work every waking
hour at substandard wages for the rest of their life and that is a major barrier to getting
started, and that is a policy choice the gov't and elite classes purposefully made which
created the precariat and will be their undoing if they are unable to see this.
Interesting point. I read a science fiction story in which the protagonist arrives for
work at his full time job at 10:00 AM, and he's finished for the day at 4:00 PM. I can't
remember the name of the story or novel, unfortunately.
Agreed. And they already have it in places like Denmark. Why don't we talk about that? It
actually exists unlike utopian schemes for either total UBI or total work guarantee
(government job creation is not utopian, but imagining it will employ everyone is, and I
would like the UBI to be more widely tried, but in this country we are nowhere close). Funny
how utopia becomes more interesting to people than actual existing arrangements, even though
of course those could be improved on too.
The Danish work arrangement is less than a 40 hour week, and mothers especially often work
part-time but both sexes can. It's here in this country where work is either impossibly
grueling or you are not working. No other choice. In countries with more flexible work
arrangements more women actually work, but it's flexible and flexible for men who choose to
do the parenting as well. I'm not saying this should be for parents only of course.
My own situation is that I am unhappy in my well-paying job and would like nothing more
than to devote myself to other interests. I'm thirty years on in a relationship with someone
who grew up in bad financial circumstances and panics whenever I talk about leaving my job. I
tell her that we have 2 years of living expenses in the bank but I can't guarantee making the
same amount of money if I do leave my job. She has a job that she loves and is important and
pays barely 1/2 of my own income. So she worries about her future with me. She worries about
losing her home. I suppose that makes me the definition of a wage slave. And it makes for an
increasingly unhappy marriage. I admire those who have faced similar circumstances and found
a way through this. Sorry to vent, but this topic and the comments hit a nerve with me and
I'm still trying to figure this out.
Otis;
We are presently going through a period where that "two year cushion" has evaporated, for
various reasons. We are seeing our way through this, straight into penury and privation.
Take nothing for granted in todays' economy.
yes find the lower paying job that you like more first. If you just quit for nothing in
the hopes of finding one it might not happen. Of course unemployment also happens sometimes,
whether we want it or not.
The newer generations are worse when it comes to lifestyle. Those of that are older can at
least remember a time without cellphones internet streaming services leasing a new car every
2 years etc.
What about the young? My niece and her husband should be all set , his mom sunk money into
a home on the condition she moved into a mother in law apartment. So far so good right? 2
years in they are imploding even with the free child care she provides. Combined their
wireless bill a month is over $300. The sit on the couch side by side and stream netflix
shows to dueling iphones in front of a 65 inch tv that is not even turned on. Wearing
headphones in silence.
Both driving new vehicles , both have gym memberships they don't use . They buy lattes 3
or 4 times a day which is probably another 500 a month.
My uncle passed away recently and my niece asked if she was in the will. It was literally
her only communication on the subject. They are going under and could easily trim a few
thousand a month from the budget but simply won't. No one in the family is going to lift a
finger for them at this point they burned every possible bridge already. I have seen people
living in cars plenty lately but I think these will be the first I see to living in brand new
cars .
Somewhere along the line they got the impression that the american dream was a leased car
a starbucks in one hand and an iphone in the other .
Confront them with the concept of living within a paycheck and they react like a patient
hearing he has 3 months to live.
Yeah being poor, never mind growing up poor, just well and truly sucks and it can really
@@@@ you up. Gives people all sorts of issues. I'm rather like her, but I have had the joy of
multi-hour commutes to unexciting soul crushing work. Happy, happy, joy, joy! However don't
forget that with the current political economy things are likely to go bad in all sorts of
ways. This whole site is devoted to that. My suggestion is to keep the job unless you have
something lined up. Not being able to rent has it own stresses too. Take my word for it.
I may be engaging in semantics but I think conflating work and jobs makes this article a
bit of a mixed bag. I know plenty of people who are terribly unhappy in their jobs, but
nonetheless extract a sense of wellbeing from having a stable source of INCOME to pay their
bills (anecdotally speaking, acute stress from recent job losses is closely linked to
uncertainty about how bills are going to be paid, that's why those with a safety net of
accumulated savings report less stress than those without). Loss of status, social standing
and identity and the chronic stress borne from these become evident much later I.e. when the
unemployment is prolonged, accompanied of course by the still unresolved top-of-mind concern
of "how to pay the bills".
As such, acute stress for the recently unemployed is driven by financial/income
uncertainty (I.e. how am I going to pay the bills) whereas chronic stress from prolonged
unemployment brings into play the more identity driven aspects like loss of social standing
and status. For policy interventions to have any effects, policy makers would have to
delineate the primary drivers of stress (or lack of wellbeing as the author calls it) during
the various phases of the unemployment lifecycle. An Unemployment Insurance Fund (UIF) like
we have here in South Africa appears to address the early stages of unemployment, and the
accompanying acute stress, quite well by providing the income guarantee (for six months) that
cushions the shock of losing a job. What's still missing of course are interventions that
promote the quick return to employment for those on UIF, so maybe a middle of the road
solution between UBI and a jobs guarantee scheme is how policy makers should be framing this,
instead of the binary either/or we currently have.
Lots' of people think they're unhappy with their jobs. Let them sit unemployed for 9
months and ask them if they want that job back. The usual parade of anecdata is on display here in the comments. Mitchell's real data and
analysis in the article above still stand.
If you'd read through my comment, and not rushed through it with a view of dishing out a
flippant response, you'd have seen that nowhere do I question the validity of his data, I
merely question how the argument is presented in some areas (NC discourages unquestioning
deference to the views of experts no??). By the way, anecdotes do add to richer understanding
of a nuanced and layered topic (as this one is) so your dismissal of them in your haste to
invalidate people's observations is hardly helpful.
Yes people many not like their jobs but prefer the security of having them to not. Yes
even if the boss sexually harasses one (as we are seeing is very common). Yes even if there
is other workplace abuse. Yes even when it causes depression or PTSD (but if one stays with
such a job long term it ruins the self confidence that is one prerequisite to get another
job!). Yes even if one is in therapy because of job stress, sexual harassment or you name it.
The job allows the having health insurance, allows the therapy, allows the complaining about
the job in therapy to make it through another week.
When unemployed, the stress of worry about money may suppress the creative juices.
Speaking from experience. People may well 'keep looking for jobs' because they know ultimately they need a job with
steady income. The great experience of some freelancers notwithstanding, not all are cut out
for it.
I would love to see some more about happiness or its lack in retirement–referenced
by stay-at-home dad BJ , above.
I wonder, too, about the impact of *how* one loses one's job. Getting laid off vs fired vs
quitting vs involuntary retirement vs voluntary, etc feel very different. Speaking from
experience on that, too. I will search on these points and post anything of interest.
There are also other things that are degrading about the very process of being unemployed
not mentioned here. What about the constant rejection that it can entail? One is unemployed
and looking for work, one sends out resumes, many of them will never be answered, that's
rejection. Then if one is lucky they get interviews, many will never lead to jobs, yet more
rejection. Does the process of constant rejection itself have a negative effect on a human
being whether it's looking for jobs or dates or whatever? Isn't it learned helplessness to if
one keeps trying for something and keeps failing. Isn't that itself demoralizing entirely
independent of any doubtful innate demoralizing quality of leisure.
I am not so sure if I agree with this article. I think it really depends on whether or not
you have income to support yourself, hate or love your job, and the amount of outside
interests you have, among other things. Almost everyone I know who lives in the NYC area and
commutes into the city .doesn't like their job and finds the whole situation "soul-crushing".
Those that live in Manhattan proper are (feel) a bit better off. I for one stopped working
somewhat voluntarily last year. I write somewhat because I began to dislike my job so much
that it was interfering with my state of well being, however, if I had been allowed to work
remotely I probably would have stuck it out for another couple of years.
I am close enough to
62 that I can make do before SS kicks in although I have completely changed my lifestyle
– i.e. I've given up a materialistic lifestyle and live very frugally.
Additionally I
saved for many years once I decided to embark on this path. I do not find myself depressed at
all and the path this year has been very enriching and exciting (and scary) as I reflect on
what I want for the future. I'm pretty sure I will end up moving and buying a property so
that I can become as self sufficient as possible. Also, I probably will get a job down the
line – but if I can't get one because I am deemed too old that will be ok as well. The
biggest unknown for me is how much health insurance will cost in the future .
The article made clear that the studies included "unemployed but with income" from
government support. It is amazing the degree to which readers ignore that and want to make
the findings about "unemployed with no income".
That's because we Americans all have work=good=worthy=blessed by God while
workless=scum=worthless=accursed by God engraved into our collective soul. Our politics, our
beliefs, are just overlays to that.
Even when we agree that the whole situation just crushes people into paste, and for which
they have no defense regardless of how hard they work, how carefully they plan, or what they
do, that underlay makes use feel that this is their/our fault. Any suggestions that at least
some support can be decoupled from work, and that maybe work, and how much you earn, should
not determine their value, brings the atavistic fear of being the "undeserving poor,"
parasites and therefore reprobated scum.
So we don't hear what you are saying without extra effort because it's bypassing our
conscious thoughts.
Add my voice to those above who feel that forced labor is the bane of existence, not the
wellspring. All this study says to me is that refusing to employ someone in capitalist
society does not make them happy. It makes them outcasts.
So, I say yes to a JG, because anyone who wants work should be offered work. But at the
same time, a proper JG is not forced labor. And the only way to ensure that it is not forced
labor, is to decouple basic needs from wage slavery.
I am critical of those who distinguish between the job and the income. Of course the
income is critical to the dignity of the job. For many jobs, it is the primary source of that
dignity. The notion that all jobs should provide some intrinsic dignity unrelated to the
income, or that people whose dignity is primarily based on the income they earn rather than
the work they do are deluded, is to buy in to the propaganda of "passion" being a requirement
for your work and to really be blind to what is required to make a society function. Someone
has to change the diapers, and wipe the butts of old people. (yes, I've done both.) It
doesn't require passion and any sense of satisfaction is gone by about the second day. But if
you could make a middle class living doing it, there would be a lot fewer unhappy people in
the world.
It is well known that auto factory jobs were not perceived as good jobs until the UAW was
able to make them middle class jobs. The nature of the actual work itself hasn't changed all
that much over the years – mostly it is still very repetitive work that requires little
specialized training, even if the machine technology is much improved. Indeed, I would guess
that more intrinsic satisfaction came from bashing metal than pushing buttons on a CNC
machine, and so the jobs may even be less self-actualizing than they used to be.
The capitalist myth is that the private sector economy generates all the wealth and the
public sector is a claim on that wealth. Yet human development proves to us that this is not
true – a substantial portion of "human capital" is developed outside the paid economy,
government investment in R&D generates productivity growth, etc. And MMT demonstrates
that we do not require private sector savings to fund public investment.
We are still a ways from having the math to demonstrate that government investment in
caring and nurturing is always socially productive – first we need productivity numbers
that reflect more than just private sector "product." But I think we are moving in that
direction. Rather than prioritize a minimum wage JG of make-work, we should first simply pay
people good wages to raise their own children or look after their elderly and disabled
relatives. The MMT JG, as I understand it, would still require people to leave their kids
with others to look after them in order to perform some minimum wage task. That is just
dumb.
Maybe it's dumb, it's certainly dumb in a system like the U.S. where work is brutal and
often low paid and paid childcare is not well remunerated either. But caretakers also working
seems to work in countries with greater income equality, good job protections, flexible work
arrangements, and a decent amount of paid parental leave – yea Denmark, they think
their children should be raised by professionals, but also work-life balance is still pretty
good.
My take is that capitalism has made the benefits and malus of having a job so ingrained
into culture and so reinforced. Having a job is so closely linked to happiness because it
gives you the money needed to pursue it.
A job affords you the ability to pursue whatever goals you want within a capitalist
framework. "Everything" costs money and so having a job gives you the money to pay for those
costs and go on to fulfill your pursuit of happiness.
Analyzing whether people are happy or not under these conditions seem apparent that it is
going to lead to results heavily biased towards finding happiness through employment.
The unemployed are often living off someone else's income and feel like an undeserving
parasite. Adults are generally ingrained with the culture that they have to grow up and be
independent and be able to provide for a new family that they will start up. Becoming
unemployed is like being emasculated and infantile, the opposite of what is expected of
adults.
There's also that not having a job is increasingly being punished especially in the case
of America. American wages have stayed either largely static or have worsened, making being
unemployed that much more of a burden on family or friends. Unemployment has been demonized
by Reaganism and has become systematically punishable for the long term unemployed. If you
are unemployed for too long, you start losing government support. This compounds the frantic
rush to get out of unemployment once unemployed.
There is little luxury to enjoy while unemployed. Life while unemployed is a frustrating
and often disappointing hell of constant job applications and having many of them lead to
nothing. The people providing support often start to become less so over time and become more
convinced of laziness or some kind of lack of character or willpower or education or ability
or whatever. Any sense of systemic failure is transplanted into a sense of personal failure,
especially under neoliberalism.
I am not so sure about the case of Europe and otherwise. I am sure that the third world
often has little or no social safety nets so having work (in exploitative conditions in many
cases) is a must for survival.
Anyways, I wonder about the exact methodologies of these studies and I think they often
take the current feelings about unemployment and then attempt to extrapolate talking points
for UBI/JG from them. Yes, UBI wouldn't change culture overnight and it would take a very,
very long time for people to let down their guard and adjust if UBI is to be implemented in a
manner that would warrant trust. This article seems to understand the potential for that, but
decides against it being a significant factor due to the studies emphasizing the malus of
unemployment.
I wonder how different the results would be if there were studies that asked people how
they would feel if they were unemployed under a UBI system versus the current system. I know
a good number of young people (mostly under 30) who would love to drop out and just play
video games all day. Though the significance of such a drastic demographic shift would
probably lead to great political consequences. It would probably prove the anti-UBI crowd
right in that under a capitalist framework, the capitalists and the employed wouldn't
tolerate the unemployed and would seek to turn them into an underclass.
Personally I think a combination of UBI and JG should be pursued. JG would work better
within the current capitalist framework. I don't think it is without its pitfalls due to
similar possible issues (with the similar policy of full employment) either under
Keynesianism (e.g. Milton Friedman sees it as inefficient) or in the USSR (e.g. bullshit
jobs). There is the possibility of UBI having benefits (not having the unemployed be a burden
but a subsidized contributer to the economy) so I personally don't think it should be fully
disregarded until it is understood better. I would like it if there were better scientific
studies to expand upon the implications of UBI and better measure if it would work or not.
The upcoming studies testing an actual UBI system should help to end the debates once and for
all.
My $0.02:
I have a creative pursuit (no money) and a engineering/physical science technical career
(income!). I am proficient in and passionate about both. Over the last few years, the
technical career became tenuous due to consolidation of regional consulting firms (endemic to
this era)- wages flat to declining, higher work stress, less time off, conversation to
contact employment, etc.- which has resulted in two layoffs.
During the time of tenuous employment, my art took on a darker tone. During unemployment the
art stopped altogether.
I'm recently re-employed in a field that I'm not proficient. Both the peter principle and
imposter syndrome apply. My art has resumed, but the topics are singular about despair and
work, to the point that I feel like I'm constantly reworking the same one piece over and over
again. And the quality has plummeted too.
In some fields (e.g. engineering), being a wage slave is the only realistic option due to
the dominance of a small number of large firms. The big players crowd out independents and
free lancers, while pressuring their own employees through just-high-enough wages and
limiting time off. Engineering services is a relationship- based field, and the big boys (and
they are nearly all boys) have vastly bigger networks to draw work from than a small firm
unless that small firm has a big contact to feed them work (until they get gobbled up). The
big firms also have more areas of expertise which limits how useful a boutique firm is to a
client pool, except under very narrow circumstances. And if you are an introvert like most
engineering people, there's no way to compete with big firms and their marketing staff to
expand a network enough to compete.
In that way, consulting is a lot like art. To make a living at it you need either contacts or
a sponsor. Or an inheritance.
I would be interested to know what the definition of unemployment was for the purpose of
this study (I couldn't find it in the supplied links). If it's simply "people who don't have
a job," for example, then it would include the likes of the idle rich, retirees, wards of the
state, and so on. Binary statements like this one do make it sound like the broad definition
is the one in use:
When considering the world's population as a whole, people with a job evaluate the
quality of their lives much more favorably than those who are unemployed.
The conclusion seems at odds with results I've seen for some of those groups – for
example, I thought it was fairly well accepted that retirees who are supported by a
government plan that is sufficient for them to live on were generally at least as happy as
they had been during their working life.
If, on the other hand, the study uses a narrow definition (e.g. people who are of working
age, want a job or need one to support themselves financially, but can't find one) then the
conclusion seems a lot more reasonable. But that's a heavily loaded definition in economic
and cultural terms. In that case, the conclusion (people are happier if they have a job) only
holds true in the current prevailing model of society. It doesn't rule out the possibility of
structuring society or the economy differently in such a way that people can be non-working
and happy. The existence of one such population already (retirees) strongly suggests that
outcomes like this are possible. A UBI would be an example of just such a restructuring of
society, and therefore I don't think that this study and its result are necessarily a valid
argument against it.
Which makes a person happier -- being considered worthless by one's society or valuable?
How many studies do we need to answer that question? Apparently, a lot, because studies like
this one keep on going. The underlying assumption is that jobs make one valuable. So if you
don't have a job you're worthless. Now, who's happier on the whole, people with jobs or the
unemployed? That's surely good for a few more studies. Did you know that members of socially
devalued groups (minorities, non-heteros, and the like) have higher rates of dysfunction,
rather like the unemployed? Hmm, I wonder if there's maybe a similar principle at work. And
my solution is not to turn all the people of color white nor to change all the women to men
nor to "cure" gays. Well, maybe a few more conclusive studies of this kind will convince me
that we must all be the same, toeing the line for those whom it has pleased God to dictate
our values to us.
I am convinced that we shouldn't outlaw jobs, because I believe the tons of stories about
happy people in their jobs However, I also believe we shouldn't force everyone into jobs,
because I know tons of stories about happy people without jobs. You know, the stories that
the JG people explain away: parents caring for their children (JG -- "oh, we'll make that a
job!"), volunteers working on local planning issues (JG -- "oh, we'll make that a job, too.
In fact, we'll make everything worth doing a job. The important thing is to be able to force
people to work schedules and bosses, because otherwise, they'll all lie around doing nothing
and be miserable"), the retired (JG -- "that's not really the same, but they'd be better off
staying in a job"). And this is all before we get to those who can't really hold a job
because of disability or geography or other responsibilities.
I support the JG over the current situation, but as to what we should be working for, the
more I read the JG arguments, the more paternalistic and just plain narrow minded judgmental
they seem.
Data like that provided by Mitchell is important to demolishing the horrid "economic
anxiety" frame much beloved by liberals, especially wonkish Democrats.* It's not (a) just feelings , to be solved by scented candles or training (the liberal version of
rugged individualism) and (b) the effects are real and measurable. It's not surprising, when
you think about it, that the working class is about work .
* To put this another way, anybody who has really suffered the crawling
inwardness of anxiety, in the clinical sense, knows that it affects every aspect of one's
being. Anxiety is not something deplorables deploy as cover for less than creditable
motives.
Example with GDP growth after natural disaster is pretty illuminating...
Notable quotes:
"... GDP = Consumption + Investment + Government Spending + Net Exports ..."
"... or more succinctly ..."
"... GDP = C + I + G + NX ..."
"... where consumption (C) represents private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures by businesses and home purchases by households, government spending (G) denotes expenditures on goods and services by the government, and net exports (NX) represents a nation's exports minus its imports. ..."
"... Here's Dave's explanation: ..."
"... Once I learned about accounting, I figured out why the GDP metric wasn't sufficient. What is missing? ..."
"... The balance sheet. ..."
"... Hurricanes are a direct hit to your nation's balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the "equity" part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred. Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased. ..."
"... We know this because we use the balance sheet equation: equity = assets – liabilities. Equity is another word for wealth. ..."
"... After hurricane, you rebuild your house, and buy a new car, using borrowed money: ..."
"... wealth = (house + car) – (2 x home debt + 2 x car debt) ..."
"... Wealth (equity) has declined by the sum (home debt + car debt) ..."
"... So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually matter; that equity is just gone. Destruction is always a downside for equity – even if there is a temporary positive impact on the income statement. ..."
"... Isn't it interesting that the mainstream economists, who don't use banks, debt, or money in their models, largely ignore balance sheets and instead just looks at the income statement alone? Its almost as if the entire education system was organized so that people paid no attention to banks, debt, and money. Who do you think might benefit from our flock of PhD economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the banks? ..."
"... without resistance from academics whom those aristocrats likewise finance ..."
Gross Domestic Product, or GDP, is the most commonly used measure and ranking of a nation's
economy. According to the OECD and Wikipedia, its definition is: "an aggregate measure of
production equal to the sum of the gross values added of all resident and institutional units
engaged in production (plus any taxes, and minus any subsidies, on products not included in the
value of their outputs) " No subtractions are included in it for debts that were undertaken in
order to generate the given "gross values added." A trillion dollars of increased assets
(additional "gross values" of "production") adds a trillion dollars to GDP, even if all of it
was produced by increasing the debts by a trillion dollars: only the assets-side of the
balance-sheet is relevant to GDP.
However, wealth is assets minus liabilities; it is assets minus debts; it is not
assets alone. Therefore, a nation's wealth has no necessary relationship at all to a nation's
GDP, because the nation's wealth is its assets minus its liabilities, not its assets
regardless of its liabilities (such as GDP is).
Britannica
provides this definition of "GDP" : "Gross domestic product (GDP), total market value of
the goods and services produced by a country's economy during a specified period of time. It
includes all final goods and services -- that is, those that are produced by the economic
agents located in that country regardless of their ownership and that are not resold in any
form. It is used throughout the world as the main measure of output and economic activity." In
this definition, too, no subtractions are included in it for the debts. Britannica then goes on
to state:
GDP = Consumption + Investment + Government Spending + Net Exports
or more succinctly
GDP = C + I + G + NX
where consumption (C) represents private-consumption expenditures by households and
nonprofit organizations, investment (I) refers to business expenditures by businesses and home
purchases by households, government spending (G) denotes expenditures on goods and services by
the government, and net exports (NX) represents a nation's exports minus its imports.
Kimberly
Amadeo at "The Balance" uses that definition , and opens her article about GDP by saying:
"Gross domestic product is the best way to measure a country's economy. GDP is the total value
of everything produced by all the people and companies in the country. It doesn't matter if
they are citizens or foreign-owned companies. If they are located within the country's
boundaries, the government counts their production as GDP."
However: is GDP, in fact , "the best way to measure a country's economy"? If you're
a banker whose income is derived from having a lot of money owed to you, then, of course, you
will want to fool the public into believing that ignoring debts that were incurred in producing
a given GDP is "the best way to measure a country's economy," because the more fools that
believe it, the more income you will make, because people won't be measuring their
economic welfare by deducting from it the debts they owe. They will be deceived to
think their country to be in better economic and financial position than it is, if the debts
that it incurs are being ignored; this ignoring of debt in the ranking of nations' economies
will make easier a government's taking on more debt than it should.
Roy H. Webb, of the Richmond Fed, headlined in 1994,
"The National Income and Product Accounts" and he presented there a lengthy breakdown of
how GDP is calculated, but, yet again, nowhere in that article did any form of the terms "debt"
or "liability" appear.
Isn't it obvious, that GDP is a fraud -- and a very influential one?
MBA-Tutorials has an article "Shortcomings of GDP"
, but it, too, doesn't mention, in any form, "debts" or "liabilities"; and, so, it, too, is
fake.
Bob McTeer, former President of the Dallas Fed, headlined in Forbes on 31 October 2012,
"Hurricane Sandy And The
Shortcomings Of GDP" , and he opened: "Natural disasters, like Hurricane Sandy, provide
periodic reminders, not of the shortcomings of GDP necessarily, but what GDP is designed to
measure and what it is not designed to measure." In other words: the bankers excuse GDP because
"it is not designed to measure" what it is being routinely used to measure. If the
ordinary-language meaning of "GDP" is devoid of the liabilities-side of the balance-sheet, and
ranks nations' economic performance in that way -- by ignoring any additional indebtedness that
went into generating that additional "production" -- then what language was Dr. McTeer even
writing in, there (since it wasn't ordinary language -- language as it's commonly understood)?
That statement by McTeer, too, therefore, is deceit. In the rest of his article, he blathers
on. And, nowhere in that article, either, are the words "debts" or "liabilities" used, in any
form.
Deceit regarding GDP is routine, just as such a fake 'misuse' of "GDP" is routine. (It's
really no "misuse" of the term, at all.) GDP is designed to be a misleading basis for ranking
the economic performance of countries; it's used for the purpose it's intended for, because the
purpose it's intended for is to deceive the public in this very way -- to ignore debt -- and,
so, that's the way it's used.
However, Charles Hugh Smith, at several blogs, explained the matter honestly, instead of (as
is normally done) as a representative of the debt-industries, when he headlined on 19 October
2017, "GDP Is Bogus: Here's Why" ,
and he presented there a superbly clear example, which applies not only to Hurricane Sandy, but
to any natural disaster or war, and thus (by implication) constitutes a threat to not only the
debt-industries (the financial firms), but also the man-made-disaster industries (the
war-firms), such as Dwight Eisenhower famously (but only vaguely) referred to in his final
words parting from the White House and handing it over to JFK in 1961, as "the
military-industrial complex," against which Eisenhower vaguely was warning there.
Charles Hugh Smith's example, much clearer than McTeer's blather, had allegedly come from
some accountant, "Dave," and presented (without linking to) the following:
Here's Dave's explanation:
Once I learned about accounting, I figured out why the GDP metric wasn't sufficient.
What is missing?
The balance sheet.
Hurricanes are a direct hit to your nation's balance sheet. The national income
statement goes up because of increased spending to replace lost assets, but the "equity" part
of the national balance sheet ends up taking a hit in direct proportion to the damage that
occurred. Even if you rebuild everything just the way it was, your assets remain the same,
while your liabilities have increased.
We know this because we use the balance sheet equation: equity = assets –
liabilities. Equity is another word for wealth.
Before hurricane:
wealth = (house + car) – (home debt + car debt)
After hurricane, you rebuild your house, and buy a new car, using borrowed
money:
wealth = (house + car) – (2 x home debt + 2 x car debt)
Wealth (equity) has declined by the sum (home debt + car debt)
So when you see pictures of a hurricane strike, you can now look through all that
devastation and see the impact on the balance sheet. National equity (wealth) just dropped by
the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually
matter; that equity is just gone. Destruction is always a downside for equity – even if
there is a temporary positive impact on the income statement.
Isn't it interesting that the mainstream economists, who don't use banks, debt, or money
in their models, largely ignore balance sheets and instead just looks at the income statement
alone? Its almost as if the entire education system was organized so that people paid no
attention to banks, debt, and money. Who do you think might benefit from our flock of PhD
economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the
banks?
By means of deceits such as using false measures of nations' economic performance, like
that, the aristocracy and its agents, in all countries -- the owners of banks like HSBC, and of
'defense' contractors like Lockheed Martin, etc. -- can, and do, without resistance from
academics whom those aristocrats likewise finance , use fake 'measures' of nations'
economic performance, so as to advance their own private economic performances, by fooling
their narcoticized public into accepting these economic and financial bloodsuckers, accepting
them by ignoring whatever blood might be lost in the process. Or: are they, too, merely fools?
They function more like vampires, than like fools. But, apparently, the victims -- here, the
public -- just don't awake from this bite, and, so, it will probably continue until the next
great economic crash, after which, yet again, the government will go into still more debt, in
order to 'recover' from these 'mistakes'. That sounds like a good business to be in -- a stable
business, of the "heads I win, tales you lose" type. It might not be irresistible, but no one
is resisting it. Now, why would that be?
"... "Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become. ..."
"... While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths. ..."
"... We should fight neoliberal cult of GDP. ..."
"... Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what. ..."
Interesting post at Digitopoly by Shane Greenstein
"Here is my two cents: these three researchers may have just put the nail in the coffin
of using production-side measures of the free economy-and that is not really all that bad. GDP
is a measure of total production. It was ever meant to be a measure of how well-off society has
become.
More to the point, maybe it is time to focus on the demand-side measures of free goods. In
other words, you get a lot more for your Internet subscription, but nothing in GDP reflects that.
For example, the price index for Internet services should reflect qualitative improvement in user
experiences, and needs to improve."
While introduction of the concept of GDP and systematic its measurement (with all its warts,
especially in calculation of "real GDP") was a great achievement, absolutization of GDP under
neoliberalism and, especially, false equivalence between GDP growth and growth of the standard
of living of population are dangerous neoliberal myths.
We should fight neoliberal cult of GDP.
Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses
of National Income Measurements":
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot be
adequately measured unless the personal distribution of income is known. And no income measurement
undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of
effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred
from a measurement of national income as defined above.
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and quality of growth, between costs
and returns, and between the short and long run. Goals for more growth should specify more growth
of what and for what.
What's missing in each and every case above -- at least in the USA! -- is
countervailing power. 6% labor union density in private business is equivalent
to 20/10 blood pressure in the human body: it starves every other healthy
process.
It is not just labor market bargaining power that has gone missing, it
is not only the lost political muscle for the average person (equal campaign
financing, almost all the votes), it is also the lack of machinery to deal
with day-to-day outrages on a day-to-day basis (that's called lobbying).
Late dean of the Washington press corps David Broder told a young reporter
that when he came to DC fifty years ago (then), all the lobbyists were union.
Big pharma's biggest rip-offs, for profit school scams, all the stuff you
hear about for one day on the news but no action is ever taken -- that's
because there is no (LABOR UNION) mechanism to stay on top of all (or any)
of it (LOBBYISTS).
It is a chicken and egg problem. Before large scale automation and globalization,
unions "negotiated" themselves their power, which was based on employers
having much fewer other choices. Any union power that was ever legislated
was legislated as a *result* of union leverage, not to enable the latter
(and most of what was legislated amounts to limiting employer interference
with unions).
It is a basic feature of human individual and group relations that when
you are needed you will be treated well, and when you are not needed you
will be treated badly (or at best you will be ignored if that's less effort
overall). And by needed I mean needed as a specific individual or narrowly
described group.
What automation and globalization have done is created a glut of labor
- specifically an oversupply of most skill sets relative to all the work
that has to be done according to socially mediated decision processes (a
different set of work than what "everybody" would like to happen as long
as they don't have to pay for it, taking away from other necessary or desired
expenditure of money, effort, or other resources).
Maybe when the boomers age out and become physically too old to work,
the balance will tip again.
Same thing with the internet - it has been hailed as a democratizing force,
but instead it has mostly (though not wholly) amplified the existing power
differentials and motivation structures.
Anecdotally, a lot of companies and institutions are either restricting
internal internet access or disconnecting parts of their organizations from
the internet altogether, and disabling I/O channels like USB sticks, encrypting
disks, locking out "untrusted" boot methods, etc. The official narrative
is security and preventing leaks of confidential information, but the latter
is clearly also aimed in part at whistleblowers disclosing illegal or unethical
practices. Of course that a number of employees illegitimately "steal" data
for personal and not to uncover injustices doesn't really help.
Surely there is a huge difference between the labor market here and the
labor market in continental Europe -- though labor there faces the same
squeezing forces it faces here. Think of German auto assembly line workers
making $60 an hour counting benefits.
Think Teamster Union UPS drivers -- and pity the poor, lately hired (if
they are even hired) Amazon drivers -- maybe renting vans.
The Teamsters have the only example here of what is standard in continental
Europe: centralized bargaining (aka sector wide labor agreements): the Master
National Freight Agreement: wherein everybody doing the same job in the
same locale (entire nation for long distance truckers) works under one common
contract (in French Canada too).
Imagine centralized bargaining for airlines. A few years ago Northwest
squeezed a billion dollars in give backs out of its pilots -- next year
gave a billion dollars in bonuses to a thousand execs. Couldn't happen under
centralized bargaining -- wouldn't even give the company any competitive
advantage.
"What's missing in each and every case above -- at least in the USA! --
is countervailing power."
It was deliberately destroyed. Neoliberalism needs to "atomize" work
force to function properly and destroys any solidarity among workers. Unions
are anathema for neoliberalism, because they prevent isolation and suppression
of workers.
Amazon and Uber are good examples. Both should be prosecuted under RICO
act. Wall-Mart in nor far from them.
Rising fatalities from heart disease and stroke, diabetes, drug overdoses,
accidents and other conditions caused the lower life expectancy revealed
in a report by the National Center for Health Statistics .
== quote ==
Anne Case and Angus Deaton garnered national headlines in 2015 when they
reported that the death rate of midlife non-Hispanic white Americans had
risen steadily since 1999 in contrast with the death rates of blacks, Hispanics
and Europeans. Their new study extends the data by two years and shows that
whatever is driving the mortality spike is not easing up.
... ... ..
Offering what they call a tentative but "plausible" explanation, they
write that less-educated white Americans who struggle in the job market
in early adulthood are likely to experience a "cumulative disadvantage"
over time, with health and personal problems that often lead to drug overdoses,
alcohol-related liver disease and suicide.
== end of quote ==
Greed is toxic. As anger tends to accumulate, and then explode, at some
point neoliberals might be up to a huge surprise. Trump was the first swan.
"... John Williams counts the long term discouraged workers (discouraged for more than one year) who formerly (before "reforms") were counted officially. When the long term discouraged are counted, the US unemployment rate is in the 22-23 percent range. This is born out by the clear fact that the labor force participation rate has been falling throughout the alleded "recovery." Normally, labor force participation rates rise during economic recoveries. ..."
"... It is an extraordinary thing that although the US government itself reports that if even a small part of discouraged workers are countered as unemployed the unemployment rate is 8.6%, the presstitute financial media, a collection of professional liars, still reports, in the face of the government's admission, that the unemployment rate as 4.4%. ..."
The "recovery" is more than a mystery. It is a miracle. It exists only on fake news paper.
According to CNN, an unreliable source for sure, Jennifer Tescher, president and CEO of the Center
for Financial Services Innovation, reports that about half of Americans report that their living
expenses are equal to or exceed their incomes. Among those aged 18 to 25 burdened by student loans,
54% say their debts are equal to or exceed their incomes. This means that half of the US population
has ZERO discretionary income. So what is driving the recovery?
Nothing. For half or more of the US population there is no discretionary income there with which
to drive the economy.
The older part of the population has no discretionary income either. For a decade there has been
essentially zero interest on the savings of the elderly, and if you believe John Williams of shadowstats.com,
which I do, the real interest rates have been zero and even negative as inflation is measured in
a way designed to prevent Social Security cost of living adjustments.
In other words, the American economy has been living on the shrinkage of the savings and living
standards of its population.
Last Friday's employment report is just another lie from the government. The report says that
the unemployment rate is 4.4% and that June employment increased by 222,000 jobs. A rosy picture.
But as I have just demonstrated, there are no fundamentals to support it. It is just another US government
lie like Saddam Hussein's weapons of mass destruction, Assad's use of chemical weapons against his
own people, Russian invasion of Ukraine, and so forth and so on.
The rosy unemployment picture is totally contrived. The unemployment rate is 4.4% because discouraged
workers who have not searched for a job in the past four weeks are not counted as unemployed.
The BLS has a second measure of unemployment, known as U6, which is seldom reported by the presstitute
financial media. According to this official measure the US unemployment rate is about double the
reported rate.
Why? the U6 rate counts discouraged workers who have been discouraged for less than one year.
John Williams counts the long term discouraged workers (discouraged for more than one year) who
formerly (before "reforms") were counted officially. When the long term discouraged are counted,
the US unemployment rate is in the 22-23 percent range. This is born out by the clear fact that the
labor force participation rate has been falling throughout the alleded "recovery." Normally, labor
force participation rates rise during economic recoveries.
It is very easy for the government to report a low jobless rate when the government studiously
avoids counting the unemployed.
It is an extraordinary thing that although the US government itself reports that if even a small
part of discouraged workers are countered as unemployed the unemployment rate is 8.6%, the presstitute
financial media, a collection of professional liars, still reports, in the face of the government's
admission, that the unemployment rate as 4.4%.
Now, let's do what I have done month after month year after year. Let's look at the jobs that
the BLS alleges are being created. Remember, most of these alleged jobs are the product of the birth/death
model that adds by assumption alone about 100,000 jobs per month. In other words, these jobs come
out of a model, not from reality.
Where are these reported jobs? They are where they always are in lowly paid domestic services.
Health care and social assistance, about half of which is "ambulatory health care services," provided
59,000 jobs. Leisure and hospitality provided 36,000 jobs of which 29,300 consist of waitresses and
bartenders. Local government rose by 35,000. Manufacturing, once the backbone of the US economy,
provided a measly 1,000 jobs.
As I have emphasized for a decade or two, the US is devolving into a third world workforce where
the only employment available is in lowly paid domestic service jobs that cannot be offshored and
that do not pay enough to provide an independent existance. This is why 50% of 25-year olds live
at home with their parents and why there are more Americans aged 24-34 living with parents than living
indepenently.
This is not the economic profile of a "superpower" that the idiot neoconservatives claim the US
to be. The American economy that offshoring corporations and financialization have created is incapable
of supporting the enormous US debt burden. It is only a matter of time and circumstance.
I doubt that the United States can continue in the ranks of a first world economy. Americans have
sat there sucking their thumbs while their "leaders" destroyed them.
"... NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct. ..."
"... The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs. ..."
"... There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on. ..."
"... You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.** ..."
"... "better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule," ..."
"... Good line here Tom... they don't have a function... ..."
"... I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it. ..."
"... Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false. ..."
For the second time, you claimed "Nobody says there is no relationship between supply,
employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by
saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of
the whole idea to me.
Tom,
You say "Probably better to say that there is no necessary or constant
relationship…". Quite agree. But whoever said there WAS a constant relationship?
Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a
whole host of variables: standards of education, recent unemployment levels (hystersis) and so
on.
EK-H,
You make the naïve mistake many people make of thinking the because something cannot be
measured accurately that therefor it does not have a precise value. The amount of iron in the
Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon
and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not
know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly
permissible to write equations or get involved in discussions which assume a very very precise
value for the amount of iron in the Moon. Same goes for NAIRU.
Much of the stuff I've written makes the latter assumption: it is helpful to make that
assumption sometimes.
No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics
is not different than social psychology in this regard.
Ralph-
NAIRU is a specific claim and estimate about the way the economy works. As you discovered
yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine
policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of
accelerating inflation. So there is literally nothing redeeming about the theory except to
say that there is some relationship between supply labor, and inflation. Which is to say,
that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are
correct.
What is the unemployment rate that would correspond to accelearating inflation right now
Ralph?
The answer is that there is no unemployment rate that generates accelerating inflation. As
inflation is not simply a relationship between unemployment and prices. Inflation is a result
of many different types of inputs.
There are literally zero examples of low unemployment rates, even below 1% during WWII,
that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand
on.
You say: "You make the naïve mistake many people make of thinking the because
something cannot be measured accurately that therefore it does not have a precise value."
You make the same mistake as all illiterate persons, that is, you cannot read. What I have
clearly stated is: "NAIRU is dead, not because of measurement problems, but because the
underlying employment theory is false."* The measurement problem is a side issue.**
Egmont Kakarot-Handtke
* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
The moronic part of economists, i.e. the vast majority, maintains that economics is a
social science. Time to wake up to the fact that economics is a system science.#1
Economics is NOT a science of individual/social/political behavior - this is the social
science delusion - but of the behavior of the monetary economy . All Human-Nature issues are
the subject matter of other disciplines (psychology, sociology, anthropology, biology/
Darwinism, political science, social philosophy, history, etcetera) and are taken in from
these by way of multi-disciplinary cooperation.#2
The economic system is subject to precise and measurable systemic laws.#3
Egmont Kakarot-Handtke
#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html
But whoever said there WAS a constant relationship? Certainly not the Fed.
Not now. They had to learn this by first the NAIRU model that assumed a natural rate and
cet. par., and then the difficulty of writing a rule that could be applied across time.
Too many confounding factors involved that are not directly related to employment or the
interest rate.
It is, first of all, of utmost importance to distinguish between political and theoretical
economics. The main differences are: (i) The goal of political economics is to successfully
push an agenda, the goal of theoretical economics is to successfully explain how the actual
economy works. (ii) In political economics anything goes; in theoretical economics the
scientific standards of material and formal consistency are observed.
Political economics has produced NOTHING of scientific value in the last 200+ years. The
four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually
contradictory, axiomatically false, and materially/formally inconsistent.
A closer look at the history of economic thought shows that theoretical economics (=
science) had been hijacked from the very beginning by the agenda pushers of political
economics. These folks never rose above the level of vacuous econ-waffle. The whole
discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's
natural rate to the rational expectation NAIRU is a case in point.
The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded
political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the
NAIRU discussion up to Wren-Lewis are fake scientists.*
Egmont Kakarot-Handtke
* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html
"better to say that there is no necessary or constant relationship between employment and
inflation that can be expressed either as a function or a rule,"
Good line here Tom... they don't have a function...
But I would point out that with the employment issue, we have had an unregulated system
interface (open borders) for decades which is ofc going to result in chaos..
I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e.
you're saying there is no relationship between inflation and unemployment.
Why then don't you advocate a massive increase in demand. Think of the economic benefits
and social problems solved.!!
Reason you don't advocate that is that, like all the other NAIRU deniers, you know
perfectly well that THERE IS a relationship between inflation and unemployment.!!
It would be fine if you could first learn to read and to think and to do your economics
homework.
The point at issue is the labor market theory and the remarkable fact of the matter is
that economists have after 200+ years NO valid labor market theory. The proof is in the
NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice
without sound theoretical foundation. Scientists don't do this.
What is known since the founding fathers about the separation of politics and science is
this: "A scientific observer or reasoner, merely as such, is not an adviser for practice. His
part is only to show that certain consequences follow from certain causes, and that to obtain
certain ends, certain means are the most effectual. Whether the ends themselves are such as
ought to be pursued, and if so, in what cases and to how great a length, it is no part of his
business as a cultivator of science to decide, and science alone will never qualify him for
the decision." (J. S. Mill)
The first point is that economists violate the separation of politics and science on a
daily basis.#1 The second point is that their unwarranted advice is utter rubbish because
they have NO idea how the economy works. The problem society has with economists is that it
would be much better off without these clowns.
You ask me: "Why then don't you advocate a massive increase in demand. Think of the
economic benefits and social problems solved.!!"
Answer: The business of the economist is the true theory about how the economic system
works and NOT the solution of social problems. This is the proper business of politicians. In
addition, an economist who understands how the price and profit mechanism works does not make
such a silly proposal, only brain-dead political agenda pushers do.#2
What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and
that economics gets finally out of what Feynman aptly called cargo cult science.#3
Economists claim since more that 200 years that they are doing science and this is
celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred
Nobel'. Time to make this claim come true.
The only thing economist like you can actively do to contribute to the progress of
economics is switching on TV and watching 24/365.
Egmont Kakarot-Handtke
#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html
"The business of the economist is the true theory about how the economic system works and
NOT the solution of social problems. This is the proper business of politicians."
"The business of the economist" is not just "true theory": it is also to give the best
economic advice they can even where the theory is clearly defective. In the case of the
relationship between inflation and unemployment, the EXACT nature of that relationship is not
known with much accuracy, but governments just have to take a judgement on what level of
unemployment results in too much inflation. Ergo economics have a duty to give the best
advice they can in the circumstances.
Re social problems, your above quote also doesn't alter the fact that economists are in a
position to solve HUGE social problems if they promote an increase in demand where that is
possible. So why are you so reluctant to solve those social problems by advocating a huge
increase in demand. It's blindingly obvious.
Like all the other NAIRU deniers, you know perfectly well there is a relationship between
inflation and unemployment!!
To say that there is "a" relationship between inflation and unemployment does not even
remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the
macroeconomic framework. NAIRU does not claim that there is "a" relationship between
inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve).
NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e.
"hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to
support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING
inflation, then please provide data to support that claim.
Furthermore, "a" relationship between unemployment and inflation in no way justifies the
central bank intervention of choking off economic growth to prevent "too many jobs". Is the
inflation harmful or benign? With the historical perspective available to us from nearly 5
decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs
productivity and observe that real wages growth took a sharp right turn at the very time
NAIRU was implemented worldwide. There has not been one iota of real wage growth since the
70's (despite low inflation), whereas the real wage grew steadily prior to that (despite
moderate inflation). If that is the price of "protecting" us from inflation, then in what way
is it beneficial to do so?
I see Ralph Musgrave referred to my article again.
Good Lord, how can I make what I wrote simpler to understand?
The DEFINITION of NAIRU is the level of the unemployment rate at which the price level
starts to accelerate. Sure, there's usually another variable in there mucking up the works,
but it's going to be a second order effect in the current environment.
- If you hand me a time series of the NAIRU, I could demonstrate how the predicted
acceleration does not match observed data.
- If you cannot hand me such a time series, that is a strong indication that no such
series exists. In which case, you're wrong, and I'm right.
You say: "Ergo economics have a duty to give the best advice they can in the
circumstances."
The only duty of scientifically incompetent economists is to throw themselves under the
bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in
life, moreover, he claimed that he had always believed that if an empire were made of granite
the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)
Economists do NOT solve social problems they ARE a social problem.
You repeat your silly question: "So why are you so reluctant to solve those social
problems by advocating a huge increase in demand. It's blindingly obvious."
Yes it is blindingly obvious that deficit spending does NOT solve social problems but
CREATES the social problem of an insanely unequal distribution (see the references
above).
This follows from the true labor market theory which is given with the systemic employment
equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ―
for purely SYSTEMIC reasons ― the average wage rate has in the current situation to
rise faster than the average price. THIS opens the way out of mass unemployment, deflation,
and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox
agenda pushers."#2
Right policy depends on true theory: "In order to tell the politicians and practitioners
something about causes and best means, the economist needs the true theory or else he has not
much more to offer than educated common sense or his personal opinion." (Stigum)
Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips
curve is provable false. Because of this ALL economic policy conclusions drawn from it are
counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps
and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment
and the social devastation that comes with it.
From the fact that the NAIRU labor market theory is false follows that economists are
incompetent scientists and that ALL their economic policy proposals are scientifically
worthless.
Egmont Kakarot-Handtke
#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in
this fight, but it seems perfectly obvious from all this that Auburn and Brian have this
exactly right. And for the life of me I cannot fathom how anyone can misunderstand their
argument: there may be a link between employment and inflation, but the NAIRU doesn't capture
it. There may be a link between dogs barking at a full moon, but my theory of a moon made out
of green cheese doesn't capture it.
Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'
David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of
his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of
unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept
is a fine example of the tendency of economists to soften, relativize, qualify, and
semantically dilute every concept until it is senseless and useless.
It is the very characteristic of economics that there are no well-defined concepts and
this begins with the pivotal economic concepts profit and income. The habit of swampification
keeps the discourse safely in the no man's land where "nothing is clear and everything is
possible" (Keynes) and where anything goes.
Swampification is what Popper called an immunizing strategy. The beauty of vagueness and
ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot
prove a vague theory wrong." (Feynman)#2
David Glasner applies the concept of evolution in order to swampify the NAIRU: "The
current behavior of economies … is consistent with evolutionary theory in which the
economy is constantly evolving in the face of path-dependent, endogenously generated,
technological change, and has a wide range of unemployment and GDP over which the inflation
rate is stable."
In other words, presumably there is a relationship between unemployment and inflation but
nobody knows what it is. While science is known to strive for uniqueness, economics is known
to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After
all, reality is messy, isn't it?
To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL
relationship between wage rate changes and the rate of unemployment. The original Phillips
curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the
economic policy trade-off between inflation and unemployment which was finally thrown out
again with the NAIRU.
A conceptional error/mistake/blunder slipped in with the bastardization of the original
Phillips curve that was never rectified but in effect buried under a huge heap of
inconclusive economic shop talk. This means that until this very day economics has no valid
theory of the labor market.
So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The
macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png
From this correct employment equation follows in the MOST ELEMENTARY case that an increase
of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the
price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0,
then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P,
i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are.
That is, NO amount of inflation or deflation has any effect on employment. Inflation is
neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price
then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price
then employment DECREASES. There is a NEGATIVE effect of inflation on employment.
So, it is the DIFFERENCE in the rates of change of wage rate and price and not the
absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS
inflation/deflation is employment-neutral, that is, employment remains indefinitely where it
actually is. The neutral inflation can start at ANY point between full and zero employment.
The crucial fact to notice is that there is no such thing as "inflation", there are THREE
types of inflation.
The systemic employment equation defines the causal relationship of "inflation" on
employment. However, there is the inverse causality of employment on "inflation".
Common sense suggests that positive inflation (ii) is more probable the closer actual
employment is at full employment and negative inflation (iii) is more probable the farther
away actual employment is from full employment. In other words: the market economy is
inherently unstable. The feed-back loop between employment and "inflation" is the very
antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium.
Standard economics has built equilibrium right into the premises, i.e. into the axiomatic
foundations. All of economics starts with the idea that the market economy is an equilibrium
system. It turns out that this premise is false, just the opposite is the case.
Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not
vaguely true, or evolutionary true as David Glasner maintains, but provable false.
Egmont Kakarot-Handtke
#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when
this is pointed out, 'When you are dealing with psychological matters things can't be defined
so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
Fed Needs a Better Inflation Target - Narayana Kocherlakota
yes for a given amount of monopoly power, which the fed does
not really control,
the most the fed can do is work on the real interest rates
but if we have less monopoly power that would reduce the
part of nairu that is also known as involuntary unemployment,
and help real wages, without having so much inflation
in other words closer we get to full a perfectly
componetitive market, the less change of accelerating
inflation because in a perfectly competitive market , firms
are price takers not price makers
in a perfectly competitive market, the unions couldn't
drive inflation, without monopoly power there is no
accelerating inflation period
the fed cant control that only the legislature and
judiciary can control the ext of monopoly power
the point is the can only target inflation and real
interest rates
but there are other factors that can get us to full
employment, ie eliminate involuntary employment, that affect
inflation wages and employment in different ways and
different directions
and those factors other than inflation and interest rates
that affect involuntary unemployment seem to be ignored when
we are having these discussion
Did the rise of free information technology improve GDP? It is commonly assumed that it did.
After all, the Internet has changed the way we work, play, and shop. Smartphones and free apps
are ubiquitous. Many forms of advertising moved online quite a while ago and support gazillions of
"free" services. Free apps changed leisure long ago-just ask any teenager or any parent of a teenager.
Shouldn't that add up to a lot?
Think again. The creation of the modern system of GDP economic accounting was among the greatest
economic inventions of the 20th century. Initially created in the US and Britain, this system has
been improved for decades, and, for all intents and purposes, it is the system in every modern government
around the world today.
Although this system contains some flexibility, it also has its rigidities, especially when it
comes to free services. I expect the answer to sit awkwardly with most readers. Nonetheless, a little
disciplined thinking yields a few insights about the modern experience, and that is worth the effort.
... ... ...
This was an obvious problem when commercial television first spread using advertising as its primary
revenue source. The consumption is free, and the only revenue comes from advertising. When the TV
experience improved- say, as it moved from black and white to color - GDP recorded only the revenue
for television sets and advertising, not the user experience.
There was hope that industry specialists would find some underlying proportional relationship
between consumption of services and advertising revenue-for example, between the time watching TV
and the value of watching commercials. Such proportionality would have been very handy for economic
accounting, because it would yield an easy proxy for improvement in the quality of services. Accountants
would merely have to examine improvement in advertising revenue.
Alas, no such relationship could be found. Just look at the history of television to understand
why. Television has gotten much better over the last few decades, but-for many reasons-total advertising
has not grown. The economics is just not that simple.
A similar problem has arisen today. Search engines attract users, and that generates tens of billions
of dollars of revenue from advertisers, and that revenue contributes to GDP. However, the services
delivered by search contribute no revenue and, by definition, contribute nothing to GDP. With so
many free services today, this weakness in GDP accounting seems awkward. It does not matter how amazing
the services are, nor how much they have improved over time. Any improvement in the quality of search
services is not a contribution in GDP except insofar as it generates more advertising dollars.
Recently, three professional economists- Leonard Nakamura, Jon Samuels, and Rachel Soloveichik-tried
to wade into this topic again, and tried something experimental and novel. They wondered how GDP
would change if these free services were reconceived as a barter.
A good way to try and quantify the value of free goods/services is to estimate (as best as
one can) how those goods/services make us healthier and/or live longer active lives. A solution
free environment and public parks are good examples of free services that make us healthier. In
principle, the social media (e.g., Facebook) and voluntary work could reduce social alienation,
and make people healthier.
On the other hand, some goods/services that contribute to the GDP can have negative effects
on health & wellbeing – e.g., gambling.
"... Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall. ..."
"... Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly. ..."
"... And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this. ..."
"... Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that. ..."
"... I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership. ..."
"... It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted. ..."
"... In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day. ..."
It is a commentary on a narrative. Of course part of the point of 401(k) and similar plans
is to "align" workers with the company and companies in general, aside from paying them in stock
rather than cash. I suspect it works more so than it doesn't, overall.
Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists.
Surely you must have heard of "alignment" between shareholders and employees. Usually used to
justify large stock grants to executives, but also applicable more broadly.
Companies have several programs: ESPP (employees can buy a limited amount of company stock
at a 15% discount), 401(k) retirement accounts that may contain company stock or other investment
funds, stock and stock option grants (employees are not buying the stock but get it as part of
a regular or retention bonus program, usually with vesting - commonly your grant will vest over
4 years).
The idea behind all programs involving company stock is (1) disbursing stock is usually cheaper
to the company than cash, for the same nominal amount - for large programs where administration
overhead is amortized, (2) employees are supposedly "incentivized" to act to increase the stock
price.
The latter is believable at higher management levels, for lower level employees it is supposed
to increase their motivation to put business priorities before their own, how much it works is
anybody's guess.
And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the
table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't
do this.
If somebody absolutely wants to quit because of a bad situation or a sufficiently compelling
offer, they will. But it raises the bar. Also I have heard about companies sufficiently interested
in hiring somebody with "handcuffs" offering compensation, i.e. effectively buying out your unvested
stock (or replacing it with their own extra grant).
Honestly cm, I have not heard about the alignment between shareholders and employees. That
doesn't mean it doesn't exist, I realize that.
Regardless, I would want to see a bunch of stats that showed that workers were primarily (or
"predominately" was the actual word used) stock holders and that they derive a meaningful part
of their yearly income through that ownership while they are working.
I don't have any stats to cite but I would say that is ridiculous. I would say that almost
all people who are characterized as working class make their income through their labor. Not from
some stock ownership.
I am not claiming that workers are primarily stockholders. I am claiming that companies have
programs to issue, or sell stock at a discount, or match 401(k) contributions up to a limit (in
all applicable cases with our without vesting) to their employees. 401(k) and ESPP probably have
to be offered to everybody, stock grants are usually selective. (Probably restricted by grade
level and job function.)
The primary motivations for companies are that stock is usually cheaper for them than cash,
and the retention effect of vesting. Employee alignment with the stock price is also a narrative,
but it is not clear to me who believes it.
Are you disputing that companies are interested in pushing narratives of their labor relations
that are beyond just "you work here and we pay you", and are in fact doing this?
It is supposedly common for startups to pay below-market (compared to established companies)
to their employees, with the promise of appreciation of stock grants after an IPO/acquisition.
Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their
stock has been heavily diluted.
In established companies, stock-based compensation can be more substantial for managerial
or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary
depending on how important you are considered, which is nice, but it will not change the fact
that you still have to show up for work every day.
"... Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium. ..."
"... One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate. ..."
Almost three and a half years ago, I published a
post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro
Equilibrium." The paper originally presented at the 2013 meeting of the History of Econmics
Society has just been published in the Journal of the History of Economic Thought , with a
slightly revised title "
The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context ." The
abstract of the revised published version of the paper is different from the earlier abstract included
in my 2013 post. Here is the new abstract.
An early post-WWII debate concerned the most desirable demand and inflationary pressures at
which to run the economy. Context was provided by Keynesian theory devoid of a full employment
equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings.
A major input came with the estimates provided by the original Phillips curve. The debate seemed
to be rendered obsolete by the curve's expectations-augmented version with its natural rate of
unemployment, and associated unique equilibrium GDP, as the only values consistent with stable
inflation. The current behavior of economies with the successful inflation targeting is inconsistent
with this natural-rate view, but is consistent with evolutionary theory in which economies have
a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not
to be as misguided as they appeared to be when economists came to accept the assumptions implicit
in the expectations-augmented Phillips curve.
Publication of Lipsey's article nicely coincides with Roger Farmer's new book
Prosperity for All which I discussed in my
previous
post . A key point that Roger makes is that the assumption of a unique equilibrium which underlies
modern macroeconomics and the vertical long-run Phillips Curve is neither theoretically compelling
nor consistent with the empirical evidence. Lipsey's article powerfully reinforces those arguments.
Access to Lipsey's article is gated on the JHET website, so in addition to the abstract, I will quote
the introduction and a couple of paragraphs from the conclusion.
One important early post-WWII debate, which took place particularly in the UK, concerned
the demand and inflationary pressures at which it was best to run the economy. The context for
this debate was provided by early Keynesian theory with its absence of a unique full-employment
equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original
Phillips Curve was highly relevant to this debate.
All this changed, however, with the introduction of the expectations-augmented version
of the curve with its natural rate of unemployment, and associated unique equilibrium GDP, as
the only values consistent with a stable inflation rate. This new view of the economy found easy
acceptance partly because most economists seem to feel deeply in their guts - and their training
predisposes them to do so - that the economy must have a unique equilibrium to which market forces
inevitably propel it, even if the approach is sometimes, as some believe, painfully slow.
The current behavior of economies with successful inflation targeting is inconsistent with
the existence of a unique non-accelerating-inflation rate of unemployment (NAIRU) but is consistent
with evolutionary theory in which the economy is constantly evolving in the face of path-dependent,
endogenously generated, technological change, and has a wide range of unemployment and GDP over
which the inflation rate is stable. This view explains what otherwise seems mysterious in the
recent experience of many economies and makes the early post-WWII debates not seem as silly as
they appeared to be when economists came to accept the assumption of a perfectly inelastic, long-run
Phillips curve located at the unique equilibrium level of unemployment. One thing that stands
in the way of accepting this view, however, the tyranny of the generally accepted assumption of
a unique, self-sustaining macroeconomic equilibrium.
This paper covers some of the key events in the theory concerning, and the experience of, the
economy's behavior with respect to inflation and unemployment over the post-WWII period. The stage
is set by the pressure-of-demand debate in the 1950s and the place that the simple Phillips curve
came to play in it. The action begins with the introduction of the expectations-augmented Phillips
curve and the acceptance by most Keynesians of its implication of a unique, self-sustaining macro
equilibrium. This view seemed not inconsistent with the facts of inflation and unemployment until
the mid-1990s, when the successful adoption of inflation targeting made it inconsistent with the
facts. An alternative view is proposed, on that is capable of explaining current macro behavior
and reinstates the relevance of the early pressure-of-demand debate. (pp. 415-16).
In reviewing the evidence that stable inflation is consistent with a range of unemployment rates,
Lipsey generalizes the concept of a unique NAIRU to a non-accelerating-inflation band of unemployment
(NAIBU) within which multiple rates of unemployment are consistent with a basically stable expected
rate of inflation. In an interesting footnote, Lipsey addresses a possible argument against the relevance
of the empirical evidence for policy makers based on the Lucas critique.
Some might raise the Lucas critique here, arguing that one finds the NAIBU in the data because
policymakers are credibly concerned only with inflation. As soon as policymakers made use of the
NAIBU, the whole unemployment-inflation relation that has been seen since the mid-1990s might
change or break. For example, unions, particularly in the European Union, where they are typically
more powerful than in North America, might alter their behavior once they became aware that the
central bank was actually targeting employment levels directly and appeared to have the power
to do so. If so, the Bank would have to establish that its priorities were lexicographically ordered
with control of inflation paramount so that any level-of-activity target would be quickly dropped
whenever inflation threatened to go outside of the target bands. (pp. 426-27)
I would just mention in this context that in
this 2013
post about the Lucas critique, I pointed out that in the paper in which Lucas articulated his
critique, he assumed that the only possible source of disequilibrium was a mistake in expected inflation.
If everything else is working well, causing inflation expectations to be incorrect will make things
worse. But if there are other sources of disequilibrium, it is not clear that incorrect inflation
expectations will make things worse; they could make things better. That is a point that Lipsey and
Kelvin Lancaster taught the profession in a
classic
article "The General Theory of Second Best," 20 years before Lucas published his
critique
of econometric policy evaluation.
I conclude by quoting Lipsey's penultimate paragraph (the final paragraph being a quote from Lipsey's
paper on the Phillips Curve from the Blaug and Lloyd volume Famous Figures and Diagrams in Economics
which I quoted in full in my 2013 post.
So we seem to have gone full circle from the early Keynesian view in which there was no unique
level of GDP to which the economy was inevitably drawn, through a simple Phillips curve with its
implied trade-off, to an expectations-augmented Phillips curve (or any of its more modern equivalents)
with its associated unique level of GDP, and finally back to the early Keynesian view in which
policymakers had an option as to the average pressure of aggregate demand at which economic activity
could be sustained.
However, the modern debated about whether to aim for [the high or low range of stable unemployment
rates] is not a debate about inflation versus growth, as it was in the 1950s, but between those
who would risk an occasional rise of inflation above the target band as the price of getting unemployment
as low as possible and those who would risk letting unemployment fall below that indicated by
the lower boundary of the NAIBU as the price of never risking an acceleration of inflation above
the target rate. (p. 427)
"... Never underestimate an [neoliberal] economist's ability to ignore reality. ..."
"... In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc. ..."
"... NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to. ..."
"... NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil. ..."
"... The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits. ..."
"... Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent. ..."
"... I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity. ..."
"... Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave. ..."
"... Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science. ..."
Great article!!! The drum beat continues Productivity is definitely constrained by tight consumer
liquidity from weak labor compensation.
Economists are going to learn a big lesson, when they see unemployment get stuck above 6.7%. They
will try to explain it by pointing to problems in the economy or government. But the dynamic to
limit employment is already established and it is due to low labor share. My calculations say
the limit is 7.0% but I am allowing some margin of error.
The next two years should certainly be enlightening for many economists, including Krugman,
Delong and Thoma. They do not see the effective demand limit coming.
Hello? All talk of policy and regulations have left-out the workers. They make shit and they
buy shit. Without them, how would multi-national corporations be able to afford the lawyers, lobbyists,
members of Congress – both House and Senate, and it would now appear, members of the US Supreme
Court.
"Higher real wage claims necessarily reduce firms' profitability and hence, if firms want to
protect profits (needed for investment and growth), higher wages must lead to higher prices and
ultimately run-away inflation. The only way to stop this process is to have an increase in "natural
unemployment", which curbs workers' wage claims.
"What is missing from this NAIRU thinking is that wages provide macroeconomic benefits in terms
of higher labour productivity growth and more rapid technological progress."
True. But that aside, the original argument is a non-sequitur. Certainly, a fight between labor
and capital over how to share the economic pie can lead to inflation, but it does not follow that
full employment leads to accelerating inflation instead of converging inflation or fairly constant
inflation. The NAIRU argument takes the behavior of capital as given and puts the onus of responsibility
on labor. It amounts to special pleading.
BTW, it is not unusual in human systems to have conflicts that threaten to become a runaway
feedback cycle. But somehow that rarely happens, for reasons that are not always clear. We still
do not understand human systems all that well.
..Greenspan's (therefore Rand "goddess") ideological position is based upon equal access and
most especially information to markets this "equality" is undone by secrecy, insider trading,
HFT, etc, etc.
In other words, it's all ideological-never existed, anywhere, any time, in reality..
In a kleptocracy, looters are not called looters. That might cause the serfs to rebel.
So they are called "creators" instead, and their stolen loot becomes the just and righteous reward
for their work. Indeed it is the manifestation of natural law without which society and the economy
would fall into darkness, etc., etc.
"Greenspan's stance reflected the conventional wisdom , codified in the theory of
the non-accelerating-inflation rate of unemployment (NAIRU). It must take the blame for unleashing
and at the same time legitimizing a vastly unequal and ultimately unsustainable growth process."
NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of
the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned
exactly as it was supposed to.
"firms want to protect profits (needed for investment and growth)"
No. Firms are inanimate. They do not want anything. Nor is it the case that their managements
want to protect their profits for the purpose of investment and growth. In a kleptocracy, management
wishes not just to keep but increase profits in order to loot them.
The authors of this article, like those they criticize, leave out the social purposes for why
we have an economy and why we allow corporations to exist. Both look on the economy as a natural
process governed by natural laws (that is what this article is about: which laws best describe
the economy), and not the human enterprise it is. The real measure of the economy is whether it
is producing the society we want to live in. Classical measures, such as growth and productivity,
may be irrelevant or even at odds with this construction.
NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of
the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned
exactly as it was supposed to.
Exactly!
NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU
rank right up there with the German racial scientists and eugenics and social Darwinism when it
comes to justifying pure evil.
I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way.
Science has enough problems without having to take on charlatans like Friedman.
Friedman's work, as exemplified by NAIRU, is pseudo-science used to justify the demands of
the industrtialists and financiers to remove governmental economic regulation. It's an example
of what I like to call "Laissez-Faire
Lysenkoism ", after the
infamous Soviet agronomist who rigged his experiments and data to demonstrate that communism had
a biological basis.
I agree very much with the article's analysis and conclusions. But I want to add two things:
1. The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith
described the inherent interdependence between management and workers in his book The New Industrial
State in which he coined the term "technostructure" to describe how modern industry no longer
could realistically claim to run by a single person. Instead, the rise of scientific and business
specialties made nearly all employees of a business vital. No one, especially the CEO, could really
claim to all the profits.
2. I think the question of economic performance is too narrow. The real issue ultimately is
power. At some point, wealth will become so concentrated that the rich won't care about economic
performance; they'll just make vassals and slaves of the rest of us. At some point money per se
will become obsolete, since everything will be owned by a few anyway.
On number 2, I don't remember Feudalists ever worrying about economic growth, except when it
came to how much grain they could extract from their serfs.
It doesn't matter all that much to the ruling classes how much growth there is or not as long
as they control all that there is.
If low growth means easier control, then they will prefer that. Though I must say im not sure
that low growth does mean easier control.
Dave's close, but you got it! Neoliberal economics is not interested in a dynamic economy,
in optimum output, or in aggregate wealth-creation, and most certainly not in shared prosperity
(egad!). It is only relative wealth that concerns our neoliberal elite.
Relative wealth is the key to power and concentrated wealth to absolute power, the holy
grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal,
a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and
violent.
I believe this is the elemental nature of our criminal elite that people must understand,
first and foremost, before change is remotely possible. Unfortunately it's difficult for sane
people to comprehend such madness, and they continue to believe people like Obama have a conscience,
that Congress really seeks the greater good, that our warriors really want to avoid war. They
can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can
to a pedophile or a rapist. They have no common reference with the enemies of humanity.
Feudalism wasn't concerned with economic growth and performance. Those ideas came with
the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in
the sense of someone who owe allegiance to a master but is not a slave.
As for the other points you made, I was trying make those too: At some point the inequality
makes modern economics irrelevant.
You can also take the time to read the classics of Bacon, Descartes, Newton, et al.
A succinct definition of "science" is not that easy. But I argue that scientific statements
at the least have to be robust-they have to be capable of reliable confirmation i.e., identical
conditions should lead to the same observations, in other words "predictability" (Popper's "falsification"
is a useful rule of thumb); a new theory should be able to explain or describe all relevant phenomena
described by older theories as well as new phenomena to maintain unified explanation.
As I've argued many times on this 'blog, economics fails both tests. Instead economists offer
statements that ape scientific forms, what I call "pseudo-science". They do this out of ignorance
and a desire to cow the public (including scientists).
And we're all entitled to review the facts and make our judgment in light of the definitions
and uses of the term "science".
I don't see your point in attacking science, which you of course never define. I believe that
humanity needs a view of life that is far broader than provided by science alone. But the scientific
view is still vital to our lives. The problem is that far too many have become mesmerized by the
usefulness of science in addressing certain types of questions, and have been trying to force
their own investigations into a scientific mold rather than admitting that the scientific method
cannot address all questions equally well.
Well for me, the question is still who gets to decide what is science and what is pseudo-science?
Is it the guy with the most money?
The guy with the biggest printing press or soap box?
The guy with the most political power?
The Nobel Prize committee?
University professors?
The person with the most publications?
The most prestigious and renowned scientist?
The school of hard knocks has taught us that none of the above are trustworthy or reliable.
The historian of science Naomi Oreskes gives a great talk about this phenomenon here:
This means that one is therefore forced back onto their own lights.
Which brings us back to the question: How does the layperson tell the difference between science
and pseudoscience? I don't know many laypersons who have read Bacon, Newton or Descartes.
And what if they've read Hume, Kant or Nietzsche? Then they come away with a very different
idea of what science is. For example:
Thus, though metaphysics is an illusion from the point of view of science, science in turn
becomes but another state of illusion as far as absolute truth is concerned. In The Birth
of Tragedy Nietzche already attacks the scientific optimism of his time under the guise
of "Socratism." The "theoretic man" pursues truth in the delusion that reality can be fathomed,
and even purged of evil, by rational thought and its applications. But faith in the omnipotence
of reason shatters, for the courageously persistent thinker, not only on the fact that science
can never complete its work but chiefly on the positive apprehension that reality is irrational.
As Nietzsche writes later, "We are illogical and therefore unjust beings from the first,
and can know this : that is one of the greatest and most insoluble disharmonies of existence."
Mexico, I already answered that question. I really don't care what Naiomi Oreskes thinks; I
think for myself. And I don't have much patience for people who won't make the effort to learn
enough about science to answer the question for themselves.
There's a world of difference between Oreskes's writings about the abuse of science to further
partisan political positions, and the meaning of science itself and deciding what qualifies as
science. Just make the effort to learn and stop quoting everyone else.
As for your quote about Nietzsche, all this argument leaves is the usual relativistic confusion.
And that just invites abuse. Science and the scientific method can be defined well enough to distinguish
reliable claims from charaltanism. If you want absolutes, you might just as well accept what the
most powerful tell you to accept.
Yes, someone does get to decide. Because there ARE universal truths, like it or not.
For example, the world is not flat. Period. All the relativism in the world won't change the
fact that the world is NOT flat.
Arguing against fact doesn't make one some sort of relativist intellectual (is that a term??)
it makes one WRONG. And the only way humanity can ever transcend chaos is to acknowledge those
truths that are universal. We, as a species, are still nowhere near there, and it's like trying
to play a baseball game with no foul lines, basees, umpires, or even a ball. Yes, if life were
like a baseball game there are entire groups of people today that argue it can be played without
a ball. We'll never get beyond this chaos and into a peaceful order until we all get on more or
less the same playing field, and the only way to do that is to acknowledge truths (or rules, like
foul lines, in baseball).
Science is but one avenue to identify those truths. There are others.
Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the
point that NAIRU was pseudo-science and that economics is not a science. Neither statement has
anything to do with indicting science.
If you argue about flaws in science, whatever that means,n then start a new thread.
Science is a method, but what that method is applied to and how its results are interpreted
are not. Science is also a human activity and so must be viewed through the lens of our humanity,
not as objective truth external to us.
Lord save us! Humans are biological systems and such systems have all kinds of modularity to
protect various sub-systems and the overall system from collapse.
So where is a modular economics?
Growth? What's that? A sensible, scientific notion of it would be a system that raises everyone
a lot, curtails rich by-products that capture politics and load the many with economic rents,
educates to planet level responsibility, reduces work and squalid energy burning and related wars
We should be seeking stability and incorporating real well-being and a new understanding of
growth. Growth as we have it is a Gucci handbag while others live on a squalid jack tuna boat
earning almost nothing for your fish, eaten with a fancy T-shirt on proclaiming 'save the dolphins',
served with salad picked by migrant workers to keep your figure trim along with the coke you snort.
What growth should be one of the first questions of economics, followed by how we might create
a modular financing of what we should be doing. Without such, no subject.
In reality all the dynamism is in the state sector – from the internet, to superconductors,
pharmaceuticals, biotechnology, containerisation. 'The market' just deals with copyright and marketing.
This is all about mathiness and corruption of neoliberal economist, which is a real Fifth Column
of financial oligarchy no question about it. With unemployment measures irrevocably corrupted
by political pressures, how one can be talk about validity of derivatives based on them, unless
he/she is drunk ?
In this sense NAIRU is yet another sophisticated neoliberal fake that help to drive the public
policy in the interests of financial oligarchy under mathiness smoke screen and a bunch of corrupt
neoliberal economics serving as a propagandist army of financial oligarchy.
It's time to revamp the old quote changing it to " When I hear the term NAURU...I reach for
my gun!."
If course it would be too cruel to shoot all neoliberal economists, so reeducation camps should
probably be considered.
I think only U6 has some connections to reality. And the discrepancy between official and Gallup
value of U6 is 4%
In other words only the first digit is probably valid and the range is 10 to 20%.
== quote ==
For January 2016 the official Current U-6 unemployment rate was 10.1% up from last month's 9.1%.
On the other hand the independently produced Gallup equivalent called the "Underemployment Rate"
was 14.1% up from 13.7 in December and 13.0% in November. The current differential between Gallup
and BLS on supposedly the same data is 4.0%!
The NAIRU essentially presupposes the existence of the wage-price spiral. Which can happen
only if wages are either indexed to inflation by law, or there are strong trade unions to defend
workers rights. Under neoliberalism both are those factors are suppressed and can be viewed as
non-existent.
And the statement that the NAIRU myth belongs to the vocabulary of charlatans does not deviate
from the serious character of the discussion. This is just a historical truth.
Hot of the presses: "Debunking the NAIRU myth" January 19, 2017 By Matthew C Klein
First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment
and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from
1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although
the relationship seems to have been an artifact of the gold standard given the vertical line he
found in the postwar period:
Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward
trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any
spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were
about whether the government should target an unemployment rate of 3 per cent or 5 per cent.
This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating
Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should
be related to the distance between the actual jobless rate and some theoretical level. If the
unemployment rate were above this "neutral" level the inflation rate would slow down and potentially
turn into outright deflation. If the jobless rate were "too low", however, consumer prices would
rise at an accelerating rate.
Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment
rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating
inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation
is that it ultimately makes everyone poorer, which should, among other things, increase unemployment.
(Just look at Venezuela, for a recent example.)
According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment.
Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing
the jobless rate to ever rise above zero.
== end of quote ==
Some comments are interesting too:
grputland, Jan 22, 2017
To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change
in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:
If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given"
rather than a function of policy.
If a certain tax feeds into prices, it leaves less room for wages to feed into prices before
(according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend
to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers
to be higher than workers' take-home pay.
Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid
of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary,
with taxes that DON'T feed into prices -- that is, taxes on economic rents.
Many variables contribute to the inflation rate, certainly more than just domestic employment
(and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense
that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather
than the cause. It is troubling that there is little discussion from most of the FOMC on inflation
factors which are now more important than unemployment (currency values, foreign labor, technology,
commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch,
etc).
Producer and consumer prices are increasing, largely due to China driven commodity prices.
Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant
due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to
sustained core inflation.
Observer, Jan 19, 2017
Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6
rate and lower labour participation rate in the US may be the issue. There's still labour market
slack even though U3 is at its "full" employment level.
grumpy, Jan 19, 2017
Models have to be used with caution (they are only tools) and interpreted with awareness of
the real world - including for example, the varying wage bargaining power of labour, which is
different, post globalisation, to what it was in the '70s.
Who do you think wanted globalisation and liberalisation of trade, and why?
"... In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off. ..."
"... A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate... ..."
"... I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years. ..."
"... Kocker buys the general story as much as say larry sommers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations ..."
"... To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid -- ..."
The models are just rationalizations of a deeply embedded
policy paradigm In place since Greenspan
The motivation: Wage rate regulation
Inflation of product prices by other means then wage costs
is ignored. The relation between job market conditions and
wage rate change
Is the core focus
If UE can go lower without wage rates accelerating. There
is no urgency Ie There is no need to accelerate the present
pace of normalizing the policy rate
Hence the informed expert opinion now calling for the FED
to play it kool
However the wall street silk hat set takes a more cynical
view
Yes Sanjait and PGL are (willfully?) naive in their pleas for
Obama's Fed to behave better.
It's not the models. It's not a bug it's a feature. The
Fed has to be pushed by a popular movement which would also
enact significant reforms on the fiscal side.
"This may seem like a strange objective, given that
Congress has charged the Fed with promoting "maximum
employment," which sounds like "try to make employment as
high as you can." But the Fed knows that if it pushes
economic activity above its long-run level in pursuing that
goal, it will eventually have to hit the brakes and bring
growth below normal to cool the economy and keep inflation
under control. The Fed doesn't want to be in that position,
so it gets just as worried when unemployment falls below its
target as it does when unemployment is too high. 1 As a
result, when the economy is close to what the Fed sees as
full employment, the central bank takes a decidedly
anti-growth policy stance to keep employment in check."
This is NAIRU worship. NK fails to bash this up. For example: How can we glibly conclude
that over shoots must be over corrected. Seems on the face of it
a convenient asymmetry: The system can run control ably Up. But not Down
The fed can lower UE step by step without some inevitable
over shoot. But not back up. The reverse gear causes a destructive excessive jolt. Well maybe so
But we ought to really look this fearsome dynamic
assymetric right in the eyes.
For a long time. Not just assume its credible because it fits some morality
play plot
written to please wall street
Depends where you locate the "basic wage trap line."
In the 90s, Democrats like Yellen and Blinder were pushing
Greenspan to raise rates when he located the trap line at a
different location than they did and held off.
A story that fits the actions.
But I suspect misses the motive.
Perhaps
Green stain far from wanting to improve job markets
i.e. defy the false wage repressing NAIRU taboo zone.
He
simply wanted the crazy stock bubble to continue to inflate...
I assume
Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed
bottom half wage rates
for more then fifteen years.
Kocker buys the general story as much as say Larry
Summers
buys it. They simply, like Greenspan,
move the mythic NAIRU up or down to support other motivations
To simply deny the NAIRU
ppens the pearly gates to a job class FED. Heaven forbid --
New Deal, I thought the hyper inflation of the 70s came about because pricing determinations all
aligned in a ratcheting, a sign of a complete breakdown in market-based economics, inviting govt
intervention to halt it.
Where was it proven that wages caused these results then?
The notion of wages being related to general pricing trends is clear during deflationary trends.
Common sense, hurting and wages follow the downward spiral. If I asked a question about wages I
might agree that the downward trend is being caused by the downward trend in general pricing and
demand.
But it needs to be proven that there us a correlation and then a cause and effect reality when
general prices are rising rapidly, if you are asking if wages are a cause if this rapid rise.
The data do not now support this as you know.
The Fed needs to figure out what it can do when general prices begin to ratchet. I wish they
would look at wages last, look at other factors and other 'tools' to influence pricing determinations,
again, long before they use these false notions to justify attacking employment.
I want better economics and better logic, a different actions. For instance, can the Fed order
the credit channels not to ratchet their pricings rapidly, this would have a direct influence
on pricing. Can the Fed stop rolling over their book of assets with new purchasing subsidies to
the financial asset marketplaces and instead lower the amount of buying and selling so that the
markets see that low rates still exist (and so premia built into pricing need not use this as
a reason to ratchet). Do something differently than slamming hard on the Volker rate-peddle and
tell everyone to take it out on employment.
Productivity is typically defined as GDP divided by the total number of hours worked by population.
As GDP includes such things a military production and consumption as well as gambling profits
(Wall Street firms profits, stock market gains) how realistic is productivity as a metric?
I do not think it is realistic. Like many other neoliberal metrics (and first of all GDP),
I think it is a fake -- a pseudoscience, if you wish.
Productivity is only a realistic concept when dealing with stable units. Dividing GDP by labor
hours (or private sector labor hours) is not realistic because the monetary units are not actual
stable units because the composition of goods and services measured by GDP changes over time.
In other words, even if GDP may be useful for comparing aggregate monetary value of goods and
services from period to period. It tells us nothing about physical output and THAT, not monetary
value is what the concept of productivity implies.
If the proportions of various goods and services remained constant from quarter to quarter,
then GDP/hours would tell us something about productivity. But they don't, so it doesn't.
See "Productivity as a Social Problem: The Uses and Misuses of Social Indicators," Fred Block
and Gene A. Burns
Productivity as a Social Problem: The Uses and Misuses of Social Indicators
By Fred Block and Gene A. Burns
The study of social indicators is valuable for understanding the role that the social sciences
play in the political arena. One common pattern is for a particular social indicator to become
frozen in place once it takes on political significance, and this can result in ironic consequences.
This study traces out the case of indicators of aggregate productivity trends in the United States.
These measures were initially developed as part of an underconsumptionist argument that was linked
to the political left, but there was considerable debate over different measurement schemes. Over
time, one particular measure of trends in aggregate productivity became central for wage negotiations
and for government policy. This created a context in which the slower rates of growth of this
measure of productivity in the 1970s helped to validate the views of those on the political right
who saw the need for greater restrictions on wage gains and government civilian spending. The
paper raises questions about the value of this particular measure and ends by emphasizing the
problems of locking in place an "objective" social indicator when the reality being measured is
in continual flux.
We marxians so reverence the notion We dare not spell it out in full LTV -- Labor theory of
value
Once. The bourgeois theory of value until ricardoput too sharp a point on it
And it became the intellectual sword of the exploited toilers
All lasting exchange value is created by social labor
The part of the value of social product exchange thru markets
Not reflected in labors compensation is a product of one or other form of class exploitation
Complication
This includes rewards to innovation
Real cost reduction
And improvements of all sorts
as well as arbitrage wind fall and mere rent
It's too easy and too useless to simply condemn the whole procedure of indexation. Despite
its inevitable contradictions
[ Really important criticism, which is why I am far more interested in accumulating data for
current comparative productivity measures. I find current comparative productivity measures revealing
and important, and readily available. ]
Criticizing measures of productivity is reasonable, but where are the alternate measures and
the data to be used in recording these alternates? Current measures are backed by extensive data
and used comparatively the measures so far strike me as meaningful and important.
"It tells us nothing about physical output and THAT, not monetary value is what the concept
of productivity implies."
Yes, GDP presentations should also report the data removing the Finance and insurance segments
from the statistical program and calculations.
Considering that with the age of the computer and advanced telco capabilities it is silly to
include these segments in productivity duscussions, so we need a GDP view that matches.
And as we know these segments grew in terms of top line revenue flows remarkably in a very
short time, and this should raise questions about its role in the economic system and whether
the views of even the 1980s make sense.
You could use crude oil or electricity or debt or any numbered entity as the denominator. Thy
are all formally similar
Why labor hours ?
This is the labor theory of exchange value in modern bourgeois scientific framing
If we posit a simple historical mission for capitalism it might be the minimizing of the social
necessary labor time to produce the material requisites of society itself
Liberating humans from the burden of necessary labor
The same list tells me that Saudi Arabia had a greater GDP than Sweden, Belgium,
Norway and Denmark did in 2015. But does this information tell us anything about the
health or long-term prospects for the Saudi economy compared to the economies of the
other countries I just mentioned? Does the information tell us how well average Saudi
citizens live compared to how well the average citizen lives in Sweden? Does the
information say anything about what Saudi Arabia produces and/or exports, and about the
range of products the KSA makes, compared to what Sweden does?
I'm sure you can do better than come up with a stack of numbers and nothing else that
explains or qualifies them.
Oh and BTW, most labour migration between Russia and other countries is made up of
Central Asian migrants travelling to Russia to work in construction and other jobs
requiring little or no technical skills, or to study in the country's universities, and
going back home to visit family on special occasions (like Persian New Year) or help
gather in local harvests. Money flows in the form of remittances between Russia and
Central Asian countries like Uzbekistan and Tajikistan tend to be out of Russia and into
those other countries.
@61. So GDP is a measure of what is produced in the country. GNP adds or subtracts from
it money that is sent from elsewhere. Russia with a significantly larger GNP compared to
GDP is a net recipient of income inflow, the Central Asian migrants not withstanding.
There are two potential problems with higher GNP. Firstly, Taxes on the income being
sent have been paid in a different country. So for example the millions of Mexicans who
send money from US to Mexico pay their taxes in US. The Mexican government does not see
any of that revenue. Secondly the money coming is primarily spent via consumption. While
this may help the local economy a little bit there is also demand for more
infrastructure to support this added consumption but the government is not getting
revenue to address this need for greater infrastructure and is always trying to play
catch up.
Most countries with higher GNP (compared to GDP) continue to have weak economies
susceptible to the ravages of the World economy. Russia is no exception. A weak economy
cannot support a strong military without significantly sacrificing spending for
improving it citizens well being. There are a number of countries maintaining large
armies (for various reasons) that are disproportionate compared to their economic power.
Russia is an extreme case of this. And the Russian citizens suffer because of this.
Russia has an economy that is smaller than that of South Korea, smaller than
Canada, smaller than Italy.
On the basis of
purchasing power parity (PPP)
, Russia has an economy that is more than TWICE that of
South Korea or Canada and 61% greater than Italy's.
The Russian economy is about 20%
that of USA but the Russian per capita GDP economy grew faster than USA, Canada, or
Italy from 1990-2015.
<> <> <> <> <> <> <> <> <> <>
2015 per capita, adjusted for PPP multipled by current population (from Wikipedia):
Some interesting notes about difficulty of comparing GDP of various countries, in this case the
USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's
proposed increase this number will increase by a few decimal points.
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita. If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke.
Goods and services in Russia are considerably less expensive than in the West (and this includes
the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator
than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States
but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.
Russia's overall GDP PPP places it slightly below Germany - 6th place in the world
:
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita.
But the US GDP is of an different structure. Compared it is overblown with pure financial
sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday
things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to
conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld
some stress tests.
If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke
No country that relies on oil ( Russia do not) has made substantial improvements. Normally
they are problem states where the problems made by oil are solved by money.
So from my point of view the opposite is true. Russia has made the big mistake to open itself
to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs
which thrown away that chance for they're primitive Neanderthal tribe thinking.
Over the years, the Pentagon encouraged Congress to move parts of national security spending
out of its budget to the extent that almost half is found outside the DOD. The USA really spends
over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and
maintenance is found in the Dept of Energy budget.
And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage
refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!
Stupid beyond belief. Countries can't go broke doing something, if they control the natural and
human resources they need to accomplish it. In addition, you apparently did not read Smoothie's
explanation of why just comparing the sums spent is silly.
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing
fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita,
but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it
is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached
from reality.
"If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke." this is even funnier, Russian does not use USD in
Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble
thru the thin air just like the Fed, why does oil price have any relationship with Russian internal
spending? Another example of "completely triumphalist and detached from Russia's economic realities"
which is defined by meaningless Wall Street economic indices and snakeoil economic theories and
rhetoric taught in the western universities.
P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it
is a creative bookkeeping and most of it is financial and service sector. Out of very few
good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which
addressed the issue of actual US military-industrial potential.
Then come strategic, operational and technological dimensions. You want to see operational
dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons
to Aleppo are not only warranted but irresistible.
In general, overall power of the state (nation) is not only in its "economic" indices.
I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in
the General Staff Academy uses virtually identical definition.
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP. ..."
"... In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. ..."
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP. ..."
"... You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one. ..."
@inertial
You just illustrated my point. Facebook vs. Gazprom market caps - all that shows is that Facebook
has access to vastly larger amounts of capital than Gazprom. Well, duh.
Market capitalization is determined mostly by institutional investors - mutual funds, pension
funds, insurance companies, etc. - who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
In Russia, the government is just about the only major saver and investor. This works fine
in areas where the government must play a role, such as weapons manufacture. In other areas,
enterprises that need capital to develop must either accumulate it themselves over the years
(which puts limit on growth,) or get the government to help them out, or borrow abroad at usurious
rates. That's not good. Ideally, Russian enterprises should enter Russian stock or fixed income
market and raise as much capital as they need.
As for Boeing, yes it's a gem. But it does have some difficulties in raising capital. It's
been balancing on the edge of bankruptcy for years and, unlike Facebook, it has huge liabilities.
Incidentally, Boeing very much engages in all that "useless" high finance stuff. The buy and
sell and issue bonds and short term paper; I don't know if they issue options but they certainly
trade them. They don't believe that they are performing "virtual transactions with virtual
money;" on the contrary, they consider this and essential part of the business, as important
as building engines or whatever. Perhaps they know something you don't?
Finally, a tip. Any "expert" who doesn't treat US (or other) economic data seriously is an
idiot.
Market capitalization is determined mostly by institutional investors – mutual funds, pension
funds, insurance companies, etc. – who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called
"investments" which are several times larger than those of Boeing who is de facto US national
treasure and who, as you stated, has problems with raising "capital". That pretty much says it
all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely
the point–structure of GDP.
You may go here and see for yourself how FIRE overtook manufacturing in US in output.
What is "output", of course, remains a complete mystery, same as many other services, once one
considers the "quality" of education in US public schools which reflects in the most profound
way on US labor force which increasingly begins to look like a third world one.
In general, we speak here different languages and I may only refer you back to Michael
Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly
the process of US literally running out of resources and no amount of "raised capital" can change
it. This is not to speak about the whole house of cards of Pax Americana which rested on US military
imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it)
the house of cards folds.
Ondrej , April 18, 2017 at 3:20 pm GMT
@Andrei Martyanov
Market capitalization is determined mostly by institutional investors – mutual funds, pension
funds, insurance companies, etc. – who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called "investments"
which are several times larger than those of Boeing who is de facto US national treasure and who,
as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit
here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure
of GDP.
You may go here and see for yourself how FIRE overtook manufacturing in US in output. What
is "output", of course, remains a complete mystery, same as many other services, once one considers
the "quality" of education in US public schools which reflects in the most profound way on US
labor force which increasingly begins to look like a third world one.
In general, we speak here different languages and I may only refer you back to Michael Lind's
quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the
process of US literally running out of resources and no amount of "raised capital" can change
it. This is not to speak about the whole house of cards of Pax Americana which rested on US military
imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it)
the house of cards folds. Maybe this would help to someone:-)
„Excluding as we do noncapitalist change, we have to define that word which good economists
always try to avoid : capitalism is that form of private property economy in which innovations
are carried out by means of borrowed money, which in general, though not by logical necessity,
implies credit creation. A society, the economic life of which is characterized by private property
and controlled by private initiative, is according to this definition not necessarily capitalist,
even if there are, for instance, privately owned factories, salaried workers, and free exchange
of goods and services, either kind or through the medium of money. The entrepreneurial function
itself is not confined to capitalist society, since such economic leadership as it implies would
be present, though in other forms, even in a primitive tribe or in a socialist community." (Schumpeter
1939, 216)
This means that in perfect equilibrium interest would be zero in the sense that it would not
be a necessary element of the process of production and distribution, or that pure interest tends
to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious,
because it involves showing why all the theories which lead to a different result are logically
unsatisfactory.
Hence, the money market with all that happens in it acquires for us a much deeper significance
than can be attributed to it from the standpoint just glanced at. It becomes the heart, although
it never becomes the brain, of the capitalist organism (Schumpeter 1939)
"[R]emember
that statistical significance is only part of what you need
to know. How strong an effect is, and how important it is in
the real world, might matter even more."
I try to learn something new every day. This is it for
Friday, April 14, 2017. Thanks Noah.
I thought Smith's column was quite good. (I don't write that
very often.) "We know what the effect accurately and
precisely. It's really small and doesn't matter." is
important if/when that's the case. You want to know when you
can get away with ignoring something when you're creating
your (approximate) model of how the world works. Conversely,
"We know what the effect is pretty accurately but not super
precisely. We know enough that we can say that it's a big
deal but we're still figuring out precisely how big a deal."
is also critical information. Knowledge re the former effect
may be more statistically significant than the latter while
at the same time being less materially significant. That can
be a fairly subtle point to a non-technical audience. Heck,
it can be a subtle point to technically-oriented audience.
I think that requirement of the normal (or Gaussian)
distribution that is behind most statistical metrics is the
weakest part.
Normal distribution is the distribution with the maximum
entropy for a specified mean and variance. As such it is
poorly suited as the distribution of the data reflecting
economic or social processes (fat tails problems).
== quote == In much of the world, of course, electricity demand is still growing. In China, per-capita electricity
use has more than quadrupled since 1999. Still, most other developed countries have experienced
a plateauing or decline in electricity use similar to that in the U.S. over the past decade. And
while the phenomenon has been most pronounced in countries such as the U.K. where the economy
has been especially weak, it's also apparent in Australia, which hasn't experienced a recession
since 1991. == end of quote ==
From comments:
One interesting data point that should be within that "industrial" number: "U.S. aluminum production
has gone from 2.5 million tons in 2005 to 1.6 million in 2015."
http://www.seattletimes.com...
Aluminum smelting uses a lot of electricity, and that's a 36% decline. I'm not sure of the
total electricity use of the aluminum industry in the U.S. but it's conceivably big enough to
make a difference in that last graph.
(Bloomberg)
... In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy
researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech
historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had
decoupled from economic growth (which I've paraphrased here):
In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy
researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech
historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had
decoupled from economic growth (which I've paraphrased here):
1.State and federal efficiency standards for buildings and appliances have enabled us to get by
with less electricity.
2.Increased use of information and communications technologies have also allowed people to conduct
business and communicate more efficiently.
3.Higher prices for electricity in some areas have depressed its use.
4.Structural changes in the economy have reduced demand.
5.Electricity use is being underestimated because of the lack of reliable data on how much energy
is being produced by rooftop solar panels. ...
I appreciate these conjectures or hypotheses, which I had read initially and should have set down
as well. The problem is there is no clear defining of the hypotheses, or provision for coming
to a tentative conclusion as to the effect of any hypothesis.
The matter is of course important, and I will welcome further consideration.
'By shifting
profits overseas, economic output that should be counted in
the United States ends up being registered in other
countries.
This shifting appears to have happened in part due to the
rise in "intangible assets." To borrow an example from the
four economists, think of a simplified version of the profits
from an iPhone. Employees at Apple Inc. design the phone,
which is then produced abroad at a cost of $250 and sold to a
customer in the United States for $750. If we assume the
reason people buy iPhones is the branding and design created
by Apple, then a good portion of the $500 net profit is a
return on "intangible assets" produced in the United States.
But if a company sells the rights to these intangible assets
to a subsidiary in a low-tax country, then the profits will
end up there.
The result? An increase in the Gross Domestic Product of
the low-tax country and a decline in the GDP of the United
States without any real change in economic activity.'
Transfer pricing abuse! Of course that Ryan DBCFT tax
deform would allow this tax avoidance on a permanent basis in
a way that is all perfectly legal.
Reply
Tuesday,
pgl said in reply to Peter K....
"hey would still be taxed on their sales."
Seriously? Most
of Apple's sales are abroad. Same for Coca Cola, Boeing,
Caterpillar, the list goes on.
transfer pricing
manipulates the situation to show most of the profits as
being earned in the low tax country. So that lets say the
true cost of the manufacture of the iphone is 250 dollars,
they might say that the American subsidiary of the same
company went to the low tax country and paid 700 dollars for
the iphone
at least say that on paper
then they import it and sell it for 750 dollars here
so 450 dollars of the profit is taxed in the low tax
country
and 50 dollars of the profit is taxed in the US
that's what he is talking about
sales tax doesn't affect the tax on profit
besides, sales tax is paid over and above the 750 dollars
Reply
Tuesday, April 11, 2017 at 11:00 AM
pgl said in reply to djb...
"pgl is talking about corporate tax on profit". Yep - you get
it.
By inducing Keynesian Stimulation from Keynesian
Expectations. Here is how works :
A car dealer has contract to buy from auto factory set
amount of cars each month. Contract allows factory to churn
out Tesla-s at steady rate thus efficient clip.
Unlike his customers, savvy dealer watches deflation rate
carefully. He holds onto inventory when he expects less or no
future deflation, but when he expects greater deflation, he
deftly dumps inventory before price drops, accelerates M2V.
Deflation causes dealers of each product and service to
stimulate economic expansion. Here is my impression of Tyler
Cohen :
When a government hardens its currency most of that
currency is held by the citizens serving that government.
Each citizen then has more buying power, more wealth because
of her/his shrewd rulers.
As deflation allows full reserve, full reserve makes the
predictions of Nouriel Roubini irrelevant. Full reserve
eliminates uncertainty that nauseates business ventures that
hire folks.
Awareness!
By
spending less, but taxing more, taxing foreigners by way of
import duties. Is that what communist rulers of China are now
doing? Import tariff? To harden currency thus enrage 45th
President?
Don't worry nothing!
Don't worry!
Be happy!
45th will soon become aware. First aware; then, "company,
attenzione!
forward march
!!
"
Reply
Tuesday, April 11, 2017 at 11:38 AM
point said in reply to pgl...
It's a terrific article, especially showing aggregate debt
exceeds aggregate assets through use of tax havens.
On calculating GDP, it sure seems the standard labor
arbitrage maneuver of transferring the production of
intermediate goods to a favorable labor rate jurisdiction for
importation should have implications beyond transfer pricing
abuse.
If I, a US citizen, own a US located factory producing
product with entirely US located inputs, then transfer an
intermediate production stage to a low wage rate
jurisdiction, where I still own the entire chain, this seems
insufficiently foreign to account as exporting and importing.
People sometimes create "look through" earnings to
consolidate unconsolidated results of minority subsidiaries
to get a better look at a parent's full results. Something
similar could be worthwhile here where a company's
"insufficiently foreign" production would be consolidated
into a look-through US production number.
Reply
Tuesday, April 11, 2017 at 06:20 AM
pgl said in reply to point...
It is an interesting paper. Glad you read it. I see that
PeterK did not.
Reply
Tuesday, April 11, 2017 at 07:48 AM
GDP is a classic junk science, some sort of 'economic Lysenkoism" and "cult of GDP is an immanent
feature of neoliberal propaganda designed to substitute arbitrary metric for more scientific measurements
of the wellbeing of people. That's a neoliberal lie: "That's why per capita GDP is one of the
strongest predictors
of happiness measured through people's subjective perceptions of their well-being. "
And it is generally connected strongly only with well being of financial oligarchy, which in the
USA is at all time high. Preetty much disconned with well being of ordinary people as declining
wages signify in the USA>
Economists have long argued that the gross domestic product has many flaws as a measure of well-being
and policy success. Yet there's a good reason it's still being used: There's a certain magic to it,
despite its science being somewhat iffy.
On Monday, the National Bureau of Economic Research published a
paper by Harvard economist Martin Feldstein
detailing an argument he has been making for years -- that GDP calculations underestimate actual
growth and productivity. This optimistic argument is based on the difficulty of measuring changes
in the quality of products and services, and therefore of life. Feldstein points out, for example,
that official measurements, for the most part, only catch quality improvements if a product or service
requires more expensive inputs: "If it doesn't cost more to produce a product or service this year
than it did last year, there has been no improvement." That way, for example, leaps in the quality
of health care -- when a patient who used to need a week in hospital to recover from a cataract operation
is now discharged on the day of the procedure -- are not measured. The way official statistics measure
the introduction of new products, too, doesn't account for their actual contribution to consumers'
well-being or to the economy as a whole.
According to Feldstein, government messaging should be more optimistic to make sure people understand
that their savings will buy more in the future. Goods and services are improving lives more than
price increases would indicate.
Nobel laureate Joseph Stiglitz has long held the
opposite view -- that the GDP as measured today may overestimate well-being. For example, it
counts any increase in government spending as positive, even though these increases may be inefficient
or even counterproductive. And as for those improvements in health care quality that form the basis
of Feldstein's argument, they, too, can be overestimated in the U.S. because health care spending
there is higher than other countries while the outcomes are the same or worse.
Some recent work also argues against the theory, supported by Feldstein, that the recent productivity
slowdown is due to a failure of measurement. Last year, Chad Syverson of the University of Chicago
pointed out that even the most generous estimates of the value added by the growth in digital
technology aren't big enough to bring productivity growth to its pre-2004 trajectory. Another
analysis by International Monetary Fund economist Marshall Reinsdorf found that their unmeasured
effect on productivity could only be small. Statistics fail to record some of the added value because
of the tech sector's use of tax havens, he wrote. But even the "free" internet services provided
now are counted through the advertising they attract. And some of the improvements that tech created
for consumers don't belong in the GDP calculation in the first place: If they save a user some personal
time, that stays in the home and doesn't affect economic activity. (Even if it did, it might be canceled
out by the time our digital addictions take out of our productive workday.)
All the back and forth about how GDP is calculated is only possible because, despite all the flaws,
the measure somehow ends up feeling right. The distortions often end up canceling themselves out.
In 2013, Nicholas Oulton of the London School of Economics' Center for Economic Performance wrote
a paper to disprove the notion that U.K. economic growth had been overestimated because official
calculations overstated the contribution of banking to GDP. He showed that "if banking output has
been overstated, then the output of some other industry or industries must have been understated."
Earlier this year, a team of IMF economists
attempted to figure out how GDP numbers would have changed for a number of developed countries
had they used an outdated deflation method, still used by China and India. It turned out that the
effects wouldn't have been consistently negative or positive for most countries; for Western European
countries, on aggregate, the effects would have been small. The team's recommendation was that more
countries adopt the more progressive deflation methods now used by most of the G20 -- but their research
made it clear that in some cases the difference in the results would be tiny.
As much as GDP calculation isn't an exact science , the results usually make sense. That's
why per capita GDP is one of the
strongest predictors
of happiness measured through people's subjective perceptions of their well-being.
It's fine to argue for better measures of well-being. These measures, however, add even harder-to-measure
indicators, such as levels of social support, freedom and generosity. For many countries, these data
are either unavailable or subjectively colored. The choice is between engineering and science: The
former will accept an imperfect approximation, while the latter will always strive for perfection.
As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator"
at best. Yet it remains extremely useful as a reference.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
"Weekly Initial Unemployment Claims decrease to 258,000"
by Bill McBride...3/30/2017...08:40:00 AM
The DOL reported:
..... In the week ending March 25, the advance figure for
seasonally adjusted initial claims was 258,000, a decrease of
3,000 from the previous week's unrevised level of 261,000.
The 4-week moving average was 254,250, an increase of 7,750
from the previous week's unrevised average of 246,500.
The previous week was revised up.
...This was above the consensus forecast.
The low level of claims suggests relatively few layoffs."
Reply
Thursday, March 30, 2017 at 05:40 PM
libezkova said in reply to im1dc...
This "seasonally adjusted" magic is more like another flavor
of statistical fraud... Because assumptions behind those
adjustments are so wrong they are not even discussed.
Also McJobs and Walmart jobs -- anything paying below
subsistence level are not actually jobs.
It's more like slavery. That's another nail in the coffin
of "free market" ideology. What is so free in a person taking
job in Wal Mart? Or any other McJob? That's neo-feudalism
with Wal Mart as a huge feudal landlord and mass of
desperate, hungry peasants.
Please note that around $100K jobs in the USA are needed just
to accommodate growing workforce.
How Many Jobs Are Needed to Keep Up with Population
Growth?
Submitted by Robert Oak on September 8, 2012 - 6:45pm
The press quotes all sorts of figures for the number of
monthly job gains needed to keep up with population growth.
We see numbers like 80,000, 100,000, 125,000 and 175,000
thrown around like statistical snow as the number of jobs
needed each month just to keep up. What's the right one? How
many jobs are needed each month just to keep up with
population growth?
The actual monthly amount can be calculated and the
Atlanta Fed even did us a huge favor by publishing an
interactive monthly jobs calculator so you can go check for
yourself. This month shows we need 104,116 payroll jobs to
maintain the same unemployment rate of 8.1% with all of the
other same terrible conditions the state of employment is in.
Reply
Thursday, March 30, 2017 at 08:06 PM
In short, there is no such thing as a "natural rate of interest".
........................
What then? It is difficult to say, exactly, whether the prevalent confusions are the result
of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal
Reserve and to obstruct potential criticism of the independent central bank. As a next step, let
us ask: is there a better theory of interest rates out there, somewhere in the great work of the
economists?
In the CEA paper, as in most of this so-called literature, the 20th century British economist
John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with
the word "Interest" in the title. It was called The General Theory of Employment Interest and
Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory
of loanable funds overlying a natural rate – that his own analysis "will have made it plain that
this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's
counsel at this point?
Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real
world, there is no "capital market" that equates household saving with business investment.
Instead, Keynes's theory of interest is about the market for money – a market that definitely
does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings
into equilibrium the demand for resources to invest with the readiness to abstain from consumption.
It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available
quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined
in the money markets, by how – in what form – people with wealth choose, at any given time, to
hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid
forms, such as bonds – and this is what provides firms with a secure source of financing, which
then permits them to invest.
Keynes's theory of interest is the pure common sense of how financial markets work. So why
is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing
folderol about natural and neutral rates? The apparent answer is damning. In the theories our
economists like, a technical theory of interest creates a technical theory of income distribution,
since interest rates govern the incomes of creditors against debtors, of the rich against the
poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point,
with its argument that the great inequalities of capitalism are due to interest rates higher than
the rate of economic growth. If interest somehow reflects the physical productivity of the capital
stock, then the consequences may be unfortunate – but they are inevitable and not something of
which it is proper to complain.
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning.
In the theories our economists like, a technical theory of interest creates a technical theory
of income distribution, since interest rates govern the incomes of creditors against debtors,
of the rich against the poor, of profits against wages..........If interest somehow reflects the
physical productivity of the capital stock, then the consequences may be unfortunate – but they
are inevitable and not something of which it is proper to complain."
[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists
for rentiers.]
Marketplace Radio Has Not Heard About the Productivity
Slowdown
Marketplace radio had a peculiar piece * asking what the
world would have looked like if the North American Free Trade
Agreement never had been signed. The piece is odd because it
dismisses job concerns associated with NAFTA by telling
readers that automation (i.e. productivity growth) has been
far more important in costing jobs.
"As in, ATMs replacing bankers, robots displacing welders.
Automation is a very old story that goes back 250 years, but
it has really picked up in the last couple decades.
"'We economic developers have an old joke,' said Charles
Hayes of the Research Triangle Regional Partnership in an
interview with Marketplace in 2010. 'The manufacturing
facility of the future will employ two people: one will be a
man, and one will be a dog. And the man will be there to feed
the dog. And the dog will be there to make sure the man
doesn't touch the equipment.'
"Ouch. But it turns out technology replaced workers in the
course of reporting this very story."
Actually, the Bureau of Labor Statistics tells us the
opposite. Productivity growth did pick up from 1995 to 2005,
rising back to its 1947 to 1973 Golden Age pace (a period of
low unemployment and rapidly rising wages), but has slowed
sharply in the last dozen years.
[Graph]
While more rapid productivity growth would allow for
faster wage and overall economic growth, no one has a very
clear path for raising the rate of productivity growth. It is
strange that Marketplace thinks our problem is a too rapid
pace of productivity growth.
The piece is right in saying that the jobs impact of NAFTA
was relatively limited. Certainly trade with China displaced
many more workers. NAFTA may nonetheless have had a negative
impact on the wages of many manufacturing workers. It made
the threat to move operations to Mexico far more credible and
many employers took advantage of this opportunity ** to
discourage workers from joining unions and to make wage
concessions. It's surprising that the piece did not discuss
this effect of NAFTA.
Thanks for the data. It confirms what Dean wrote here:
"the
Bureau of Labor Statistics tells us the opposite.
Productivity growth did pick up from 1995 to 2005, rising
back to its 1947 to 1973 Golden Age pace (a period of low
unemployment and rapidly rising wages), but has slowed
sharply in the last dozen years.
Looking internationally, I consider the evidence conclusive
that productivity growth has slowed significantly since 2005
in countries that have had limited infrastructure
development, regardless of the emphasis in those countries on
information technology advance and application.
The OECD defines it as "the ratio of a volume measure of
output to a volume measure of input".] Volume measures of
output are normally gross domestic product (GDP) or gross
value added (GVA), expressed at constant prices i.e. adjusted
for inflation.
== end of quote ==
If you use GDP the result is suspect for the reasons GDP
is suspect. If not, then it is sector/industry based metric.
In this sense growth of GDP in 1990th is not only the
result of technological changes (Internet, PCs, cell phones)
but also looting of the xUSSR economies
And as looting slowed down after 2000 growth of
productivity also allowed down.
Steve Keen pointed out that all production is driven by
energy (mostly oil and electricity). And the energy comes
ultimately from the sun.
Either it is turned into production via feeding workers,
or by fueling machinery (by burning hydrocarbons or
indirectly via electricity supply).
That means that growth of productivity is inversely
correlated with the price of oil. As the period of cheap
hydrocarbons ended (remember $.99 per gallon of gas in 90th)
the period of rapid productivity growth ended as well.
One of the aspects od the idea of "secular stagnation" is
that high oil prices hit neoliberal economies like a hammer
and the period of high oil prices started to undermine
neoliberal globalization by making shipping more expensive.
That also means that without continuation of low oil
prices the next debt crisis (aka Minsky moment) is eminent
for the USA economy.
BTW none of US shale companies is profitable. They are all
up to the neck in debt, and their method of extracting oil
includes generating a flow of junk bonds. If financing stops
most of them will be bankrupt in one year period.
Obama clever game with Iran helped to produce "Obama
recovery" due to the period of "normal" oil prices which
started in mid 2015.
It probably can be extended for another year or two. What
happens next is completely unknown territory. It is clear
that the US shale is a card that was already played. It can't
be played again as output probably can be substantially
raised (say 2 Mbd/day) only with high or very high oil prices
(as in above $70 or higher).
After "Obama recovery" (which depends on continuing low
oil prices created by clever political maneuvering in Arab
world -- Hail Mary pass that worked) we might well face the
period of "elevated oil prices" and increased stagnation of
the US economy with noticeably higher level of unemployment.
Much depends on Trump playing his trump card of "détente"
with Russia which theoretically could extend this period
(Russia has the same level of oil production as Saudis and
more reserves), but there were to much sand thrown by neocons
and DemoRats for this scenario to work. I thing Russia now is
no longer interested in partnership with the USA on the basis
of maintaining low oil prices -- like KSA today, and might
cut output further to get higher oil prices which are vital
for their economy. Of course Russia has strong neoliberal
fifth column (including pro-western directors of oil
companies and oligarchs who have their wealth transferred to
Western banks) but even they are pissed off by the USA now.
DemoRats wiped up Anti-Russian hysteria to the level when
even contact with Russian official can be a "career limiting
move" in the USA.
This hysteria now has its own self-propagating dynamics
and is difficult to stop. It might last for the same period
of time as McCarthyism hysteria (roughly from 1947 to 1956).
"... "The principal problem for Democrats is that so many
media figures and online charlatans are personally benefiting
from feeding the base increasingly unhinged, fact-free
conspiracies - just as right-wing media polemicists did after
both Bill Clinton and Obama were elected - that there are now
millions of partisan soldiers absolutely convinced of a
Trump/Russia conspiracy for which, at least as of now, there
is no evidence. ..."
It put the Democrats and Republicans in sync as two
equally warmongering parties, but what good that would bring
for the American people and the world is hard to fathom.
The USA lost the possibility of switching personal car
fleet to more economical hybrid models by adopting some
drastic measures and now is less prepared for a new period of
high oil prices. People are still buying SUV which became the
most popular type of personal transportation in the USA, and
small tracks.
On the electricity front there are some problems too. The
looting of Russia and the flow of cheap uranium stopped.
Building of high voltage East -West line necessary for
substantial wind and solar production is still on the drawing
board.
"... The long term absence of convergence in productivity growth between developed and developing countries should be of considerable concern, but seems overlooked even in settings such as trade negotiations in which such concerns especially need to be addressed. ..."
"... You need to understand that like most "integral" metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred cow" status. ..."
"... While the strong earnings growth of US-based corporations might, at least partially, be real and not all accounting tricks, the question arise what part of those gains are coming from improvements in domestic productivity and what part from offshoring. ..."
"... Productivity growth is an important part of the system of neoliberal myths (along with "cult of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting from the neoliberal transformation of the society, while in reality we observe impoverishment of the majority of population. As in " The USA is the country with fastest productivity grown." Rejoice. ..."
The long term absence of convergence in productivity growth between developed and developing countries
should be of considerable concern, but seems overlooked even in settings such as trade negotiations
in which such concerns especially need to be addressed.
You need to understand that like most "integral" metrics (and, especially, like GDP) productivity
growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred
cow" status.
Government bureaucrats also are afraid to tell the truth. Richard Benson , a well-known critic
of government labor statistics, who wrote several insightful papers on the subject, noted "The
BLS is mindful of how politically sensitive any reported job data is to the White House, so there
is a strong bias for the government bureaucrats to publish a favorable jobs report."
One hidden fact is that it is offshoring that is the driver of corporate profits and it distorts
"productivity" statistics.
While the strong earnings growth of US-based corporations might, at least partially, be real
and not all accounting tricks, the question arise what part of those gains are coming from improvements
in domestic productivity and what part from offshoring.
Rising stratification of the society also affects this metric (via the ratio of "have more"
vs "have not")
Productivity growth is an important part of the system of neoliberal myths (along with "cult
of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting
from the neoliberal transformation of the society, while in reality we observe impoverishment
of the majority of population. As in " The USA is the country with fastest productivity grown."
Rejoice.
It is also simplifies the adoption of pro financial oligarchy policies masked with technocratic
jargon -- policies that destroyed New Deal and hurt the majority of the population ("rising labor
costs" is one such usage).
Adopting technocratic posture (economics like Boeing there by using certain controls you can
change flight course) serves like anesthetic. Rephrasing Marx we can say "neoliberal economics
is the opium for the people". And it is by design. which confirms the iron law of oligarchy in
a very interesting, unexpected way.
That's why jargon use by priests of neo-classical economics is almost in-penetrable for an
ordinary person. The well known neoliberal stooge Greenspan was a real master of it.
So the importance assigned to such measures as GDP and productivity is, to a certain extent,
politically motivated.
For example, in the denominator we have all those hedge funds managers and other members of
financial oligarchy bonuses, and top managers exorbitant remuneration within all kinds of firms
(which definitely drives productivity growth down ;-)
In the numerator are military expenses and income of financial sector (and now another somewhat
parasitic sector close to banking -- medical insurance industry).
Both are essentially money stolen from people and, to a certain extent, from "real" economy.
Of cause, not all money are wasted as military spending in addition to war for neoliberal empire
expansion (and related loot) also employs a lot of people and fund fundamental research; the myth
about innovation of Silicon Valley is partially a myth; in reality in many cases this is a direct
transfer of technology from the military sector.
Among the examples are integrated circuits, laser, wireless, Internet, multiprocessing, etc;
even some algorithmic languages :-).
So when you have such fuzzy numerator and denominator, the result is also fuzzy and all conclusions
based on them might be not worth electrons with which they are depicted on our screens.
As I mentioned before, productivity should be somewhat inversely correlated with the oil price,
as "amount of energy per worker" is what defines at the end worker's productivity (via the level
of automation, mechanization of his work). That's were the USA strong (or week, if you wish) point
is -- it has the largest consumption of energy per capita in the world. If we normalize productivity
via per capita energy consumption we will get a more interesting picture.
"... The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation. ..."
"... If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric. ..."
"... In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies ..."
"... And as looting slowed down after 2000 growth of productivity also allowed down. ..."
"... One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive. ..."
"... BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period. ..."
Marketplace Radio Has Not Heard About the Productivity Slowdown
Marketplace radio had a peculiar piece * asking what the world would have looked like if the
North American Free Trade Agreement never had been signed. The piece is odd because it dismisses
job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth)
has been far more important in costing jobs.
"As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that
goes back 250 years, but it has really picked up in the last couple decades.
"'We economic developers have an old joke,' said Charles Hayes of the Research Triangle Regional
Partnership in an interview with Marketplace in 2010. 'The manufacturing facility of the future
will employ two people: one will be a man, and one will be a dog. And the man will be there to
feed the dog. And the dog will be there to make sure the man doesn't touch the equipment.'
"Ouch. But it turns out technology replaced workers in the course of reporting this very story."
Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick
up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment
and rapidly rising wages), but has slowed sharply in the last dozen years.
[Graph]
While more rapid productivity growth would allow for faster wage and overall economic growth,
no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace
thinks our problem is a too rapid pace of productivity growth.
The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly
trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact
on the wages of many manufacturing workers. It made the threat to move operations to Mexico far
more credible and many employers took advantage of this opportunity ** to discourage workers from
joining unions and to make wage concessions. It's surprising that the piece did not discuss this
effect of NAFTA.
Thanks for the data. It confirms what Dean wrote here:
"the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from
1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and
rapidly rising wages), but has slowed sharply in the last dozen years.
Looking internationally, I consider the evidence conclusive that productivity growth has slowed
significantly since 2005 in countries that have had limited infrastructure development, regardless
of the emphasis in those countries on information technology advance and application.
The OECD defines it as "the ratio of a volume measure of output to a volume measure of
input".] Volume measures of output are normally gross domestic product (GDP) or gross value added
(GVA), expressed at constant prices i.e. adjusted for inflation.
== end of quote ==
If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is
sector/industry based metric.
In this sense growth of GDP in 1990th is not only the result of technological changes (Internet,
PCs, cell phones) but also looting of the xUSSR economies
And as looting slowed down after 2000 growth of productivity also allowed down.
Steve Keen pointed out that all production is driven by energy (mostly oil and electricity).
And the energy comes ultimately from the sun.
Either it is turned into production via feeding workers, or by fueling machinery (by burning
hydrocarbons or indirectly via electricity supply).
That means that growth of productivity is inversely correlated with the price of oil. As the
period of cheap hydrocarbons ended (remember $.99 per gallon of gas in 90th) the period of rapid
productivity growth ended as well.
One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal
economies like a hammer and the period of high oil prices started to undermine neoliberal globalization
by making shipping more expensive.
That also means that without continuation of low oil prices the next debt crisis (aka Minsky
moment) is eminent for the USA economy.
BTW none of US shale companies is profitable. They are all up to the neck in debt, and
their method of extracting oil includes generating a flow of junk bonds. If financing stops most
of them will be bankrupt in one year period.
Obama clever game with Iran helped to produce "Obama recovery" due to the period of "normal"
oil prices which started in mid 2015.
It probably can be extended for another year or two. What happens next is completely unknown
territory. It is clear that the US shale is a card that was already played. It can't be played
again as output probably can be substantially raised (say 2 Mbd/day) only with high or very high
oil prices (as in above $70 or higher).
After "Obama recovery" (which depends on continuing low oil prices created by clever political
maneuvering in Arab world -- Hail Mary pass that worked) we might well face the period of "elevated
oil prices" and increased stagnation of the US economy with noticeably higher level of unemployment.
Much depends on Trump playing his trump card of "détente" with Russia which theoretically could
extend this period (Russia has the same level of oil production as Saudis and more reserves),
but there were to much sand thrown by neocons and DemoRats for this scenario to work. I thing
Russia now is no longer interested in partnership with the USA on the basis of maintaining low
oil prices -- like KSA today, and might cut output further to get higher oil prices which are
vital for their economy. Of course Russia has strong neoliberal fifth column (including pro-western
directors of oil companies and oligarchs who have their wealth transferred to Western banks) but
even they are pissed off by the USA now.
DemoRats wiped up Anti-Russian hysteria to the level when even contact with Russian official
can be a "career limiting move" in the USA.
This hysteria now has its own self-propagating dynamics and is difficult to stop. It might
last for the same period of time as McCarthyism hysteria (roughly from 1947 to 1956).
"... "The principal problem for Democrats is that so many media figures and online charlatans
are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies
- just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that
there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy
for which, at least as of now, there is no evidence. ..."
It put the Democrats and Republicans in sync as two equally warmongering parties, but what
good that would bring for the American people and the world is hard to fathom.
The USA lost the possibility of switching personal car fleet to more economical hybrid models
by adopting some drastic measures and now is less prepared for a new period of high oil prices.
People are still buying SUV which became the most popular type of personal transportation in the
USA, and small tracks.
On the electricity front there are some problems too. The looting of Russia and the flow of
cheap uranium stopped. Building of high voltage East -West line necessary for substantial wind
and solar production is still on the drawing board.
"... With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...] ..."
People like you pray on the altar of GDP growth, don't they?
Look at the formula and shake from fear because the formula:
GDP = C + G + I + NX
or
GDP = consumption + government+ investment + (exports − imports)
is clearly open to huge machinations (BTW G includes purchase of weapons for the military;
you get the idea what I am hinting at). Also all the contribution of financial firms to GDP should
probably be counted with negative sign ;-). Because large part of it is either racket or illicit
rent extraction from the society which weakens the "real" economy.
The problem with all major statistical aggregates is that "it is better not to see them being
made."
And if you measure GDP via
GDP = Compensation of employees + Gross operating surplus + Gross mixed income
are you sure that you will get the same metric?
The same is true for unemployment, inflation, oil production, and other "politically sensitive"
economic metrics.
When I see a person who quotes GDP figures or unemployment without discussing his view of its
reliability and margin of error (for example for GDP via inflation, or the method of including
"services" part of economy; same for the difference between fake U3 and more realistic U6 for
unemployment), I suspect that particular person is either charlatan, or neoclassical economist
( which is basically highly intersecting subsets ).
We probably should introduce the term "statiness" in analogy with "mathiness" (or would "number
racket" be a better term?)
As Kuznets told to "statistical charlatans" long ago:
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria.
With quantitative measurements especially, the definiteness of the result suggests, often misleadingly,
a precision and simplicity in the outlines of the object measured. Measurements of national income
are subject to this type of illusion and resulting abuse, especially since they deal with matters
that are the center of conflict of opposing social groups where the effectiveness of an argument
is often contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot be
adequately measured unless the personal distribution of income is known.
And no income measurement undertakes to estimate the reverse side of income, that is, the intensity
and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore,
scarcely be inferred from a measurement of national income as defined above.
"... In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" .. ..."
"... Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory. ..."
"... But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive ..."
"... "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." ..."
"... Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right. ..."
"... One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere. ..."
"... Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains). ..."
"... I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia): ..."
"... "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. ..."
"... All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what." ..."
"... "So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant ..."
"... That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes! ..."
"... Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia. ..."
"... He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.) ..."
"... Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics. ..."
"... I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust. ..."
"... Gibbon's Decline and Fall of the Roman Empire ..."
"... The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days. ..."
"... That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution. ..."
"... The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline. ..."
"... From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years. ..."
"... It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy. ..."
"... Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories. ..."
"... In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor. ..."
Yves here. This post takes what I see as an inconsistent, indeed, inaccurate stance
on Adam Smith, since it depicts him as advocating laissez faire and also not being concerned about
"emotions, sentiment, human relations and community." Smith was fiercely opposed to monopolies as
well as businessmen colluding to lower the wages paid to workers. He also saw The Theory of Moral
Sentiments as his most important work and wanted it inscribed on his gravestone.
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 ..Here is a list
extracted from Wealth Of Nations:
the Navigation Acts, blessed by Smith under the assertion that 'defence, however, is of much
more importance than opulence' (WN464); Sterling marks on plate and stamps on linen and woollen
cloth (WN138–9); enforcement of contracts by a system of justice (WN720); wages to be paid
in money, not goods; regulations of paper money in banking (WN437); obligations to build party
walls to prevent the spread of fire (WN324); rights of farmers to send farm produce to the
best market (except 'only in the most urgent necessity') (WN539); 'Premiums and other encouragements
to advance the linen and woollen industries' (TMS185); 'Police', or preservation of the 'cleanliness
of roads, streets, and to prevent the bad effects of corruption and putrifying substances';
ensuring the 'cheapness or plenty [of provisions]' (LJ6; 331); patrols by town guards and fire
fighters to watch for hazardous accidents (LJ331–2); erecting and maintaining certain public
works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours)
(WN723); coinage and the mint (WN478; 1724); post office (WN724); regulation of institutions,
such as company structures (joint- stock companies, co-partneries, regulated companies and
so on) (WN731–58); temporary monopolies, including copyright and patents, of fixed duration
(WN754); education of youth ('village schools', curriculum design and so on) (WN758–89); education
of people of all ages (tythes or land tax) (WN788); encouragement of 'the frequency and gaiety
of publick diversions'(WN796); the prevention of 'leprosy or any other loathsome and offensive
disease' from spreading among the population (WN787–88); encouragement of martial exercises
(WN786); registration of mortgages for land, houses and boats over two tons (WN861, 863); government
restrictions on interest for borrowing (usury laws) to overcome investor 'stupidity' (WN356–7);
laws against banks issuing low-denomination promissory notes (WN324); natural liberty may be
breached if individuals 'endanger the security of the whole society' (WN324); limiting 'free
exportation of corn' only 'in cases of the most urgent necessity' ('dearth' turning into 'famine')
(WN539); and moderate export taxes on wool exports for government revenue (WN879).
"Viner concluded, unsurprisingly, that 'Adam Smith was not a doctrinaire advocate of laissez-faire'.
By Douglass Carmichael, perviously a Professor at University of California at Santa Cruz and
a Washington DC based consultant, which clients including Hewlett-Packard, World Bank, Bell laboratories,
The White House and the State Department. For the last ten years he has focused on the broad social
science issues relevant to rethinking humanity's relationship to nature. Cross posted from
the Institute for New Economic Thinking website
With Adam Smith, and hints before in Ricardo and others, economics took the path of treating the
economy as a natural object that should not be interfered with by the state. This fit the Newtonian
ethos of the age: science was great, science was mathematics; science was true, right and good.
But along the way the discussion in, for example, Montaigne and Machiavelli - about the powers
of imagination, myth, emotions, sentiment, human relations and community - was abandoned by the economists.
(Adam Smith had written his Theory of Moral Sentiments 20 years earlier and sort of left
it behind, though the Wealth of Nations is still concerned with human well-being.) Gibbon's
Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's
Wealth , but hardly read today by most economists.
In philosophy and the arts (romanticism among others) there was great engagement in these issues
economics was trying to avoid. But that philosophy and art criticism have not been widely read for
many years.
The effect of ignoring the human side of lives was to undermine the social perspective of the
"political," by merging it with the individually focused "interest." So, instead of exploring the
inner structure of interest (or later utility or preference), or community feeling and the impact
of culture, these were assumed to be irrelevant to the mechanics of the market. Politics, having
to do with interest groups and power arrangements, is more vague and harder to model than economic
activity.
Those who wanted economics to be a science were motivated by the perception that "being scientific"
was appreciated by the society of the time, and was the path to rock-solid truth. But the move towards
economics as a science also happened to align with a view of the landed and the wealthy that the
economy was working for them, so don't touch it. We get the equation, embracing science = conservative.
This is still with us because of the implication that the market is made by god or nature rather
than being socially constructed. Since economics is the attempt at a description of the economy,
it was more or less locked in to the naturalist approach, which ignores things like class and ownership
and treated capital as part of economic flow rather than as a possession that was useable for social
and political power.
Even now, economics still continues as if it were part of the age of Descartes and avoids most
social, historical and philosophical thought about the nature of man and society. Names like Shaftesbury
and Puffendorf, very much read in their time, are far less known now than Hobbes, Descartes, Ricardo,
Mill and Keynes. Karl Polanyi is much less well known than Hayek. We do not learn of the social history
such as the complex interplay in Viennese society among those who were classmates and colleagues
such as Hayek, Gombrich, Popper and Drucker. The impact of Viennese culture is not known to many
economists.
The result is an economics that supports an economy that is out of control because the feedback
loops through society and its impact of the quality of life - and resentment - are not recognized
in a dehumanized economics, and so can't have a feedback correcting effect.
The solution, however, is not to look for simplicity, but to embrace a kind of complexity that
honors nature, humans, politics, and the way they are dealt with in philosophy, arts, investigative
reporting, anthropology and history. Because the way forward cannot be a simple projection of the
past. We are in more danger than that.
Anthony Pagden, in Why the Enlightenment is Still Important , writes that before the
enlightenment, late feudalism and the Renaissance, "The scholastics had made their version of the
natural law the basis for a universal moral and political code that demanded that all human beings
be regarded in the same way, no matter what their culture or their beliefs. It also demanded that
human beings respect each other because they share a common urge to 'come together,' and it required
them to offer to each other, even to total strangers, help in times of need, to recognize 'that amity
among men is part of the natural law.' Finally, while Hobbes and Grotius had accepted the existence
of only one natural right - the right to self-preservation - the scholastics had allowed for a wide
range of them." -
Pagen also writes, "The Enlightenment, and in particular that portion with which I am concerned,
was in part, as we shall now see, an attempt to recover something of this vision of a unified and
essentially benign humanity, of a potentially cosmopolitan world, without also being obliged to accept
the theologians' claim that this could only make sense as part of the larger plan of a well-meaning,
if deeply inscrutable, deity."
But as Pagen shows, that effort was overcome by market, technical and financial interests.
The reason this is so important is that the simple and ethical view in Smith (and many other classical
economists if we were to read them) that it was wrong to let the poor starve because of manipulated
grain prices, was replaced by a more mechanical view of society that denied human intelligence except
as calculators of self interest. This is a return to the Hobbesian world leading to a destructive
society: climate, inequality, corruption. Today, the poor are hemmed in by so many regulations and
procedures (real estate, education, police) that people are now starved. Not having no food, but
having bad food, which along with all the new forms of privation add up to a seriously starved life,
is not perceived by a blinded society to be suffering. Economics in its current form - most economics
papers and college courses - do not touch the third rail of class, or such pain.
Interesting. I've been reading (thanks to an intro from NC) Mark Blyth's "Austerity" and, thus
far, seems to imply, if not outright state, that Adam Smith was quite suspicious of government
intervention in the economy. The "can't live with it, can't live without it, don't want to pay
for it" perspective. The bullet points you've listed above seem to refute that notion.
Adam Smith tried to make a moral science out of what his class wanted to hear. If he had actually
gone into those factories of his time, he might have had a different opinion of what labour was
and how there was no "natural state" for wages, but only what was imposed on people who couldn't
fight back. If he had gotten out of his ivory tower for a while, he might have had a different
opinion of what those owners of stock were doing. He also might have had different views on trade
if he could have seen what was happening to the labourers in the textile industries in France.
And I could go on. But instead he created a fantasy that has been the basis for all economic thinking
since.
In the same way, neoliberals are no different. They aren't bad people – they just see their
policies as right and just because those policies are working well for them and the people in
their class, and I don't think they really understand why it doesn't work for others – maybe,
like Adam Smith, they think that is the "natural state" ..
Sorry, but there needs to be a Copernican Revolution in Economics just as there was in science.
We have to realize that maybe Adam Smith was wrong – and I know that will be hard – just as it
was hard for people to realize that the Earth wasn't the center of the universe.
Since I am retired, maybe I will go back to school, hold my nose and cover my lying eyes long
enough to finish that Economics degree, so that I can get good access to all the other windows
in Economics. I can't really believe I am the only person thinking this way – there must be some
bright people out there who have come to similar conclusions and I would dearly love to know who
they are.
Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which
is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics
is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption
is false or at least not true enough to form a sound foundation for useful economic theory.
But "morality" means different things to different people. Smith only saw the morality
of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate
as much money as he could so that he would be seen by his peers as a good and worthy man who cares
for his future generations and the well being of his class – he doesn't see this accumulation
as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks
that money could be better used provide for those without the basic needs to survive
I've read a fair amount of Wealth of Nations although far from all of it and my take was that
Smith was describing the economic system of his time as it was , not necessarily as it
should or must be. Smith gets a bad rap from the left due to many people over the last 200+ years
hearing what they wanted to hear from him to justify their own actions rather than what he actually
said.
I'm cherry picking a bit here since I don't have the time to go through several hundred pages,
but I think Smith might actually agree with you about the plight of labor and he was well aware
of what the ownership class was up to –
"People of the same trade seldom meet together, even for merriment and diversion, but
the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
there needs to be a Copernican Revolution in Economics
One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's
epicycles; assume the Earth is at the centre, and that the planets orbit in circles and
simply by adding little circles-epicycles-you can accurately describe the observed motion of the
planets. The right epicycles in the right places can describe any motion. But they can't
explain anything, they add nothing to understanding, they subtract from it, because they
are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere.
And that is exactly what Marx did, but then got himself sidetracked by trying to find (or create)
support for his labor theory of value.
Actually most of what he writes in Capital basically refutes said theory, instead hinting at
energy being the core source of value (how much food/fuel is needed to produce one unit, basically).
Steve Keen seems to have latched onto this in the last year or so, pointing out that all
production is driven by energy. And the energy comes ultimately from the sun. Either it is turned
into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted
from plant and animal remains).
Since words have somewhat flexible boundaries, it's hard to tell from what perspective this
response is looking at the history of science. Characterizing cybernetics as mechanistic would
require an unusually broad definition of "mechanistic". Even a superficial reading of Norbert
Wiener, Warren McCulloch, W. Ross Ashby, or any of the other early contributors to the discipline
will make one aware that they were explicitly trying to address the limitations of simplistic
mechanistic thinking.
In the related discipline, General Systems Theory, von Bertalanffy expressly argued that we
should take our cues from the organic living world to understand complex systems. With the introduction
of Second Order Cybernetics by Heinz von Foerster, Margaret Mead, Gregory Bateson and others,
the role of a sentient observer in describing the system in which he/she is embedded becomes the
focus of attention. Bateson was an original participant with many of the people mentioned above
in the Macy conferences where cybernetics was first introduced. The bulk of his work was a direct
attack on the mechanistic view of the natural world.
Of course, many writers treat cybernetics, General Systems Theory, and their related disciplines
as pseudoscientific. But those are typically people who are firmly committed to mechanistic explanations.
I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented
modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics).
However, Kuznets , in the same report in which he presented modern concept of GDP to US congress,
wrote following(from wikipedia):-
"The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification.
All these qualifications upon estimates of national income as an index of productivity are just
as important when income measurements are interpreted from the point of view of economic welfare.
But in the latter case additional difficulties will be suggested to anyone who wants to penetrate
below the surface of total figures and market values. Economic welfare cannot be adequately measured
unless the personal distribution of income is known. And no income measurement undertakes to estimate
the reverse side of income, that is, the intensity and unpleasantness of effort going into the
earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement
of national income as defined above.
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns,
and between the short and long run. Goals for more growth should specify more growth of what and
for what."
So , my question is why economists keep treating GDP as some scared metric when its creator
himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most
of the economists nowadays?
"So , my question is why economists keep treating GDP as some scared metric when its creator
himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most
of the economists nowadays?"@Vedant
" Economic welfare cannot be adequately measured unless the personal distribution of income
is known. And no income measurement undertakes to estimate the reverse side of income, that is,
the intensity and unpleasantness of effort going into the earning of income."
That is your explanation right there. Large abstract numbers such as GDP obscure social
issues such as "the personal distribution of income." and the effort that goes into creating that
income. Large abstract numbers obscure the moral dimension that must be a part of all economic
discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There
are lies, damned lies and statistics." Beware the credentialed classes!
Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science
(2001)", which tackles this subject in a general way: the facts that taking a mechanistic model
as a paradigm for diverse areas of science is problematic and leads to myopia.
He describes it
as a form of 'scientific imperialism', stretching the use of concepts from one area of science
to other areas and leading to bad results (because there are, you know, relevant differences).
As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science')
of economics, I was struck by the similar argument.)
Science does not imply only mechanistic models, which may be appropriate for physics, but not
economics. Science is a method of obtaining sound knowledge by iterative interaction between facts
and theory.
Just because equilibrium is shitty mechanistic model to try and stamp onto economics doesn't
mean that all scientific modeling of economics futile. Soddy just about derived MMT from the conservation
of energy in 1921.
Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour,
but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists.
It is unscientific to apply universal laws discovered in physics and chemistry to economics without
proving by observations that those laws also apply to economics.
Soddy needed to have developed a scientific methodology for economics first, before stating
his opinions which are scientifically unproven like most economic propositions.
I get irritated by radical free-marketeers who when presented with a social problem tend to
dogmatically assert that "The free market wills it," as if that ended all discussion. It is as
if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to
obey if we feel that the answer is unjust.
Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year
as Smith's Wealth, but hardly read today by most economists.
Other than as a reflection of the sentiments of the time Gibbon was writing in, historians
don't spend much time reading it either. The moralistic explanations for the disintegration of
the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity.
More practical explanations, especially the loss of the North African bread basket to the Vandals,
are presented in the scholarly work these days.
That book of Gibbon's is an incredible achievement. If it is not read by historians today,
it is their loss. Its moral explanations, out of fashion today, are actually quite compelling.
They become more so when read with de Tocqueville's views of the moral foundations of American
township democracy and their transmission into the behavior, and assumptions, of New Englanders,
whose views formed the basis of the federal republican constitution.
The loss of the breadbasket was problematical, too. And it may be that no civilization, however
young and virile, could withstand the migrations forever, as they withstood or absorbed them,
with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes
may have been a symptom of the real, "moral," cause of the decline.
After all, the Romans did not always have that breadbasket; indeed, they had to conquer it
to get it, along with the rest of the mighty and ancient civilizations of the Mediterranean and
beyond, using the strengths derived from the mores of their martial republic. The story of the
Punic Wars is a morality play in history, as much as anything else. But the main problem was the
dilution of the Roman republican mores into a provincial stew.
And after that nice detached remark, about which historians can surely natter on in the abstract,
I'll toss in this completely anti-historicist piece of nonsense: I think it's actually much the
same problem the Americans are having today, as the mores of the founders have dissolved into
the idea that the nation is about national government, centralized administration, world leadership,
global domination through military might, and imperialist capitalism. That is not a national ethic
that leads to lasting nobility of purpose and moral strength-as George Washington and Ike Eisenhower
both pointed out.
Dendrochronology ( tree ring dating & organic history ) has established a wholly new rationale
for the termination of the Roman Empire the re-boot of the Chinese and Japanese cultures and
the death of a slew of Meso-American cultures.
From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through
those years.
The Orientals actually heard the blasts recognized that they emminated from the Indonesian
islands. ( Well, at least to the south. ) The erruption and the weather was duly recorded by Court
scribes.
Roman accounts assert that 90% of the population of Constantinople died or fled. ( mostly died
) The Emperor and his wife were at the dockside ready to flee - when she talked him back off the
boat. Her reasoning was sound: it's Hell everywhere. He won't have any authority once he leaves
his imperial guard.
It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought
blew all of the top soil into the Med. It was an irreversible tragedy.
This super drought triggered the events in Beowulf - and the exodus of the Petrans from Petra.
They marched off to Mecca and Medina both locations long known to have mountain springs with
deep water. The entire Arabian population congregated there.
This was the founding population amongst which Mohammed was raised many years later.
The true reason that Islam swept through Araby and North Africa was that both lands were still
largely de-populated. The die-off was so staggering that one can't wrap ones mind around it.
Period art is so bleak that modern historians discounted it until the tree ring record established
that this trauma happened on a global scale.
Or throw them out! I remember the very first thing I was taught in Economics 101 about supply
and demand and how they would balance at an equilibrium price. It didn't take much thinking to
realize that there is no equilibrium price and that an equilibrium price was exactly the last
thing suppliers or demanders wanted, and that the price of a good depended on who had the most
power to set the price. Yet, we had to accept the "supply and demand theory" as coming directly
from God. It's as if we were taught in Chemistry that the only acceptable theory of bonding possible
was the hydrogen-oxygen bond and even though we could see with our own eyes that hydrogen also
bonds to carbon, we should throw that out because it is an aberration from "acceptable theory" ..
Yes, coming from God; Platonic, like a Form. Economics is written in Forms, like "homo economicus"
and "the efficient market." But we live in the Cave, where the markets that humans actually make
are sad imitations of the Forms in the textbooks.
There's a lot good in the post, I think; noting the important philosophical underpinnings and
challenges to Economics, and particularly in making it a moral, and therefore political and "social"
science. But it's great to see where people's use of "incantatory names from the past" is called
out by the curator. It's a pet peeve.
Economics is the last "science" to hold onto the notion of equilibrium. The rest has moved on to complex systems/chaos theory, first demonstrated in meteorology.
Trying to apply complex systems to economics have been the goal of Steve Keen's work for several
decades now.
In college I couldn't help but notice the similarities between modern economic theory and the
control theory taught in engineering. Not such a great fit though, society is not a mechanical
governor.
Ha. That's the same thing that got economists so excited. Things is, an engineering student
attempting to model a simple system with two moving parts cares a great deal about whether the
moving parts are connected by a spring, or ball screw, or shock absorber, or lever, or even invisible
stuff like a temperature gradient when coming up with the system math model. Economists seem to
think wtf is the difference?
Next, if the math gets a bit unwieldy as the number of moving parts increase, which it does
in a hurry, they decide to simplify the math. Next, assume they have perfect sensors for everything and system lag can assumed to be zero
for talking purposes, and in research papers too. Next, hysteresis effects due to bent parts, leaky valves and stretched springs are assumed
not to exist. Congress has the "Highway Bill" thingy to address that.
Next, the guy with the control knob will do the "right thing". Or better yet, a "market" is
doing the control knob. There could be "intermediaries", but these are modeled as zero loss pieces
of golden wire and gold plated connectors.
Finally, money comes from batteries and there is no such thing in the real world like "shorts",
"open circuits", or "semiconductors" with their quantum tunneling properties.
Thanks for this, and especially the heads up about the author's take on Smith. This is exactly
what I'm on about. Not only are there more ways of knowing than the infamous mechanical, it itself
should've died long ago.
The author stresses economics is stuck in the age of Descartes. The history of Newton's refutation
of Descartes's mechanical philosophy is very interesting. Yes, refutation. Descartes's mechanical
philosophy is as dead as a dodo. So why does it still plague us? Obviously, because thinking of
and acting on nature as if it were all just one great big machine works at getting you paid, much
better than that wishy-washy humanism crap. /f (facetious).
I used to go on and on against reducing everything to mechanisms, and I largely blamed Newton.
I was wrong.
I've spent an hour trying to boil this down. Ain't happenin. Apologies for the length.
The background is the so-called "mechanical philosophy" – mechanical science in modern terminology.
This doctrine, originating with Galileo and his contemporaries, held that the world is a machine,
operating by mechanical principles, much like the remarkable devices that were being constructed
by skilled artisans of the day and that stimulated the scientific imagination much as computers
do today; devices with gears, levers, and other mechanical components, interacting through
direct contact with no mysterious forces relating them. The doctrine held that the entire world
is similar: it could in principle be constructed by a skilled artisan, and was in fact created
by a super-skilled artisan. The doctrine was intended to replace the resort to "occult properties"
on the part of the neoscholastics: their appeal to mysterious sympathies and antipathies, to
forms flitting through the air as the means of perception, the idea that rocks fall and steam
rises because they are moving to their natural place, and similar notions that were mocked
by the new science.
The mechanical philosophy provided the very criterion for intelligibility in the sciences.
Galileo insisted that theories are intelligible, in his words, only if we can "duplicate [their
posits] by means of appropriate artificial devices." The same conception, which became the
reigning orthodoxy, was maintained and developed by the other leading figures of the scientific
revolution: Descartes, Leibniz, Huygens, Newton, and others.
Today Descartes is remembered mainly for his philosophical reflections, but he was primarily
a working scientist and presumably thought of himself that way, as his contemporaries did.
His great achievement, he believed, was to have firmly established the mechanical philosophy,
to have shown that the world is indeed a machine, that the phenomena of nature could be accounted
for in mechanical terms in the sense of the science of the day. But he discovered phenomena
that appeared to escape the reach of mechanical science. Primary among them, for Descartes,
was the creative aspect of language use, a capacity unique to humans that cannot be duplicated
by machines and does not exist among animals, which in fact were a variety of machines, in
his conception.
As a serious and honest scientist, Descartes therefore invoked a new principle to accommodate
these non-mechanical phenomena, a kind of creative principle. In the substance philosophy of
the day, this was a new substance, res cogitans, which stood alongside of res extensa. This
dichotomy constitutes the mind-body theory in its scientific version. Then followed further
tasks: to explain how the two substances interact and to devise experimental tests to determine
whether some other creature has a mind like ours. These tasks were undertaken by Descartes
and his followers, notably Géraud de Cordemoy; and in the domain of language, by the logician-grammarians
of Port Royal and the tradition of rational and philosophical grammar that succeeded them,
not strictly Cartesian but influenced by Cartesian ideas.
All of this is normal science, and like much normal science, it was soon shown to be incorrect.
Newton demonstrated that one of the two substances does not exist: res extensa. The properties
of matter, Newton showed, escape the bounds of the mechanical philosophy. To account for them
it is necessary to resort to interaction without contact. Not surprisingly, Newton was condemned
by the great physicists of the day for invoking the despised occult properties of the neo-scholastics.
Newton largely agreed. He regarded action at a distance, in his words, as "so great an Absurdity,
that I believe no Man who has in philosophical matters a competent Faculty of thinking, can
ever fall into it." Newton however argued that these ideas, though absurd, were not "occult"
in the traditional despised sense. Nevertheless, by invoking this absurdity, we concede that
we do not understand the phenomena of the material world. To quote one standard scholarly source,
"By `understand' Newton still meant what his critics meant: `understand in mechanical terms
of contact action'."
It is commonly believed that Newton showed that the world is a machine, following mechanical
principles, and that we can therefore dismiss "the ghost in the machine," the mind, with appropriate
ridicule. The facts are the opposite: Newton exorcised the machine, leaving the ghost intact.
The mind-body problem in its scientific form did indeed vanish as unformulable, because one
of its terms, body, does not exist in any intelligible form. Newton knew this very well, and
so did his great contemporaries.
And later:
Similar conclusions are commonplace in the history of science. In the mid-twentieth century,
Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature
is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius
or of Descartes, is utterly impossible, too)"; his mathematical physics required the "admission
into the body of science of incomprehensible and inexplicable `facts' imposed up on us by empiricism,"
by what is observed and our conclusions from these observations.
So the wrong guy was declared the winner of Descartes vs. Newton, and we've been living with
the resultant Frankenstein's monster of an economy running rampant all this time. And the mad
"scientists" who keep it alive, who think themselves so "realistic" and "pragmatic" in fact are
atavists ignorant of the last few centuries of science. But they do get paid, whereas I (relatively)
don't.
Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern
of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as
that of Lucretius or of Descartes, is utterly impossible, too)"
I think that Newton considered phenomena like gravity, magnetism, and optics to be non-material,
perhaps even spiritual, and separate from matter. Modern physicists would disagree, and would
consider gravity and electro-magnetism to be purely material phenomena. Newton didn't prove that
the world is non-mechanical; he showed that objects do not need to touch for them to have influence
on each other.
It is still quite possible that there are non-material phenomena, but those would be separate
from gravity and electro-magnetism, which Newton considered non-material.
Are all products of the brain. I don't see how the results of the interaction of electrical
impulses and chemicals are non-material. Magic is not an explanation for anything.
So Newton formulated his theories because of his belief in Alchemy and not, as I had thought,
despite it.
Discussions like this are what make this site so great.
All modern economic thought ( 1900+ ) has been corrupted by the arrogance of Taylor's Time
& Motion Studies. The essence of which is that bean counters can revolutionize economic output by statistics
and basic accounting.
AKA Taylorism.
Big Government is Taylorism as practiced.
At bottom, it arrogantly assumes that if you can count it, you can optimise it.
The fact is that 'things' are too complicated.
Taylor's principles only work in a micro environment. His work started in machine shops, and
at that level of simplicity, still applies.
Its abstractions and assumptions break down elsewhere.
MOST economic models in use today are the grandsons of Taylorism.
They are also the analytic engines that have driven the global economy to the edge of the cliff.
For my penny's worth the sentence "Today, the poor are hemmed in by so many regulations and
procedures (real estate, education, police) that people are now starved" reveals the main problem.
Too many of the most lucrative parts of every national economy have been closed off by politicians
and reserved for their friends.
DAVID BARSAMIAN: One of the heroes of the current right-wing revival is Adam Smith. You've
done some pretty impressive research on Smith that has excavated a lot of information that's
not coming out. You've often quoted him describing the "vile maxim of the masters of mankind:
all for ourselves and nothing for other people."
NOAM CHOMSKY: I didn't do any research at all on Smith. I just read him. There's no research.
Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism
he despised.
People read snippets of Adam Smith, the few phrases they teach in school. Everybody
reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division
of labor is. But not many people get to the point hundreds of pages later, where he says that
division of labor will destroy human beings and turn people into creatures as stupid and ignorant
as it is possible for a human being to be.
And therefore in any civilized society the government
is going to have to take some measures to prevent division of labor from proceeding to its
limits.
And here is a link to Adam Smith's poignant denunciation of division of labour:
This mention of division of labor is, as Chomsky points out, left out of the index of the University
of Chicago scholarly edition! Of George Stigler's introduction Chomsky claims, "It's likely he
never opened The Wealth of Nations. Just about everything he said about the book was completely
false."
I recommend reading the entire paragraph at the link above. Smith writes:
"The man whose whole life is spent in performing a few simple operations, of which the effects
are perhaps always the same, or very nearly the same, has no occasion to exert his understanding
or to exercise his invention in finding out expedients for removing difficulties which never
occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as
stupid and ignorant as it is possible for a human creature to become. But in every improved
and civilized society this is the state into which the labouring poor, that is, the great body
of the people, must necessarily fall, unless government takes some pains to prevent it.
"
The Economist asks: "Fifty years after the dawn of empirical financial
economics, is anyone the wiser?"
My short answer: "Only the people who understand both the data
and its limitations, and not get lost in the illusion of precision."
Markets are driven by myriad factors, most of which are readily quantifiable.
But the small number of inputs that do not lend themselves to easy modeling
is how certain empiricists get themselves into trouble. They believe
their models accurately account for the real world, when they do not.
One would imagine that the parade of Black Swan events that keep
upending their models would convince these economists otherwise, but
you would be surprised at how foolishly stubborn these folks are.
The EMH proponents, the VAR analysts, the "stocks for the long run"
folks - the grim reality of their performance has not dissuaded them
from their beliefs. This has Yale Professor Robert Shiller concerned:
"[Shiller] worries that academic departments are "creating idiot
savants, who get a sense of authority from work that contains lots
of data". To have seen the financial crisis coming, he argues, it
would have been better to "go back to old-fashioned readings of
history, studying institutions and laws. We should have talked to
grandpa."
Shiller puts his finger on the right pressure point. The factors
ignored by the quants were the underlying changes in laws and regulations.
That allowed banks to run wild, something the pure quants were not prepared
to detect and act upon. The radical deregulation of the past 3 decades
was the equivalent of dark matter, undetectable by Newtonian physics
- or quant trading funds.
Shiller describes many modern economists and market observers as
idiot-savants; truth be told, when using that phrase he is
only half right.
Here is the Economist:
IT ALL began with a phone call, from a banker at Merrill Lynch
who wanted to know how investors in shares had performed relative
to investors in other assets. I don't know, but if you gave me $50,000
I could find out, replied Jim Lorie, a dean at the University of
Chicago's business school, in so many words. The banker, Louis Engel,
soon agreed to stump up the cash, and more. The result, in 1960,
was the launch of the university's Centre for Research in Security
Prices. Half a century later CRSP (pronounced "crisp") data are
everywhere. They provide the foundation of at least one-third of
all empirical research in finance over the past 40 years, according
to a presentation at a symposium held this month. They probably
influenced much of the rest. Whether that is an entirely good thing
has become a matter of debate among economists since the financial
crisis.
34 Responses to "Are Empirical Economists Idiot Savants?"
KentWillard: November 21st, 2010 at 8:51 am
My personal experience has been that
most 'quants' in Finance don't have economics degrees. Often a PhD in
Physics. Sometimes in Math, sometimes in Finance. Many aren't from the
US, or even the West. They don't have an understanding, or often
interest in markets. They can sure run a lot of simulations quickly
though.
machinehead : November 21st, 2010 at 8:53 am
'Shiller puts his finger on the right
pressure point. The factors ignored by the quants were the underlying
changes in laws and regulations.'
To these factors, I would add the cyclical analysis described in a
Big Picture post about Felix Zulauf a couple of days ago. Quantitative
models do a pretty good job of identifying 'late expansion phase'
syndrome: bubbly equity markets, loose credit standards, tightening
capacity, persistent inflation (properly measured).
But every time, economists as a group say that the Federal Reserve
will achieve a soft landing, and recession will be averted. Many of them
are saying this now about China, currently manifesting 'late expansion
phase' syndrome with a vengeance.
Why are economists so poor at reading the business cycle? I'd contend
that most of them are conflicted. Their paychecks come from corporate
entities who don't want to hear recession forecasts. Federal Reserve
economists certainly aren't going to bite the FOMC's guiding hand.
Academic economists should be freer, you'd think, but some have
corporate research funding. Robert Schiller at Yale was one of the few
(with Irrational Exuberance, January 2000) to get a cyclical peak right.
Behavioral economics says that economists, like every other cohort,
will be victims of groupthink at inflection points, always zigging when
they should zag. This is the tragedy of the Federal Reserve's interest
rate central planners. Never will they succeed at day-trading this vast
economy into prosperity. They've spectacularly failed at even the much
narrower task of enriching their client banking cartel at the expense of
everyone else.
Here's hoping that B.S. 'Benny Bubbles' Bernanke will be history's
last Fed chairman.
ToNYC: November 21st, 2010 at 9:02 am
Granpa knew that Moral Authority took
care of business and was worth more to effect continuity or change than
any manipulation of currency or credit. JP Morgan knew that Lending was
all about Character and told Congress that other factors were secondary.
Quants know how to manipulate data and the value of nothing.
Opir: November 21st, 2010 at 9:27 am
If we accept, for the sake of
argument, that economics is really 90% mass psychology, 10% math, then
isn't a large part of the issue that many of its professional
practitioners have tried to understand problems though a lens where
those percentages are reversed? There is perhaps kind of bias that
causes many of these people to only see the world using neat models, and
discount that what economics is really about trying to understand (once
you get beyond the simple cases where said models and standard ideas
about incentives work):
what people do and want to do; how many of them do it; and for how
long, modified by:
1) geopolitical events 2) the zeitgeist 3) culture (and subculture)
People may go into the field with a love of numbers and an interest
in money; what we may really need, however, are people who care about
understanding human behavior as it pertains to resources and power
within and between societies. A "sociology for money", as it were.
Go Dog Go: November 21st, 2010 at 9:27 am
Shiller describes many modern
economists and market observers as idiot-savants; truth be told, when
using that phrase he is only half right.
I just got that. Very funny
Mark E Hoffer: November 21st, 2010 at 9:42 am
funny, the Argument, ~"over-reliance
on imperfect Models/questionable Data", is, no doubt, True..
though, substitute "AGW/"Climate Change" for "Econometrics/Financial
Engineering" and . ~~
differently, Economists, of course, should be snorting more *Exhaust
Fumes, and less Laser Toner..
billkeep: November 21st, 2010 at 9:42 am
There are empiricists and then there
are empiricists. A quick look at Reinhart and Rogoff's book "This Time
Is Different," shows the incestual limitation of quant jocks (whether
trained in econ or physics or math - it's all the same because they use
the same tired data) and the power that can come from fresh data, fresh
thinking, and an absence of self-interest in the outcome (see Folbre's
piece on the ethics of economists in the NYT Economix column).
Bill W: November 21st, 2010 at 9:47 am
Despite our great triumphs of science
and advances in understanding, we still don't know jack about the
universe. I believe in the constant advance of knowledge, but I also
believe in being realistic.
We need to be prudent when we apply our theories about the world to
the real world. The results can be disappointing.
What's much worse than a fool? A fool with ambition.
How the Common Man Sees It Says:
November 21st, 2010 at 10:08 am The fact is, if you pay people to
look the other way, they usually do.
mhdoc: November 21st, 2010 at 10:14 am
Many years ago I was a biology
graduate student when we got our first computer terminal and I
discovered the joys of stepwise regression. I spent hours searching out
the last 5% of the variance. Then I went on my first field trip of the
season to check on the rainfall collectors I had randomly scattered
through the forest. We measured the dissolved elements in the water we
collected; parts per million potassium, etc.
One of the collectors had gotten plugged, filled with water, and a
thirsty chipmunk had fallen in and drowned. In addition, the water was
covered with pollen. Suddenly the value of stepwise regression for
explaining what was going on took a serious hit. I guess my black swan
looked like a chipmunk :)
Bill W: November 21st, 2010 at 10:26 am
billkeep, I like what you said about
fresh thinking and and absence of self-interest. How often do "data
driven," "open-minded," scientists become high priests of their own
theories. They will put down traditional religious beliefs, without
realizing the dogma of their own thinking. There will always be religion
of some sort in this world, whether the practitioners realize it or not.
I think the quants are probably missing a healthy dose of the applied
knowledge of experienced investors. You don't have to be able to
mathematically formulate why something works to understand that it does.
How do you separate the quack theories from the real ones? If I knew
that I'd be considerably wealthier.
farmera1: November 21st, 2010 at 10:34 am
Misuse of statistics by
economist/quants is a root cause of our recent meltdown.
Seeing the world and economics as a normal/Gaussian/bell curve world
(it isn't in most cases) will lead you to a path of unforeseen and
destructive events. You end up making all kinds of risk assessments and
predictions that are built upon "facts/Gaussian models/bell curve" that
just don't reflect the real world. Some big unpredicted event will get
you.
For example thinking (and building an investment house of cards) just
because models show you that the real estate market never goes down
(nation wide) that it will never happen is a fool's approach, but it
built huge bonuses (say a cool $100,000,000/yr for several) for the
executives so in that sense it was successful. It also made the
Ownership Society possible. It allowed this country to live way beyond
its means for years so most benefited. Cut taxes and start wars, no
problem, we got this baby humming. Since we were able to predict and
control risk so well who needs regulations. Leverage, no problem, we
have it under control (aka being fully hedged). RIGHT.
By the way the social sciences do the same thing, in using things
like ANV, standard deviations, risk, relative error (?)etc. This misuse
is just as big in its' own way as the quants/economists' errors.
Petey Wheatstraw: November 21st, 2010 at 11:12 am
"Markets are driven by myriad
factors, most of which are readily quantifiable." _______________
The least quantifiable of which is direct intervention in, and
manipulation by, central bankers. The markets are rigged. Quantify THAT,
bitch.
(sorry for the last sentence, not aimed at anyone.)
~~~
BR: $600 Billion dollars over 6-9 months.
Mark E Hoffer: November 21st, 2010 at 11:35 am
though, speaking of 'Empiricists',
these cats http://www.gapminder.org/ offer some interesting analytics,
esp. here http://www.gapminder.org/labs/
as per, YMMV, YOMP ..
louis: November 21st, 2010 at 11:38 am
There are a myriad of factors that
set a point spread.
Sechel: November 21st, 2010 at 11:55 am
There's an old joke about the drunk
economists looking for his keys by the light post even though they were
lost elsewhere, when asked he responded, "because this is where the
light is
The market seems intent on assuming the market operates under the
efficient market hypothesis, price distribution is normal and that
participants always act rationally. Nothing could be further from the
truth. Mandelbrot discussed how observations of Cotton price movements
disproved this. We know there is information asymmetry in the
marketplace.
The market knows what models to use, it just chooses not to. It's
beyond fat tails, it requires extreme value theory, knowing that risk
scales at the extremes and that bad news comes in threes(dependence).
So why use the failed tools, the answer is simple. If the market
gives up on OAS, Black-Scholes and the like, it has to accept being in
the dark more than it's used to.
Sechel: November 21st, 2010 at 12:02 pm
Barry, the mortgage market learned
that VAR does not work, that OAS is a terrible tool. Many have turned to
scenario analysis, but a great deal many like the simplicity of the old
failed tools.
daf48: November 21st, 2010 at 12:12 pm
"most of which are readily
quantifiable" Really? I'd be careful if that was my point of view.
Economic reality is compiled by using data points from thousands of
governments, corporate think tanks, independent agencies, etc'. But
little work has been done to look at the system as a whole. Or better
yet. is there a global economic system?
IMO your "short answer" is spot on
BR: The illusion of precision is a major problem not only because the
data are limited or much more granular than suspected - e.g., the fact
that price can be recorded down to the penny does not mean that is where
the significant digit is - but also because increased precision cannot
significantly improve predictability of system behavior if nonlinear
factors are present.*
*this was a key insight of the meteorologist Edward Lorenz, one of
the first 'chaos' theoreticians (1963), that and the sensitivity of even
the best model simulations to minute changes in initial conditions
(butterfly effect).
Uchicagoman: November 21st, 2010 at 12:38 pm
Here's an old (physics?) saying:
"You can either dazzle me with data, or butter me with bullshit."
b_thunder: November 21st, 2010 at 3:16 pm
"[Shiller] worries that academic
departments are "creating idiot savants, who get a sense of authority
from work that contains lots of data".
I wonder who Shiller had in mind? How about that guy who used to go
over massive amounts of data while in his bathtub? Remember the Maestro?
And another one who says we're under threat of deflation (according to
statisticians) and who doesn't see that other than houses and
flat-screen TVs, prices for everything else are rising in the real
world. The one who thinks that because cost of gasoline and food are not
in his data tables and charts, they do not matter. The one who thinks
that in times of 17% U6 un/under-employment and massive outsourcing
wages will rise and people will get hired if prices go up.
I also wonder what Barry's buddy "Invictus" thinks about all this. He
seems to trust the charts and data more than the real world sentiment.
Sechel: November 21st, 2010 at 4:01 pm
Who can believe anything they say.
With one breadth they tell us quantitative easing is meant to spur bank
lending, then they pay banks on their reserves encouraging them not to
lend those same reserves out. As far as the Fed goes, no credibility.
Julia Chestnut: November 21st, 2010 at 4:02 pm
You know, BR, the best economics class
I had during my graduate studies was econometrics. The thing that was so
good about it (and so incredibly annoying at the time) was that the prof
made us work the matrix algebra from the ground up in building
regression analyses. We were going to be using computers to regress the
data - but he was adamant that unless you understood the math, and knew
exactly what the math was doing with the data we input, you would have
no idea what the limitations of the analysis were. He also insisted that
we understand the limitations of the data – how it was collected, what
it meant. I've used that course at least weekly since I graduated
embarrassingly long ago (unlike "finance," where I at least learned that
derivatives are for hedging, not investing).
I'd say that either a true statistician or an applied mathematician
for a quant is the way to go. I meet loads of economists who couldn't
figure their way out of a paper bag. Know what's worse, though? The
number of MDs with less than a clue about the math underlying normative
numbers in lab tests. I'm less likely to get killed by a quant.
TerryC: November 21st, 2010 at 4:07 pm
"Only the people who understand both
the data and its limitations, and not get lost in the illusion of
precision."
Barry, I think you mean accuracy.
billkeep: November 21st, 2010 at 4:08 pm
Bill W
Actually if you knew that you wouldn't be wealthy. You would only be
wealthy if you knew it first and with enough time to act in your own
interests. There is a unreconcilable difference of purpose between
public and private interests when it comes to understanding markets. As
Sechel says We know there is information assymetry in the marketplace.
In fact, we bet on it. The problem we seem to now have is that a few
analysts who do understand the psychology of investors or not "public"
analysts. As a result, the public analysts lag behind because they have
been trained too narrowly in terms of the data and lack the
understanding of investor behavior. That is the way it appears to me
anyway.
constantnormal: November 21st, 2010 at 5:35 pm
As in most things, the quality of the
question says more than the completeness of the answer.
What many people lose sight of is the fact that we humans tend to
move in "excesses." First there is excessive greed which causes asset
bubbles, then comes the excessive fear after the bubble bursts.
This has been going on for several hundred years, regardless of
regulatory structure.
And, you know what?
That's OK. It is it what it is
Attempts to "modify" human behavior or attempts to disrupt the
natural flow of things will have it's own unintended consequences.
ezrasfund: November 21st, 2010 at 7:21 pm
So right. You can build a giant
edifice of precise calculations. But so often that edifice is build on a
foundation of vague assumptions such as "housing prices won't go down."
RodgerMitchell: November 21st, 2010 at 7:26 pm
All the mathematical formulas in the
world are trumped by the simple fact that the U.S. is monetarily
sovereign.
1. It does not need to borrow
2. It can pay for any deficits
of any size, without raising taxes
3. It never should engage in
"austerity."
4. It cannot be forced into bankruptcy, nor can any of its
agencies (i.e. Social Security, Medicare et al) be forced into
bankruptcy. .
Spending by the U.S. neither is constrained by taxes and
borrowing, nor is it even related to taxes and borrowing. Either can be
done or eliminated without affecting the other. That is, taxing does not
affect spending, and spending does not affect taxing. They, in fact, are
two, unrelated operations. . The sole constraint on federal spending is
inflation. We are nowhere near inflation, and it easily can be prevented
and cured with interest rate control. . Those who do not understand
monetary sovereignty do not understand economics. .
and, because of such, it, actually, "does need to borrow", contra to
your first assertion..(?)
soloduff: November 21st, 2010 at 9:50 pm
The author exhibits an elementary
conceptual confusion. Financial economics (of the EMH/Modern Portfolio
fame) is not "empirical" economics. Rather, it is based upon analogy
with 19th century statistical mechanics; hence its fetish of the bell
curve ("normal distribution"), which fails as a benchmark in every
crisis. B. Mandlebrot and E. Derman have written extensively on this
genre of economics; which differs from mainstream ("neoclassical" a la
Samuelson et al.) only inasmuch as neoclassical economics takes its
metaphor from an even more antiquated department of 19th century
physics, namely, "rational mechanics"–remember your Econ 101 text's
proud mention of the "production function" (Cobb-Douglas) and the
Lagrangian multiplier? About 15 years ago Philip Mirowski wrote an
expose of the neoclassical analogy–"More Heat Than Light"–demonstrating
conclusively that the luminaries of economics understood neither the
physics that they borrowed nor the economics that they data-fitted to
their analogy. (Ditto with financial economics in the critiques provided
by Mandlebrot and Derman.) –Oh, well, should we expect scholarly
accuracy from a mere financial reporter when the scholars themselves
serve up such wanton slop? In a word: All idiots, no savants.
CitizenWhy: November 21st, 2010 at 10:32 pm
Empirical economists are idiot
savants only in regard to economics. In other things they are probably
OK.
I have often referenced this without being aware of it.
My version is that any proxy measure will become less
relevant over time as it drifts away from the intended target
(the more so if it is used to guide policy).
Campbell's law is an adage developed by Donald T. Campbell,
an example of the cobra effect:
"The more any quantitative social indicator is used for
social decision-making, the more subject it will be to
corruption pressures and the more apt it will be to distort
and corrupt the social processes it is intended to monitor."
Campbell's law was published in 1976 by Campbell, a social
psychologist, an experimental social science researcher and
the author of many works on research methodology: "When a
measure becomes a target, it ceases to be a good measure."
Donald T. Campbell, Master of Many Disciplines
By ROBERT MCG. THOMAS JR.
Donald T. Campbell, a nimble-minded social scientist who
left his mark on half a dozen disciplines and helped
revolutionize the fundamental principles of scientific
inquiry common to them all, died on Monday in a hospital near
his home in Bethlehem, Pa....
Dr. Campbell, who did his major work at Northwestern
University, was by training and his Berkeley doctorate a
social psychologist, but it was a tribute to his bewildering
range as a master methodologist that when he took up his last
academic post, at Lehigh University, in 1982 university
officials threw up their hands and simply designated him
"university professor," with faculty listings in the
departments of psychology, sociology and anthropology and the
department of education.
They could easily have thrown in biology, the philosophy
of science and market research. For a generation, virtually
no respectable researcher this side of the chemistry lab has
designed or carried out a reputable scientific study without
a thorough grounding in what Dr. Campbell called
quasi-experimentation, the highly sophisticated
statistics-based approach he invented to replicate the
effects of the truly randomized scientific studies that are
all but impossible in the slippery and unruly world of human
interactions....
It is a valid and reliable adage from a Social Psychologist
who Economists should take seriously. His adage explains why
Economists are so often wrong, i.e., they fail to take into
account the nature and thus behavior of people as
individuals, groups, and as both sentient and thinking beings
who can and do change behavior routinely sometimes for
rational reasons but just as often just to do and be
different.
That's impossible to predict with statistical
models although with statistical models scientists can
capture WHEN a change is occurring, even where and sometimes
why and how but only after the change has occurred, which
makes Prediction most difficult.
Add to this what Marxists used to call "class interest" of
financial oligarchy and we get closer to understanding why
neo-classical economics is so bad.
"... Sociologists spend their careers trying to understand how societies work. And some of the most pressing problems in big chunks of the United States may show up in economic data as low employment levels and stagnant wages but are also evident in elevated rates of depression, drug addiction and premature death. In other words, economics is only a piece of a broader, societal problem. So maybe the people who study just that could be worth listening to. ..."
"... "Once economists have the ears of people in Washington, they convince them that the only questions worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a Harvard sociologist and president of the American Sociological Association. "That's not to take anything away from what they do. It's just that many of the answers they give are very partial." ..."
"... For starters, while economists tend to view a job as a straightforward exchange of labor for money, a wide body of sociological research shows how tied up work is with a sense of purpose and identity. ..."
"... "Wages are very important because of course they help people live and provide for their families," said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and a feeling of usefulness and all the things that make human beings happy and able to function. ..."
"... That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found that in the United States, his subjects viewed their ability to land a job as a personal reflection of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard, blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged by rejection. ..."
"... By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the Wall Street banking cartel. ..."
"... BTW what happened to Krugman's perfunctory twice a year column on inequality? ..."
"... The nicotine addict cares about as much about 'risk under uncertainty' as Harford. ..."
What if Sociologists Had as Much Influence as
Economists? https://nyti.ms/2m9yDHL via
@UpshotNYT
NYT - NEIL IRWIN - MARCH 17, 2017
Walk half a city block in downtown Washington, and there is a good chance that you will pass an
economist; people with advanced training in the field shape policy on subjects as varied as how
health care is provided, broadcast licenses auctioned, or air pollution regulated.
Turn on cable news, and the guests who opine on the weighty public policy questions of the
day quite often have some title like "chief economist" underneath their name. And there are economists
sprinkled throughout the government - there is an entire council of them advising the president
in most administrations, if not yet in this one.
But as much as we love economics here - this column is named Economic View, after all - there
just may be a downside to this one academic discipline having such primacy in shaping public policy.
They say when all you have is a hammer, every problem looks like a nail. And the risk is that
when every policy adviser is an economist, every problem looks like inadequate per-capita gross
domestic product.
Another academic discipline may not have the ear of presidents but may actually do a better
job of explaining what has gone wrong in large swaths of the United States and other advanced
nations in recent years.
Sociologists spend their careers trying to understand how societies work. And some of the most
pressing problems in big chunks of the United States may show up in economic data as low employment
levels and stagnant wages but are also evident in elevated rates of depression, drug addiction
and premature death. In other words, economics is only a piece of a broader, societal problem.
So maybe the people who study just that could be worth listening to.
"Once economists have the ears of people in Washington, they convince them that the only questions
worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a
Harvard sociologist and president of the American Sociological Association. "That's not to take
anything away from what they do. It's just that many of the answers they give are very partial."
As a small corrective, I took a dive into some sociological research with particular relevance
to the biggest problems facing communities in advanced countries today to understand what kinds
of lessons the field can offer. In 1967, Senator Walter Mondale actually proposed a White House
Council of Social Advisers that he envisioned as a counterpart to the well-entrenched Council
of Economic Advisers. It was never created, but if it had been, this is the sort of advice it
might have been giving recent presidents.
For starters, while economists tend to view a job as a straightforward exchange of labor for
money, a wide body of sociological research shows how tied up work is with a sense of purpose
and identity.
"Wages are very important because of course they help people live and provide for their families,"
said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can
do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and
a feeling of usefulness and all the things that make human beings happy and able to function.
That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist
at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found
that in the United States, his subjects viewed their ability to land a job as a personal reflection
of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard,
blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar
unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged
by rejection.
It seems plausible that this helps explain why so many Americans who lost jobs in the 2008
recession have never returned to the labor force despite an improved job market. Mr. Sharone is
working with career counselors to explore how to put this finding to work to help the long-term
unemployed. ...
By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from
policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the
Wall Street banking cartel.
BTW what happened to Krugman's perfunctory twice a year column on inequality?
It's important to try to estimate the unemployment rate that is equivalent to maximum employment
because persistently operating below it pushes inflation higher, which brings me to our price
stability mandate. –Janet Yellen,
January 18, 2017
A little more than half the income generated in America is paid to workers and most of the money
spent in America goes to personal consumption. So it's reasonable to think there is some relationship
between the health of the job market and other important macro variables.
And, in fact, there is a robust connection between the change in the unemployment rate
and the change in the real value of money spent on employee compensation per working-age American
since the mid-1980s:
That chart shows the link between two real variables that have a logical connection to each other.
The question for NAIRU believers is: why should a purely real variable (unemployment) have any bearing
on a purely nominal one (inflation)?
In particular, is it reasonable to think there is an unemployment rate below which inflation necessarily
gets faster and above which the pace of consumer price increases slows down? And even if there were
such an unemployment rate at any point in time, would it be stable enough to be useful for policymakers
concerned with smoothing the business cycle?
Many, including Federal Reserve boss Janet Yellen, seem to think the answer is "yes", but the
evidence points the other way, particularly since the mid-1980s.
First, some history. In 1926, Irving Fisher
found
a relationship between the level of unemployment and the rate of consumer price inflation in
the US. In 1958, AW Phillips studied UK data from 1861-1957 and
found a relationship
between the jobless rate and the growth of nominal wages, although the relationship seems to
have been an artifact of the gold standard given the vertical line he found in the postwar period:
Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off
between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the
Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the
government should target an unemployment rate of 3 per cent or 5 per cent.
This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating
Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate
should be related to the distance between the actual jobless rate and some theoretical level. If
the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially
turn into outright
deflation . If the jobless rate were "too low", however, consumer prices would rise at an accelerating
rate.
Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment
rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation,
eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that
it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just
look at Venezuela, for a recent example.)
According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment.
Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing
the jobless rate to ever rise above zero.
In case this argument seems strange, consider the following exchange the Fed had on this very
topic back in
July 1994 (emphasis added):
MR. LINDSEY. If we ran the model out, do we believe that if we applied some social rate of
discount, the losses in output later on would be more than, less than, or equal to the gains in
output in the short run [from letting inflation accelerate]?
MR. KOHN. The model itself doesn't have, I don't believe, losses in output from higher inflation
rates.
MR. LINDSEY. Ever? We never have a net loss in output resulting from a choice to go for inflation?
MR. PRELL. It does not take, in terms of a normal simple cost of capital calculation, a very
big inflation differential to get you a net loss in the present value in the long run.
CHAIRMAN GREENSPAN. The argument as to why we get a net loss is "the Federal Reserve will react–do
something." But the question is, we are the Federal Reserve and why should we react if that's
true?
MR. LINDSEY. If we don't believe that the present value of output in this economy will be lower
by letting inflation alone, then we should let inflation go up. It's as simple as that Do we believe
that printing money will increase the present value of output?
MR. BLINDER. Yes, I think we would. I believe that printing money will give the economy a temporary
high that will not last and therefore in the integral sense that you said, yes, you get a larger
integral of output over an historical period, if you never decided to end it–if you never said,
when you got to 10 percent inflation, whoops, that wasn't very good, and you went back to lower
inflation.
CHAIRMAN GREENSPAN. Yes, but why would you conclude that at that point when, because as Ed
Boehne says, 11 percent is still better?
MR. BLINDER. If 11 percent is better than 10 percent, if there's no cost to inflation–I am
a little bit surprised at the tenor of this conversation around here! [Laughter] There is some
academic content that is–
CHAIRMAN GREENSPAN. In all seriousness, the question really gets to the models. Why would you
believe that there is a cost of increased inflation from the models?
Greenspan never got a straight answer to his question but the consensus was that models based
on NAIRU are basically wrong. Tellingly, it was
none other than Janet Yellen who wrongly worried the unemployment rate was "too low" in the mid-to-late
1990s and would cause inflation to accelerate.
As it happens, the data don't support the idea of NAIRU either, at least not since the mid-1980s.
The test would be to compare changes in the unemployment rate against changes in the inflation rate.
If NAIRU made sense, there should be a strong inverse relationship between the changes in the two
series. And yet:
Regressing changes in core inflation against changes in the jobless rate gets you an r-squared
of 0.11, which is basically meaningless. Moreover, that result is purely a product of the data points
in the blue circle, which all occurred during the teeth of the financial crisis and could be blamed
on the co-movement of employment and commodity prices. Take those out, and you end up with two perfectly
unrelated series:
You get similar results if you use headline inflation rather than core inflation.
The intellectual confusion over the relationship between unemployment and inflation was especially
salient during the Fed's own policy debates in the aftermath of the crisis. The unemployment rate
rose by 5 percentage points between mid-1979 and late 1982. It also rose by 5 percentage points between
early 2008 and late 2009. Moreover, the jobless rate stayed above 9 per cent through first nine months
of 2011.
The Fed staff expected this would produce massive disinflation, or even deflation, yet it never
happened.
By the
January 2011 FOMC meeting , it should have been clear the old models weren't sufficient. Instead
of ditching the NAIRU concept, however, the Fed's staff and many of the regional presidents tried
to rehabilitate it by arguing the NAIRU had changed. (There were lots of reasons provided, including
the extension of unemployment insurance benefits and skill mismatches.)
With the admirable exception of Richard Fisher at the Federal Reserve Bank of Dallas, the overwhelming
consensus was that the crisis had raised the "non-accelerating inflation rate of unemployment" by
about
1.5 percentage points :
Moreover, everyone except Fisher and the New York Fed's Bill Dudley thought the crisis produced
such long-lasting damage that the NAIRU would still be higher by 2015 (!) than it was before 2007.
In reality, of course, the Fed has been forced to steadily revise its NAIRU estimates lower as the
unemployment rate gradually normalises and inflation remains quiescent. The net effect was this rather
ridiculous chart:
NAIRU isn't just a useless concept, it's a counterproductive one that encourages policymakers
to focus on the jobless rate as a means to an end (price stability) even though there is zero connection
between the two variables. The sooner NAIRU is buried and forgotten, the better.
To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change
in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:
If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given"
rather than a function of policy. If a certain tax feeds into prices, it leaves less room
for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any
tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax
causes the cost of labor for employers to be higher than workers' take-home pay.
Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid
of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary,
with taxes that DON'T feed into prices -- that is, taxes on economic rents.
Drago Jan 21, 2017
@ Ralph Musgrave So according to Galileo Galilei the earth is a perfect sphere. Great news.
So presumably he believes there's some magical force of nature that keeps us all from falling
into space, and apparently one can travel in a straight line and end up exactly where he departed.
Never read such twaddle.
Ralph Musgrave, Jan 21, 2017
@ Drago
@ Ralph Musgrave Totally daft response to my points - but what I'd expect from the anti-NAIRU
brigade. But for the benefit of the latter cerebrally challenged brigade, I'll spell out what
I mean in more detail. I'd honestly appreciate a detailed and intelligent answer.
NAIRU is the idea that there is a relationship between inflation and unemployment: specifically,
when demand rises and unemployment falls, inflation will at some point also rise (assuming the
rise in demand continues).
Klein & Co claim that NAIRU relationship does not exist. That means, unless I've missed something,
that if unemployment falls and continues to fall, inflation WILL NOT RISE, (because, to repeat,
according to Klein & Co there is no relationship between inflation and unemployment).
Ergo it should be possible to implement a very large rise in demand plus a very large fall
in unemployment, and according to Klein & Co there will be no automatic rise in inflation. Now
what have I missed?
@ Ralph Musgrave
@ Drago MCK perhaps went too far in saying that there is zero connection between inflation
and unemployment, but the rest of his points stand.
And regarding my previous reply, I was merely alluding to the fact that what is intuitive is
not always what is true.
@ Ralph Musgrave "So presumably he favors bumping up demand to the point where unemployment
almost vanishes"
There won't if you hold the level of competition high and using buying power to stop price
rises taking hold. The key is for a significant purchaser to refuse to trade at any suggested
higher prices which then starves the system of aggregate demand forcing either innovation or failure.
And you do that directly rather than trying to do it indirectly by trying, and failing, to price
loans higher.
In a tight labour market the capital/labour ratio gets better which forces replacement of jobs
with machinery and improved methods. If you can't get the staff you have to get cleverer with
the ones you have.
Inflation is people trying higher prices and having them confirmed by market purchases. So
you set up the system so it refuses to confirm them which forces time serialisation on the market
at a lower price.
Everybody knows that the labour market pricing is controlled by trying to keep a pool of people
out of work and not producing. It is a very sick design that impoverishes many, many people. And
the policy concept on which it is based is a belief system, not even science. You can't see them.
You can't measure them. You just have a bunch of 'Very Clever People' who make them up based upon
what they feel and what they believe.
Far better to have a pool of people employed outside the private sector at a fixed living wage
which the private sector has to bid against to get any labour. Then the labour market is always
'tight' against the living wage and excess bids of labour wages fall back to the living wage when
the businesses fail. Both of which allow you to keep business competition white hot intense -
which is what controls prices and drives productivity.
Many variables contribute to the inflation rate, certainly more than just domestic employment
(and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense
that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather
than the cause. It is troubling that there is little discussion from most of the FOMC on inflation
factors which are now more important than unemployment (currency values, foreign labor, technology,
commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch,
etc).
Producer and consumer prices are increasing, largely due to China driven commodity prices.
Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant
due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to
sustained core inflation.
Mr Klein, your work is usually excellent, but this, I am afraid, is very poor. Your regression
analysis does not test for labour market slack (unemployment minus NAIRU); you do not discuss
how the unemployment rate can be an imperfect measure of labour market slack if the structure
of the labour market changes; no one has ever assumed the NAIRU is constant and policymakers are
well aware of the pitfalls of using an unobservable quality; the Philips curve can shift and indeed
monetary policy making is in no small part about trying to judge under what conditions it may
shift.
Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate
and lower labour participation rate in the US may be the issue. There's still labour market slack
even though U3 is at its "full" employment level.
Brito , Jan 19, 2017
" The test would be to compare changes in the unemployment rate against changes in the inflation
rate."
Wait what? That doesn't test for NAIRU, that simply tests the Philips Curve, but the NAIRU
and the Philips Curve is not the same concept.
"zero connection between the two variables."
What? How can there be zero connection? If the labour market becomes very tight, firms have
to raise wages to attract workers. Are you saying wages cannot impact prices? That would be a
bizarre claim. Wage price spirals are an observable phenomena. And what about simple supply &
demand? At some point you're not going to be able to employ enough additional people to supply
the rising demand for your product, this increased scarcity is likely to result in higher prices.
@ Brito "If the labour market becomes very tight, firms have to raise wages to attract workers.
Are you saying wages cannot impact prices?"
Or do without the person, or invest in capital to replace the labour - because the capital/labour
ratio just changed. Both of which drive productivity. Which is what we want.
Tight labour markets drive innovation, and if you keep the level of competition active at the
front end then prices remain stable.
Models have to be used with caution (they are only tools) and interpreted with awareness of
the real world - including for example, the varying wage bargaining power of labour, which is
different, post globalisation, to what it was in the '70s.
Who do you think wanted globalisation and liberalisation of trade, and why?
What a silly piece. NAIRU, like many economic concepts, requires a ceteris paribus clause. Your
unconditional evaluation of hypothesis is naive at best. If you're having a surge in productivity
due to, say, tech, or globalization, all else is not equal.
Drago Jan 19, 2017
@ user8347 Regardless, even if such a thing as NAIRU exists, its value can only be estimated post
factum, which makes it completely useless for policy purposes.
There's a whole string of other relationships in economics which cannot be estimated with any
sort of accuracy. For example it is widely accepted that devaluation will sooner or later improve
a country's balance of payments, but no one really claims to know by how much and by when. So
what do we do: abandon currency re-alignments as a method of rectifying external surpluses or
deficits?
And again, it is widely accepted that interest rate hikes curb demand, but no knows with any
great accuracy exactly by how much. What do you suggest: abandon interest rate adjustments?
"What do you suggest: abandon interest rate adjustments?"
Maybe?
"The funny thing is: they haven't. In fact, among the more than 10,000 research articles produced
by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation
or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is
not very demanding, and once we conduct such an examination, we conclude that, in actual fact,
there is no evidence to back these assertions whatsoever. To the contrary, empirical evidence
shows that the central banking narrative on interest rates is diametrically opposed to the observable
facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic
growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead
of growth, but instead are either coincidental or even follow it."
@ Ralph Musgrave This is gold standard thinking Ralph. There is no balancing payment of gold
to send to China any more.
Instead China's pounds are sitting in an account in London, right alongside yours and mine.
What difference does it make to anything if for instance China were to buy something for you and
now those Pounds sit in your account rather than China's??
What do you think that changes..?
Your neighbours bought Chinese TV's and now China is sitting on a bunch of Pounds it can't
easily spend - except on property, and educating the children of the wealthy. The incorrect thinking
that 'we need to get those Pounds back' just means that we're more likely to sell vital infrastructure
to China.
How is that a good response? We're NEVER going to export as much to China as China exports
to us, and selling them our vital infrastructure is the result the flawed logic of thinking that
moving numbers from one account to another account in London is something we 'need' to do in order
to balance things up.
What if you could erase your old misassumptions Ralph? Rather than falling back on automatic
mistakes.
Viewed correctly, the Pound IS the export, and the trade already balances. It's just that we
don't happen to measure it this way.. yet..
Ralph Musgrave Jan 26, 2017
@ yellowbrickroad
@ Ralph Musgrave Your comment is totally an completely unrelated to the above article and
to my comments. Never mind being right or wrong: you haven't the faintest idea what this debate
is about.
Isn't the point that the NAIRU theory is based on the concept of a wage-price spiral which is
only sustainable in a situation where wages are either indexed or there are strong trade unions?
With the rise of the precariously employed, in the services sector, even if there are many other
minimum wage jobs in town, the threat to leave is not going to result in meaningful pay increases.
This is not a dogma. This is a convenient pretext for suppressing wages, which is part of FED agenda
Notable quotes:
"... When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. ..."
"... It conjures up lots of bad associations. ..."
"... Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. ..."
"... Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent. ..."
Re: The NAIRU: a response to critics - mainly macro
[Simon is catching a lot of heat and is getting a little irritated.]
....................
The NAIRU: a response to critics
When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had
read which said we cannot reliably estimate it so why not junk the concept. What I had forgotten,
however, is that for heterodox economists of a certain hue, the NAIRU is a trigger word, a bit
like methodology is for mainstream economists. It conjures up lots of bad associations.
As a result, I got comments on my blog that were almost unbelievable. The most colourful was
"NAIRU is the economic equivalent of "Muslim ban"". At least two wanted to hold me directly responsible
for any unemployment at the NAIRU. For example: "So according to you a fraction of the workforce
needs to be kept unemployed." Which is a bit like saying to doctors: "So according to you some
people have to be allowed to die as a result of cancer."
...........
[PostKeynesians fire back]:
........
Simon Wren-Lewis, NAIRU And TINA
Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against
the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending
NAIRU. SWL's argument is essentially that there is no alternative (TINA):
[By coincidence I posted this comment by Dean Baker yesterday]:
NAIRU: Dangerous Dogma at the Fed
BY DEAN BAKER
The Full Employment and Balanced Growth Act of 1978 established two goals to guide the
Federal Reserve's conduct of monetary policy: price stability and full employment, defined by
the Act as four percent unemployment. While the central bank has diligently pursued the first
goal, it has often given the second part of its mission short shrift. Indeed, past Fed policy
makers have publicly labeled four percent unemployment unobtainable for practical purposes.
..............
The experience of the last six years has unambiguously repudiated the NAIRU - at least insofar
as an economic theory may ever be disproved with evidence.
Die-hard adherents simply proclaim the NAIRU a moving target that has shifted. But none of
these advocates has explained convincingly why previous consensus estimates of the NAIRU went
so far awry.
The Full Employment and Balanced Growth Act of 1978 established two goals to guide the Federal
Reserve's conduct of monetary policy: price stability and full employment, defined by the Act
as four percent unemployment. While the central bank has diligently pursued the first goal, it
has often given the second part of its mission short shrift. Indeed, past Fed policymakers have
publicly labeled four percent unemployment unobtainable for practical purposes.
Instead of their statutory mandate, these central bankers sought guidance from the so-called
non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim
that some fixed level of unemployment exists that will yield a stable rate of inflation. If the
actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment
drops below this level, inflation will increase. Most economic research over the last two decades
placed the NAIRU between 5.8 and 6.6 percent.
The operating differences between a legal target of four percent unemployment and a NAIRU target
matter tremendously for the economy and the public....
"... Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial. ..."
First is
Dean Baker's post about the latest Economic Report of the President's "insight into the question
of how fast the economy can grow, and more importantly how low the unemployment rate can go."
Economists have long held the view that lower rates of unemployment would be associated with rising
rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates
to slow the economy it is based on the belief that unemployment is falling to a level that would
be associated with a rising rate of inflation.
Most economists now put the unemployment rate at which inflation starts to rise somewhere near
the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment
or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.
Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives
article, "
Time to
ditch the NAIRU "
First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence
for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the
NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the
past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become
a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence
to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks
of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit
of full employment could be substantial.
G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based
on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that]
has major costs and negligible benefits."
But, hey, you can't criticize the top wonks if the they don't come right out and say it.
UPDATE:
John T. Harvey writes, at Forbes:
In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack
Obama:
"Just as there is no regularity in the timing of business cycles, there is no reason why cycles
have to occur at all. The prevailing view among economists is that there is a level of economic
activity, often referred to as full employment*, at which the economy could stay forever."
*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU
is full employment.
I normally try to avoid index number theory. Don't trust me on
this.
It is well understood that real GDP is a very imperfect
measure of welfare. We teach that in first year macro. That is
not what this post is about. What I'm worried about is whether
real GDP is an imperfect measure of itself. Does it have
internal validity?
If better technology enabled producers of new goods
to ramp up production more quickly to meet initial demand, would
that cause the measured growth rate to fall?
Initially an economy produces 100 kg of apples at $1 per kg.
Then bananas get invented. After a long slow adjustment, the
economy eventually reaches a new long run equilibrium and
produces 50 kg of apples at $1 per kg and 50 kg of bananas at $1
per kg.
We know that nominal GDP stays the same at $100. But
what happens to real GDP? The answer depends on what happened
during the long slow process of adjustment. Was it supply, or
demand, or both, that caused the slow adjustment?
To keep it simple, assume the price of apples is always $1
per kg (the central bank targets the price of apples). And
assume the quantity of bananas produced and consumed increases
slowly and continuously from 0 to 50 kg. And assume the
statistical agency that measures GDP has access to continuous
time data (so we can ignore the difference between
Paasche, Laspeyres, and Fisher price indices
). Remember that
Real GDP = Nominal GDP/Price Level. What happens to the price of
bananas during the long slow adjustment period?
Assume that supply and demand adjust equally slowly to
the invention of bananas. It takes producers time to switch
from producing apples to producing bananas, and it takes
consumers time to switch from consuming apples to consuming
bananas. So the price of bananas is constant at $1 per kg
during the adjustment. The weights in the price index slowly
change (with a falling number of apples and increasing number
of bananas in the basket), but the price index stays
constant, because neither price is changing. Real GDP is the
same as it was before bananas were invented.
Assume that supply adjusts more slowly than demand.
Producers need a high price to give them the incentive to
adjust. So the price of bananas starts out above $1, and
slowly falls over time to $1. So the price index falls over
time. Real GDP ends up higher than it was before bananas were
invented.
Assume that demand adjusts more slowly than supply.
Consumers need a low price to give them the incentive to
adjust. So the price of bananas starts out below $1, and
slowly rises over time to $1. So the price index rises over
time. Real GDP ends up lower than it was before bananas were
invented.
Even if you say that my third case is implausible, and that
demand always adjusts more quickly than supply, so the price of
new goods (relative to existing goods) always starts out high
and falls over time, that does not resolve the problem. The
initial price of bananas, when they first appear on the market,
depends on how many bananas can be grown in that very first
season. Anything that enables producers of new goods to increase
production for the initial roll-out will permanently reduce the
measured level of real GDP.
The underlying problem is that we do not observe the price of
bananas before bananas are invented.
Unless you allow a
discontinuous jump in real GDP the moment the new good hits the
market, even if initial production is negligible, I don't think
you can avoid this paradox.
Thanks to commenters (especially
louis
) on my previous post, and to Brent Moulton via Twitter
and David Rosnick via email. Errors and opinions are mine alone.
As
this starts as an apple economy, the large effect is to lower
apple investment, but apple investment can't fall beneath
depreciation (or more accurately, can't fall below depreciation
at all) without affecting the price of apples, so there is a
limit to how fast banana production can ramp up without causing
this. Then there is the matter of relative investment costs,
higher investment costs would lower growth while lower
investment costs would increase growth and only if these were
nearly equal would pricing be significant and even then only as
one good among many. I expect pricing would have this effect
which would differ depending on whether apples and bananas were
treated as substitutes. It would take some time for bananas to
even make it into baskets reducing their impact on measurements,
missing both any discontinuity or initial change.
Posted by: Lord |
February 07, 2017 at 11:52 AM
Lord: there's lots of things that could be determining what's
happening during the adjustment period. But for the question
addressed in this post, the only thing that matters is whether
the *relative* price of bananas starts out above one apple or
below one apple. Dollar prices won't matter. I made the
assumption that the *nominal* price of apples stays at $1
throughout, just to make the discussion simpler.
When a new good is
introduced how is it factored int the price index ? For example
suppose in period 1 100 apples are produced, and in period 2 50
Apples and 25 Banana. As the price of apples is fixed at $1 and
GDP is fixed at $100 we know the price of bananas is $2. But how
do we use this information to calculate the change in the price
level between period 1 and period 2?
(I can see that once we have sales data and prices for all
periods after bananas have appeared the logic that Nick
describes kicks in - but I can't see how we deal with the
introduction of bananas)
Posted by: Market
Fiscalist |
February 07, 2017 at 02:26 PM
I
think you're right. There's a technical literature on path
dependence of Divisia indices (see, for example,
a paper from Nick Oulton
). The chain indices used for GDP
and the CPI are approximations to the continuous-time Divisia
indices, so it's clearly relevant. The problem arises whenever
new goods are introduced or old ones disappear, and would also
be relevant when large shocks (e.g., major wars) take place that
result in temporary major changes to consumption patterns. It's
a hard problem, and though the literature suggested some
potential solutions, they haven't reached the stage of
statistical agency implementation.
Regarding your third case, sometimes sellers offer low
initial prices for goods or services for which consumption is
likely to be persistent -- new social networks, narcotics. So I
don't think it's implausible.
Posted by:
Brent Moulton
|
February 07, 2017 at 02:30 PM
Your price index doesn't have to rise or fall monotonically with
time. If we weight the price of each good by its share of
nominal spending, then the starting and ending price indexes are
the same – the price level is 1.
What happens in the meantime
depends on supply and demand effects.
Imagine we're partway through the transition, and our economy
sells 50kg of apples at $1 and 25kg of bananas at $2 (the
remaining banana trees are waiting to mature). Nominal GDP is
$100 as before, but the expense-weighted price index is 50%*($1
+ $2) = $1.50, so real GDP is $66. This is lower than the
long-run equilibrium of $100, but so is the actual fruit
consumption. It would be accurate to call this economy
comparatively depressed.
If banana trees mature quickly but can only be planted
slowly, then maybe we're selling 90kg of apples at $1 and 10kg
of bananas at $2. Nominal GDP is now $110, and the
expense-weighted price index is about 1.18 (9/11*1 + 2/11*2), so
the economy still looks depressed (real GDP of 93) but not as
badly.
In the other case (apple trees are exogenously converted to
banana trees but bananas are an acquired taste), then we might
sell 90kg of apples at $1 and 10kg of bananas at $0.50. Nominal
GDP is $95, and the price index is about 0.973 (9/9.5 +
0.25/9.5), so real GDP is about 97.6. If the new bana
In both cases, a statistician would observe a fall in real
GDP due to a preference shift, followed by a rebound to its
prior level. The unstated assumption for meaningful RGDP is that
the utility of a price-index basket is approximately the same
throughout the interval, and that's what's obviously untrue with
preference changes.
Posted by: Majromax |
February 07, 2017 at 02:49 PM
Nick: You price the value of bananas at a constant $1 over the
long period that it takes to ramp production from zero to 50 Kg.
It seems to me that you need to simultaneously recognize that
to establish 'price', you need to have two persons trading and
agreeing on a commonly accepted value ('price').
Hence, one option is that the banana producer is otherwise
unemployed but now producing his first banana. The GDP should
increase. OTOH, the buyer may be substituting goods so his
contribution to increased GDP is negative, making the final GDP
change zero. Further OTOH, the buyer may be borrowing to fund
the purchase which would result in a valid GDP increase.
I think I am pointing out that just considering the
producer's contribution to GDP is an incomplete exercise. A new
product has several tentacles that impact GDP.
Posted by:
Roger Sparks
|
February 07, 2017 at 02:59 PM
MF: Brent Moulton (who commented just after you) knows much more
than I do about how your question is normally answered by those
who actually measure GDP. But I think the short answer is: "with
difficulty". I think the point of this post is to say that that
the problem posed by new goods does not get very small even if
the expenditure share of new goods starts out very small when
they are first introduced. The problem gets bigger over time.
Thanks Brent! Glad to hear I'm not totally out-to-lunch on this!
Purely speculative, but I'm wondering if this might be part of
the productivity growth slowdown puzzle? If new goods don't fall
in price nowadays as much as they used to, simply because it's
easier to build a big batch of new phones before releasing them
(and/or they keep initial prices low because of network effects,
as you say).
Posted by:
Nick Rowe
|
February 07, 2017 at 03:11 PM
Majro: "Your price index doesn't have to rise or fall
monotonically with time. If we weight the price of each good by
its share of nominal spending, then the starting and ending
price indexes are the same – the price level is 1."
The share
of nominal spending before bananas are invented? Or after we get
to the new long run equilibrium? If "before", then the price of
bananas doesn't matter at all.
Roger: "Nick: You price the value of bananas at a constant $1
over the long period that it takes to ramp production from zero
to 50 Kg."
Why? And suppose we have a different example, where the
(relative) price of bananas never reaches some constant level,
because of ongoing technological improvement in growing bananas.
Posted by:
Nick Rowe
|
February 07, 2017 at 05:03 PM
Market Fiscalist: The way the CPI is calculated by statistical
agencies, they would simply ignore the bananas in calculating
the period 1 to period 2 price change. The "market basket" that
is selected in period 1 doesn't have any bananas in it, so the
price change from period 1 to period 2 is based solely on apples
(no price change).
Nick: The standard (Konus) constant-utility
cost-of-living index theory assumes that each period's
consumption is on a stable demand curve. If, for your second
case, you assume that it takes time for producers to switch but
that each period consumers are consuming along their demand
curve, I think the continuous time price index should come close
to the true Konus cost-of-living index--especially if there
isn't any discrete jump in consumption when the item is first
introduced. Real GDP increases, and that's what we expect given
that consumers prefer consuming A+B to A. Your first and third
cases involve adjustment costs for consumers and thus don't fit
easily in the standard cost-of-living index model.
Posted by:
Brent Moulton
|
February 07, 2017 at 09:48 PM
Brent: I was wondering if something like that would work. We
could maybe imagine extending my second case to have a
succession of new goods invented.
Posted by:
Nick Rowe
|
February 08, 2017 at 04:09 AM
Do
they teach students in first year macro that when they later
become professors they should say "we teach that in first year
macro"? I see that expression a lot these days. It sounds like,
this is truth. ;)
I remember Kotlikoff once using it when I
suggested to him that it might not be clarifying to say that the
"true" debt is 119 gazillion dollars. "I have been teaching my
students that for 20 years." Oh, well could you then please stop
writing that AND stop confusing your young charges?
More seriously, I am curious how important you think this
index number issue might be compared with the more basic issue
of measuring and aggregating individual utility. What is GDP
supposed to correlate with? Back in the day it was about the
flow of nominal demand but then seemed to morph into aggregate
real goodness.
I love your work. Thanks.
Posted by:
Gerard MacDonell
|
February 08, 2017 at 08:21 AM
At
risk of straying too far off topic, let's think of this in a
trade context.
Instead of bananas being new to the world, let's say they are
just new to a market. Country A can produce only apples, Country
B produces both apples and bananas. In country B, one apple is
tradeable for one banana.
When country B opens up to trade with country A, suddenly there
is a global jump in demand for bananas. The price of bananas in
terms of apples rises in country B to induce the people to
consume fewer bananas and more apples. A certain number of
apples flows to country B in exchange for a smaller flow of
bananas back to A.
A's GDP, in terms of apples, shouldn't change -- its apple crop
is the same as it was the previous year, although consumers are
better off due to trade.
You'd think B's GDP should rise, as the value of the bananas it
produces is worth more in terms of apples than it used to be. Or
would we just say that's a change in the price level and real
GDP is unchanged? Seems like this depends on how you construct
the price index.
Gains from trade are real, but it seems they would be tricky to
capture in GDP framework
The main cases where I use that "we teach that
in first year" line is (for example, like in this case) some
anti-economist says "GDP is a bad measure of welfare!" thinking
they are making some devastating new critique of economics.
How important is this particular issue, empirically? I don't
know. And I first wanted to make sure my head was straight on
the theory. But speculating wildly, I am wondering if the
productivity growth slowdown might be caused by something like
this? I have no evidence to back that up, but that is what is at
the back of my mind about *possible* empirical relevance. It's
less about utility per se (which was at the back of my mind in
the last post) than productivity.
louis: only a little off-topic. I'm going to be a bit shaky
on the answer. I *think* country B's real GDP stays the same,
since it is measured in terms of the basket it produces. But its
real income *measured in terms of the basket it consumes* will
rise or stay the same, depending on whether we use a Paasch or
Laspeyres index (old basket or new basket). More simply, if your
Terms of Trade improve, real GDP can stay the same, but increase
when NGDP is deflated by the CPI.
Posted by: marcel proust
|
February 08, 2017 at 11:39 AM
"this issue" == valuing newly introduced products.
Briefly (IIRC, and I may well not), the solution he presents for
getting the price index right is to estimate a demand curve for
bananas (presumably right after their introduction) and set the
pre-introduction price to the point where demand is zero. This
allows for comparison of the CPI's before and after bananas hit
the market.
Posted by: marcel proust
|
February 08, 2017 at 11:51 AM
marcel: yes. But that was a different question (trying to
measure utility gains). And that assumes an extreme version of
my case 2, where demand adjusts instantly and supply adjusts
slowly.
Posted by:
Nick Rowe
|
February 08, 2017 at 12:09 PM
Let's get the same result but use the basket brigade model.
Instead of a continuous result,m this result is the same but
never leaves probability space.
Chiqita introduces bananas,
and initially we love them. So the delivery trucks and consumer
baskets are fuller than normal. Each time we move goods our cash
cards swipe at market price, so the Savings and Loan machine is
building the significant probability distribution of cash swipes
in (deposit) or out (loan). The S&L machine enforces
amortization on the full baskets and everyone pays a suprising
'rate' on their purchases.
As a result of the bananas, the yield curve is steeper. The
S&L machine is forcing us to go to work and build bigger
baskets, or develop a more granular distribution that we can
make more frequent trips and keep our basket from ov er filling.
If we choose the latter, we get more term points on the yield
curve. Or, we can go home and work out a substitution between
bananas and mangos, making our baskets fill normally again.
The key here is our sense of equilibrium, we know when our
baskets ate optimally full. We know that because we hate waiting
in line, so our sense of frustration stabilizes the queues. When
queues ate sable, mean equals variance in our basket. At that
condition, then every single person in the monetary zone can
independently calculate the probability of the basket
overflowing or underflowing. Supply then equals demand and
container algebra works, we can pretend to be continuous.
It is Nicks model, fouled up a bit, but just recast as a
sequence of probabilistic purchases.
The currently established welfare criterion used in international trade theory results in
conclusions that are not only intellectually dishonest and deceptively misleading but are not as
value free as is commonly believed. Although academic economists have devoted much effort to
understanding the distributional effects of trade, the current welfare conclusions of trade
basically ignore entirely the distributional effects. This paper argues that trade policy needs
to be framed within a legitimate moral framework that moves distribution to the forefront. The
welfare effects of trade should be judged by what actually happens, not by what could potentially
happen in an idealized world with costless transfers.
In the first section the inadequacy of current international welfare economics is discussed.
Second, the justification for using a utilitarian framework is developed along with a brief
history of the doctrine and its role in Cambridge welfare economics. Next the properties of a
utility function that would be realistic as well as having desirable mathematical properties are
discussed. Welfare considerations would not be especially important if trade did not create
significant redistributions; therefore the size of the redistributions relative to the efficiency
gains from trade liberalization is examined. Finally, the welfare effects of trade liberalization
using various trade models and simulations are discussed.
The current approach to the welfare analysis of trade is to follow the recommendation of Hicks
and Kaldor and equate national welfare with real national income and ignore entirely how income
is distributed. Although admitting that considering distribution involves an unscientific
value judgment, numerous economists (such as I.M.D. Little, Frank Knight, Edward Chamberlin) have
concluded that distribution is too important to ignore and it is better to consider it even if
that makes the analysis less than scientific. As Blaug has stated (1978,p. 626), "the true
function of welfare economics is to invade the discipline of applied ethics rather than to avoid
it."
The basic objective of trade policy under modern welfare analysis therefore is to maximize
national income. This outcome is considered optimal because of the Hicks-Kaldor compensation
principle whereby everyone could potentially be made better off than in any other alternative
with the appropriate lump sum transfers. For some, the possibility that these transfers
could be made is sufficient, regardless of whether any transfers are actually made. For others,
there is a naive belief that after all the income maximizing policies are implemented, that the
government (or society) then consistently redistributes income in a manner consistent with its
specific social welfare function. However, Rodrik (1997, p.30) is correct when he states that in
regard to trade policy changes, "compensation rarely takes place in practice and never in full."
Even if society wanted to redistribute income, however, it can not be done in a zero costs lump sum fashion.
Current U-6 Unemployment Rate is 9.1% (BLS) or 13.7% (Gallup)
Current U-6 Unemployment Rate:
Unemployment U6 vs U3 For December 2016 the official Current U-6 unemployment rate was 9.1%
up from last month's 9.0% but still below the recent low of 9.3% in April and September and October's
9.2%.
On the other hand the independently produced Gallup equivalent called the "Underemployment
Rate" was up to 13.7 in December from 13.0% in November nearing the 13.8% of April. The current
differential between Gallup and BLS on supposedly the same data is 4.6%!
"The labor market remains near its sustainable, full employment level."
This is a hope not a fact
There is plenty of slack if the underemployed move into jobs and we return the 20-50 yr olds to
pre-recession participation rates.
nope,nope,nope. you don't get how employment to population ratio is calculated. it can't rise
and should not rise unless the calculations are adjusted.
Let's see:
SUPPORTING the belief that we are "close" to full employment is the U-3 measure of unemployment,
a measure with an arbitrary cut-off that excludes from the official labor force as many people
as possible who are not employed but do want jobs -- by requiring (1) an "active" search effort
only within the last four weeks, based on (2) a definition of "active" that probably does not
fit rational behavior by the unemployed who now have access to comprehensive Internet jobs databases
that did not exist 20 years ago. (It is not terribly hard to surmise the institutional interests
that are served by keeping the size of the labor force for purposes of determining the official
unemployment rate as small as possible.)
NOT SUPPORTING the belief that we are close to full employment:
(1) the lowest employment-to-population ratio in almost half a century;
(2) negating the intellectually-lazy demographic excuse that invariably gets raised to point No.
1, the lowest employment-to-population ratio in 30 years in the prime working age group (25-54),
a group that is 99.99% unaffected by the phenomenon of voluntary retirement;
(3) a U-6 (that counts many more of the unemployed in the labor force) that is still three percentage
points higher than the low point reached in 2000 (three percentage points is a lot, representing
about 7.5 million people who want jobs but are not counted in the labor force for calculating
the U-3);
(4) an aggregate growth in full-time jobs of only 9% since the relative high point in 2000 even
though the working age population has grown by 20%;
(5) average weeks unemployed among those who are counted as part of the labor force (26 weeks)
that is still more than twice as high as it was in 2000 (under 13 weeks) and is still 10 weeks
higher than it was before the Great Recession;
(6) involuntary part-time employment still 75% higher than it was in 2000, 33% higher than before
the Great Recession;
(7) whereas in 2000, the U.S. was near the top in employment rate among the OECD countries, in
2017 it is close to the bottom; most OECD countries have recovered in their employment rates since
the depths of the Great Recession, and many have moved to new levels (even supposedly sick France
has a higher employment rate in the 25-54 prime working age group than te U.S.).
With this array of negative date to overcome, it takes a lot of wise monkeys who neither speak,
hear nor see any evil to expound a belief that we are close to full employment.
RW said... January 18, 2017 at 07:05 AM
Inflation for the 4th quarter of 2016 is zero -- no change Oct through Dec -- and real interest
rates remain near the zero boundary. Republican history WRT governing particularly as it pertains
to the economy is sufficiently poor that optimism appears entirely unwarranted. I hear a lot of
investors are adjusting their portfolio allocations to favor equities over bonds. Two years ago
that was a smart move; now, not so much.
mulp said...
"All else equal, tax cuts boost household and business income."
In 2001, I was rif'd from my 100K++ job and got a $20,000 tax cut.
That tax cut did not boost my household income.
That economists have been bamboozled into thinking this way is beyond my comprehension.
Economies are zero sum. For every action, there is a reaction. Tax cuts mean revenue cuts which
means spending cuts and spending cuts mean lower household income.
Very few sectors of the economy are subject to demand price elasticity that results in higher
revenue from price reduction due to the quantity increasing explosively from a small reduction
in price.
For example, cutting the profit tax by 30% on $100 oil so gasoline falls from $4.05 to $4.00
and thus doubles the quantity of gasoline sold to boost profit taxes is an impossibility.
And cutting the tax on economic profits from restricting oil production to drive up prices
and profits can only increase tax revenue if oil production is cut further by cutting jobs so
gasoline prices can be increased from $4 to $5 to $6 per gallon.
Since Reagan, economists seem to have self lobotomized so they spout totally illogical nonsense
like "All else equal, tax cuts boost household and business income."
Might as well say "if you believe, you can fly when tinker bell hits you with pixie dust."
"As explained in the Fuzzy Numbers chapter of The Crash Course, even though healthcare spending is
nearly 18% of GDP, for some reason healthcare comprises only 5.85% of the CPI basket:
U.S. health care spending grew 5.8 percent in 2015, reaching $3.2 trillion or $9,990 per person. As
a share of the nation's Gross Domestic Product, health spending accounted for 17.8 percent.
Does it make any sense to record something that's nearly 18% of GDP as only 5.8%*** of your inflationary
experience? Nope, it sure doesn't. Unless your desire is to mask the actual rate of inflation.
In simple terms, just healthcare's share of inflation alone comes to (0.25)*(0.18) = 4.5%. That's
more than twice the rate of the supposed total inflation we are experiencing all by itself. Throw in
rising rents, car prices, and energy and it's far more likely that an urban consumer is experiencing
total price inflation closer to 6% or more per year."
==========================================================================
AND
and although I have posted this many times before, it is always good for a laugh .or a cry .
https://www.bls.gov/cpi/cpifact4.htm
"Although medical insurance premiums are an important part of consumers' medical spending, the direct
pricing of health insurance policies is not included in the CPI. As explained below, BLS reassigns most
of this spending to the other medical categories (such as Hospitals) that are paid for by insurance.
The extreme difficulty distinguishing changes in insurance quality from changes in its price forces
the CPI to use this indirect method."
AND
"The US now routinely subjects its citizens to racketeering, charging excessive prices that are increasingly
cumbersome to avoid. One example among thousands; a Viagra pill that costs less than $1 in India, costs
over $38 in the US"
I am hoping that when masturbatoriums are popping up like Starbucks, and the population ages, the
expanding need for viagra will uh stimulate Galbraiths theory of countervailing power, and the stiff
increases in the price of viagra will soften.
***I note that the BLS cpi link I use says healthcare composes about 6.5% of the cpi. Of course,
the definition is Medical commodities AND medical services, so this may account for the difference .
Krugman is a neoliberal stooge. Since when Social Security is an entitlement program. If you start
contributing at 25 and retire at 67 (40 years of monthly contributions), you actually get less then
you contribute, unless you live more then 80 years. It just protects you from "free market casino".
Notable quotes:
"... A "contribution" theory of what a proper distribution of income might be can only be made coherent if there are constant returns to scale in the scarce, priced, owned factors of production. Only then can you divide the pile of resources by giving to each the marginal societal product of their work and of the resources that they own. ..."
"... n a world--like the one we live in--of mammoth increasing returns to unowned knowledge and to networks, no individual and no community is especially valuable. Those who receive good livings are those who are lucky -- as Carrier's workers in Indiana have been lucky in living near Carrier's initial location. It's not that their contribution to society is large or that their luck is replicable: if it were, they would not care (much) about the departure of Carrier because there would be another productive network that they could fit into a slot in. ..."
"... If not about people, what is an economy about? ..."
"... I hadn't realized that Democrats now view Social Security and Medicare as "government handouts". ..."
"... Some Democrats like Krugman are Social Darwinists. ..."
"... PK is an ignorant vicious SOB. Many of those "dependent hillbillies" PK despises paid SS and Medicare taxes for many decades, most I know have never been on foos stamps, and if they are on disability it is because they did honest hard work, something PK knows nothing about. What an ignorant jerk. ..."
"... What is a very highly subsidized industry that benefits Delong and Krugman? Higher education. Damn welfare queens! :) ..."
"... No Krugman is echoing the tribalism of Johnny Bakho. These people won't move or educate themselves or "skill up" so they deserve what they get. Social darwinism. ..."
"... People like Bakho are probably anti-union as well. They're seen as relics of an earlier age and economically "uncompetitve." See Fred Dobbs below. That's the dog whistle about the "rust belt." ..."
"... Paul Krugman's reputation, formerly that of a a noted economic, succumbed after a brief struggle to Trump Derangement Syndrome. Friends said Mr Krugman's condition had been further aggravated by cognitive dissonance from a severely challenged worldview. ..."
"... He is survived by the New York Times, also said to be in failing health. ..."
"... For a long time DeLong was mocking the notion of "economic anxiety" amongst the voters. Does this blog post mean he's rethinking that idea? ..."
"... The GOP has a long history of benefitting from the disconnect where a lot of their voters are convinced that when government money goes to others (sometimes even within their own white congregations), then it is not deserved. ..."
Brad DeLong has an interesting meditation * on markets and political demands - inspired by
a note from Noah Smith ** - that offers food for thought. I wonder, however, if Brad's discussion
is too abstract; and I also wonder whether it fully recognizes the disconnect between what Trump
voters think they want and reality. So, an entry of my own.
What Brad is getting at is the widespread belief by, well, almost everyone that they are entitled
to - have earned - whatever good hand they have been dealt by the market economy. This is reflected
in the more or less universal belief of the affluent that they deserve what they have; you could
see this in the rage of rentiers at low interest rates, because it's the Federal Reserve's job
to reward savers, right? In this terrible political year, the story was in part one of people
in Appalachia angrily demanding a return of the good jobs they used to have mining coal - even
though the world doesn't want more coal given fracking, and it can get the coal it still wants
from strip mines and mountaintop removal, which don't employ many people.
And what Brad is saying, I think, is that what those longing for the return to coal want is
those jobs they deserve, where they earn their money - not government handouts, no sir.
A fact-constrained candidate wouldn't have been able to promise such people what they want;
Trump, of course, had no problem.
But is that really all there is? Working-class Trump voters do, in fact, receive a lot of government
handouts - they're almost totally dependent on Social Security for retirement, Medicare for health
care when old, are quite dependent on food stamps, and many have recently received coverage from
Obamacare. Quite a few receive disability payments too. They don't want those benefits to go away.
But they managed to convince themselves (with a lot of help from Fox News etc) that they aren't
really beneficiaries of government programs, or that they're not getting the "good welfare", which
only goes to Those People.
And you can really see this in the regional patterns. California is an affluent state, a heavy
net contributor to the federal budget; it went 2-1 Clinton. West Virginia is poor and a huge net
recipient of federal aid; it went 2 1/2-1 Trump.
I don't think any kind of economic analysis can explain this. It has to be about culture and,
as always, race.
Regional Policy and Distributional Policy in a World Where People Want to Ignore the Value
and Contribution of Knowledge- and Network-Based Increasing Returns
Pascal Lamy: "When the wise man points at the moon, the fool looks at the finger..."
Perhaps in the end the problem is that people want to pretend that they are filling a valuable
role in the societal division of labor, and are receiving no more than they earn--than they contribute.
But that is not the case. The value--the societal dividend--is in the accumulated knowledge
of humanity and in the painfully constructed networks that make up our value chains.
A "contribution" theory of what a proper distribution of income might be can only be made
coherent if there are constant returns to scale in the scarce, priced, owned factors of production.
Only then can you divide the pile of resources by giving to each the marginal societal product
of their work and of the resources that they own.
That, however, is not the world we live in.
In a world--like the one we live in--of mammoth increasing returns to unowned knowledge
and to networks, no individual and no community is especially valuable. Those who receive good
livings are those who are lucky -- as Carrier's workers in Indiana have been lucky in living near
Carrier's initial location. It's not that their contribution to society is large or that their
luck is replicable: if it were, they would not care (much) about the departure of Carrier because
there would be another productive network that they could fit into a slot in.
All of this "what you deserve" language is tied up with some vague idea that you deserve what
you contribute--that what your work adds to the pool of society's resources is what you deserve.
This illusion is punctured by any recognition that there is a large societal dividend to be
distributed, and that the government can distribute it by supplementing (inadequate) market wages
determined by your (low) societal marginal product, or by explicitly providing income support
or services unconnected with work via social insurance. Instead, the government is supposed to,
somehow, via clever redistribution, rearrange the pattern of market power in the economy so that
the increasing-returns knowledge- and network-based societal dividend is predistributed in a relatively
egalitarian way so that everybody can pretend that their income is just "to each according to
his work", and that they are not heirs and heiresses coupon clipping off of the societal capital
of our predecessors' accumulated knowledge and networks.
On top of this we add: Polanyian disruption of patterns of life--local communities, income
levels, industrial specialization--that you believed you had a right to obtain or maintain, and
a right to believe that you deserve. But in a market capitalist society, nobody has a right to
the preservation of their local communities, to their income levels, or to an occupation in their
industrial specialization. In a market capitalist society, those survive only if they pass a market
profitability test. And so the only rights that matter are those property rights that at the moment
carry with them market power--the combination of the (almost inevitably low) marginal societal
products of your skills and the resources you own, plus the (sometimes high) market power that
those resources grant to you.
This wish to believe that you are not a moocher is what keeps people from seeing issues of
distribution and allocation clearly--and generates hostility to social insurance and to wage supplement
policies, for they rip the veil off of the idea that you deserve to be highly paid because you
are worth it. You aren't.
And this ties itself up with regional issues: regional decline can come very quickly whenever
a region finds that its key industries have, for whatever reason, lost the market power that diverted
its previously substantial share of the knowledge- and network-based societal dividend into the
coffers of its firms. The resources cannot be simply redeployed in other industries unless those
two have market power to control the direction of a share of the knowledge- and network-based
societal dividend. And so communities decline and die. And the social contract--which was supposed
to have given you a right to a healthy community--is broken.
As I have said before, humans are, at a very deep and basic level, gift-exchange animals. We
create and reinforce our social bonds by establishing patterns of "owing" other people and by
"being owed". We want to enter into reciprocal gift-exchange relationships. We create and reinforce
social bonds by giving each other presents. We like to give. We like to receive. We like neither
to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual
reciprocal obligation. We don't like being too much on the downside of the gift exchange: to have
received much more than we have given in return makes us feel very small. We don't like being
too much on the upside of the gift exchange either: to give and give and give and never receive
makes us feel like suckers.
PK is an ignorant vicious SOB. Many of those "dependent hillbillies" PK despises paid SS and
Medicare taxes for many decades, most I know have never been on foos stamps, and if they are on
disability it is because they did honest hard work, something PK knows nothing about. What an
ignorant jerk.
Exactly the same could be said about many of those inner city minorities that the "dependent hillbillies"
look down on as "welfare queens". That may be one of the reasons they take special issues with
"food stamps", because in contrast to the hillbillies, inner city poor people cannot grow their
own food. What Krugman is pointing out is the hypocrisy of their tribalism - and also the idiocy,
because the dismantling of society would ultimately hurt the morons that voted GOP into power
this round.
"What Krugman is pointing out is the hypocrisy of their tribalism "
No Krugman is echoing the tribalism of Johnny Bakho. These people won't move or educate
themselves or "skill up" so they deserve what they get. Social darwinism.
People like Bakho are probably anti-union as well. They're seen as relics of an earlier age
and economically "uncompetitve." See Fred Dobbs below. That's the dog whistle about the "rust
belt."
His tone is supercilious and offensive. But your argument is that they are not "dependent" because
they earned every benefit they get from the government. I think his point is that "dependent"
is not offensive -- the term jus reflects how we all depend on government services. DeLong makes
the point much better in the article quoted by anne above.
Paul Krugman's reputation, formerly that of a a noted economic, succumbed after a brief
struggle to Trump Derangement Syndrome. Friends said Mr Krugman's condition had been further aggravated
by cognitive dissonance from a severely challenged worldview.
He is survived by the New York Times, also said to be in failing health.
The New York Times is easily the finest newspaper in the world, is broadly recognized as such
and is of course flourishing. Such an institution will always have sections or editors and writers
of relative strength but these relative strengths change over time as the newspaper continually
changes.
NYT Co. to revamp HQ, vacate eight floors in consolidation
"In an SEC filing, New York Times Co. discloses a staff communication it provided today to
employees about a revamp of its headquarters -- including consolidating floors.
The company will vacate at least eight floors, consolidating workspaces and allowing for "significant"
rental income, the memo says."
The GOP has a long history of benefitting from the disconnect where a lot of their voters
are convinced that when government money goes to others (sometimes even within their own white
congregations), then it is not deserved. But if that same government money goes to themselves
(or their real close relatives), then it is a hard earned and well-deserved payback for their
sacrifices and tax payments. So the GOP leadership has always called it "saving social security"
and "cracking down on fraud" rather than admitting to their attempts to dismantle those programs.
The Dems better be on the ball and call it what it is. If you want to save those programs you
just have to prevent rich people from wiggling out of paying for them (don't repeal the Obamacare
medicare taxes on the rich).
On the Pk piece. I think it is really about human dignity, and the need for it. There were a lot
of factors in this horrific election, but just as urban blacks need to be spared police brutality,
rural whites need a dignified path in their lives. Everyone, united, deserves such a path.
This is a real challenge for economists; how do we rebuild the rust belt (which applies to
areas beyond the literal rust belt).
If we do not, we risk Trump 2.0, which could be very scary indeed.
I agree to a point, but what the piece is about is that in search of a solution to the problems
of the rustbelt (whatever the definition is),people voted for Trump who had absolutely no plan
to solve such a problem, other than going back to the future and redoing Nafta and getting rid
of regulations.
Meanwhile, that vote also meant that the safety net that helps all Americans in trouble was
being placed in severe risk.
Those voters were fixed on his rhetoric and right arm extended while his left hand was grabbing
them by the (in deference to Anne I will not say the words, but Trump himself has said one of
them and the other is the male version).
Really? You didn't seem to before. You'd say what Duy or Noah Smith or DeLong were mulling about was
off-limits. You'd ban them from the comment section if you could. "This is a real challenge for economists; how do we rebuild the rust belt (which applies to
areas beyond the literal rust belt).
If we do not, we risk Trump 2.0, which could be very scary indeed." I don't see why this is such a controversial point for centrist like Krugman. How do we appeal to the white working class without contradicting our principles?
By promoting policies that raise living standards. By delivering, which mean left-wing policies
not centrist tinkering. It's the Clinton vs. Sanders primary. Hillary could have nominated Elizabeth Warren as her VP candidate but her corporate masters
wouldn't let her.
"Meanwhile, that vote also meant that the safety net that helps all Americans in trouble was being
placed in severe risk."
That safety net is an improvement over 1930. But it's been fraying so badly over the last 20-30
years that it's almost lost all meaning. It's something people turn to before total destitution,
but for rebuilding a life? A sick joke, filled with petty hassles and frustrations.
And the fraying has been a solidly bipartisan project. Who can forget welfare "reform"?
So maybe the yokels you're blaming for the 10,000-th time might not buy your logic or your
intentions.
... At the height of their influence in the 1950s, labor unions could claim to represent about
1 of every 3 American workers. Today, it's 1 in 9 - and falling.
Some have seen the shrinking size and waning influence of labor unions as a sign that the US
economy is growing more flexible and dynamic, but there's mounting evidence that it is also contributing
to slow wage growth and the rise in inequality. ...
(Union membership) NY 24.7%, MA 12.4%, SC 2.1%
... Are unions faring any better here in Massachusetts?
While Massachusetts's unions are stronger than average, it's not among the most heavily unionized
states. That honor goes to New York, where 1 in every 4 workers belongs to a union. After New
York, there are 11 other states with higher union membership rates then Massachusetts.
Here too, though, the decline in union membership over time has been steep.
... In 2015, 30 states and the District of Columbia had union membership rates below
that of the U.S. average, 11.1 percent, and 20 states had rates above it. All states
in the East South Central and West South Central divisions had union membership rates
below the national average, and all states in the Middle Atlantic and Pacific divisions
had rates above it. Union membership rates increased over the year in 24 states and
the District of Columbia, declined in 23 states, and were unchanged in 3 states.
(See table 5.)
Five states had union membership rates below 5.0 percent in 2015: South Carolina
(2.1 percent), North Carolina (3.0 percent), Utah (3.9 percent), Georgia (4.0 percent),
and Texas (4.5 percent).
Two states had union membership rates over 20.0 percent in
2015: New York (24.7 percent) and Hawaii (20.4 percent).
State union membership levels depend on both the employment level and the union
membership rate. The largest numbers of union members lived in California (2.5 million)
and New York (2.0 million).
Roughly half of the 14.8 million union members in the
U.S. lived in just seven states (California, 2.5 million; New York, 2.0 million;
Illinois, 0.8 million; Pennsylvania, 0.7 million; and Michigan, Ohio, and New Jersey,
0.6 million each), though these states accounted for only about one-third of wage and
salary employment nationally.
(It appears that New England union participation
lags in the northeast, and also in the rest of
the US not in the Red Zone.)
I have noted before that New England
is doing better 'than average' (IMO)
because of high-tech industry & education.
Not necessarily because of a lack of
unionization, which is prevalent here
in public education & among service
workers. Note that in higher ed,
much here is private.
Private industry here traditionally
is not heavily unionized, although
that is probably not the case
among defense corps.
As to causation, I think the
implication is that 'Dems dealing
with unions' has not been working
all that well, recovery-wise,
particularly in the rust belt.
That must have as much to do with
industrial management as it does
with labor, and the ubiquitous
on-going industrial revolution.
Everybody needs, and desperately crave, self-confidence and dignity. In white rural culture that
has always been connected to the old settler mentality and values of personal "freedom" and "independence".
It is unfortunate that this freedom/independence mythology has been what attracted all the immigrants
from Europe over here. So it is as strongly engrained (both in culture and individual values)
as it is outdated and counterproductive in the world of the future. I am not sure that society
can help a community where people find themselves humiliated by being helped (especially by bad
government). Maybe somehow try to get them to think of the government help as an earned benefit?
20% of US GDP was created from thin air via QE of well over
4 Trillion dollars. That doesn't even count whimsical creation over the
same time period elsewhere. The ECB just yesterday extended their QE
program so that it will add up to about 2 Trillion Euros - which will
have taken place over about 18 – 24 months.
There is no economy. That has all gone away, and there is no way in
hell these bond and bond packages on central bank balance sheets are
going to be retired (thereby extracting that money from the system
overall) and so It's Not Coming Back. Probably Ever.
This is critical to oil because we do micro-economic evaluations of
what wells are profitable and which are not, and our analysis and
conclusions make less and less sense as we've seen from the non
profitable activity going on. That's symptomatic of the disease.
Nothing was "fixed" from 2008 onward, and that's not a swipe at Obama.
It's not a swipe at anything. It's just reality. When you create 20% of
your GDP by whimsy, the measure can't possibly mean anything. And that's
global.
We all have to live in the world using money in our own microscopic
bubbles of economy, but from the macro perspective, that's pretense, and
it's pretense everything depends on. Just keep in mind Fed Governors
themselves have been quoted saying "we're in completely uncharted
territory. No one knows what is going to happen, and that includes us,
despite the superb people we have on staff trying to figure it out."
Trump is the wildcard inserted into a world of wildcards. I can assure
you if the administration strongly doesn't want Ford building cars in
Mexico, they probably won't.
"... In our artificial economy real things do not matter so much, but politics and managing the
perceptions of the public are of paramount importance. And so the 'Goldilocks' Jobs Report, which is
how the business TV channels described that lukewarm piece of dreck, did little to rally the markets
except fleetingly intraday. ..."
"... The headline includes ALL employees, but if you take out the top 15-20% of managers, the average
hourly earning growth showed a pronounced downward divergence to a lower growth rate. The BLS switched
to this number including all employees a few years ago from the non-supervisory number. As a rule of
thumb, when someone shows you the 'average' number, find out the median number for the same sample.
Especially in these days of historically high inequality. ..."
"The wealth of another region excites their greed; and if it is weak, their lust for power
as well. Nothing from the rising to the setting of the sun is enough for them.
Among all others only they are compelled to attack the poor as well as the rich. Robbery, rape,
and slaughter they falsely call empire; and where they make a desert, they call it peace."
Tacitus
"He who makes a beast of himself gets rid of the pain of being a man."
Samuel Johnson
In our artificial economy real things do not matter so much, but politics and managing the
perceptions of the public are of paramount importance. And so the 'Goldilocks' Jobs Report, which
is how the business TV channels described that lukewarm piece of dreck, did little to rally the markets
except fleetingly intraday.
In the first chart below I take a look inside that 'average hourly earnings growth' number.
The headline includes ALL employees, but if you take out the top 15-20% of managers, the average
hourly earning growth showed a pronounced downward divergence to a lower growth rate. The BLS switched
to this number including all employees a few years ago from the non-supervisory number. As a rule
of thumb, when someone shows you the 'average' number, find out the median number for the same sample.
Especially in these days of historically high inequality.
Be that as it may, the markets overall were in a flight to safety as the financiers bowed to their
fears of the upcoming presidential election, that something might happen that will upset their status
quo.
so when people criticize the big deflation in
computer/electronics hardware using baseless measures like
"if the computer has a processor twice as fast then it has
fallen by half in price" they are wackos. but now the real
growth that is artificially generated by this way (quality
improvements) to keep inflation down is being criticized by
Fox. Of course it is completely made up growth. the absurdity
of the economists deal with price inflation. now years later,
everyone realizes we have all taken a big fall in living
standards no matter how many gigahertz my stupid computer is.
Manufacturing hasn't boomed since the 60's. The FRED graphs
are garbage and useless in general. They are improperly
calculated and they have out right admitted they may have
"problems".
Manufacturing is dying out and becoming automated over the
decades. There is no such thing as artificial growth either.
Demand based on consumption is just as valid as industrial
production shipped to other countries.
"The FRED graphs are garbage and useless in general."
No -
your comments are garbage and useless. Actually READ the
post. He did not get his graphs or data from FRED. Seriously
- you need professional help.
poppycock. the garbage on their industrial production chart
in the 90's and 00's was stupid bad. The US hasn't had a
industrial boom since the 60's when our consumption was
surging while we still made most of our products. No wonder
inflation surged by the late 60's. The war against communism
was having a painful bad side effects to rentiers and
bankers, which spread to capital by the late 60's.
"the garbage on their industrial production chart in the 90's
and 00's was stupid bad."
Can we focus on the single word
"their". You think he used FRED. No jackass, he made his own
charts from the source data - BLS. But noooooooo - you are
too stupid to get even this simple point. So the rest of your
ramblings is nothing more than your usual intellectual
garbage.
Auto mfg dropped by half post 2008.
It is now back but has nowhere to grow.
Urbanization makes cars less necessary and less desirable
There is not enough room to park them all now.
People who earn MinWage cannot afford them
Interesting point but many will overinterpret this. Leave in
the expansion of computer and electronics manufacturing value
add, and we have manufacturing output slightly expanding.
Take it out entirely and we have manufacturing output
basically steady.
The difference isn't telling an important
macro story.
The important macro story is the major decline in
manufacturing employment, and that has two big and one
smaller causes.
The two big factors are the increased productivity of
manufacturing globally and the declining share of
manufactured products as a % of GDP globally. The smaller
factor is the US's declining share of global manufacturing
output, which itself is only fractionally attributable to
trade policy.
I don't know anyone who says US manufacturing is
"booming." It certainly isn't. It's treading water. It's
growing slowly as the economy grows, but we can predict with
high confidence that it will continue to contract as a share
of total output over time, because that has been the secular
trend for decades and there's no reason to expect that to
change.
The only big question is how we adapt to the world as it
actually is.
Also, I did not realize I was being presented
with an argument about Chinese growth and sustainability. I
foolishly stopped reading and I am entirely sorry. I have set
down data and begun to answer the argument below on Links:
What is significant though is how China insists on holding to
growth targets that are very likely not sustainable.
Stability is a worthy aim but when growth is achieved through
pushing bad private sector loans, that is ultimately the
enemy of stability.
[ For these 39 past years China has
been holding to and achieving growth targets that were
repeatedly considered unsustainable so I prefer to figure out
why Chinese growth targets have been and from my perspective
are now sustainable. ]
the forgotten spirit of American protectionism :
, -1
YES! Of course US manufacturing isn't booming - how could it?
We have horrible economic policies that are focused almost
entirely on destroying our industrial base. High overvalued
currency, combined with 0% tariffs and we have no VAT, so
foreign imports from countries with a VAT receive export
subsidies but are not taxed on the US side. That we have even
one factory left is amazing and testament to the quality of
American workers. Under Clinton, we'll lose what's left.
Trump is our only hope. If we don't get Trump's protectionism
we will quickly become a country as poor as Armenia or
Moldova - stripped of industry and wealth, dependent on
remittances from our migrant workers in Asia and Europe.
"... Of course it is completely made up growth. the absurdity of the economists deal with price inflation. now years later, everyone realizes we have all taken a big fall in living standards no matter how many gigahertz my stupid computer is. ..."
"... The important macro story is the major decline in manufacturing employment, and that has two big and one smaller causes. ..."
"... I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading water. It's growing slowly as the economy grows, but we can predict with high confidence that it will continue to contract as a share of total output over time, because that has been the secular trend for decades and there's no reason to expect that to change. ..."
No, U.S. Manufacturing Isn't Really Booming :...[Is]American manufacturing .. in decline?
An answer frequently offered by wonky economics journalists is that, no, U.S. manufacturing output
has actually kept growing. ...
There's a catch, though. As economist Susan N. Houseman of the W.E. Upjohn Institute for Employment
Research ...
points out , about half of the growth in U.S. manufacturing output since 1997 has been in
just one sector: computer and electronics manufacturing.
If it weren't for computers and electronics (which includes semiconductors), manufacturing
output would still be well below its 2008 peak and only 21 percent higher than in 1997...
The ... way those computers-and-electronics numbers are arrived at is worthy of a closer look.
... Without adjusting for deflation, value added in computer and electronics manufacturing is
up 45 percent since 1997. With the adjustments, it's up 699 percent! What's happening here is
that the Bureau of Economic Analysis has been trying to account for vast improvements in ... quality...
Writes Houseman:
Such quality adjustment ... can make the numbers difficult to interpret..., figures that exclude
this industry ... arguably provide a clearer picture of trends in manufacturing output.
As it stands now, those trends don't look impressive. U.S. manufacturing output has held up
a lot better than manufacturing employment. But it definitely isn't booming.
so when people criticize the big deflation in computer/electronics hardware using baseless
measures like "if the computer has a processor twice as fast then it has fallen by half in price"
they are wackos. but now the real growth that is artificially generated by this way (quality improvements)
to keep inflation down is being criticized by Fox.
Of course it is completely made up growth. the absurdity of the economists deal with price
inflation. now years later, everyone realizes we have all taken a big fall in living standards
no matter how many gigahertz my stupid computer is.
Auto mfg dropped by half post 2008. It is now back but has nowhere to grow. Urbanization makes
cars less necessary and less desirable
There is not enough room to park them all now. People who earn MinWage cannot afford them
Interesting point but many will overinterpret this. Leave in the expansion of computer and electronics
manufacturing value add, and we have manufacturing output slightly expanding. Take it out entirely
and we have manufacturing output basically steady.
The difference isn't telling an important macro story.
The important macro story is the major decline in manufacturing employment, and that has
two big and one smaller causes.
The two big factors are the increased productivity of manufacturing globally and the declining
share of manufactured products as a % of GDP globally. The smaller factor is the US's declining
share of global manufacturing output, which itself is only fractionally attributable to trade
policy.
I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading
water. It's growing slowly as the economy grows, but we can predict with high confidence that
it will continue to contract as a share of total output over time, because that has been the secular
trend for decades and there's no reason to expect that to change.
The only big question is how we adapt to the world as it actually is.
Also, I did not realize I was being presented with an argument about Chinese growth and sustainability.
I foolishly stopped reading and I am entirely sorry. I have set down data and begun to answer
the argument below on Links:
What is significant though is how China insists on holding to growth targets that are very likely
not sustainable. Stability is a worthy aim but when growth is achieved through pushing bad private
sector loans, that is ultimately the enemy of stability.
[ For these 39 past years China has been holding to and achieving growth targets that were
repeatedly considered unsustainable so I prefer to figure out why Chinese growth targets have
been and from my perspective are now sustainable. ]
the forgotten spirit of American protectionism : , -1
YES! Of course US manufacturing isn't booming - how could it? We have horrible economic policies
that are focused almost entirely on destroying our industrial base. High overvalued currency,
combined with 0% tariffs and we have no VAT, so foreign imports from countries with a VAT receive
export subsidies but are not taxed on the US side. That we have even one factory left is amazing
and testament to the quality of American workers. Under Clinton, we'll lose what's left. Trump
is our only hope. If we don't get Trump's protectionism we will quickly become a country as poor
as Armenia or Moldova - stripped of industry and wealth, dependent on remittances from our migrant
workers in Asia and Europe.
48% of Trump supporters "completely distrust the economic data reported by the federal government"
including unemployment, spending, jobs. https://t.co/5l9GhucBFI
- Justin Wolfers (@JustinWolfers)
October
15, 2016
That tweet and the
linked article got my attention (no trust of data by 25% of adults!) ... Still why reflect
on this? ... so much else to get stuck on these days. First, I use official statistics in my work
A LOT; second, I am always on the look out for new survey insights; and finally, I am a bit
obsessed lately with models
in which people are not acting on the same information. This level of distrust is troubling
... even though I doubt it's new or entirely about the data ... I want us to think about WHY.
I study consumer behavior as an economist, which in 2016 still means reading lots of research
with dynamic optimization and Euler equations. This is a typical
early morning
ritual for me, that quiet time before my kids wake up when I can still imagine a world in
which we know everything about everything, including ourselves, and we choose calmly and appropriately.
BUT I balance out my openness to such models with a determination to also understand what people
ACTUALLY do and think.
Nevertheless, I am picky about the survey insights that I absorb, pass on, and try to understand.
My cognate in grad school
was survey methodology and I still write survey questions in my research ... thus I understand
how much responses can be manipulated, or even carelessly biased by poor methods and human nature.
Also I want to know what people think, not what someone writing up the survey results wants me
as a reader to think. (I'm not a fan of the tweet, by the way.) So I googled and found the
survey's homepage
, a Marketplace-Edison Research poll designed to measure economic anxiety. And, I found a
description of the
methods AND the
full survey too (see page 30 for this question). It's not the micro data online, so I can't
replicate the statistic in the tweet, but I could see that the "data trust" question was asked
before voting intentions or political affiliation. I have learned from pollsters that
asking about politics conjures up an identity that can be hard to shake in the rest of the survey.
The main roadblock I see in interpreting the data distrust is this survey's short time series;
it only began last fall as a quarterly survey. My hunch is that distrust of economic data is nothing
new but I can't prove that here. Plus changes in attitudes are often more informative than a snapshot,
since subjective questions are tricky to interpret. What does it mean to "trust data" anyway?
Do you trust data?
To be clear, I am not justifying anyone's views, but I am also trying not to be judgmental.
A key principle of surveying is not to make people feel bad or shameful about their views. Because,
guess what, if you do, they are less likely to tell you what they think or did ... then you are
fighting blind and may miss the chance to learn why we sometimes see the world differently. I
am not in the 25% of adults who have "no trust at all" in economic statistics from the
government. In fact, I am in a rare set of adults who spends more time on the
Bureau of Economic Analysis ' website sorting
through spending data than on Amazon adding to it. So what's up with all this distrust? I have
a few hypotheses to take to the data.
Hypothesis 1: government economic data don't match people's life
Sometimes I think the Representative Agent is a frenemy of economists. (Oh, not the
Twitter persona , he's great, but
the concept.) How can a simplifying assumption ... a focus on the typical or aggregate household
... be an enemy in disguise? Well, sometimes it gives theoretical models the focus they need and
other times, especially in empirical work, it glosses over important details. Details, also known
as people . So maybe distrust of economic data comes from not seeing your life experience
in the numbers that roll across the screen. National aggregates get a lot of attention, so maybe
it is minorities that end of distrusting data more, data that doesn't tell their story as loudly.
Not so, at least in terms of data about the economy, minorities are more trusting
than whites. Only 15 percent of African-American have no trust at all in economic data almost
half the fraction of whites. And among Hispanics, only12 percent have complete distrust of data.
With whites comprising over 70 percent of all adults, they are well represented in both aggregate
statistics and the distrust of them. Of course, this is just one cut of the data and not seeing
your life experience in the data may raise other issues (more below). Government agencies have
made a push to improve regional statistics
and even make
neighborhood data more readily accessible and help improve local decision making. And of course,
lots of household level surveys exist too. Another reason to take distrust (or even disinterest)
in government economic data seriously is that the quality of the data we have depends on people's
participation in our surveys. Response rates on numerous surveys
have been falling and
research
suggests that non response could impact official statistics, making them a less accurate reflection
of life experiences.
Hypothesis 2: distrust stems from people being "hurt" by data
One the first Friday of the every month, my Twitter feed is overflowing with chatter about
the latest employment report from the Bureau of
Labor Statistics . That makes me weird. I firmly believe that few people absorb the government
statistics in the way that I and my fellow econos do. Why should they? People confront economic
data when it affects them. One example I can think of is the cost-of-living adjustment, such as
for Social Security benefits. That came to mind when I looked at data distrust by age.
no cost-of-living
adjustment to benefits had led some seniors to "distrust" government data, like the CPI-W?
Again, this hypothesis would be a lot better to test with a time series of data, comparing years
with benefit increases and without. But feeling shortchanged by the data may be understandable
given wide variation relative price changes , few of us exactly consume the representative
basket. Alternatively, as risk aversion appears to rise with age, maybe so too does distrust?
I wrote earlier that age is
more than just a number , the impact of demographic change deserves more study.
Hypothesis 3: it's not the data, it is the way we use them ... the spin
I don't trust data, I trust people. And even then, trust but verify, right? Perfectly measured
data (dream, dream), can be still be suspect. In fact, data can codify a lot of the biases and
mistakes we have made together in the past. Maybe we should also be concerned for the people who
"completely trust" government economic data? (Do read
Cathy O'Neil's book on
Big Data and algorithms.) Yet, I suspect the distrust in the survey is not about data construction
(I've never seen a protest at the ever-interesting
BEA advisory committee meetings
) ... or even about the government employees who construct the statistics in excruciating
detail, and in line with
international
standards . I bet the distrust is more about how the numbers are interpreted and how they
are used in policy making. Drawing conclusions from data is hard and reasonable disagreement is
to be expected. As just one example, the seasonally-adjusted unemployment rate for African Americans
was 8.3 in September
, which is below its average of 10.8 percent over the past 20 years but is almost double the
4.4 percent unemployment rate of whites. Should we call that 8.3 (or 4.4, for that matter) victory
or 'full employment'? And is the unemployment rate even the right statistic to assess? Relative
to the past it may well be but the past can be an imperfect guide for the future. Every data point
has its shortcoming, especially where there is no clear counterfactual or agreed upon target.
My "moderate" growth could easily be your "weaker-than-expected" growth. And, of course, on top
of honest disagreements about data, plenty of motivated reasoning is done with numbers. BUT when
we start with the same data, there are at least some bounds on the disagreement. In contrast,
when government data are wholesale rejected one quarter of adults, it's no surprise that we aren't
living in the same world. And we stop trying to understand each other. I would be lost (and bored
out of my mind) in my work on consumer behavior without data. You don't want me extrapolating
from my tiny circle of experience ... and frankly no one should make decisions with that little
information. We can learn a lot from the data, including these attitudinal surveys. And data adds
accountability, including in how its collected. Even so, no one likes to feel manipulated or,
worse, written off, especially with numbers.
Data can't solve problems but maybe it holds clues to a path forward ... to rebuild trust.
**Opinions here are mine and should not to be attributed to anyone with whom I work.**
Is it just not done to ask people why they distrust Government figures ?
2016-10-17, Stuart Gibson The same thing happened here in Italy with Silvio Berlusconi. He got
a lot of reforms but a lot of people ignored facts.
2016-10-17, pietro No one 'trusts' data. We all have confidence intervals.
This combined with your point number 3 is the main issue I suspect.
Point number 1 is also in play, I think point 2 is essentially irrelevant, it might be true for
some data, but not for data.
As far as economics goes, people intuitively understand that economics attempts to push the envelope
and use data to draw conclusions that are not really addressable with the data. Economists don't
even have agreement on how data is used - thinking mostly of macro. I see no reason to puzzle
on this until you can get economists to all agree. I don't mean this as a challenge, just a description
of the situation.
2016-10-17, Dan The headline unemployment number is obviously false, and this affects confidence
in the other numbers.
There is no particular mystery about what is going on.
2016-10-17, Dave Chapman Because your aggregated statistics does not reflect the experience of
the individuals:
"But several underlying factors also appear to have contributed to the closeness of the race.
For starters, many Americans are economically worse off than they were a quarter-century ago.
The median income of full-time male employees is lower than it was 42 years ago, and it is increasingly
difficult for those with limited education to get a full-time job that pays decent wages.
Indeed, real (inflation-adjusted) wages at the bottom of the income distribution are roughly where
they were 60 years ago. So it is no surprise that Trump finds a large, receptive audience when
he says the state of the economy is rotten. But Trump is wrong both about the diagnosis and the
prescription. The US economy as a whole has done well for the last six decades: GDP has increased
nearly six-fold. But the fruits of that growth have gone to a relatively few at the top – people
like Trump, owing partly to massive tax cuts that he would extend and deepen. "
https://www.project-syndicate.org/commentary/trump-candidacy-message-to-political-leaders-by-joseph-e--stiglitz-2016-10
2016-10-17, PSteele
"... In the West, the priority accorded to the individualist self-regarding norms underlying the Washington Consensus created a nurturing environment for growth in corruption, inequality, and mistrust in governing elites – the unintended consequences of rational-choice, me-first premises. With the emergence in advanced economies of disorders previously associated with developing countries, Swedish political scientist Bo Rothstein has petitioned the Academy of Sciences (of which he is a member) to suspend the Nobel Prize in economics until such consequences are investigated." ..."
Interesting read on the history of the Nobel Prize in
Economics and its ideological tendency:
Avner Offer: "a
group of center-right economists captured the process of
selecting prizewinners...The prize kingmaker was Stockholm
University economist Assar Lindbeck, who had turned away from
social democracy. During the 1970s and 1980s, Lindbeck
intervened in Swedish elections, invoked microeconomic theory
against social democracy, and warned that high taxation and
full employment led to disaster. His interventions diverted
attention from the grave policy error being made at the time:
deregulation of credit, which led to a deep financial crisis
in the 1990s and anticipated the global crisis that erupted
in 2008.
Lindbeck's concerns were similar to those of the
International Monetary Fund, the World Bank, and the US
Treasury. These actors' insistence on privatization,
deregulation, and liberalization of capital markets and trade
– the so-called Washington Consensus – enriched business and
financial elites, led to acute crises, and undermined
emerging economies' growth.
In the West, the priority accorded to the individualist
self-regarding norms underlying the Washington Consensus
created a nurturing environment for growth in corruption,
inequality, and mistrust in governing elites – the unintended
consequences of rational-choice, me-first premises. With the
emergence in advanced economies of disorders previously
associated with developing countries, Swedish political
scientist Bo Rothstein has petitioned the Academy of Sciences
(of which he is a member) to suspend the Nobel Prize in
economics until such consequences are investigated."
Spirited defense of the establishment from one of financial oligarchy members.
" The economy overall is doing just fine." Does this include QE? If the Fed is pouring
billions of new money into the economy, how accurate is it to say that the economy
is doing just fine?
Notable quotes:
"... "That was a number that was devised, statistically devised, to make politicians - and in particular, presidents - look good. And I wouldn't be getting the kind of massive crowds that I'm getting if the number was a real number." ..."
"... In the 1950s and 1960s, for instance, organized labor was fairly convinced that the government was purposely underestimating inflation and the cost of living to keep Social Security payments low and wages from rising. George Meany, the powerful head of the American Federation of Labor at the time, claimed that the Bureau of Labor Statistics, which compiled both employment and inflation numbers, had "become identified with an effort to freeze wages and is not longer a free agency of statistical research." ..."
"... Employment figures are sometimes seen as equally suspect. Jack Welch, the once-legendary former CEO of GE, blithely accused the Obama administration of manipulating the final employment report before the 2012 election to make the economic recovery look better than it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers," he tweeted ..."
"... His arguments were later fleshed out by New York Post columnist John Crudele , who went on to charge the Census Bureau (which works with BLS to create the samples for the unemployment rate) with faking and fabricating the numbers to help Obama win reelection. ..."
"... The chairman of the Gallup organization, Jim Clifton, sees so many flaws with the way unemployment is measured that he has called the official rate a "Big Lie." In the Democratic presidential campaign, Bernie Sanders has also weighed in, saying the real unemployment rate is at best above 10 percent. ..."
"... What a useless article. The author explains precisely nothing about what the official statistics do and do not measure, what they miss and what they capture. ..."
"... I had the same impression as well. Notice he does not mention that the Gallop number is over 10% and is based on their polling data. ..."
"... But never mentioned that Reagan changed how Unemployment was figured in the early 80's. He included all people in the military service, as employed. Before that, they was counted neither way. He also intentionally left out that when Obama, had the unemployed numbers dropped one month before the election, from 8.1% to 7.8% --because it was believed that no one could be reelected if it was above 8%. ..."
"... U6 is 9.8% for March 2016. We still have 94 million unemployed and you want to say its 5 % what journalistic malpractice. ..."
"... Trump has emphasized that he is looking at the percent of the population that is participating in the workforce - and that this participation rate is currently at historical lows -- and Trump has been clear that his approach to paying down the national debt is based on getting the participation rates back to historical levels ..."
"... "The government can't lie about a hundred billion dollars of Social Security money stolen for the Clinton 'balanced budget', that would be a crime against the citizens, they would revolt. John, come one now. " ..."
"... I didn't say it first, Senator Ernest Hollings did, on the Senate floor. ..."
"... And here is how they did it: http://www.craigsteiner.us/articles/16 ..."
"... There is plenty of evidence the figures are cooked, folks, enough to fill a book: Atlas Shouts. Don't believe trash like this article claims. GDP, unemployment and inflation are all manipulated numbers, as Campbell's Law predicts. ..."
"... I can't believe the Washington Post prints propaganda like this. ..."
"... I do remember when the officially-announced unemployment rate stopped including those who were no longer looking for work. That *was* a significant shift, and there's no doubt it made politicians (Reagan, I think it was) look better; of course, no President since then has reversed it, as it would instantly make themselves look worse. ..."
"... Working one hour a week, at minimum wage, is 'employed', according to the government. No wonder unemployment is at 5%. ..."
"... Add in people who are working, but want and need full time jobs, add in people who have dropped out of the labor market and/or retired earlier than they wanted to, and unemployment is at least 10%. Ten seconds on Google will show you that. ..."
"... The writer should be sacked for taking a very serious issue and turning it into a piece of non-informative fluff. Bad mouthing Trump and Sanders is the same as endorsing Hilly. ..."
Yes, Donald Trump is wrong about unemployment. But he's not the only one. -
The Washington Post
Listen to President Obama, and you'll hear that job growth is stronger than
at any point in the past 20 years, and - as
he said in his final State of the Union address - "anyone claiming that
America's economy is in decline is peddling fiction."
Listen to Donald Trump and you'll hear something completely different. The
billionaire Republican candidate for president told The Washington Post last
week that
the economy is one big Federal Reserve bubble waiting to burst, and that
as for job growth, "we're not at 5 percent unemployment. We're at a number that's
probably into the 20s if you look at the real number." Not only that, Trump
said, but the numbers are juiced: "That was a number that was devised, statistically
devised, to make politicians - and in particular, presidents - look good. And
I wouldn't be getting the kind of massive crowds that I'm getting if the number
was a real number."
It's easy enough to dismiss - as a phalanx of economists and analysts
did - Trump's claims as yet another one of his all-too-frequent campaign
lines that have little to do with reality. But with this one, at least, Trump
is tapping into a deep and mostly overlooked well of popular suspicion of government
numbers and a deeply held belief that what "we the people" are told about the
economy by the government is
lies, damn
lies and statistics designed to benefit the elite at the expense of the
working class. The stubborn persistence of these beliefs should be a reminder
that just because the United States is doing well in general, that doesn't mean
everyone in the country is. It's also a warning to experts and policymakers
that in the real world,
there is no "the economy," there are many, and generalizations have a way
of glossing over some very rough patches.
Since the mid-20th century, when the U.S. government began keeping
and compiling our modern suite of economic numbers, there has been constant
skepticism of the reports, coming from different corners depending on economic
trends and the broader political climate. In the 1950s and 1960s, for instance,
organized labor was fairly convinced that the government was purposely underestimating
inflation and the cost of living to keep Social Security payments low and wages
from rising. George Meany, the powerful head of the American Federation of Labor
at the time, claimed that the Bureau of Labor Statistics, which compiled both
employment and inflation numbers, had "become identified with an effort to freeze
wages and is not longer a free agency of statistical research."
Over the decades, those views hardened. Throughout the 1970s, as workers
struggled with unemployment and stagflation, the government continually tweaked
its formulas for measuring prices. By and large, these changes and new formulas
were designed to make the figures more accurate in a fast-changing world. But
for those who were already convinced the government was trying to paint a deliberately
false picture, the tweaks and innovations were interpreted as a devious way
to avoid spending money to help the ailing middle class, not trying to measure
what was actually happening to design policies to help address it. The commissioner
of BLS at the time, Janet Norwood, dismissed those concerns
in testimony to Congress in the late 1970s, saying that when people don't
get the number they want, "they feel there must be something wrong with the
indicator itself."
Employment figures are sometimes seen as equally suspect. Jack Welch,
the once-legendary former CEO of GE,
blithely accused the Obama administration of manipulating the final employment
report before the 2012 election to make the economic recovery look better than
it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't
debate so change numbers," he tweeted after that last October report showed
better-than-expected job growth and lower-than-anticipated unemployment rate.
His arguments were later fleshed out by New York Post columnist
John Crudele, who went on to charge the Census Bureau (which works with
BLS to create the samples for the unemployment rate) with faking and fabricating
the numbers to help Obama win reelection.
These views are not fringe. Type the search terms "inflation
is false" into Google, and you will get reams of articles and analysis from
mainstream outlets and voices, including investment guru Bill Gross (who referred
to inflation numbers as a "haute
con job"). Similar results pop up with the terms "real
unemployment rate," and given how many ways there are to count employment,
there are legitimate issues with the headline number.
The cohort that responds to Trump reads those numbers in a starkly different
light from the cohort laughing at him for it. Whenever the unemployment rate
comes out showing improvement and hiring, those who are experiencing dwindling
wages and shrinking opportunities might see a meticulously constructed web of
lies meant to paint a positive picture so that the plight of tens of millions
who have dropped out of the workforce can be ignored. The chairman of the
Gallup organization, Jim Clifton, sees so many flaws with the way unemployment
is measured that he has called the
official rate a "Big Lie." In the Democratic presidential campaign,
Bernie Sanders has also weighed in, saying the real unemployment rate is
at best above 10 percent.
Beneath the anger and the distrust - which extend to a booming stock market
that helps the wealthy and banks flush with profit even after the financial
crisis - there lies a very real problem with how economists, the media and policymakers
discuss economics. No, the bureaucrats in the Labor and Commerce departments
who compile these numbers aren't a cabal engaged in a cover-up. And no, the
Fed is not an Illuminati conspiracy. But the idea that a few simple big numbers
that are at best averages to describe a large system we call "the economy" can
adequately capture the stories of 320 million people is a fiction, one that
we tell ourselves regularly, and which millions of people know to be false to
their own experience.
It may be true that there is a national unemployment rate measured at
5 percent.
But it is also true that for white men without a college degree, or white men
who had worked factory jobs until the mid-2000s with no more than a high school
education, the unemployment reality is much worse (though it's even worse for
black
and Hispanic men, who don't seem to be responding by flocking to Trump in
large numbers). Even when those with these skill sets can get a job, the pay
is woefully below a living wage. Jobs that don't pay well still count, in the
stats, as jobs. Telling people who are barely getting by that the economy is
just fine must appear much more than insensitive. It is insulting, and it feels
like a denial of what they are experiencing.
The chords Trump strikes when he makes these claims, therefore, should be
taken more seriously than the claims themselves. We need to be much more diligent
in understanding what our national numbers do and do not tell us, and how much
they obscure. In trying to hang our sense of what's what on a few big numbers,
we risk glossing over the tens of millions whose lives don't fit those numbers
and don't fit the story. "The economy" may be doing just fine, but that doesn't
mean that everyone is. Inflation might be low, but millions can be struggling
to meet basic costs just the same.
So yes, Trump is wrong, and he's the culmination of decades of paranoia and
distrust of government reports. The economy overall is doing just fine.
But people are still struggling. We don't have to share the paranoia or buy
into the conspiratorial narrative to acknowledge that. A great nation, the one
Trump promises to restore, can embrace more than one story, and can afford to
speak to those left out of our rosy national numbers along with those whose
experience reflect them.
the3sattlers, 4/8/2016 1:05 PM EDT
" The economy overall is doing just fine." Does this include QE? If the
Fed is pouring billions of new money into the economy, how accurate is it
to say that the economy is doing just fine?
james_harrigan, 4/8/2016 10:14 AM EDT
What a useless article. The author explains precisely nothing about
what the official statistics do and do not measure, what they miss and what
they capture.
Derbigdog, 4/8/2016 11:40 AM EDT
I had the same impression as well. Notice he does not mention that
the Gallop number is over 10% and is based on their polling data.
captdon1, 4/8/2016 5:51 AM EDT
Not reported by WP
The first two years of Obama's presidency Democrats controlled the house
and Senate. The second two years, Republicans controlled the Senate. The
last two years of Obama's term, the Republicans controlled house and Senate.
During this six years the national debt increase $10 TRILLION and the Government
collected $9 TRILLION in taxes and borrowed $10 TRILLION. ($19 Trillion
In Six Years!!!) (Where did our lovely politicians spend this enormous amount
of money??? (Republicans and Democrats!)
reussere, 4/8/2016 1:43 AM EDT
Reading the comments below it strikes me again and again how far out
of whack most people are with reality. It's absolutely true that using a
single number for the employment rate reflects the overall average of the
economy certainly doesn't measure how every person is doing, anymore than
an average global temperature doesn't measure any local temperatures.
One thing not emphasized in the article is that there is a number of
different statistics. The 5% figure refers to the U-3 statistic. Nearly
all of the rest of the employment statistics are higher, some considerably
so because they include different groups of people. But when you compare
U-3 from different years, you are comparing apples and apples. The rest
of the numbers very closely track with U-3. That is when U-3 goes up and
down, U-6 go up and down pretty much in lockstep.
It is unfortunate that subpopulations of Americans are doing far worse
(and some doing far better) than average. But that is the nature of averages
after all. It is simply impossible for a single number (or even a group
of a dozen different employment measurements) to accurately reflect a complex
reality.
Smoothcountryside, 4/8/2016 12:04 PM EDT
The alternative measures of labor underutilization are defined as U-1
through U-6 with U-6 being the broadest measure and probably the closes
to the "true" level of unemployment. Otherwise, all the rest of your commentary
is correct.
southernbaked, 4/7/2016 11:02 PM EDT
Because this highly educated writer is totally bias, he left out some
key parts, I personally lived though. He referred back to the late 70's
twice. But never mentioned that Reagan changed how Unemployment was
figured in the early 80's. He included all people in the military service,
as employed. Before that, they was counted neither way. He also intentionally
left out that when Obama, had the unemployed numbers dropped one month before
the election, from 8.1% to 7.8% --because it was believed that no one could
be reelected if it was above 8%.
Then after he was sworn in--- in January, they had to readjust the numbers
back up. They blamed it on one employees mistakes-- PS. no one was fired
or disciplined for fudging. Bottom line is, for every 1.8 manufacturing
job, there are 2 government jobs, that is disaster. Because this writer
is to young to have lived in America when it was great. When for every 1
government job, you had 3 manufacturing jobs.
I will enlighten him. I joined the workforce -- With no higher education
-- when you merely walked down the road, and picked out a job. Because jobs
hang on trees like apples. By 35 I COMPLETELY owned my first 3 bedroom brick
house, and the 2 newer cars parked in the driveway. Anyone care to try that
now ??
As for all this talk about education-- I have a bit of knowledge about
that subject-- because I paid in full to send all under my roof through
it. Without one dime of aide from anyone. The above writer is proof-- you
can be heavily educated, and DEAD WRONG. There is nothing good about this
economy. Signed, UN-affiliated to either corrupted party
Bluhorizons, 4/7/2016 9:43 PM EDT
"we're not at 5 percent unemployment. We're at a number that's probably
into the 20s if you look at the real number." Trump is correct. The unemployment
data is contrived from data about people receiving unemployment compensation
but the people who's unemployment has ended and people who have just given
up is invisible.
"It may be true that there is a national unemployment rate measured at
5 percent. But it is also true that for white men without a college degree,
or white men who had worked factory jobs until the mid-2000s with no more
than a high school education, the unemployment reality is much worse "
The author goes on and on about the legitimate distrust of government
unemployment data and then tells us Trump is wrong. But the article convinces
us Trump is right! So, this article its not really about the legitimate
distrust of government data is is about the author's not liking Trump. Typical
New Left bs
Aushax, 4/7/2016 8:24 PM EDT
Last jobs report before the 2012 election the number unusually dropped
then was readjusted up after the election. Coincidentally?
George Mason, 4/7/2016 8:15 PM EDT
U6 is 9.8% for March 2016. We still have 94 million unemployed and
you want to say its 5 % what journalistic malpractice.
F mackey, 4/7/2016 7:57 PM EDT
hey reporter,Todays WSJ, More than 40% of the student borrowers aren't
making payments? WHY? easy,they owe big $ money$ & cant get a job or a well
paying job to pay back the loans,hey reporter,i'd send you $10 bucks to
buy a clue,but you'd probably get lost going to the store,what a %@%@%@,another
reporter,who doesn't have a clue on whats going on,jmo
SimpleCountryActuary, 4/7/2016 7:57 PM EDT
This reporter is a Hillary tool. Even the Los Angeles Times on March
6th had to admit:
"Trump is partly right in saying that trade has cost the U.S. economy
jobs and held down wages. He may also be correct - to a degree - in saying
that low-skilled immigrants have depressed salaries for certain jobs or
industries..."
If this is the quality of reporting the WaPo is going to provide, namely
even worse than the Los Angeles Times, then Bezos had better fire the editorial
staff and buy a new one.
Clyde4, 4/7/2016 7:34 PM EDT [Edited]
This article dismissing Trump is exactly what is wrong with journalism
today - all about creating a false reality for people instead of investigating
and reporting
Trump has emphasized that he is looking at the percent of the population
that is participating in the workforce - and that this participation rate
is currently at historical lows -- and Trump has been clear that his approach
to paying down the national debt is based on getting the participation rates
back to historical levels
The author completely ignored the big elephant in the room -- that is
irresponsible journalism
The author may want to look into how the unemployment rate shot up in
2008 when the government extended benefits and then the unemployment rate
plummeted again when unemployment benefits were decrease (around 2011, I
believe) - if I were the author I would do a little research into whether
the unemployment rate correlates with how much is paid out in benefits or
with unemployment determined through some other approach (like surveys
dangerbird1225, 4/7/2016 7:25 PM EDT
Bunch of crap. If you stop counting those that stop looking for a job,
your numbers are wrong. Period. Why didn't this apologist for statistics
mention that?
"The government can't lie about a hundred billion dollars of Social
Security money stolen for the Clinton 'balanced budget', that would be a
crime against the citizens, they would revolt. John, come one now. "
I didn't say it first, Senator Ernest Hollings did, on the Senate
floor.
"Both Democrats and Republicans are all running this year and next
and saying surplus, surplus. Look what we have done. It is false. The
actual figures show that from the beginning of the fiscal year until
now we had to borrow $127,800,000,000." - Senate speech, Democratic
Senator Ernest Hollings, October 28, 1999
Go to New Orleans Chicago Atlanta Los Angeles Detroit stop anybody on
the street and ask if unemployment is 5% and that there is a 95% chance
a guy can get a job.
Then you will have a statistic reference point. Its not a Democratic
or republican issue because both of them have manipulated the system for
so long its meaningless. Go Trump 2016 and get this crap sorted out with
common sense plain English
AtlasRocked, 4/7/2016 4:37 PM EDT
There is plenty of evidence the figures are cooked, folks, enough
to fill a book: Atlas Shouts. Don't believe trash like this article claims.
GDP, unemployment and inflation are all manipulated numbers, as Campbell's
Law predicts.
I can't believe the Washington Post prints propaganda like this.
TimberDave, 4/7/2016 2:23 PM EDT
I do remember when the officially-announced unemployment rate stopped
including those who were no longer looking for work. That *was* a significant
shift, and there's no doubt it made politicians (Reagan, I think it was)
look better; of course, no President since then has reversed it, as it would
instantly make themselves look worse.
astroboy_2000, 4/7/2016 1:28 PM EDT
This would be a much more intelligent article if the writer actually
said what the government considers as 'employed'.
Working one hour a week, at minimum wage, is 'employed', according
to the government. No wonder unemployment is at 5%.
Add in people who are working, but want and need full time jobs,
add in people who have dropped out of the labor market and/or retired earlier
than they wanted to, and unemployment is at least 10%. Ten seconds on Google
will show you that.
The writer should be sacked for taking a very serious issue and turning
it into a piece of non-informative fluff. Bad mouthing Trump and Sanders
is the same as endorsing Hilly.
Manchester0913, 4/7/2016 2:12 PM EDT
The number you're referencing is captured under U6. However, U3 is the
traditional measure.
Son House, 4/7/2016 2:24 PM EDT
The government doesn't claim that working one hour a week is employed.
Google U 3 unemployment. Then google U 6 unemployment. You can be enlightened.
Liz in AL, 4/7/2016 7:21 PM EDT
I've found this compilation of all 6 of the "U-rates" very useful. It
encompasses the most restrictive (and thus smallest) U-1 rate, though the
most expansive U-6. It provides brief descriptions of what gets counted
for each rate, and (at least for more recent years) provides the ability
to compare at the monthly level of detail.
U6 Unemployment Rate Portal Seven
"... Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service economy." ..."
Energy intensity of the World economy has decreased from 1970 to 2014. Energy intensity is energy
consumed by the economy divided by the real GDP produced.
In 1970 314 tonnes of oil equivalent(toe) were needed for each million 2005$ of GDP produced and
by 2014 energy intensity had fallen to 225 toe per million 2005$ of GDP.
While you produce some fine charts, I hope you don't believe GDP and energy consumption will
continue higher indefinitely. Also I hope you realize GDP figures are overstated due to understated
inflation rates.
For example the policy of substitution says if top sirloin beef is too expensive, then we switch
to eating ground chuck. If chuck becomes too high, then its plain ole ground beef. Once ground
beef becomes too costly, then we switch to ground rat.
Lastly, why don't you add the debt into your equations and see what the trend lines look like.
No inflation is not understated, the Shadowstats stuff is not believable. If you believe the
Shadowstats CPI adjustment and us those numbers to find the real oil price from 1970 to 2012 and
do the same using the BLS CPI we get the following chart. Does the Shadowstats estimate for the
real oil price in 1980 look reasonable?
Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service
economy."
"This is probably due to deindustrialization of the Western countries. Aka "growth of service
economy.""
The GLOBAL industrial production did not decrease, therefore, your argument does not make sense.
It is only useful in a national e.g. US-centric discussion.
Or if you actually check data for developed countries with quite different share of industry
to their GDP you do not see the correlation of low share of industry = low energy intensity!
As Ulenspiegel says correctly, for the World your point does not apply. The World Energy
intensity has fallen as I have used Global GDP and Global energy consumption.
As long as we don't do a lot of interplanetary trade, this estimate will be close enough.
:-)
GDP does not reflect only production (compare with GNI). It is completely different metric
which takes into account the "value" produced by financial services, prostitution (yes in some
countries income from prostitution is included into GDP; GB (3-4% or ~£10 billion) and Italy (2%
of national GDP) are two examples:
https://www.rt.com/news/161140-italy-drugs-prostitution-economy/
) and like.
GDP is defined as the total value of final goods and services produced within a territory
during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's
annual product). GDP differs from gross national product (GNP) in excluding inter-country income
transfers, in effect attributing to a territory the product generated within it rather than
the incomes received in it.
So the country with zero production in which people just wash dirty linen for each for remuneration
or trade on stock market has a positive GDP. Other classic example: if somebody marries his secretary
and she stays home to look after children GDP drops.
GDP never measures economic efficiency of the country; it measures the level of economic
activity. Healthcare is a classic example. The USA spends 20% to subsidize maladaptive behavior
between producers and consumers in the medical food chain. Another example is sales of high sugar
context flavored water called Coca Cola and Pepsi Cola. It is negatively affect children health
leading to obesity and early diabetes, but it is positively reflected in GDP. And then medical
expenses for treating diabetes further increase GDP. That brings us to the problem of conspicuous
consumption or consumption for the sake of status. Which in the USA is a real national epidemics
(Keeping up with Jones). Many other components of GDP (especially FIRE - finance, insurance and
real estate) are partially anti-social and their fast growth is a sign of the problems inherent
in neoliberal societies rather then social progress of the particular country. This is especially
true for the USA, which in this sense is the most wicked (aka neoliberal) country in the world.
This voodoo cult of GDP that dominates US economic discourse since 1991 is just a sign of the
level of degradation of economic science under neoliberalism.
In an article * on the Federal Reserve Board's decision to raise interest rates, the
Washington Post referred to the 2.4 percent median growth forecast of the Fed's Open Market
Committee. For example, last December their median forecast for growth in 2015 was 2.8 percent.
It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with
other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be
near the middle of major forecasts, forecast 2.9 percent growth for 2015.
"... The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society's wellbeing. These new data on white Americans' declining health status confirms this conclusion. The world's quintessential middle-class society is on the way to becoming its first former middle-class society. ..."
The basic perquisites of a middle-class life were increasingly beyond the reach of a growing
share of Americans. The Great Recession had shown their vulnerability. Those who had invested in
the stock market saw much of their wealth wiped out; those who had put their money in safe
government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down
both short- and long-term interest rates. With college tuition soaring, the only way their
children could get the education that would provide a modicum of hope was to borrow; but, with
education loans virtually never dischargeable, student debt seemed even worse than other forms of
debt.
... ... ...
The international Commission on the Measurement of Economic Performance
and Social Progress, which I co-chaired and on which Deaton served, had earlier
emphasized that GDP often is not a good measure of a society's wellbeing. These new data on
white Americans' declining health status confirms this conclusion. The world's quintessential
middle-class society is on the way to becoming its first former middle-class society.
What is the service sector? Mostly software, restaurants, banks, construction companies,
retailers, doctors and hospitals.
Can an economy thrive if it doesn't make or move physical
things? Intuitively the answer is no, because most of the services mentioned above either
maintain the status quo (like healthcare and restaurants) or (like houses) consume rather
than build capital. As for banking, in its current incarnation it's almost certainly
a net negative, draining capital from productive uses and funneling it to trading desks and political
action committees.
The US, in short, is engaged in an experiment to see how long an economy can function with services
growing and manufacturing contracting. As with so many of today's monetary and fiscal
experiments, no one knows when definitive results will come in. But the data so far aren't encouraging.
Noplebian
History shows when the fiat currency system reaches it's end cycle, there is always a call
for war. This one however, will wipe out billions!
"The US, in short, is engaged in an experiment to see how long an economy can
function with services growing and manufacturing contracting."
Should read:
"The US, in short, is engaged in an experiment to see how long an economy can function with
services growing and manufacturing contracting while the MSM tells us how awesome everything
is."
toady
Another "oldy-but-a-goody". This "transition from a manufacturing to a services economy"
has been going on since before NAFTA, and it's now almost finished we'll finally get to see
what the Reagan-Bush1 voodoo economics hath wrought.
Good times!
Amish Hacker
In politics, "definitive results" do not exist. Causes and effects can be, and are, argued
and denied ad infinitum , in spite of overwhelming evidence to the contrary. For example,
Cheney & the neocons still claim they did the right thing in Iraq & Afghanistan, and proudly
boast that they would do the same thing again today. Keynesian economists will argue that they
made no mistakes over the last 8 years, we just didn't apply their prescriptions aggressively
enough. And so on.
In politics, confirmation bias is the leading cause of blindness.
The apparent decoupling turns out to be mostly a mirage. It is true that rich countries outsource
some of the more energy and materials intensive operations to poor countries, but if you count back
from consumption, the rich countries are essentially as energy and materials dependent as they ever
were. For fossil fuels, the coefficient is 90 percent…a 90 point increase in fossil fuels is needed
for a 100 point increase in GDP.
Part of what happens can perhaps be understood by thinking about beef imports. If England imports
beef from Africa, then there is a great deal of materials and energy consumed in Africa to produce
the beef. Only a small percentage of the resource used gets exported to England. If you start with
the steak in England and look back at the supply chain, you find that the consumption of the pound
of steak in England was responsible for the consumption of lots of energy and materials in Africa.
I think that 'decoupling' is not the same as energy efficiency. Suppose, for example, that we
look at the efficiency with which firewood is burned in an ordinary house. Back in the olden days,
the wood was burned in a fireplace, which is inefficient. Then Franklin invented the Franklin stove
and heating became more efficient in terms of calories of usable heat per cord of wood. But the stove
wasn't necessarily any less or more expensive than the fireplace. Since GDP essentially measures
cash outlay, the increased efficiency doesn't necessary have any direct impact on GDP.
Recently, we have begun to adjust GDP for 'hedonic factors'. Suppose, for example, that one has
an old radio with lots of static and poor sound quality. Then one buys a new radio with better sound
quality. But suppose that the price you pay for the new radio is the same as it was for the old radio.
GDP would be the same for both radios. But, recently, the US government has begun to make adjustments
for the quality of the sound.
Whether the hedonic adjustments make any sense depends on what sort of question you are trying
to answer. If you are asking 'will my radio company be able to pay our debts?', then all that matters
is your actual income. The fact that you had to improve the sound quality in order to remain competitive
is an ancillary fact. If you are not getting any more income, then paying your debts doesn't get
any easier.
In their book,
The Spirit Level: Why Greater Equality Makes Societies Stronger (link is external), Professors
Richard Wilkinson and Kate Pickett, present data taken from multiple credible sources that show
the gap between the poor and rich the greatest in the U.S. among all developed nations; child
well being is the worst in the U.S. among all developed nations; and levels of trust among people
in the U.S. among the worst of all developed nations.
The Subcommittee on International Organizations, Human Rights and Oversight of the U.S.
Congress' House Committee on Foreign Affairs stated, after examining the issue of the U.S.'s declining
image abroad, "the decline in international approval of U.S. leadership is caused largely by opposition
to the invasion of Iraq, U.S. support for dictators, and practices such as torture and rendition.
They testified that this opposition is strengthened by the perception that our decisions are made
unilaterally and without constraint by international law or standards-and that our rhetoric about
democracy and human rights is hypocritical."
The US ranks 114th out of 125 countries in international peace and security.
To those in power who believe that only strength counts, and that people are always self-interested,
I say "We tried it your way, and it didn't work. Let's try something new."
Hi Dennis,
I see up there little discussion about GDP and what it means.
Let's say:
Country A: use washable rags to clean kitchen counter-tops.
Country B: use paper towels to clean same kitchen counter-tops.
As result they both have clean
kitchen counter-tops but Country B has higher GDP due to use of paper towels.
So GDP means absolutely nothing or anything depending what you want to present.
GDP is like looking at the sunset and your mind is thinking that you are actually looking at the
sunset. But it takes 8 minutes for sunlight to reach the earth and that sun that we think we are
looking at is already gone. (Since this site is loaded with scientist they can correct me with
if that 8 minutes is more or less correct
)
Anyway, mostly GDP is used by some "smart" people we call economist to tell us some "story".
For example they tell us: "You see sunny boy that GDP is big number this year, bigger than one
from last year. So you should be content and happy. Not convinced? Don't worry we will "super
size" that GDP for you next year. Isn't your tummy already feeling full and content?"
This kind of storytelling is usually printed as financial news about GDP. Meaningless if you
ask me from the point of average citizen.
I have to go now because I have whole day of work planned for me by this economy and I will
catch you later tonight to see your thoughts. Another thing that crosses my mind is how come that
we work more or at least the same now when oil is at $40 compared to when oil was $100 last year?
Wasn't the official meme that use of oil as our biggest invention beside sliced bread, made our
life easier so we actually work less and spent more time with family & friends and doing odd staff
like canoeing
How come I don't feel that I did not get 60% discount due to price of oil in terms of work load
from the last year
Who is pocketing that 60%
How about employed folks who bought kiwi Leaf? Do they work less and have more time with family
and friends or they are paddling in the same hamster wheel we call economy?
I agree GDP is a poor measure of well being. Another example would be World War 2 where
a lot of output was created to destroy stuff (tanks, bombs, planes, ships, guns, etc), then stuff
was destroyed, cities and other infrastructure in Europe and Asia and then it was rebuilt leading
to a lot of economic growth. Were we better off? Probably not, especially the millions who died
and their families.
GDP has many problems, beyond paper towels and paper plates and other wasteful (in my opinion)
uses of resources.
I did a different chart using the human development index (HDI) from 1980 to 2013 which shows
World primary energy use per unit of HDI(a dimensionless number) has been increasing roughly linearly,
not decreasing as is the case for energy intensity.
The HDI is also far from perfect as a measure of human welfare, but probably better than GDP.
"... A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. ..."
"... GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass. ..."
"... I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling. ..."
"... Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP. ..."
"A paper published earlier this year in Proceedings of the National Academy of Sciences proposes
that even the relative decoupling we claim to have achieved is an artefact of false accounting.
It points out that governments and economists have measured our impacts in a way that seems irrational.
Here's how the false accounting works. It takes the raw materials we extract in our own countries,
adds them to our imports of stuff from other countries, then subtracts our exports, to end up
with something called "domestic material consumption". But by measuring only the products shifted
from one nation to another, rather than the raw materials needed to create those products, it
greatly underestimates the total use of resources by the rich nations.
For instance, if ores are mined and processed at home, these raw materials, as well as the
machinery and infrastructure used to make finished metal, are included in the domestic material
consumption accounts. But if we buy a metal product from abroad, only the weight of the metal
is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries
like China and India, the rich nations appear to be using fewer resources. A more rational measure,
called the material footprint, includes all the raw materials an economy uses, wherever they happen
to be extracted. When these are taken into account, the apparent improvements in efficiency disappear."
VK, precisely. The US has been in a net-exergetic deficit in debt-money-based terms per capita
since the mid- to late 1960s to mid-1970s to mid-1980s, having compensated by increasing to an
unprecedented level to date debt to wages and GDP.
Moreover, the BEA-determined industry requirement costs as the basis of estimated gross and
real value-added output (what we refer to as GDP), adjusted for our net-exergetic deficit in debt-money
terms, the US has been in recession/"slow-motion depression" since Q4 2000-Q1 2001, and the world
since 2005-08.
Senior BEA, BLS, Commerce, White House economic advisors, CIA, NSA, military intelligence,
and Pentagon planners all know this in varying degrees as it relates to their imperatives and
prerogatives.
However, the mass public and most political leaders are utterly unaware, or in the case of
the latter, have no incentive to know or to share with the public what they know because they
will not be able to raise a nickel thereafter for reelection if they do share.
He told me that he and his colleagues had conducted a similar analysis, in this case of
the UK's energy use and greenhouse gas emissions, "and we find a similar pattern". One of his
papers reveals that while the UK's carbon dioxide emissions officially fell by 194m tonnes between
1990 and 2012, this apparent reduction is more than cancelled out by the CO2 we commission through
buying stuff from abroad. This rose by 280m tonnes in the same period.
GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass.
I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit
of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines.
If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then
the 2 lines on the graph will diverge. There is no decoupling.
Only a divergence due to more units
of GDP produced per unit of energy consumed. When somebody can create units of GDP and consume
no energy at all then we will have decoupling. Coupling and decoupling are all or none terms/states
of being. You're either coupled or your decoupled. Any arguments to the contrary are pedantic
and uninformed.
Look up the meaning of decouple it is reduce or eliminate the effect of one part of
a circuit on another. In this context the appropriate meaning is reduce.
Doesn't really matter, nobody thinks that energy inputs can be eliminated, that would be absurd.
The problem is solved by looking at World output and World primary energy use.
Energy intensity for the World has improved, though during the Chinese rapid expansion from
2000-2010, the progress stopped for a decade as energy was not used very efficiently in China
over that period, since 2010 the progress has continued. Energy intensity is energy per unit of
GDP produced.
Chart below for 1965 to 2014 using World Bank(from FRED), UN, and BP data.
Left vertical axis is in metric tons of oil equivalent (toe) per millions of 2005$ of real
GDP (M2005$).
That graph shows several things mixed that have co-evolved independently, so not
many conclusions can be extracted.
-It reflects improvements in energy usage, meaning we are able to extract more economic yield
per unit of energy. This is the only real efficiency improvement.
-It reflects increase in debt, that is reflected in GDP but does not use energy. If I borrow
money GDP increases yet no energy is used.
-It reflects increase in tertiary economy at the expense of primary and secondary economies.
We pay more for services and less for resources and goods.
We don't know the contribution of each to that graph (at least I don't), but given the magnitudes
involved I would guess that the real efficiency improvement is small. This is supported by how
the graph reacts to recessions (not the Chinese expansion as you claim), indicating that the main
factor is economic, not energetic.
Now we know that debt has a limit, and once debt saturation is reached the economy, and specially
the tertiary sector would be very badly affected. If that happens we might very well see that
graph turn around and energy intensity increase.
GDP only increases if your money is spent on goods or services. It is output
of goods and services. On a World level the debts and liabilities balance, so if I save my money
and lend it to you, I spend less and you spend more. You should review your economics. At a World
level, the debt has no effect, assuming we don't have ant interstellar debts. There was a World
recession from 2000 to 2010? I hadn't heard about that.
Yes services might have increased, if that is what people want to spend their money on, then
the share of services in the economy will increase. I don't have figures on the "non-service economy".
Part of this increase reflects women entering the labor pool in greater numbers, some of the work
cleaning the house or taking care of the garden are now part of GDP when before they were taken
care of by the family. We may not have good data for the World on this effect.
I think I do understand. If I go to the bank and ask for a 200,000 $ mortgage loan,
that money is created from thin air, and when I go and pay for the house, GDP jumps by 200,000
$, so yes, increasing debt increases GDP as soon as the debt money is used. Since no oil was used
to create the money, it counts as a reduction in oil intensity. Of course if I return the money
to the bank the operation is reversed (they do keep the interests), but since on average debt
is always expanding, except during crisis periods, oil intensity is always decreasing, except
during crisis periods. Debt that is used to buy stocks or companies or to extract oil from the
ground is the same.
In most cases the debt will come first if the home is purchased with financing. It
is possible to build a home using savings, in which case there would be no debt.
So the debt is not a requirement for GDP, just creating a new house, car, or other good or
service.
Would GDP be lower if there were no debt, of course!
As long as debt grows at reasonable rates (similar to GDP growth at full employment), when
there is a recession debt will initially grow faster than GDP and then will slow down until GDP
growth catches up and surpasses the debt rate of growth.
I am curious. Do you think what Javier is saying is correct? Energy intensity has decreased
because Debt to GDP ratios have increased? I am pretty sure Javier is not right, but you are very
knowledgeable about economics. Perhaps you can explain it to me, if I am mistaken.
If all GDP was created with no debt (all of it was based on savings and income with no new
borrowing) in year 1. And in year 2 50% of income was borrowed from banks to create the same level
of GDP, would that mean in year 2 we have 150% of the first year because of the debt?
Javier's suggestion about debt is not correct. Really, really not correct. Debt is just
accounting for various kinds of ownership and obligations. If this were the old Soviet Union,
construction would happen based on a central plan, and there would be no debt at all, but there
would still be GDP.
Let's say there two houses on an island, and 2 residents, 1 in each house. One owns both houses,
the other rents from the 1st. Then the renter borrows from the owner, and buys the house he/she
lives in. Their monthly payment was rent, now it's a mortgage payment. The renter is now leveraged.
But, has anything "real" changed? No. Same amount of wealth, same amount of income, with different
kinds of ownership, and different obligations (the renter now has to fix his own roof!).
You should read up on national income accounting. Debt does not really come into
play, and more or less debt says absolutely nothing about the energy intensity of GDP.
The chart I created is primary energy in metric tons of oil equivalent divided by real GDP in
millions of 2005$. Debt plays no role.
Try the following link for a detailed introduction to national income accounting:
I still disagree. It is well known that the increase in debt has a positive effect on
GDP, while the total outstanding debt can become a drag on GDP if too high. It is difficult to
sustain that debt plays no role in GDP in light of the evidence.
For example China has had a phenomenal rate of growth accompanied by the highest rate of debt
growth that the world has seen.
I think it is easy to understand.
Country A finances everything with savings and profits without increasing debt and sees
an increase in GDP of 2%.
Country B finances half of the goods and services with an increase in debt and sees an
increase in GDP of 2%.
Both countries use the same oil so both report the same oil intensity. However country B has
brought half of the wealth used to increase the GDP from the future without bringing any future
oil. That wealth will have to be repaid eventually, detracting from future GDP but at that point
no oil will be recovered.
So in reality country B is reporting half of its real oil intensity. With present wealth it
would have grown GDP by only 1% yet it has spent the same amount of oil than A.
Net effect is that debt reduces oil intensity when it is created and it increases oil intensity
when it is payed. We have not seen that yet because we have not paid any debt yet. Debt is always
increasing.
First we need the GDP level of countries A and B, not just their growth rate. If we only talk
about the incremental increases in GDP and energy use for each country it makes a little more
sense.
So in reality country B is reporting half of its real oil intensity. With present wealth
it would have grown GDP by only 1% yet it has spent the same amount of oil than A.
What you say above is incorrect.
For simplicity I will assume if output grows by 2%, that energy use also grows by 2%, I will further
assume each country has the same GDP, we will say it is $100 million before the 2% growth in your
example.
If country B does not take on any debt and its GDP grows by 1%, then its energy use will also
grow by 1% (not by 2%) as the energy use is proportional to GDP. So the energy intensity would
remain the same. There is no reason for it to change, it depends on technology and the structural
features of the economy (proportion of agriculture, manufacturing, and services).
Another basic fact of economics is that the loans taken out by a business are to take advantage
of a business opportunity and they will tend to lead to higher growth, so your example is flawed.
If countries A and B are of similar size and similar levels of development (twins as it were),
then if country A and country B both shunned any borrowing they will both grow at the same rate,
say 2% and have the same energy intensity (energy use also grows by 2%). Let's now assume both
countries are the same except that country A's culture is such that they think debt is bad, but
country B does not have the same aversion to debt.
Country B borrows at 2% interest to take advantage of an investment opportunity which will have
a rate of return of 4%, so country B grows faster than country A at 3% and its energy use also
grows at 3% (energy intensity remains the same). The extra income earned is used to pay back the
debt and the individual businesses come out ahead earning a net profit of 2% after paying back
the interest. This is how rational businesses operate, they borrow money to make money.
I also have lots of problems with your example, so let's take a step back to look at
the big picture.
That an increase on debt increases GDP is not in doubt. It is not only supported by evidence,
but the basis for an entire economic theory that supports fighting recessions with debt-based
stimulus.
So the question is if an increase in debt increases also GDP without oil consumption as to
reduce oil-intensity. The answer is a resounding yes. Financial services are proportional to debt
increase. Net interest expenses in the financial sector are seen as production and value added
and are added to GDP. Any service charged by financial companies also increases GDP, and none
of this economic activities uses oil, and very little energy.
I believe that a significant part of oil intensity reduction has come from the financialization
of the economy linked to debt-increase, and therefore oil intensity is a fake measure of oil decoupling.
If you look at energy-intensity you see the same phenomenon as with oil. It seems that we are
decoupling from energy because we are moving towards a fake economy based on financial instruments.
Finanzialization also appears linked to raising inequality as it effect is to increase the wealth
only of owners of financial instruments.
I do not doubt that some oil and energy efficiency is real, after all it is a process that
has been going on forever since the first oven was built to cook. But I seriously doubt that it
is a process significant enough to solve an energy deficit problem which is what peak oil is going
to bring. And to me oil intensity is a fake measure of increases in oil efficiency, that I do
not doubt are real but much overstated.
Gail Tverberg has a lot more to say about decoupling GDP growth from energy growth in her article
at TOD for anybody interested in the matter:
Yes the financial sector has increased to a small degree from 4% of GDP to 8% based
on the chart you posted (which is only for the United States rather than the World).
This has probably increased to some degree (more or less than the US is unknown) at the World
level as well. This might explain a very small slice of the decrease in energy intensity, but
I doubt it accounts for most of the change.
I agree with you that changes in the structure of the World economy (higher proportion of services)
has probably decreased energy intensity, but I doubt that accounts for all of the change. The
bottom line is that the World economic system is becoming more service oriented with services
accounting for a larger share of GDP. At some point, services may reach some maximum level, in
percentage terms, beyond which they cannot go. I don't know where that level is, debt levels will
also reach some maximum level (in percentage terms) beyond which they cannot rise (maybe total
debt of 300% to 350% of GDP at a World level as a potential maximum).
When those points are reached growth may be limited by how much more efficiently we can use
energy and how quickly we can ramp up alternative energy as fossil fuel output declines. There
is much that is unknown about the future.
Note that you keep talking about oil, the chart shows primary energy (all forms of
energy used by the economic system.)
Can you explain why country B in your example uses the same amount of energy whether it grows
at 1% or 2%. One would expect that the energy use would be proportional to GDP, as that is what
the World data shows.
That is not what I said or meant. Country B by increasing GDP 1% through an increase
in debt is in essence bringing GDP from the future to the present. That borrowed GDP is using
present energy.
The financial sector has increased from 2% to 8%, a 4x increase. This is not small peanuts.
Specially considering that only a minor part of the financial transactions are considered towards
GDP. Probably only Luxembourg and perhaps Switzerland and other banking paradises have a bigger
share.
So in reality country B is reporting half of its real oil intensity. With present wealth
it would have grown GDP by only 1% yet it has spent the same amount of oil than A.
You say above without the borrowing country B would grow by 1% (why does it grow less than
country A?) but it uses the same amount of oil as country A, why if it grows more slowly?
Look closely at your chart in 1970 (when energy intensity started to decline) it
was 4% and the most recent points on the chart are about 8.4%. I used the data from your chart
(even though it is for the US rather than the World) and did an exponential trend from 1970 to
2010 for 4% to 8% and then extended to 2014 (8.5%) for financial GDP of World economy (probably
not correct, but this is an illustration). Then I found the Energy intensity of the non-financial
sector by assuming the financial sector has zero energy inputs (I expect they are low, this is
an approximation). The Non-Financial Energy intensity is in the chart below.
Finally, Aggregate Demand is increased when there is more debt, but consider the Aggregate
supply of goods produced to meet that demand. Whether the aggregate demand is because of private
or public debt or not does not change the amount of energy needed to produce the supply of goods
and services, it only changes how much demand there will be for those goods and services. I really
cannot make it any simpler than that. Oh one more thing, do you think the energy needed to build
a car (total energy embodied in all processes used to create the car and its components) changes
if someone pays cash for the car vs financing the car?
" This article explains how the majority of money in the modern economy is created by commercial
banks making loans.
Money creation in practice differs from some popular misconceptions - banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they 'multiply
up' central bank money to create new loans and deposits."
Yes that is correct. The banks create money by lending and borrowers destroy money
as they pay back their loans. The money supply is controlled by the Central Bank buying and selling
bonds.
The debt is only a problem if it grows too quickly. If the rate of debt growth slows or the
rate of GDP growth increases there will not be a problem. There are differing views on how much
debt is too much.
Yes I did. Under normal circumstances the supply of money is primarily influenced by
the interest rate that is paid by commercial banks for money borrowed from the central bank. When
the economy is in a severe recession and this interest rate falls to the "effective lower bound"
(about 0.5%), the central bank loses its ability to increase the supply of money through lower
interest rates.
Under these circumstances the central bank will buy assets (government bonds) to increase the
money supply, it does not sell assets to reduce the money supply, it simply raises the interest
rate it charges the commercial banks.
Thanks for that link, it is a nice review of how central banks influence the supply
of money by setting the interest rate which banks must pay on money borrowed from the central
bank, which feeds through to interest rates throughout the economy and affects saving and borrowing
through market interest rates set by banks.
I would encourage Javier to read that link as it addresses many misconceptions about money.
You are comparing apples to oranges. GDP is determined using a price, or market, theory of value. So you are comparing a value determined using a market theory of value to a value determined
using an intrinsic theory of value - the toe of energy.
If you want to compare apples to apples, then you have to compare GDP to the market value of
the energy used.
If we are concerned the energy constraints will limit real GDP, then the amount of
energy consumed per unit of GDP produced is very relevant in my view.
It is not a comparison, it is a measure of energy intensity and how it has changed over time.
See
Well again, Dennis, a valid comparison is one which compares dollars and cents to dollars and
cents, not dollars and cents to toe.
There was a time (1970 to 2010) when the EIA published
the total amount spent in the United States on energy. I have plotted the ratio of total spent
on energy to total nominal GDP for those years. This is a true measure of "energy intensity,"
as it compares apples to apples, and does not omit the price of energy as your graph does.
I have added YOY growth in real GDP (calculated using constant 2009 dollars).
I don't want to draw too many conclusions from the graph, but it paints a far bleaker picture
than your graph does. When energy intensity goes over .08 - as it did in 1974 and 2008 - then
the economy began having convulsions.
The period from 1983 to 2006 is what is known as "the Great Moderation." It is also a period
of low and generally declining energy intensity. When energy intensity began increasing again,
as it did in 1999, surpassing .08 in 2006, then this marked the end of the Great Moderation. Is
this mere coincidence?
Botton line: In my opinion not only is the quantity of energy (measured in toe) important to
the performance of the economy, but the price of that energy is also important.
Using your graph, which makes no allowance for the price of energy, it is easy to see how you
have come to believe that the economy is decoupling from energy.
It is not a comparison of money spent, energy intensity is defined as energy
consumed per unit of output (measured in dollars) as there are many different goods and services
and their monetary value is measured in constant dollars.
The difficulty with using price is that there are many different forms of energy (oil, coal,
natural gas, nuclear, hydro, solar, wind, geothermal, and biofuels) which are included in the
"primary energy" category. Note that your chart shows only one country not the world. I would
present a chart for the World if I had it, I am using the data I have for primary energy divided
by real GDP. I think it is useful because it is energy contraints we are concerned about, currently
some forms of energy (fossil fuels especially) have very low prices so in monetary terms money
spent on Energy divided by real GDP would be quite low.
Energy prices are quite volatile so I like the Energy intensity measure better as it shows
energy needed to produce a unit of GDP, which has in fact declined since 1970 by about 30%(or
an average annual decrease of about 0.8% per year).
I suppose price doesn't matter as long as one can get somebody else to pick up
the tab.
For instance, we can compare a new $40,000 Chevy Bolt ev to a new $20,000 Honda HRV. There's
no way the Bolt can compete on price. But if you can get somebody else to pick up the tab for
the Bolt? Well then, no sweat!
As part of its COP21 coverage, CBS did a puff piece on their Evening News last night about
how EVs are sweeping Norway.
They interviewed one fellow who said he "had done the math" and will be able to drive his new
EV "for free."
So I did a little bit more digging, and sure 'nuf, it looks like he's right.
According to the Wall Street Journal, Norway currently has 54,000 EVs on the road. Last
year their owners received $540,000 in various forms of rebates, tax breaks and other perks from
the Norwegian state. That's a cool $10,000 per car per year. So at that clip, it would only take
4 years to recover the cost of a $40,000 EV. And then after that one can enjoy almost free driving,
all on the government's tab.
But it looks like there's trouble in paradise. The WSJ says the government give-a-ways are
set to end. The day of reckoning is still up in the air, but the latest date for phasing out the
government largess is 2020. So the Norwegian government is taking the punch bowl away. The EV
crowd, of course, isn't taking this horrible injustice lying down:
Christina Bu, secretary-general of the lobbying group Norwegian Electric Vehicle Association,
said the 25,000-member association has been stalking political parties and government officials
to ensure the main incentives remain in place, at least until 2020.
"If you cut all the incentives overnight, sales will plummet," she said.
Weaning buyers from such purchase incentives could add new headwinds to sales of vehicles
already undercut by cheap fuel prices in some markets. In the U.S., the state of Georgia halted
its $5,000 tax credit on July 1. Electric cars were about 2% of purchases in the state in 2014,
estimates Washington-based think tank Keybridge Research LLC. It forecasts a 90% decline, or 8,700
fewer sales annually, as a result of the loss.
Do you have the price of primary energy from 1965 to 2014? I would be happy to do
the chart you would like, but I don't know the appropriate price of energy, which has many different
forms and prices throughout the World.
I agree price matters, as does the amount of energy available to purchase (which is what is
in my chart).
The original study in question was asking about whether an economy can grow without increasing
it's inputs of oil, steel, etc.*
That's a very different question than whether an economy will be hurt by a sudden increase
in the price of a key commodity, like oil. If the price of oil spikes, that can create a shock
for the economy (e.g., people wait to see what happens with prices before they buy their next
vehicle, and that delay causes a recession), but an increase in prices doesn't mean energy consumption
has gone up.
-----------------
* (it can, of course, but that's separate issue from whether our societies have chosen
to do so).
I am far from convinced that GDP growth is a good way of measuring progress in a society. Let's
take an example from the UK economy. (btw I am not worried about the genders here, I would happily
be a house husband if my wife's earning potential was close to mine).
Today, nearly 70% of women of working age work. Families need both incomes to meet a reasonable
standard of living. As a result, a large majority of UK children grow up in families with both
parents working. Many parents end up sending young children to child minders and crèches so that
they can work. This employs a lot of people, mostly women. More wealthy families then employ house
cleaners and gardeners and handymen etc. to clean, garden and repair their homes that they don't
have time to do themselves. Poorer people do without. This employs a lot more people. All the
working women and the people employed by the working women pay taxes which means that people end
up working more hours to afford to pay someone else to do these jobs than it would take to do
the jobs themselves. Unless your own rate of pay is significantly higher than the people you pay
to do the jobs, you would be financially better off doing it yourself. The government and the
economists are delighted because tax take and GDP rise. All these extra people in useful employment
driving around from low skilled job to to low skilled job, consuming extra resources, especially
fossil fuels, when they would be a lot less stressed, more free time and financially better off,
just doing all these activities for themselves.
It is a major mistake to professionalise low skilled domestic work. All it does is free up
time for the rich and increases government tax take. Society as a whole is worse off.
I agree GDP is by no means a perfect measure, just a measure that is available at
the World level. There are other measures such as the social progress index, but this is not available
at the World level. There is also the United Nations Human Development Index(HDI), but again these
measures are not published at the World level (or I couldn't find it). Actually I found some World
data for the HDI from 1980 to 2013. The measure is not perfect see link below for data:
Human Development Index (HDI): A composite index measuring average achievement in three
basic dimensions of human development-a long and healthy life, knowledge and a decent standard
of living. See Technical note 1 (http://hdr.undp.org/en)
for details on how the HDI is calculated.
Chart below with World Primary energy (ktoe) divided by World HDI from 1980 to 2013. Based
on the HDI, more energy is needed to improve well being and GDP is not a good measure of human
welfare.
There is also an index for HDI that takes account of inequality, but the index (called IHDI)
is only available from 2010 to 2013.
...Look at basic staples eggs, beef, chicken and other foods, rent/housing, education, even
transportation and telecommunication cost are "effectively" raising, not to mention medical
care, all those things people need to live are raising precipitously.
Even those 1%-ters facing massive inflation forced to buy risky bonds at unbelievable high
prices to get any yield at all. The global inflation bubble is here while global demand is
dying and commodity nominal prices are collapsing as we speak since with such a high "real"
prices everybody expects loss or severe decline of income or profit in the future expressed by
a dead body of CapEx and consumption.
On the top of it typical the inflation hiding maneuvers of the retailers producing serving
size inflation, quality collapse inflation, component substitution inflation, choice narrowing
inflation, package cost and quality inflation, air conditioning, freezing/heating power
limitation inflation, shopping experience quality collapse inflation, and other manipulations
to keep so called nominal "at the store" price marginal increase of few percent only per year
but even that was impossible in 2015 so far.
.. ... ...
More on the scam of evaluating inflation in various forms including CPI I found at:
The reduction in product sizes and quality is not so much a measure of inflation as a
measure of the declining wealth of the population. People can afford less so the manufacturers
change product size/quality to match.
The area I live in now has high inflation but salaries are growing at a faster pace. So I
notice a gradual increase in quality and size of products. That said, if you can afford to pay
premium prices, you can get good quality pretty much anywhere.
Canoe Driver
American culture is based on financial rape of the working class by a criminal elite.
Always was. Part of the system is the illusion fed the common man that his interests are
represented by the political class, who in reality are merely business agents for the rich.
This illusion dies hard.
ebworthen
"1/2 gallon" of ice cream now 3 pints instead of 4 pints, canned vegetables going to 14 oz
instead of 16 oz, "1 pound" bacon now transforming to 12 oz "healthier" packages with a "great
price".
I swear to God they are going to sell a "bakers dozen" of 10 eggs instead of 12 for the same
price 'ere long.
TeamDepends
It's nuts, sometime over the summer the cans of tomatoes we buy went from 14.75 oz to 14.0.
Are they going to start making the cans thicker? Will the cans shrink to G.I. Joe size? Times
is tough, people!
Whodathunkit
Buy the imported brand from Europe. They haven't caught on to the smaller size package same
amount of $. YET
Escapeclaws
Not true that Europe doesn't have the same problem. Just look at tuna: smaller can,
half-full, higher price. Same with everything. Inflation gets going because of corporate
greed, which they "justify" by saying their costs are going up. It's a scam through and
through. About time someone does a study to analyze when their costs really go up as opposed
to them "claiming" their costs are going up.
This inflation is a form of SYSTEMIC PRICE FIXING. Because it is systemic it is not
considered price fixing as such from a legal point of view, so they get away with it. Like
everything the elite does, they have total control and we are obliged to accept it.
Same story with "gotcha capitalism". They pump a bag of potato chips full of air and
then use the excuse that the the chips, which are cozily nestled in the bottom quarter of the
bag, are being protected that way. Kind of like the mafia killing one of your kids and then
offering to protect the others for a small stipend.
The Yurpeans also pay much higher prices due to how things are packaged. I buy dried beans and
pressure cook them, but even there, you cannot buy beans in bulk. Instead you must pay an arm
and a leg for a small package. It has gotten to the point that if a bean falls to the floor, I
search for it like the widow searching for her lost penny. Pretty soon they will be packaging
single beans. I figured that out using mathematical induction.
Eventually, we former middle class people will enjoy the same standard of living as the
poor in the third world.
This reminds me of Ferfal's The Modern Survival Manual:
Surviving the Economic Collapse, written by a guy who lived
through the collapse in Argentina. There are so many paralells to
what's going on in the US, they're hard to count. Highly
recommended...
That's "Ferfal." For what it's worth, he's super accessible via his own website forums and
a couple of the larger survival forums (I think the ones on ar15.com and ovet at
survivalistsboards.com) He's got a recent posting with information from people in the Ukraine
that's especially interesting.
If anyone has any doubts about these adjustments, just buy a roll of TP and compare it to the
size of the TP holder in any house older than 10 years, it's quite obvious. I have TP that
predates the '08 collapse of the identical brand and product line, and it's at least 1/2"
wider and wrapped more densely as well.
There is substantial inflation, and it's covered up, and there's no interest being paid by
banks but they're charging the average credit card holder something around 14.9 percent.
Meanwhile 51% of workers in the US now make under 30K a year. The financial system is
absolutely raping the common people in the US, in part due to greed and in part in a desperate
attempt to save itself from collapsed caused by their greed accumulated over the past 100
years.
TBT or not TBT
I am shocked, shocked, to find stealth inflation going on in this establishment!
Supernova Born
Every ZH'er should support FerFAL's books (it is the 7.62x51 rifle his "name" is
referencing, FAL being an acronym for Fusil Automatique Léger ("Light Automatic Rifle"), and
the first three letters are from his first name, Fernando).
Surviving the Economic Collapse is filled with great insights and has proven prophetic.
First thing I think when I see shrinking retail packaging and lowered quality (diluted in the
case of SodaStream) was FerFAL said this would happen...
OceanX
Ya'll slam Castro and what he did was kick out the banksters you profess to hate. The way I
see it, what happened to Cuba was the retalliation of the banksters. He was blocked from
global trade and financing.
In addition, the conservation of their natural resources have preserved Florida's fishing
waters!
"... In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output." ..."
"... In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. ..."
"... Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society. ..."
"... Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. ..."
"... And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous. ..."
"... This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. ..."
The most basic measure we have of economic growth is gross domestic product. GDP was developed from
the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure
economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and
other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output."
In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. Some countries have experimented with other
metrics to augment GDP, such as Bhutan's "gross national happiness index."
Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society.
Since the field's beginnings, economists have been concerned with why one thing has more value than
another, and what conditions lead to greater prosperity-or social welfare, as economists call it.
Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does
not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value,
are typically far more expensive than water, which is essential for life. This is of course where
markets come into play-in most places, water is more abundant than diamonds, and so the law of supply
and demand determines that water is cheaper.
After lots of debate about the nature of economic value in the nineteenth and early twentieth
centuries, economists considered the issue largely settled by the mid-twentieth century. The great
French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive
and people are rational and have good information, then markets will automatically sort everything
out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's
welfare is maximized, and that no one can be made better off without making someone else worse off.
In essence, the market price of something reflects a collective judgment of the value of that thing.
The idea of intrinsic value was always problematic because it was inherently relative and hard to
observe or measure. But market prices are cold hard facts. If market prices provide a collective
societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses,
then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at
the price of something to know its value.
Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics
and repeatedly warned about over-interpreting its applicability to real-world economies. However,
his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson,
laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating
critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered
the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory
that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows
that we should minimize any distortions that move society away from this optimal state, whether it
is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments
creating distortions through taxes and regulation.
These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s
and led to a wave of financial market deregulation that continued through the 1990s up until the
crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets
in the world, then they should be minimally regulated. And innovations like complex derivatives must
be valuable, not just to the bankers earning big fees from creating them, but to those buying them
and to society as a whole. Any interference will reduce the efficiency of the market and reduce the
welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives
must reflect the value they are adding to society - they are making the market more efficient. In
efficient markets, if someone is willing to pay for something, it must be valuable. Price and value
are effectively the same thing.
Even before the crash, some economists were beginning to question these ideas. Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that
real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers
in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of
the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.
An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving,
highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly
innovative and effective, but they can sometimes be far from efficient. And likewise, people may
be clever, but they can sometimes be far from rational. So if markets are not always efficient and
people are not always rational, then the twentieth century mantra that price equals value may not
be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity
mean?
Prosperity Isn't Money, It's Solutions
In every society, some people are better off than others. Discerning the differences is simple. When
someone has more money than most other people, we call him wealthy. But an important distinction
must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity."
What it takes to make a society prosperous is far more complex than what it takes to make one individual
better off than another.
Most of us intuitively believe that the more money people have in a society, the more prosperous
that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194
for Canada; therefore America is more prosperous than Canada.
But the idea that prosperity is simply "having money" can be easily disproved with a simple thought
experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's
The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of
a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer
tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money
but anthropologists estimate their standard of living at the equivalent of about $90 per year). But
you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut,
bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches
still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American
typically has access to these crucial elements of well-being.
And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous.
This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.
These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for
deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that
it has found a way to solve and how available it has made those solutions to its citizens. Every
item in the huge retail stores that Americans shop in can be thought of as a solution to a different
kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain
ourselves, and so on. The more and better solutions available to us, the more prosperity we have.
The long arc of human progress can be thought of as an accumulation of such solutions, embodied in
the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors
15,000 years ago, has a variety of products and services measured in the hundreds or thousands at
most. The variety of modern America's economy can be measured in the tens or even hundreds of billions.
Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access
to products and services that provide solutions to human problems, we are hundreds of millions of
times more prosperous.
"When so many think the numbers are manipulated to some nefarious end, it
is no wonder that empirical observations carry so little weight in informing
thought on how the economy works."
For the last 20 years, realistic US inflation rate was probably higher then
official figures considerably. Some estimate it between 4% to 5% a year. Medical
expenses rose probably 200%. Cost of higher education skyrocketed. We can say that
rent alone from 1995 to 1996 rose probably 60% (assuming 3% a year official figure).
Food prices are highly correlated with oil and they rose more (but they do not represent
major expense item in most budgets).
"... Absolute shit one bedroom apartments rent for $800 a month. A decent two
bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city of Boston
or suburbs like Cambridge, but 40 miles west. A "three" bedroom 1100 sq ft house
in a crap city like Fitchburg can rent for $1400. ..."
... by now everyone knows that the artificially suppressed, "hedonically-modified"
and seasonally-adjusted inflationary readings is what has permitted the
Fed to not only grow its balance sheet to $4.5 trillion but to keep rates
at 0% for 8 years. Because "how will the economy recover if there is no
broad inflation", the Keynesian brains in the ivory tower scream, demanding
more, more, more easing just to push inflation higher.
There is only one problem with this: it is all a lie - just ask
any average American whose cost of living has soared in the past decade.
Still, with reality diverging so massively from the government's official
data, reality just had to be wrong somehow.
Turns out reality was right all along, as revealed by the latest
"State
of the Nation's Housing" report released by the Center for Housing Studies
at Harvard, which showed that while inflation among most products and services
may indeed be roughly as the Fed and BLS represent it, when it comes to
rent - that most fundamental of staple costs - things have never been worse.
According to the report, for American renters 2013 marked another
year with a record-high number of cost burdened households - those paying
more than 30 percent of income for housing. In the United States, 20.7
million renter households (49.0 percent) were cost burdened in 2013.
It gets worse: a whopping 11.2 million, or more than a quarter of
all renter households, had "severe cost burdens, paying more than half of
income for housing." The median US renter household earned $32,700 in
2013 and spent $900 per month on housing costs. Renter housing costs are
gross rents, which include contract rents and utilities.
... ... ...
And since there is an unprecedented demand for rental units across the US
(as the "owning" alternative has become inaccessible), the median asking rent
not only soared at an annual rate of over 6%, it has never been higher, with
the Census Department recently reporting that the Median US asking just hit
an all time high $803.
... ... ...
What is odd is that according to the BLS, rent inflation is far less: at
just 3% in the most recent print. One wonders what seasonal adjustments American
renters should use to make their monthly paycheck smaller, the way the BLS perceives
it. Still, at 3.6% this is the highest annual rent inflation since 2008.
And herein lies the rub: because it is not so much what the real, honest
inflation growth rate of rent is, it is what the offsetting income growth. Unfortunately,
while the BLS can seasonally adjust rent payments to make them as low as a bunch
of bureaucrats want, the bigger problem is that US household income is not only
not keeping up with rent inflation, it is far below it. In fact, as reported
last week, real income is now back at 1989 levels!
And here is the punchline:
"in the years following 2000, gains in typical monthly rental costs exceeded
the overall inflation rate, while median income among renters fell further
and further behind (Figure 3). As a result, the share of renter households
facing severe cost burdens grew dramatically, reaching a new record high
of 28 percent in 2011 before edging down to 26.5 percent in 2013. Adding
in those with moderate burdens, just under half of all renters were cost
burdened in 2013. These rates are substantially higher than a decade ago
and roughly twice what they were in 1960."
... ... ...
Furthermore, rent inflation isn't going anywhere - in fact, it will only
get worse: "as of 2013, the median rent of a newly constructed unit
of $1,290 was equal to about half the median renter's monthly household income,
underscoring the urgent need for policy makers to consider enhanced levels of
support for rental housing particularly for lowest income households but across
a range of income levels."
Hype Alert
Housing and healthcare are severely under reported on inflation. How
healthcare can triple and not set off flashing red lights on inflation is
unreal.
Never One Roach
I don't know how seniors who relied on SS benefits to survive are living
when their COLA has been 0.01% the past several years despite soaring food,
health costs, utinilites, etc.
AGuy
"I don't know how seniors who relied on SS benefits to survive are
living when their COLA has been 0.01% "
Simple: many still work while collecting SS. Some have part-time jobs (aka
Wallmart) others maintained their full time jobs. If you look at the employment
chart, Employment for those 55 and older has risen considerably. I believe
employment for the 70+ group has also increased.
However, many 65+ have a lower cost of living. (ie no mortgage payments,
no college loans, lower healthcare -on Medicare, etc). They can afford to
take on one part time job to meet ends since they have SS.
Consuelo
"The reason for this is a simple, if dramatic one: the U.S. transformation
from a homeownership society, to one of renters."
All well & good in the context of officialdom's lies and deceit, but
there's just a ~tiny~ bit of clarification needed here...
Home 'ownership' is a misnomer, and just a plain bald-faced Falsehood
in reality. You don't 'own' ~anything~ until that last mortgage payment
is made - assuming you're not a $cash buyer. And even then, try skipping
a property tax payment... And didn't we just find out a few years back,
the real meaning of 'home ownership' to the ball & chain tied schlub paying
(or not) his mortgage...?
WTF_247
Wage growth has lagged most other costs for at least a decade or more.
Inflation and other cost increases are compound functions. The correction
will take care of itself. Healthcare and rent are taking more and more of
peoples $$ You can only stretch it so far - at some point there is no more
money.
Either incomes will rocket up OR housing, including rent, will crash
huge. You cannot get renters to pay for something they have no money for.
No one is going to rent and choose not to eat or to eat ramen noodles permanently.
You cant even get rid of health insurance now or the IRS comes after you
- no matter how much it increases each year (estimated 15-20% increase next
year). You can get 1 roommate, then 2. But most cities limit the number
of renters based upon the number of bedrooms - this only goes so far.
The solution is to stop working or only work a bare minimum - get benefits.
Section 8 housing. EBT. Free healthcare. Welfare benefits.
Something is wrong in the US when a working mother making 29k has a better
standard of living that someone making 69k per year. If anyone thinks this
is not lost on the population as a whole, they would be mistaken. As costs
keep going up it is more lucrative to NOT fight anymore. Let the govt pay
for it.
novictim
Tyler! "Missing Inflation" is not a mistake or a misunderstanding or
an accounting glitch.
Inflation really is low. People have insufficient money.
Do not confuse asset inflation with real inflation. Stock overvaluations
and real estate over-evaluations do not create real inflation because prices
drop when people sell. Assets are self correcting and non-inflationary.
adr
I shouldn't have to worry about affording somewhere to live with the
job I have, yet because of where the job is I have to.
The entire Northeast is fucking insane.
Absolute shit one bedroom apartments rent for $800 a month. A decent
two bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city
of Boston or suburbs like Cambridge, but 40 miles west. A "three" bedroom
1100 sq ft house in a crap city like Fitchburg can rent for $1400.
I posted a three bedroom ranch that was renting for $3200 a month a little
while ago. What do millionaires rent shitty 1950s ranch homes in a hick
town?
Then you have property taxes. Up 100% in five years in almost every town
even though assessments are actually down. I saw a home listed with a 2009
value of $364k and property taxes of $2800 a year. The current assessed
value is $289k but taxes are $5200.
"...You're an econ prof, no? In the first year macro I just finished, it was explained that
inflation is a tax on the rentiers class. Thus the power elite hates inflation."
"...The Fed does absolutely nothing to require that the money it creates pays workers to build
anything. Instead the only thing the Fed money does is cause existing asset churn which inflates
asset prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant
and being spent buying old labor in hopes that the value of the decades old labor will be worth more
tomorrow."
pgl still hasn't demonstrated the iron economic law that says that inflation increases must
necessarily be passed along to labor, not stolen by capital.
The precedent of productivity increases stolen by capital over the past 40 years is not
encouraging, but there are economists like Janet Yellen who still disingenuously are that
productivity increases get passed along! And despite the evidence, pgl chooses to believe her!
mulp said...
But printing more money just forces the exiting money to be spent paying workers slower and
slower.
The national economic policy selected by We the People is clearly:
DO NOT PAY WORKERS TO BUILD ANYTHING.
The Fed does absolutely nothing to require that the money it creates pays workers to build
anything.
Instead the only thing the Fed money does is cause existing asset churn which inflates asset
prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant
and being spent buying old labor in hopes that the value of the decades old labor will be
worth more tomorrow.
We the People understand that paying labor to build new assets will crater the prices of all
the inflated asset prices, eg, creating the kind of excess supply we see in fossil fuels which
will cause cratering prices, profits turning to losses, and the asset price bubble popping in
a big way.
The 21st century has proved to me that I was totally wrong to believe in monetary theory based
on the arguments and data of Milton Friedman, and that led me to reexamine the policies of FDR
in the face of a populist Congress.
Insight one: deep crisis is required to motivate We the People.
Insight two: the only way to create a better economy is to pay more workers to work more
Insight three: the only way to pay more workers more to work more is for taxes taking money
from those who have money which is basically everyone in the upper half who will then demand
benefits NOW for all their taxes
Doing the liberal thing to prevent massive poverty in 2008 was the wrong thing. Democrats
should have made demands that Bush and Republicans would totally refuse to agree to, so all
the money market funds experienced runs and 50% of the depository banks got taken over by the
FDIC, and half the businesses in the US stopped paying workers because they could get their
cash in their banks because the banks were taken over by the FDIC. And in 2009, Democrats
should have kept increasing demands and demanding ever higher tax hikes every time Republicans
fought to block Democratic budget bills keeping the economy sinking deeper and deeper making
more and more people poor.
The ideal outcome of 2009 would have been corporate tax rates of 50% on business profits of 5%
ROIC or lower and 90% on all profits in excess of 5% ROIC, but with 100% deduction for all
capital investment excluding buying existing corporations or partnerships. And 90% income tax
rates in excess of twice the median income, excluding buying tax exempt infrastructure
construction bonds or investing in energy efficiency capital assets.
Or a carbon tax that was set to rise every year until tax revenue was zero with all the tax
revenue used to repay Federal debt.
Tax dodging is the biggest incentive to pay workers to build stuff that lasts and that is
productive.
The Fed can't do anything but prevent the required crisis to force the required political
change.
Or cause the crisis that will create change.
The Fed needs to jack up interest rates to, if nothing else, increase the Federal deficit
rapidly by increasing the interest costs.
One of two things would happen: Republicans would win in 2016 and crash the economy by massive
spending cuts driving tens of millions into poverty, homelessness, etc.
Or taxes rates would be greatly increased to reduce the deficit but the high tax rates would
make hiring workers the cheapest way to cut taxes due and get some benefit.
If I were in the Fed I'd be calling for a 1% hike every year (.25% a quarter) for the next
three years.
likbez said...
The USA now reminds me the USSR in a sense that government figures are not using open
verifiable methodology. Some thing that those metrics became yet another "number racket". Some
measures like inflation and GDP are definitely politicized.
That gives an impetus for sites like http://www.shadowstats.com
Those people who operate using pure government statistical figures without questioning their
error range are just another brand of highly paid charlatans. And their papers and articles
should be viewed as exercise in "tail wags the dog"
Actually that can be viewed as another dimension of mathiness.
For example government announced that GDP is 3.7%. And everybody jumps in admiration. And
nobody asks what was GDI released for this period. Suckers...
Peter K. said in reply to likbez...
"The USA now reminds me the USSR in a sense that...
Republicans are dynamic scoring in order to massage the numbers to that their favored policies
look better?
likbez said in reply to Peter K....
My point is the USA now reminds the USSR with its tendency to "beautify" economic data.
Think about all those birth-death adjustments, substitution of U6 with U3 (concepts of
"discouraged workers" and "marginally attached workers"), redefining full employment metric
(which no longer means 40 hours a week employment), hedonic adjustments/substitutes,
"managing" inflation by changing the way it is calculated, price anomalies that bump GDP up,
like tremendously overpriced military hardware, etc.
Please don't throw the baby out with the bathwater
Dan Kervick
"Finally, why the huge fear over a little bit of inflation rather than huge fear over
higher than necessary unemployment?"
It is a good question, and frankly I have trouble believing that people like Fisher actually
*are* worried about a little bit of inflation. Fisher set out his fuller position over a year
ago, and I doubt it has changed much:
He's mainly afraid that the Fed might blow a bubble, and he's afraid that the independence of
the political Fed is being compromised by it's being dragged into service to compensate for
the lack of fiscal and regulatory action by Congress.
I would suggest that, on the second point at least, everyone should get used to the fact that
central bank policy is inevitably a response to politics. That's because central bank policy
is always based on general economic conditions, and general economic conditions are always to
a substantial extent a function of government policy. So central bank policy has to be
responsive to government policy. Tough cookies for all of those believers in an "independent"
central bank. There is no such thing as an autonomous "economy" that is independent of
political choices.
Other not fully acknowledged factors driving the recent debate are equally political. The Fed
is worried that if normalization is delayed, then some time next year the Fed will *have to*
reverse course, one way or another. If that takes place after the parties have chosen their
nominees and the political race is in full gallop, the Fed will be accused of intervening (in
some way, on behalf of someone) in the campaign, and will become a political football. (As far
as I'm concerned that would be great, because the US central banking system needs radical
reform - but the Fed guys wouldn't like it.)
The other thing they are obviously worried about is a recession. If the US experiences a
recession for any reason over the next 18 months, and the Fed is still stuck down close to the
zero bound, then it will not be able to exert a substantial stimulative impact - at least not
without radical new measures like helicopter money. Again, that's something that wouldn't both
me personally, but Independent Fed establishmentarians would freak.
John said...
You're an econ prof, no?
In the first year macro I just finished, it was explained that inflation is a tax on the
rentiers class. Thus the power elite hates inflation.
The federal government today released two very different estimates of the U.S. economy's
growth rate in the second quarter. The one that got
all the attention was the robust 3.7 percent annual rate of increase in gross domestic
product. Not many people noticed that gross domestic income increased at an annual rate of just
0.6 percent.
That's a big discrepancy for two numbers that should theoretically be the same, since they're
two ways of measuring the same thing: the size of the economy. If you believe the GDP number,
you're happy. If you believe the GDI number, you're thinking the U.S. is skating close to a
recession.
The Bureau of Economic Analysis always gives more prominence to the GDP number in its
quarterly press release. But today, for the second time in a quarterly report, it released an
average of GDP and GDI growth rates. That average came in at 2.1 percent after rounding-and in
this case, that's probably closer to the truth than either number alone.
There is no name for the new hybrid data series, which was described
rather prosaically as "the average of real GDP and real GDI." President Obama's Council of
Economic Advisers nicknamed it gross domestic output in a July
issue brief. Here's what it wrote:
GDP tracks all expenditures on final goods and services produced in the United States,
whereas GDI tracks all income received by those who produced that output. Conceptually the two
should be equal because every dollar spent on a good or service (in GDP) must flow as income
to a household, a firm, or the government (and therefore must show up in GDI). However, the
two numbers differ in practice because of measurement error.
Here's one key takeaway from the Commerce Department's report on gross domestic product
Thursday in Washington: Gross domestic income climbed at a 0.6 percent annualized rate, well
short of the rebound in growth.
* The increase in GDI last quarter followed a 0.4 percent advance in the first three months of
the year, marking the weakest back-to-back gains since mid-2012
* The 3.1 percentage-point gap between GDI and GDP, which climbed at a 3.7 percent rate, was the
largest in favor of GDP since the third quarter of 2007
* While GDI and GDP should theoretically match over the long run, they can diverge from
quarter to quarter. There has been a debate about which is more accurate, with some Federal
Reserve researchers finding incomes give better signals
Nothing particularly surprising here -- the Great recession was unusually severe and unusually
long, and hence had unusual impacts, but it's good to have numbers characterizing what happened:
Great Recession Job Losses Severe, Enduring:
Of those who lost full-time jobs between 2007 and 2009, only about 50 percent were employed
in January 2010 and only about 75 percent of those were re-employed in full-time jobs.
The economic downturn that began in December 2007 was associated with a rapid rise in unemployment
and with an especially pronounced increase in the number of long-term unemployed. In "Job Loss
in the Great Recession and its Aftermath: U.S. Evidence from the Displaced Workers Survey" (NBER
Working Paper No. 21216),
Henry S. Farber uses data from the Displaced
Workers Survey (DWS) from 1984-2014 to study labor market dynamics. From these data he calculates
both the short-term and medium-term effects of the Great Recession's sharply elevated rate of
job losses. He concludes that these effects have been particularly severe.
Of the workers who lost full-time jobs between 2007 and 2009, Farber reports, only about 50 percent
were employed in January 2010 and only about 75 percent of those were re-employed in full-time
jobs. This means only about 35 to 40 percent of those in the DWS who reported losing a job in
2007-09 were employed full-time in January 2010. This was by far the worst post-displacement employment
experience of the 1981-2014 period.
The adverse employment experience of job losers has also been persistent. While both overall employment
rates and full-time employment rates began to improve in 2009, even those who lost jobs between
2011 and 2013 had very low re-employment rates and, by historical standards, very low full-time
employment rates.
In addition, the data show substantial weekly earnings declines even for those who did find work,
although these earnings losses were not especially large by historical standards. Farber suggests
that the earnings decline measure from the DWS is appropriate for understanding how job loss affects
the earnings that a full-time-employed former job-loser is able to command.
The author notes that the measures on which he focuses may understate the true economic cost of
job loss, since they do not consider the value of time spent unemployed or the value of lost health
insurance and pension benefits.
Farber concludes that the costs of job losses in the Great Recession were unusually severe and
remain substantial years later. Most importantly, workers laid off in the Great Recession and
its aftermath have been much less successful at finding new jobs, particularly full-time jobs,
than those laid off in earlier periods. The findings suggest that job loss since the Great Recession
has had severe adverse consequences for employment and earnings.
- in the hope of preserving there institutional economic
significance,
- out of a sense of loyalty to the Fed's history of financial influence using interest rates,
- because using rates to influence economic events increases their professional comfort,
- and because their economic grad school training was to fear wage push inflation above all
else (they seem to believe that if inflation exceeds 2% it is a harbinger of hyper inflation).
Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding.
The precision of models is ersatz, more or less inversely proportional to its real world relevance.
The delusion of being a scientist is critical to their professional self-respect.
Dan Kervick -> lower middle class...
A 3.7% quarter with several hands tied behind our backs by a don-nothing government. Think
about what we could do if we were really trying.
pgl -> Dan Kervick...
YEA! Let's build that Mexican wall. Let's wage war on China. Lord - the stupidity here is multiplying!
Dan Kervick -> pgl...
This is an area in which you seem to be persistently incapable of avoiding lies.
You know very well that are a large number of ambitious long-term projects the US could do
that are non-military, have nothing to do with immigration and could boost output tremendously.
You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."
That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.
That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet partisan
servings to keep Democrats' attention riveted on the foibles of the Republicans.
That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green
Lanternism".
You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal
government, and will figure out that with a more assertive and economically engaged central government
dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation,
cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and
completely avoidable mistake.
40% of this country has household income of under $40,000 per year. If we remove the plutocratic
capitalist stranglehold on this economy, use government to more efficiently distribute and invest
our national wealth, and demote private enterprise to its proper subordinate place, we could double
that rapidly and drive a wave of high-growth social transformation with all of the liberated economic
energy.
This is going to happen. Take your pick: we're either going to get the somewhat fascistic and
racist Trump version on strong government or democratic socialist version. The Ivy League twits
hanging on for dear life to their established networks, revolving doors, tit-for-tatting, sinecures
and don't-rock-the-boat regime of stagnant managerialism are going to butts handed to them by
history.
pgl -> Dan Kervick...
Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are already
doing at Census.
Dan Kervick -> pgl...
The Census doesn't and can't combine income distribution numbers with growth numbers on a monthly
and quarterly basis. The BEA could collect this data, but doesn't, because it is part of their
mission to pretend class conflict doesn't exist.
The top quintile in the US pulls down about 50% percent of the income. That means we could
get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by less
than 1/2 a percent.
Is that what's happening? Inquiring minds want to know. It seems like a natural mission for
the BEA to track this. But they don't.
pgl -> Dan Kervick...
You have no clue what these people do or the task you are whining about. With all you incessant
babbling and whining - your keyboard is likely ready to just rot away.
Me? I'm headed down to the Starbucks to whine that they don't make tacos. Duh.
Dan Kervick -> pgl...
I know what they do, and I know what they don't do. Their mission should be expanded.
likbez -> Dan Kervick...
Dan,
I think you are mistaken about "a natural mission for the BEA to track this". Our elected officials
and Wall Street executives all have a vested interest in keeping the perception of a robust economy
alive. The economy growth numbers and the employment data announced are critical to this perception,
but a thorough analysis of the data suggests something quite different that what we are told.
Statistics now became more and more "number racket" performed, like in the USSR, in the interest
of the powers that be.
Think about "substitution" games in measuring consumer inflation.
Think about "Birth/Death adjustment" in employment data.
Think about tricks they play with GDP measurement.
The net result of this tricks is that the error margin of government statistics is pretty high.
And nobody in economic profession is taking into account those error margins.
So in no way we can accept this 3.7% annualized growth figure. This is a fuzzy number, a distribution
from probably 2.7% to 3.7%. Only upper bound is reported. And if you delve into the methodology
deeper this range might be even wider. What is actually the assumption of quarterly inflation
in the USA used in calculation of this number?
Which is another factor that makes neoliberal economics a pseudoscience, a branch of Lysenkoism.
JohnH -> Dan Kervick...
This is very revealing...nobody provides regular statistics on distribution. That lack of interest
makes it blatantly obvious that policy makers only care about the top number--GDP--and are totally
uninterested in knowing whether most Americans are prospering or not.
There is one source that updates Census data on a monthly basis. It shows that real median
household income is still 3.8% below where it was in 2008 or in 2001. In fact, it's back where
it was in the 1980s.
Meanwhile, Saez and Montecino have pointed out that the 1% got 58% of the gains from the 'recovery,'
while the 99% got 42%.
Of course, pgl doesn't even care enough about this to know where the data is...and, apparently,
most 'liberal' economists are just as indifferent to distribution as he is.
Dan Kervick -> JohnH...
If it weren't for Piketty and Saez, we'd still be fumbling around in the dark on income and
wealth distribution.
It shows the dramatic the separation between the top quintile and the bottom 80% during the
Clinton years. Separation was even greater for the top 5%.
Yet the only thing that most economists ever notice is GDP growth...
pgl -> JohnH...
"Yet the only thing that most economists ever notice is GDP growth".
There you go again. Clueless as can be and lying your ass off.
likbez -> pgl...
And what you actually know about methodology of calculation of this GDP number. Inquiring minds
want to know.
Correct calculation of nominal GDP depends on correct calculation of inflation, which is the
most politicized of economic metrics and as such subject to tremendous level of manipulation.
Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses
of National Income Measurements":
=== Start of quote ====
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are
subject to this type of illusion and resulting abuse, especially since they deal with matters
that are the center of conflict of opposing social groups where the effectiveness of an argument
is often contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot
be adequately measured unless the personal distribution of income is known. And no income measurement
undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness
of effort going into the earning of income. The welfare of a nation can, therefore, scarcely
be inferred from a measurement of national income as defined above.
"... then from Romer's assumptions the rival inputs cannot be earning their marginal product. ..."
"... The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2). ... ..."
"... Four-fifths of the "Economy" is a Complete Waste of Time ..."
"... I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output. ..."
"... The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output. ..."
"... "In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness." ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models." ..."
"... why do economies grow vulnerable over time ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. ..."
"... Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment ..."
More from Paul Romer on "mathiness" -- this time the use of math in finance to obfuscate communication
with regulators:
Using Math to Obfuscate
- Observations from Finance: The usual narrative suggests that the new mathematical tools of modern
finance were like the wings that Daedalus gave Icarus. The people who put these tools to work soared
too high and crashed.
In two posts,
here
and
here, Tim Johnson notes that two government investigations (one
in the UK, the other
in the US) tell a different tale. People in finance used math to hide what they were doing.
One of the premises I used to take for granted was that an argument presented using math would
be more precise than the corresponding argument presented using words. Under this model, words from
natural language are more flexible than math. They let us refer to concepts we do not yet fully understand.
They are like rough prototypes. Then as our understanding grows, we use math to give words more precise
definitions and meanings. ...
I assumed that because I was trying to use math to reason more precisely and to communicate more
clearly, everyone would use it the same way. I knew that math, like words, could be used to confuse
a reader, but I assumed that all of us who used math operated in a reputational equilibrium where
obfuscating would be costly. I expected that in this equilibrium, we would see only the use of math
to clarify and lend precision.
Unfortunately, I was wrong even about the equilibrium in the academic world, where
mathiness is in fact used to obfuscate. In the world
of for-profit finance, the return to obfuscation in communication with regulators is much higher,
so there is every reason to expect that mathiness would be used liberally, particularly in mandated
disclosures. ...
We should expect that there will be mistakes in math, just as there are mistakes in computer code.
We should also expect some inaccuracies in the verbal claims about what the math says. A small number
of errors of either type should not be a cause for alarm, particularly if the math is presented transparently
so that readers can check the math itself and check whether it aligns with the words. In contrast,
either opaque math or ambiguous
verbal statements about the math should be grounds for suspicion. ...
I always loved Boulding's somewhat critical review of Samuelson, discussing the limits of the mathematicization
of economic theory. Of course Samuelson was the tip of the iceberg, and since then many overconfident
economic mathematicians have led to very serious financial problems. I had one stats professor who
called a complex theory on the blackboard "graffiti."
Samuelson did not do math for math's sake. He figured out first what the real world issue was and
then used math to help explain his insights.
likbez -> pgl...
You need to distinguish "math" from "mathematical masturbation", or as they are now more politically
correctly called "mathiness".
Many economic works that use differential equations belong to the latter category ;-). A lot of
pitiful clowns pretending to be mathematicians do not even bother to understand what is the precision
and error bounds of the input data. As in "garbage in, garbage out".
This is probably a unique case when mathematic equations are used to support particular political
ideology. Support via "scietification" (as in Church of Scientology) of essentially political statements.
Especially about unemployment and poverty.
anne -> anne...
All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of
course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.
[ Keynesian ideas have worked? Influential among policy makers in general or not, Keynesian ideas
have worked. ]
pgl -> anne...
Keynesian theory explains what happened. But what happened was the our policy makers failed to
do the right thing. Had they listened to Keynes - the recoveries would have been much faster.
likbez -> pgl...
"Had they listened to Keynes - the recoveries would have been much faster."
This was impossible. There is such thing as "Intellectual capture". As Keyes noted
"The ideas of economists and political philosophers, both when they are right and when they are wrong
are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical
men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves
of some defunct economist."
Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post I left
out). Glad he's interpreting Romer -- it's very helpful:
What
Assumptions Matter for Growth Theory?: The whole "mathiness" debate that Paul Romer started tumbled
onwards this week... I was able to get a little clarity in this whole "price-taking" versus "market
power" part of the debate. I'll circle back to the actual "mathiness" issue at the end of the post.
There are really two questions we are dealing with here. First, do inputs to production earn their
marginal product? Second, do the owners of non-rival ideas have market power or not? We can answer
the first without having to answer the second.
Just to refresh, a production function tells us that output is determined by some combination of non-rival
inputs and rival inputs.
Non-rival inputs are things like ideas that can be used by many firms or people at once without
limiting the use by others. Think of blueprints.
Rival inputs are things that can only be used by one person or firm at a time. Think of nails.
The income earned by both rival and non-rival inputs has to add up to total output.
Okay, given all that setup, here are three statements that could be true.
Output is constant returns to scale in rival inputs
Non-rival inputs receive some portion of output
Rival inputs receive output equal to their marginal product
Pick two.
Romer's argument is that (1) and (2) are true. (1) he asserts through replication arguments, like
my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot be true.
If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival
inputs earn less than their marginal product.
Notice that I don't need to say anything about how the non-rival inputs are compensated
here. But if they earn anything, then from Romer's assumptions the rival inputs cannot
be earning their marginal product.
Different authors have made different choices than Romer.
McGrattan and Prescott
abandoned (1) in favor of (2) and (3).
Boldrin and Levine dropped
(2) and accepted (1) and (3). Romer's issue with these papers is that (1) and (2) are clearly true,
so writing down a model that abandons one of these assumptions gives you a model that makes no sense
in describing growth. ...
The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2).
...
[There's a lot more in the full post. Also, Romer comments on Vollrath
here.]
Paine
Excellent
Lots of conclusions are per determined by simple assumptions like constant returns to scale
If by scale we mean replication of the existing production system on a larger scale
Where say we triple every plant and highway etc
The model nicely captures the reality of a static production system
Where all factors are expandable even if at a cost
This is a very narrow notion of scale effects
If for example markets for oust expand and a different technique is optimal
Then there's a dynamic transition
Where residuals emerge.
anne -> Paine ...
I assume this is the reference which the writer is too inconsiderate to mention:
But in actuality there is nothing but assertion of various hypothetical entities behind the entire
neo classical construct
No matter how carefully these atoms are defined they remain figments
That one can conjure like epicycles
Example
Advertising Is a production factor -- Once we move away from he material basis of production lots
of spirits dance in the air around us
Once a non rival good has been discovered or invented or created etc it's cost to replicate is
nearly zero
To lay the bulk of profits at its feet is ridiculous of course. But intellectual property none
the less is a growing means of exploitation...
Paine -> Paine ...
My definition of non rival is wrong of course. The meaning of non rival is castlessly inexhaustible
Nothing fits this description exactly. And almost is as bad as not at all.
Non rival -- Example of belief in the divinity of Jesus. I can believe as much whether you believe
or not
anne -> Paine ...
All exchange value flows from labor time. Even if in complex patterns easily mystified by simple
definitions. Of imaginary objects like non-rival production factors
[ I understand and am pleased. ]
Sandwichman said...
Four-fifths of the "Economy" is a Complete Waste of Time
"There are really two questions we are dealing with here. First, do inputs to production earn their
marginal product? Second, do the owners of non-rival ideas have market power or not?" -- Dietz Vollrath
"What Assumptions Matter for Growth Theory?"
"Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the fight
over the foundations of growth theory." -- Paul Romer, "The Assumptions in Growth Theory"
Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper domicile
is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney Hook's discussion
of the dangers of the use of this analogy.
"As an argument it is formally worthless and never logically compelling. An argument from analogy
can be countered usually with another argument from analogy which leads to a diametrically opposed
conclusion.... The belief that society is an organism is an old but fanciful notion. It can only be
seriously entertained by closing the eye to all the respects in which a group of separate individuals
differs from a system of connected cells, and by violently redefining terms like 'birth,' 'reproduction,'
and 'death.'"
Growth "theory" gets around this objection to the uncritical use of analogy by ignoring it -- by
'closing the eye' to explicit caveats in the seminal contribution to the measurement of growth. Let's
pretend that the economy really is an organism that grows perpetually but never dies.
Four-fifths of the "Economy" is a Complete Waste of Time
-- Sandwichman
Sandwichman -> Sandwichman...
1. "growth is a concept whose proper domicile is the study of organic units..."
2. "The belief that society is an organism is an old but fanciful notion."
3. ?
4. Growth!
Sandwichman -> anne...
"the meaning of per capita growth in China over these last 38 years of 8.6% yearly"
It means, literally, that if you ate one bowl of rice for dinner in 1977, in 2015 you would eat
23 bowls of rice for dinner. Of course it doesn't *really* mean that. The "measurement" is actually
a figure of speech.
Figuratively, it means something more like: many more Chinese own cars today than 38 years ago and
those cars are worth hundreds of times what the old bicycle was worth. Never mind that the car is
used to commute to work, that it takes as long to drive to work through congested traffic as it once
did to ride a bike to work and that the air is unbreathable so it would be suicide to go back to riding
a bike.
Still, growing 8.6% per year for 38 years is a prodigious achievement even if we don't know what
it means.
Sandwichman -> anne...
A large part of that gain in life expectancy is attributable to an enormous decline in infant mortality.
Expenditures on improved infant health care would be only a miniscule portion of the total economic
growth.
When I say "prodigious" I mean remarkable or immense without attaching any value judgement about whether
it is a good or a bad thing. There have obviously been some good things associated with that growth
-- see infant mortality. There has also been an explosion of GHG emissions. If 2/3 of that growth
was good things (reduced infant mortality, improved nutrition etc.) and 1/3 bad things (police surveillance,
cost of commuting to work, etc.) then China would have been better off with a 6% growth rate.
Can't we just forget about the confounded aggregate and get on with promoting the good? No, apparently
not. Two pieces of pie is better than one if it's cherry pie but not if it's "dirt" pie.
anne -> Sandwichman...
Can't we just forget about the confounded aggregate and get on with promoting the good?
[ Surely so, but if a part of the good is life span, well, that of India is 66 years which shows how
far China has come and I really do know of the problems. ]
anne -> Sandwichman...
Again, I am waiting for an explanation of or a description showing what the past 38 years of per
capita growth in China represent. What does the past 38 years of astonishing gains in Chinese productivity
represent and how to depict these gains?
Paine -> anne...
We need a welfare index. And that greatly increases the degree of difficulty over a simple output
index
And do you know what the overwhelming response of economists was to that article? "Nothing new
here." "We know GDP is not a measure of welfare. But it's useful because it tells us about the capacity
to produce goods that could enhance welfare."
Or to paraphrase Orwell, "If this boot wasn't stamping on your face, you could put it on your foot
and it would keep your toes warm -- FOREVER!" Paul Samuelson's version, "Evaluation of Real National
Income":
"Production possibilities as such have no normative connotations. We are interested in them for
the light they throw on utility-possibilities. This is why economists have wanted to include such
wasteful output as war goods in their calculations of national product; presumably they serve as
some kind of an index of the useful things that might be produced in better times."
I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither
good nor bad that the economy ACTUALLY produces wasteful output.
The amount of wasteful output "serves as an index" for the amount of useful output that could
be produced if the economy wasn't producing wasteful output.
Some Kind of an Index -- No Normative Connotations
-- Sandwichman
Julio -> Sandwichman...
A question for you folks in this subthread:
"In a perfect free market world where the price mechanism adjusts production to our wishes and
all externalities are priced in, GDP measures economic happiness."
Proposition: That myth underlies our world.
Conclusion: In our world, "GDP is not correlated to happiness" is, therefore, a subversive
statement.
Is this sensible, and if so, does it make alternative measures of economic well-being difficult
to construct?
Julio -> Sandwichman...
Aggregate is not the same as average.
The "prices as the driver" argument is that you will buy a yellow car and I a green one, and Detroit
will make just enough of each, and that's the closest we'll ever come to an economy that reflects
our wishes, and that's in turn the closest we'll ever come to (economic) happiness.
But this may be an aside: is your point that a "welfare index", as paine proposes, is unrealistic
and so irrelevant?
We could measure economic decisions by using economics as far as it takes us to evaluate their
consequences, and then using our moral compass to do the measuring.
A more ad-hoc method which, for our collective decisions, has political pitfalls; but politics
is the appropriate forum for those fights. We would no longer know (or care) what "progress" is, as
a national aggregate.
Sandwichman -> Julio...
"is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?"
No, it's not entirely unrealistic and irrelevant but it IS very limited and, like GDP subject to misinterpretation
as more substantive than it is.
The thing about GDP that won't be gotten away from is that it does provide information that is useful
for projecting revenues for business and for government.
A welfare index wouldn't do that. You can tax income but you can't tax happiness -- at least not
literally.
anne -> Sandwichman...
The measurement of economic well-being is inherently difficult (impossible) because it involves
the aggregation of subjective judgments....
[ Agreed. ]
anne -> Sandwichman...
The sort of growth-happiness surveying referred to is to my mind no more than pseudo research.
As empirical as bumble bees.
Sandwichman -> anne...
anne, I tend to agree with your skepticism about happiness surveying. However, I have also worked
on so-called real survey research -- Canadian census. If you saw how the sausage was made...
"...On the Bagehot question, economists were initially caught flat-footed, for two reasons:
failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate
the problems of leverage because there is no room for such problems in representative-agent models."
Gavyn Davis has a
good summary of the recent IMF conference on rethinking macro;
Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn't been more
of a change, decrying
the arrogance that asserts that we have little to learn about theory or
policy from the economists who wrote during and after the Great Depression.
Maybe surprisingly, I'm a bit more upbeat than either. Of course there are
economists, and whole departments, that have learned nothing, and remain wholly dominated by
mathiness. But it seems to be that economists have done
OK on two of the big three questions raised by the economic crisis. What are these three questions?
I'm glad you asked.
As I see it, it makes sense to think of what happened in terms of three phases.
First, a buildup of vulnerability, with rising leverage and an increasingly
fragile financial system.
Second, the acute phase of crisis, with bank runs or their functional equivalent,
collapsing liquidity, and more.
Then a long period of depressed employment and activity, which still isn't
over.
The questions then are how and why each of these things can/did happen. I
think of these as the Minsky question - why do economies grow vulnerable over time ; the Bagehot
question - why does all hell break loose now and then; and the Keynes question - how economies can
stay depressed, and how such depressed economies work.
On the Keynes question, it's true that we haven't had a radical change in
thinking, but that's mainly because the old thinking still works pretty well. That is, the answer for
people asking who would be the new Keynes turns out to be that Keynes is the new Keynes. Or maybe that's
Hicks - anyway, IS-LMish analysis worked well, and the economists who made fools of themselves were
those who rejected the time-tested approaches.
What is new is that we have had a flowering of empirical work, and have much
more econometric evidence on monetary and especially fiscal policy, price behavior, and more than we
used to. Look, for example, at Nakamura/Steinsson's
survey, or at the Blanchard work on multipliers in the euro area. So this is a happy story: the
existing framework worked fairly well, and is now buttressed by a lot of really good empirical evidence.
On the Bagehot question, economists were initially caught flat-footed,
for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure
to appreciate the problems of leverage because there is no room for such problems in representative-agent
models. But it wasn't very hard to fix these problems, or at least apply workable patches. Once
you realized that
repo was the new bank deposits, the basic crisis framework was already there; and there was already
enough existing analysis of balance-sheet constraints and all that to make creation of a somewhat messy,
inelegant, but usable set of models quite easy.
And here too we have seen a flowering of empirical work, e.g.
Mian and Sufi on household debt.
Where we have not, as far as I can tell, made much progress is the Minsky
question. Why did the system become so vulnerable? Was it deregulation (or failure of regulation to
keep up with institutional change)? Simple forgetting, as memories of past crises faded? Excessively
loose policy? I have views, but I have to admit that there isn't a lot of either fresh thinking or
hard evidence here.
Why is Minsky still mostly missing? Partly because asking how we got here
may be less urgent than the question of what we do now. But also, I'd guess, because it's hard. Bubbles,
excessive leverage, and all that probably have a lot to do with the limits of rationality, and behavioral
economics doesn't provide anything like as much guidance as it should.
Still, I'm relatively positive in my assessment of the state of macroeconomics.
Against mathiness and political ideology, the gods themselves contend in vain, but that's not a problem
with the models
kbaa, The Irate Plutokrat
It is good to see Krugman write in opposition to 'mathiness', economists'
misuse of mathematics to justify their pet theories. And his suggestion that 'behavioral economics
doesn't provide anything like as much guidance as it should' is probably as close to an admission
as we are ever likely to get from an academic economist that it's human psychology that drives the
economy after all, and that all of the various high minded macroeconomics theories are nothing more
than propaganda to be used by lobbyists who present them as scholarship.
Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is always
the possibility of misusing mathematics to intimidate. Any paper that cites game theory or the Euler
consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise.
Mathematics serves the same function for academic economists as Latin theology did for medieval clerics:
both provide an aura of erudite wisdom where there is no wisdom at all to be found.
NB For those who have never studied Calculus, "Euler" is pronounced "oiler", but there's no connection
with the price of oil or any other commodity, and don't let any academic economist try to tell you
otherwise.
Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested
in playing with mathematical models than in trying to understand how the world actually works. Mr.
Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured
the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.
This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained
in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and
it is too late to improve. This has, I believe, saved me from important errors of thinking."
Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on
the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally,
the language of logic. Modern research into Keynes's theories-I have conducted such research myself-tries
to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns
out that the task is not easy.
Keynesian theory is based in part on the premise that wages and prices do not adjust to levels
that ensure full employment. But if recessions and depressions are as costly as they seem to be,
why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium?
This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.
Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the
anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate
points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far.
Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions
than compelling answers.
The Minsky mess is the whole endogenous pathology. No attack on that and we are sure to face
crisis again. And knowing a policy path to fast and full recovery from a Minsky moment
doesn't mean we will follow it
Political economy not macro has failed us says Simon Templar. Call it class politics going
unexposed and I agree. Talk of inequality muffles the sharper edged conflict between the job
class and their employer class in the corporate glass towers
Gavyn Davis has a
good summary of the recent IMF conference on rethinking macro;
Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn't been more
of a change, decrying
the arrogance that asserts that we have little
to learn about theory or policy from the economists who wrote during and after the Great Depression.
Maybe surprisingly, I'm a bit more upbeat than
either. Of course there are economists, and whole departments, that have learned nothing, and remain
wholly dominated by mathiness. But it seems to be that
economists have done OK on two of the big three questions raised by the economic crisis. What are
these three questions? I'm glad you asked.
As I see it, it makes sense to think of what happened
in terms of three phases.
First, a buildup of vulnerability, with rising
leverage and an increasingly fragile financial system.
Second, the acute phase of crisis, with bank
runs or their functional equivalent, collapsing liquidity, and more.
Then a long period of depressed employment and
activity, which still isn't over.
The questions then are how and why each of these
things can/did happen. I think of these as the Minsky question - why do economies grow vulnerable
over time ; the Bagehot question - why does all hell break loose now and then; and the Keynes
question - how economies can stay depressed, and how such depressed economies work.
On the Keynes question, it's true that we haven't
had a radical change in thinking, but that's mainly because the old thinking still works pretty well.
That is, the answer for people asking who would be the new Keynes turns out to be that Keynes is
the new Keynes. Or maybe that's Hicks - anyway, IS-LMish analysis worked well, and the economists
who made fools of themselves were those who rejected the time-tested approaches.
What is new is that we have had a flowering of
empirical work, and have much more econometric evidence on monetary and especially fiscal policy,
price behavior, and more than we used to. Look, for example, at
Nakamura/Steinsson's survey,
or at the Blanchard work on multipliers in the euro area. So this is a happy story: the existing
framework worked fairly well, and is now buttressed by a lot of really good empirical evidence.
On the Bagehot question, economists were initially
caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk
of bank runs, and failure to appreciate the problems of leverage because there is no room for such
problems in representative-agent models. But it wasn't very hard to fix these problems, or at
least apply workable patches. Once you realized that
repo was the new bank deposits, the basic crisis framework was already there; and there was already
enough existing analysis of balance-sheet constraints and all that to make creation of a somewhat
messy, inelegant, but usable set of models quite easy.
And here too we have seen a flowering of empirical
work, e.g. Mian and Sufi on household debt.
Where we have not, as far as I can tell, made much
progress is the Minsky question. Why did the system become so vulnerable? Was it deregulation (or
failure of regulation to keep up with institutional change)? Simple forgetting, as memories of past
crises faded? Excessively loose policy? I have views, but I have to admit that there isn't a lot
of either fresh thinking or hard evidence here.
Why is Minsky still mostly missing? Partly because
asking how we got here may be less urgent than the question of what we do now. But also, I'd guess,
because it's hard. Bubbles, excessive leverage, and all that probably have a lot to do with the limits
of rationality, and behavioral economics doesn't provide anything like as much guidance as it should.
Still, I'm relatively positive in my assessment
of the state of macroeconomics. Against mathiness and political ideology, the gods themselves contend
in vain, but that's not a problem with the models
kbaa, The Irate Plutokrat
It is good to see Krugman write in opposition
to 'mathiness', economists' misuse of mathematics to justify their pet theories. And his suggestion
that 'behavioral economics doesn't provide anything like as much guidance as it should' is probably
as close to an admission as we are ever likely to get from an academic economist that it's human
psychology that drives the economy after all, and that all of the various high minded macroeconomics
theories are nothing more than propaganda to be used by lobbyists who present them as scholarship.
Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there
is always the possibility of misusing mathematics to intimidate. Any paper that cites game theory
or the Euler consumption equation to promote public policy should be regarded as fraudulent until
shown to be otherwise. Mathematics serves the same function for academic economists as Latin theology
did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom at all
to be found.
NB For those who have never studied Calculus, "Euler" is pronounced "oiler", but there's no connection
with the price of oil or any other commodity, and don't let any academic economist try to tell
you otherwise.
Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested
in playing with mathematical models than in trying to understand how the world actually works.
Mr. Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who]
pictured the economy as a system of simultaneous equations." The very idea is made to sound slightly
crazed.
This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained
in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say,
and it is too late to improve. This has, I believe, saved me from important errors of thinking."
Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on
the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally,
the language of logic. Modern research into Keynes's theories-I have conducted such research myself-tries
to put his ideas into mathematical form precisely to figure out whether they logically cohere. It
turns out that the task is not easy.
Keynesian theory is based in part on the premise that wages and prices do not adjust to levels
that ensure full employment. But if recessions and depressions are as costly as they seem to be,
why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium?
This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.
Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor
the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate
points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too
far. Keynes was a creative thinker and keen observer of economic events, but he left us with more
hard questions than compelling answers.
Goldman goes astray on Grand Theft Auto and productivity
There's always a danger, when you question official statistics, that you come off sounding like a
nutter.
But some forms of scepticism are more respectable than others. At one end of the spectrum, we've
previously indulged the possibility that seasonal adjustment algorithms inadvertently distorted the
GDP and employment figures. At the other, you have people who add fixed constants to the reported
growth rate of consumer prices because they disagree with methodological changes from the 1980s and
1990s, but speak as if they are uncovering a conspiracy.
Somewhere in the middle is a group of people we're going to call "inflation deniers". These people
- often, but not exclusively, affiliated with the tech industry - think the government fails to fully
capture improvements in living standards. In other words, they believe this chart of underlying total
factor productivity growth is deeply misleading, at least for the last few years...
... ... ...
By contrast, consider Microsoft Excel, one of the greatest computer programmes ever created, and
among the most integral to global business. It would be ludicrous to think that increasing the number
of cells in a worksheet increases the value of new versions by a comparable amount. In fact,
many of the most active Excel users prefer the 2003 version, presumably because the genuine improvements
are outweighed by various hidden costs. Similarly, many companies still prefer to use Microsoft's
Windows 7 because the newer versions have features that aren't particularly useful for workers sitting
at desks.
We wouldn't go so far as to say that a "quality" adjusted price measure would report more inflation
than is currently being captured in the official statistics, but the constant share of nominal spending
devoted to business investments in software suddenly seems less odd.
Goldman concludes by noting that "if true inflation is even lower than measured inflation-and especially
if this gap is bigger than it has been historically-the case for keeping monetary policy accommodative
strengthens further." We tend to be sceptical that the growth rate of consumer prices is necessarily
a good guide to monetary policy either way, but it seems like a bit of a stretch to cite the quality
storytelling in one video game to justify calls to alter the path of rate hikes in one direction
or another.
Related links:
Lady Gaga for Free Online Shows Boom Missed by U.S. GDP: Economy - Bloomberg
Technology, inflation, and the Federal Reserve - Gavyn Davies
The Big Meh - Paul Krugman
The role of hedonic methods in measuring real GDP in the United States - BEA
How much of the value of the internet is not captured in GDP? - Tyler Cowen
My Paper "Mathiness in the Theory of Economic Growth":
I have a new paper
in the Papers and Proceedings Volume of the AER that is out in print and on
the AER website. A short version of the supporting appendix is available
here. It
should eventually be available on the AER website but has not been posted yet. A longer version
with more details behind the calculations is
available
here.
The point of the paper is that if we want economics to be a science, we have to recognize that
it is not ok for macroeconomists to hole up in separate camps, one that supports its version of
the geocentric model of the solar system and another that supports the heliocentric model. As
scientists, we have to hold ourselves to a standard that requires us to reach a consensus about
which model is right, and then to move on to other questions.
The alternative to science is academic politics, where persistent disagreement is encouraged
as a way to create distinctive sub-group identities.
The usual way to protect a scientific discussion from the factionalism of academic politics
is to exclude people who opt out of the norms of science. The challenge lies in knowing how to
identify them.
From my paper:
The style that I am calling mathiness lets academic politics masquerade as science. Like
mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight
links, it leaves ample room for slippage between statements in natural versus formal language
and between statements with theoretical as opposed to empirical content.
Persistent disagreement is a sign that some of the participants in a discussion are not committed
to the norms of science. Mathiness is a symptom of this deeper problem, but one that is particularly
damaging because it can generate a broad backlash against the genuine mathematical theory that
it mimics. If the participants in a discussion are committed to science, mathematical theory can
encourage a unique clarity and precision in both reasoning and communication. It would be a serious
setback for our discipline if economists lose their commitment to careful mathematical reasoning.
I focus on mathiness in growth models because growth is the field I know best, one that gave
me a chance to observe closely the behavior I describe. ...
The goal in starting this discussion is to ensure that economics is a science that makes progress
toward truth. ... Science is the most important human accomplishment. An investment in science
can offer a higher social rate of return than any other a person can make. It would be tragic
if economists did not stay current on the periodic maintenance needed to protect our shared norms
of science from infection by the norms of politics.
[I cut quite a bit -- see the full post
for more.]
Sandwichman said...
Ceteris paribus, mathiness is only the symptom of a deeper, long-standing disconnect between
ideology and pretense.
Sandwichman said in reply to anne...
Yep, Syaloch got my drift. When push comes to shove, economists' ideological priors trump.
Not that there is anything wrong with having convictions. It's fine to have convictions.
The problem arises with the methodological bobbing and weaving that goes on when the evidence
doesn't confirm those convictions. ANY evidence can be made to fit ANY theory if you're willing
to play fast and loose enough with weasel words and cherry-picked evidence. Even if somebody proves
you wrong, just stonewall and pretend nothing happened.
I'll have to take another look at just what Romer has to say lately about growth theory. Last
time I looked, I objected to the absence of "land" [i.e., natural resources] in his canonical
1986 article, "Increasing Returns and Long-Run Growth."
In my book, one element of "land" is the capacity of the atmosphere to absorb greenhouse gases.
They're not making any more atmosphere.
"Growth" is a stock/flow question. The standard analysis equates growing income with growth, which
is wrong at a very fundamental systems conceptual level. See the work of Booth-Sweeney and Sterman.
If the "outflow" of nature services exceeds the inflow of produced goods and services then there
hasn't been growth.
Is Romer up to speed on bathtub dynamics?
mulp said in reply to Roger Gathmann...
Capitalism is required to explain economics just as matter is required to explain nature. And
like nature now explains matter as just energy in another state, capital is labor in a different
state, and one can produce energy from matter and produce work from capital.
Energy in matter gets locked up and "owned" by individual bits of matter, just as labor locked
up in capital is "owned" by an agent of the economy.
Free lunch economists have tried to redefine nature (no human caused climate change) and capitalism:
I own a gun which is capital which entitle me to take money from you: your money or your life!
The Islamic State qualifies under free lunch economics as capitalists - they have capital they
use to make money and take capital which they sell to pay gunman to take more capital. I don't
see a fundamental difference between coal mine operators and Islamic State.
Podemos and the Economic Future of Spain
How Should Economics be Taught?
By VINCENT NAVARRO
Interview by students at the Barcelona Graduate School of Economics:
Q. There is little doubt that neoclassical economics has contributed to a very large extent to
the study of economics and social sciences. Nevertheless, it seems that this neoclassical school
of thought has monopolized the economic syllabus in top Universities around the United States
and Europe, leaving alternative economic perspectives ignored.
You suggest in a number of articles that many of the economic policies that are being implemented
currently in Europe come from specific power relations within the Eurozone (European Central Bank
and the IMF against antiausterity movements in Greece, Spain, etc.). In relation to the study
of economics, how does the lack of teaching about institutions and politics in the economic curriculum,
as well as the lack of debate against the foundations of neoclassical theories are limiting our
understanding of today's economic and political scene?
Navarro: One of the major problems we encounter in the production of economic knowledge is its
excessive disciplinary approach. Actually, the academic institutions are usually divided by departments
based on disciplines, one of them being economics. The reality that surrounds us, however, cannot
be understood following the disciplinary approach. The understanding of our realities, including
the economic ones, calls for a multidisciplinary analysis, with the understandings of the historical,
political and social forces that shape and determine that reality. In order to understand the
current Great Recession, for example, we have to understand how power-class power, race power,
gender power, national power-is produced and reproduced through political institutions, as well
as social and cultural ones. In other words, we have to comprehend how power relations shape the
governance of our societies, including their economies.
The current economics, for the most part, do not do that. They specialize in branches of the tree
without understanding, or even less, questioning, the nature of the forest. Moreover, they have
given great emphasis to the methods, depoliticizing the realities of the economic phenomenon.
Today, modern economics is used as a way of confusing and/or ignoring the political realities
that shape the economy. Currently, most of the major economic problems we face are basically political.
You cannot understand, for example, the current crisis in Europe without understanding the decline
of labor income, and, thus, of domestic demand; this is the result of the changing power relations-primarily
class power relations-that have occurred in the last thirty years. You can also not explain the
crisis without understanding the enormous influence of financial capital on the European Central
Bank. To try to explain reality by referring to the working of the financial markets as a point
of departure is profoundly wrong and naïve. Financial markets have very little to do with markets.
It was enough for Mario Draghi, the President of the European Central Bank, to speak a sentence,
to reduce the interest rates dramatically.
The absence of the study of the political and social context, determined historically, makes current
economics an apologetic message for current power relations, mystifying, hiding, and/or confusing
the understanding of the economic phenomena. It is not surprising, therefore, that the critical
traditions within economies are completely ignored or marginalized. It is predictable that current
economists did not perceive the arrival of the current recession, which is a Great Depression
for millions of Europeans. Only analysts from critical traditions were able to predict it. And
we did it....
Vincent Navarro is professor of Public and Social Policy in The John Hopkins University USA and
the Pompeu Fabra University Catalonia, Spain and also the Director of the JHU-UPF Public Policy
Center in Barcelona, Spain.
mulp said in reply to anne...
"You cannot understand, for example, the current crisis in Europe without understanding the
decline of labor income, and, thus, of domestic demand; this is the result of the changing power
relations-primarily class power relations-that have occurred in the last thirty years."
So, Navarro is saying that the class power struggle has been about reducing GDP.
Presumably the people with the power, the corporations, want lower and lower GDP.
And conversely, the masses are blindly seeking exponential growth in GDP.
For this to be false, the Navarro is a free lunch economist in believing that it is rational to
believe that slashing wages will lead to higher GDP growth instead of sharp decline in GDP.
From "You cannot understand, for example, the current crisis in Europe without understanding the
decline of labor income, and, thus, of domestic demand..." it is clear that profits are causing
recession and economics must return to the 60s when economists called profits a sign the economy
want inefficient, not working, reducing welfare.
Many recent commentaries have noted a distinct devolution in the numerical lies which the U.S.
government calls its "economic statistics". Numbers which used to be mere exaggerations (i.e. used
to somewhat mirror the real world) have now become literally perverse: opposite to reality.
As U.S. "retail sales" collapsed at the end of last year (and now into this year) with a string
of negative numbers, we're told that somehow U.S. "consumer spending" surged by 4.3% in the fourth
quarter of 2014, something which is mathematically impossible, since the two numbers must mirror
each other.
With the U.S. economy showing even more obvious weakness than in previous years of this fantasy
"recovery", we're supposed to believe that the U.S. economy just enjoyed its strongest quarters
of growth in well over a decade. The economic lies are not merely far-fetched, they are totally ludicrous.
This begs the question, why pervert these "statistics" to such silly extremes? The answer will
come immediately to readers the moment they turn on their business news, and hear about yet more
"record highs" in the U.S.'s bubble-markets.
At this point, it's necessary to turn the attention of readers to the themes of two previous commentaries
which are of particular significance. The first commentary concerns the method by which all our markets
are marched up and down like yo-yo's, in near-perfect synchronicity – something which is absolutely/mathematically
impossible in legitimate markets. Indeed, even in "rigged" markets there is only one means by which
these markets can be led-by-the-nose, ever hour of every day: via a computerized Pied Piper.
The second commentary of note concerns the most likely time these bubble-markets will be torpedoed,
allowing the sheep to be fleeced, and allowing Warren Buffett to 'invest' his hoard of money, which
is now well in excess of $60 billion. Even in the Wonderland Matrix, no bubbles can be inflated
forever. At some point the bubbles must be "popped", or they will simply burst on their own – in
an uncontrolled/uncontrollable manner/
"...the financial crisis has demonstrated that financial CEOs and Super Crunchers have introduced
the most characteristic financial traits of Wall Street and the City of London – greed and the desire
for a "sure thing" – into our financial models. It is true that the model will "arrive at the same answer
before and after lunch" – the answer that enriches the CEO and the Super Torturers. (This is a variant
on the old joke that the accountant who gets hired is the one who responds to the question "what's 2
+ 2" with the answer "what would you like the answer to be?")
The danger of hidden biases is, of course, exactly what believers in behavioral economics warn about
– when it is in their financial interest to do so."
Yves here. Many of the concerns about Big Data focus on the surveillance apparatus used to collect
it, or on the naive modeling approaches, like attributing causality to mere correlations. Here Black
addresses an established problem: that of deliberate abuse of models.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate
professor of economics and law at the University of Missouri-Kansas City. Originally published at
New Economic Perspectives
Some books have spectacularly bad timing, like Moral Markets: The Critical Role of Values
in the Economy, which was published in 2008 as a celebration of market and their nourishment
of high ethical values. The book has many interesting chapters and I recommend it, but even
lifelong market apologists now refer to the "corrupt culture of banking." Ian Ayres, a brilliant
professor of law and economics at Yale, published his book Super Crunchers: Why Thinking-By-Numbers
is the New Way To Be Smart to critical acclaim on August 28, 2007. Ayres' book is an ode
to how much better decision-making becomes when it is made empirically on the basis of very large
data rather than through human judgment. There is a great deal of support in the literature
for that thesis, and the result is one of the reasons why behavioral economics has become increasingly
dominant. The general idea is that humans bring significant, unexamined biases to our decisions
and that systems that rigorously examine the data are superior because they avoid these biases.
That general idea continues to have considerable support and I have no personal problem with the
general idea.
I write, however, to raise several cautions that arise from the disastrous performance of the
Super Crunchers in finance during the financial crisis. Finance quants purported to be the
best Super Crunchers in any commercial context. We are examining therefore a series of hundreds
of catastrophic failures at our most elite financial institutions by those who claimed to be the
best Super Crunchers in existence. (Physicists and the NSA's top Super Crunchers always considered
these claims to be laughable, but I will let them express that view.)
This article was prompted by reading a January 1, 2009 article entitled: "Irrational
Expectations: How statistical thinking can lead us to better decisions" by "Deloitte University
Press." Deloitte, of course, is "talking its book," trying to sell its consultants as Super
Crunchers, but the article is lively and worth reading. The authors rightly consider the neoclassical
model of decision-making a farce.
If you look at economics textbooks, you will learn that homo economicus can think like Albert
Einstein, store as much memory as IBM's Big Blue, and exercise the willpower of Mahatma Gandhi.
Really. But the folks that we know are not like that. Real people have trouble with long division
if they don't have a calculator, sometimes forget their spouse's birthday, and have a hangover
on New Year's Day. They are not homo economicus; they are homo sapiens.
Because they are, ultimately, quants incentivized to be sales guys, they oversell their quant
products.
"But unlike a human decision-maker, a predictive model has the ability to optimally combine
these and many other factors to efficiently estimate the employee's relative likelihood of leaving.
And unlike the human decision-maker, the predictive model will arrive at the same answer before
and after lunch, takes virtually no time to draw conclusions, and is not affected by prejudices,
pre-conceived ideas or cognitive biases. In short, predictive models can help us better approximate
the ideally rational homo economicus."
Here, two of the authors in Moral Markets could have helped protect the Deloitte authors
from error. The ringing phrase in Moral Markets is that "homo economicus is a sociopath."
The Deloitte authors are businessmen who sell to other businessmen (and a very few women).
They apparently think that homo economicus is superior to a human – "ideally rational" and not "affected
by prejudices" – or love, empathy, mercy, justice, or Tikkun Olam, but they are in fact
describing a sociopath.
I explain that the financial crisis has demonstrated that financial CEOs and Super Crunchers
have introduced the most characteristic financial traits of Wall Street and the City of London –
greed and the desire for a "sure thing" – into our financial models. It is true that the
model will "arrive at the same answer before and after lunch" – the answer that enriches the CEO
and the Super Torturers. (This is a variant on the old joke that the accountant who gets hired
is the one who responds to the question "what's 2 + 2" with the answer "what would you like the answer
to be?")
The danger of hidden biases is, of course, exactly what believers in behavioral economics warn
about – when it is in their financial interest to do so. Deloitte's authors illustrate that
Super Crunchers are capable of writing odes to behavioral finance on p. 2 and ignoring those odes
on the next page and pretending that "predictive models" are not designed by humans to have biases
that will aid the humans. Indeed, there is nothing as dangerous as someone who thinks (and
tells senior managers) that their "Super Torturer" models are "not affected by prejudices, pre-conceived
ideas or cognitive biases."
But the Deloitte authors were still saying things at this point that were not in the heart of
my work. Then I hit this passage.
Many of Ayres' examples are valuable in that they encourage one to think creatively about new
ways in which predictive analytics can be applied. Everyone knows that credit scores outperform
loan officers at assessing mortgage default risk.
The remainder of the paragraph goes on to describe predictive analytics models that the Deloitte
authors consider relatively more esoteric, and therefore "creative." The second sentence is
treated as a "duh" example – of course "everyone knows" (even your innumerate and nearly illiterate
near do well cousin) that "credit scores outperform loan officers at assessing mortgage default risk."
Remember that this sentence was published on January 1, 2009 – after the crisis had reached the acute
phase. The Deloitte Super Torturer disciples should have been inclined to caution in proclaiming
that their financial models "approximate the ideally rational" rather than N. Gregory Mankiw's famous
illustration of "Mankiw morality" – "it would be irrational for operators of the savings and loans
not to loot." (Another example of the "ideally rational" – the bank CEO as rational looter
– made possible and amorally immoral by economic modelling of perfect rationality.)
The Deloitte authors, of course, knew that the financial "predictive analytics" had just produced
results that purported to accurately value assets five digits to the right of the decimal point –
but failed to come close to the actual values seven digits to the left of the decimal point that
the models assigned to large pools of mortgage paper. The models' illusion of precision and
objectivity also breeds complacency, creating a deadly mix that breeds recurrent financial crises.
The Fed's longtime head of supervision, Richard Spillenkothen, gave an example of this problem in
his memorandum to the Financial Crisis Inquiry Commission (FCIC).
Basel II was viewed by its most ardent Fed devotees with a quasi-theological reverence and
as a sine qua non for assuring financial stability in an increasingly complex global
financial system (p. 16).
Spillenkothen was talking about the Fed's economists in that sentence, but he later makes the
point that even skeptical Fed supervisors assumed that the credit rating agencies' models couldn't
be systematically producing farcically inflated values.
Supervisors were not naïve enough to believe that external ratings were perfect, and they understood
that downgrades were always possible – but going from triple A or super- senior to "junk" status
or worthless overnight was simply never given serious consideration (p. 17).
The Deloitte authors have been well trained to see financial catastrophe as a marketing opportunity
"in these tumultuous times."
Consumer business: We have helped companies use analytics to better understand their
customers and sales patterns. While it is true that some companies make extensive use of their
data to segment, target and cross-sell to their customers, we have found that many others use
their data only to generate business metrics and fairly stale management reports. The situation
is to a surprising degree similar to what we have found in the emerging field of workforce intelligence:
the data exist but are not being used to refine decisions rooted in intuition and mental heuristics.
Analytics and predictive models can therefore be brought to bear to exploit the resulting market
inefficiencies.
Mortgage triage: We are assisting mortgage lenders to use predictive modeling to better
identify potentially troubled loans before borrowers fall behind on their payments or default.
In these tumultuous times, traditional reactive and subjective loan management methods are proving
unsatisfactory. We are helping to bring predictive analytics to bear for mortgage lenders to design
proactive loan and credit-line portfolio management strategies. Loans can be saved – and mortgagees
can be kept in their homes – by strategically offering mitigation strategies before borrowers
default.
(I leave the reality of how lenders and servicers created over 100,000 fraudulent affidavits to
conduct foreclosures to the reader to consider.)
Ayres' book gives an example of how bankers "exploit the resulting market inefficiencies" that
arise when they can use data "to segment, target, and cross-sell to their customers."
While most consumers now know that the sales price of a car can be negotiated, many do not
know that auto lenders such as Ford Motor Credit or GMAC, often given dealers the option of marking
up a borrower's interest rate. When a car buyer works with the dealer to arrange financing,
the dealer normally sends the buyer's credit information to a potential lender. The lender
then responds with a private message to the dealer that offers a "buy rate' – the interest rate
at which the lender is willing to lend. Lenders will often pay a dealer – sometimes thousands
of dollars – if the dealer can get the consumer to sign a loan at an inflated interest rate.
For example, Ford Motor Credit tells a dealer that it was willing to lend Susan money at a 6 percent
interest rate, but they would pay the dealership $2,800 if the dealership could get Susan to sign
an 11 percent loan. The borrower would never be told ….(p. 143).
Ayres is famous for a study showing that auto dealers gave much worse deals to women and African-Americans.
I trust that at this juncture the reader understands that Deloitte's gushing praise for this analytical
technique as representing an "ideal" is overstated. These techniques, absent effective regulation,
will be used to detect "market inefficiencies" (aka, human weaknesses) and then to "optimally" "exploit"
that inefficiency to enrich the bankers at the expense of the "inefficient" humans. As Ayres
helped show, the typical American "target[s]" that banks "exploit" are African-Americans, Latinos,
and women. But not to worry, the banks are using these techniques to seek to identify and "exploit"
each of our weaknesses. As Michael Corleone assured his brother in The Godfather,
"It's not personal, it's strictly business." (The context was Michael's plan to commit a double
murder.) Various organized criminals, while sociopaths, do have recognized restraints.
Those restraints may not be strictly moral, as Don Corleone explains in the movie he avoids the drug
trade because joining it would make it harder to corrupt politicians.
Charles Keating, who professed to be a devout Catholic, deliberately targeted widows to exploit
through the sale of worthless junk bonds of his insolvent holding company out of Lincoln Savings'
branches located near retirement communities. Keating's team figured out that that ultra-clean
cut, well-dressed, and polite young men aged 18-20 were ideal to sell this toxic junk (which James
Grant aptly labeled the worst security being sold in America) to the widows. This was the first
professional job for most of them so they had never been mentored to treat customers properly and
they lacked both the experience and expertise to understand that what they were selling was worthless.
They were so callow that they sometimes enlisted their relatives to buy the worthless bonds.
But they looked great and sounded sincere when they repeated the sales pitches worked out by their
seniors. They looked like the grandsons the widows wished they had. The worst banksters
represent the sociopaths' sociopath.
As for the glories of cross-selling, by the time Deloitte wrote its ode to maximizing cross-selling
the practice was infamous in the UK banks. UK banks cross-sold grotesquely improper products
to their borrowers to an extent that is astonishing even if you have my background and interests
in elite bank fraud. Here are the primary takeaways that even regulators appointed by the Tories
emphasize about the scam. (The UK authorities religiously avoid using the "f" word to describe
the bank abuses, even when they were clearly fraudulent.)
The sales of PPI (a type of insurance) to individuals and swaps to small business owners (you
know, the entrepreneurs bankers always claim to be helping) were the overwhelming source of UK
banks' total profits
The sales of PPI and swaps were overwhelmingly inappropriate (claimants are winning 80-90%
of their claims in front of the Ombudsman
The markup on PPI was an extraordinary 80%
In sum, the paramount business strategy of the massive UK bank (and many smaller ones) was to
systematically and repeatedly rip off their customers. The banks' compensation systems and
informal and formal forms of discipline forced employees to rip off their customers on a daily basis.
One strategy was to force an employee whose ethical restraints caused her to "fail" to cross-sell
to keep a cabbage (signifying in the UK a dumb, useless person) on her desk until she joined in ripping-off
customers. The purpose was to humiliate the employee and force her either to act unethically
or resign.
Models Can Be Crafted to Aid Fraud
And then there is the, vastly larger, home lending analog to Ayres' example of how auto dealers
and lenders corruptly conspire to rip off their customers. Ayres, of course, is not supporting
the auto dealers and lenders' conspiracy to rip off the customers. But he is not immune to
the lies they tell. Consider how Ayres phrased the matter: "When a car buyer works with
the dealer to arrange financing," That is the exact phrase that the dealer uses to deceive his or
her customer – "I'll work with you." As Ayres explains, however, this is a cynical lie.
The dealer is working against, rather than "with" the customer. The lender bribes
the dealer to deceive and "exploit" the customer.
Precisely this same scam was used by fraudulent lenders to corrupt loan brokers by creating intense,
perverse incentives for the broker to do five things. The bribe from the lender to the broker
was called the "yield spread premium" (YSP). The lenders' controlling officers intended the
bribe to create five perverse incentives among mortgage brokers.
Hustle relentlessly to find induce people, to buy a home and arrange a loan through the broker
regardless of whether the borrower could afford to repay the loan.
Induce them to take out a liar's loan, so that the borrower would have to pay a higher interest
rate
Induce the broker to inflate the borrower's income to make the loan look prudent
Induce the broker to extort the appraiser to inflate the appraised value of the home in order
to make the loan look prudent
Induce the broker to charge the borrower a materially higher interest rate.
In fairness to real estate brokers, the fact that they have been bribed was actually typically
disclosed due to federal mortgage disclosure requirements. However, only someone sophisticated
in real estate would understand that the disclosure indicated that the customer had been ripped off.
Most borrowers relied on their broker to direct them on how to fill out the forms and what the RESPA
disclosures meant. Brokers had powerful incentives not to disclose that "this YSP figure here
means the lender bribed me and my brokerage firm to induce you to pay an excessive interest rate."
Krystofiak Tries to Save America (and the Fed) and Shows How the Models Torture Facts
All of this would have been clear to the Fed (which had unique authority under HOEPA – since 1994
– to ban all liar's loans), Ayres, the Deloitte authors, and Attorney General Eric Holder had they
ever read Steven Krystofiak's 2006 testimony to the Fed about liar's loans. Here is how his
written statement began:
"My name is Steven Krystofiak, President of the Mortgage Brokers Association for Responsible
Lending. The MBARL is an advocacy group protecting consumers and the loan industry from outlandish
and counter-productive loan programs. Currently we see stated income and stated asset loans as
the largest problem in the real estate industry."
Krystofiak was trying to save the Nation. He went to the regional Fed hearing (mandated
by Congress) as an uninvited participant. He was given a few minutes to speak and asked no
questions by the Fed. All the quotes here are from his written statement to the Fed.
The Mortgage Bankers Association (MBA) chose as its spokesperson at the hearing (who was invited
– and praised lavishly by the clueless Fed Governor) – a senior officer from one of the largest specialty
lenders of fraudulent "liar's" loans. Note that the MBA chose this S&L, IndyMac, to provide
its official spokesperson on the issue of liar's loans to the Fed. In 2006, reporting on Krystofiak's
study, the MBA's own anti-fraud experts (MARI) warned every member of the MBA in writing that the
loans were 90% fraudulent.
Krystofiak's got right to the point. His next statement was:
"A stated income loan is a loan where the income that is put on a home loan application is
not verified at all by the banks. The banks simply take your word for it. Home buyers might be
unaware of the fraudulent income that is being stated on the loan application because the loan
officer, or bank representative have the power to falsify the income on the application."
While Krysofiak did not use the famous industry phrase that "a rolling loan gathers no loss" he
explained the concept to the Fed.
"This cycle is the reason why currently there is a small default rate on stated income loans.
Once appreciation goes flat the cycle of "cashing out" [mortgages through refinancing] will no
longer keep default rates low. Stated income loans need to stop now before thousands of new home
buyers buy property that they cannot afford."
Krystofiak then demonstrated that the banks were "accounting control frauds."
"3. Fraud is encouraged by the banks
A large problem as to why these loans have become so prevalent is because the first line of
defense against stated income loan fraud are individuals who are commission based; the loan originator,
the bank representative, and in many cases the managers for the bank reps have a large portion
of their income derived from bonuses based on loan production. Bank employees, i.e. underwriters
and bank processors, return applications back to mortgage brokers with instructions to send back
an application with a higher stated income. The mortgage industry has become comfortable with
stating incomes higher on loan applications."
It is, of course, the bank's and loan brokerage's controlling officers who shaped there perverse
incentives and continued them even as they received myriad reports of endemic fraud.
Krystofiak then explained the reality of the "ideal" model that Deloitte claimed "arrive at the
same answer before and after lunch, takes virtually no time to draw conclusions, and is not affected
by prejudices, pre-conceived ideas or cognitive biases …." Well, that's true if (a) no one
devises the model to game it, (b) no one changes the model to game it, and (c) no one changes the
inputs. Krystofiak implicitly addressed the first two points by explaining that the values
were Super Tortured by the lenders' agents to inflate values and the losses were hidden by refinancing.
He now explained how inputs were gamed – and that the models were designed to allow them to be repeatedly
gamed.
"Online underwriting systems that are used by Fannie Mae and some banks are being exploited
by bank representatives and loan officers wanting to obtain a loan with stated income underwriting
standards but with fully documented interest rates. The systems allow mortgage brokers to "play"
with different incomes more than 15 times until they get the results they want."
The reality is that the answer varied up to 15 times – because the model was designed to be gamed.
Krystofiak realized something that economists did not recognize (or pretended not to) about the
interconnection between the rise in liar's loans, the hyper-inflation of the real estate bubble,
and the delayed recognition of massive losses on the pervasively fraudulent liar's loans. One
must imagine the Fed economists choking as a young mortgage broker dared to explain real estate economics
and reality to them. He also introduces the role of more sophisticated real estate speculators.
"6. Stated income loans are why home prices have skyrocketed. They have caused a large
demand in the US housing supply.
Many economists are currently unaware of how prevalent stated income loans are. They attribute
high home prices to low interest rates, low to zero percent down payments, speculative purchasing,
and interest only loans. What economist[s] fail to realize is that popular stated income loans
are what have led have home prices to skyrocket in recent years. Traditionally banks told consumers
how much money their maximum monthly payment could be, based on their income and outstanding debts.
With stated income loans the consumer is in the driver's seat to tell the bank how much they want
to spend every month on their home payments. This is dangerous and unproven over time and is the
reason [housing prices] have doubled while the median incomes in the respective areas have remained
relatively flat since 2001. Loose underwriting guidelines caused by stated income loans have allowed
individuals to speculate on 3, 4, and in some cases over 5 homes at once.
Homes have a unique situation where demand is directly related to whether or not someone can
receive a loan from a bank or lender. With banks loosening their guidelines for the home buying
process we have experienced a huge surge in demand for homes over the past few years."
Krystofiak added the fact that appraisal fraud was endemic – and created overwhelmingly by lenders
and reiterated the FBI's warnings about mortgage fraud. He then made two points – the Fed needed
to stop liar's loans now – and if they failed to do so it would blow up in their faces.
To do so, he resurrected the lead data he had buried.
"13. Stated income loans must stop now
Stated income loans might be more convenient for a small portion of the home buying population,
but it is a sleeping plague on the financial integrity for the rest of us. Federal regulators
must end stated income loans now. Greed by mortgage brokers, banks, and real estate developers
must not be encouraged by keeping this issue unaddressed and silent. Stated income loans are being
used fraudulently in alarmingly high rates and are hurting consumers. If federal regulators don't
act on this now, they will be dealing with the consequences of their lack of actions later.
Data Collected by the Mortgage Brokers Association for Responsible Lending
58. A recent sample of 100 stated income loans which were compared to IRS records (which is
allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated
by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN
50%. These results suggest that the stated income loans deserves the nickname used by many in
the industry, the 'liar's loan' (emphasis in original). "
Note that the Fed could have ordered the lenders it regulated (including those it regulates as
part of holding companies) to conduct the Krystofiak test at their institutions because nearly all
borrowers signed the 4506-T form to get their loans. For obvious reasons, people rarely deliberately
inflate the income they report to the IRS. Form 4506-T allows the bank to get a "transcript"
of the borrower's tax return, allowing an easy, inexpensive, and highly accurate means of preventing
the inflation of the borrower's income in a loan application. Lenders making liar's loans,
however, virtually never used their ability pursuant to the 4506-T to obtain the transcript of the
borrower's tax return and verify the borrower's income. Doing so would have inhibited their
fraud schemes.
The Fed and Folly of the Models
The Fed's ignoring of Krystofiak's warnings was nonsensical but consistent. If the Fed's
senior leadership were to admit that liar's loans were pervasively fraudulent it would have no choice
but to recognize an imminent economic catastrophe. Here is what the Fed leadership knew (no
later than 2005) about the extraordinary (and growing) prevalence of liar's loans at the largest
banks.
Sabeth Siddique, the assistant director for credit risk in the Division of Banking Supervision
and Regulation at the Federal Reserve Board, was charged with investigating how broadly loan patterns
were changing. He took the questions directly to large banks in 2005 and asked them how many of
which kinds of loans they were making. Siddique found the information he received "very
alarming," he told the Commission. In fact, nontraditional loans made up 59 percent of originations
at Countrywide, 58 percent at Wells Fargo, 51 at National City, 31% at Washington Mutual, 26.5%
at CitiFinancial, and 28.3% at Bank of America. Moreover, the banks expected that their originations
of nontraditional loans would rise by 17% in 2005 to 608.5 billion. The review also noted the
"slowly deteriorating quality of loans due to loosening underwriting standards." In addition,
it found that two-thirds of the nontraditional loans made by the banks in 2003 had been of the
stated-income, minimal documentation variety known as liar loans, which had a particularly great
likelihood of going sour.
The reaction to Siddique's briefing was mixed. Federal Reserve Governor Bies recalled the response
by the Fed governors and regional board directors as divided from the beginning. "Some people
on the board and regional presidents . . . just wanted to come to a different answer. So they
did ignore it, or the full thrust of it," she told the Commission.
Within the Fed, the debate grew heated and emotional, Siddique recalled. "It got very
personal," he told the Commission. The ideological turf war lasted more than a year, while
the number of nontraditional loans kept growing…. (FCIC 2011: 20-21).
Yes, that was the Fed under Alan Greenspan and Ben Bernanke. They had all kinds of models
telling them everything was wonderful. The models produce faux data that is massively
inflated. Then they had actual data, interpreted by experienced examiners and supervisors that
caused them to warn that a disaster was coming. Guess which source Greenspan and Bernanke chose
to rely on and which it chose to assault the messenger?
In my most recent
article I cited portions of Richard Spillenkothen's written memorandum to the FCIC about the
Fed's economists' insane efforts to virtually eliminate capital requirements for the largest banks
through their Basel II (Super Cruncher) models. I was responding to a Cato author's claim that
Basel II demonstrates the insanity of regulation. I made the point that the problem with the
Fed was that its key economics decision-makers shared Cato's key anti-regulatory dogmas. I
did not quote this portion of Spillenkothen's explanation that discusses both the Fed economists'
dogma and their faith-based models.
"Over the last 15 years, professional economists have played an increasingly important role
in the Fed's supervision function – with respect to both policy formation and program execution
– and it seems clear that this role will expand further in the years ahead.
[Fed] economists' overarching intellectual commitment to the ideal of efficient and self-correcting
markets, abiding faith in counterparty and market discipline, inherent skepticism of supervision
and regulation, and penchant for solutions based on complex modeling or arcane quantitative risk
measurement methodologies were significant contributing factors to some of the major regulatory
policy errors since the mid 1990s.
Going forward, it will be important to structure and manage supervision in a way that garners
the important benefits of economists' perspectives, techniques, and expertise – without diluting
the quality of hands-on, micro-prudential financial oversight; without basing policies on philosophical
aspirations or theoretical constructs at odds with the realities of risk management or the lessons
of history; and without diverting supervisory resources from critical safety and soundness priorities"
(p. 29).
Bank and S&L examiners have repeatedly proved their ability to outperform the models – to identify
the frauds while the models' results are still praising the frauds. George Akerlof and Paul
Romer emphasized this point in their famous 1993 article on "looting."
"The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists
foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept,
could they have known how serious it would be. Thus the regulators in the field who understood
what was happening from the beginning found lukewarm support, at best, for their cause. Now we
know better. If we learn from experience, history need not repeat itself" (Akerlof & Romer 1993:
60).
Spillenkothen makes a related point.
"[S]upervisors, economists, and researchers have spent decades trying to develop improved surveillance
tools, early warning systems, and better predictors of future bank performance. During my career,
the evidence suggested that surveillance tools, even those that incorporated market information,
were useful in reflecting a bank's current condition; but were not necessarily good predictors
of future performance. And experience also suggested that examination findings and supervisory
judgments consistently identified problems before they were reflected in market indices, which
tended to be lagging indicators.
Earlier this decade, in connection with an effort to explore ways to make greater use of public
information in the supervision process, an attempt was made to find examples of where the market
identified problems before they were noted in supervisory examinations. To the best of my recollection,
no examples were found" (p. 22).
Remember, this study included Fed economists devoted to the dogma that regulators are useless
and private market discipline is elegant, reliable, and robust – yet they could find no examples
of their dogma having any basis in reality. The Fed economists, of course, did not abandon
their dogmas in response to reality.
Human Underwriters Were Mighty Good When They Had Honest Leaders
Deloitte's assertion, without benefit of argument or citation, that: "Everyone knows that credit
scores outperform loan officers at assessing mortgage default risk" is not true because I don't know
any such thing. I will simply note in passing that two significant problems demonstrated during
the crisis were that credit scores can be gamed and falsely attributed to the wrong person.
Empirical studies confirm a suspicious pattern with undue numbers of credit scores just above the
cutoffs used by many lenders.
The point I emphasize here is that while a credit score is useful and underwriters' review them,
a credit score inherently cannot evaluate one of the "C's" essential to successful underwriting –
the borrower's "capacity" to repay the loan. This was precisely the problem with liar's loans,
because they did not verify the borrower's income and were pervasively fraudulent as Krystofiak warned
the Fed and the Nation. Further, the fact that "a rolling loan gathers no loss" means as Krystofiak
explained that the tests that purport to prove that relying on the credit score provides a superior
default prediction to also evaluating "capacity" are unreliable for the reasons Krystofiak explained.
This is why models proved so embarrassing in massively understating the losses inherent from liar's
loans. It also explains why our (Office of Thrift Supervision – West Region) examiners' conclusions
in 1990 that liar's loans should be banned that led us to begin driving out of the S&L industry in
1991 were so superior to the banksters' claims that they could rely on high credit scores to "compensate"
for failing to verify the borrower's actual income. What we actually know is that relying on
credit scores to make liar's loans is vastly worse than relying on honest, competent underwriters.
For example, Countrywide had a Super Cruncher model (that did not rely fully on credit scores).
One could argue that it performed in a way that was superior to Countrywide's loan officers for the
model called for the rejection of hundreds of thousands of loans (most of them terrible) that were
actually approved by humans as "exceptions." But the comparison is not reliable. The
model was a Potemkin model designed (at least from the perspective of Countrywide's controlling managers)
to fool the regulators and other outsiders. Exceptions were endemic because Countrywide was
following the accounting control fraud recipe and it is essential that the leaders gut the underwriting
function and suborn the controls. The comparison of model v. human becomes nonsensical in such
situations because the models are (to stay with my Russian theme) a Maskirovka designed
to hide the truth. The humans running the fraud will insure that the models fail or are ignored.
How good were human underwriters when they did not suffer from the perverse incentives created
by their fraudulent bosses? Exceptionally good is the answer. Vastly better than the
performance of the models about the liar's loans – even if those models had not been ignored when
they called for loan rejection. I note for purposes of potential bias that I was once an active
member of the Federal Home Loan Bank of San Francisco's (FHLBSF) credit committee. Before Fannie
was privatized, and before Freddie was created, Fannie created a national system of high quality
underwriting.
A
study by the FHLB Chicago examined charge-offs on mortgage loans made by FHLB Chicago thrifts
and Fannie and Freddie in this earlier era. Figures 2 (Fannie and Freddie: 1975-1998) & 3 (the
FHLBs: 1994-1998) on p. 33 are the keys. The average annual loss at Fannie and Freddie for
this 23 year period was 5 basis points (0.05%). The most extreme loss for the entire 24-year
period was 16 basis points.
The FHLB Chicago thrifts' average annual loss from (1994-1998) was 3 basis points. The FHLB
thrifts were relatively small and were particularly unlikely to have fancy models. Humans can
be taught, particularly in a well-run bank with effective internal controls and honest managers,
to make conventional home loans that will rarely default.
Fraud Epidemics and Models that Rely on Distributions
What we should have learned from the crisis is a number of cautions about financial models.
I'll leave the non-ergodic nature of the data feeding the models to the quants and concentrate on
an understandable, critical point. There is no fixed distribution of bad events in business.
One of the most important reasons this is true is control fraud epidemics. This is the importance
of the concept of a "criminogenic environment." If the incentives are sufficiently perverse,
such frauds can become epidemic, particularly if they create "Gresham's" dynamics in which bad ethics
drives good ethics out of the markets and professions.
Here is the
Free Dictionary's example of a symmetrical distribution. It illustrates a situation in
which most of the distribution (say of the height of 15 year-old females) is clustered fairly close
to the average (mean) height. To either extreme side are the "thin" "tails" of the distribution
– a small percentage of females at age 15 are above 6'5" or below 4'8." In finance, it is usually
the tail that kills your company. This would be the very unlikely event that caused extreme
losses.
A static distribution is not obviously insane for a characteristic like height, though if one
examines the substantial increases in average height in regions within countries in Asia that have
been most effective in reducing childhood malnutrition it would be clear that the distribution of
height is dynamic rather than fixed (static). Many forms of crime, including accounting control
fraud are extremely dynamic. We understand this in the street crime context. If we leave
a nice car in a "bad neighborhood" unlocked with the key in the ignition and park it far from any
street lights the chances of it being stolen go up enormously. If you go out drinking in seedy
bar in a "bad neighborhood," brag about how much money you have, flash a fat bankroll, get drunk,
stagger out the door and walk into a dark alley the chances of getting robbed go up dramatically.
If accounting control fraud becomes epidemic the likelihood of a bubble hyper-inflating (absent
vigorous regulatory intervention) goes up greatly. Because "a rolling loan gathers no loss"
the loss recognition will be greatly delayed as long as the bubble expands. Models that rely
on recent performance will seriously understate risk (and in finance that means overstate market
values). The three "sure things" of accounting control fraud include "severe losses."
All financial bubbles end and when they end the fraudulent loans can no longer be hidden by refinancing.
Extreme losses in these circumstances are not improbable, but virtually certain. (In jargon,
there is no true exogenous distribution of accounting control fraud. Our public policies determine
the likelihood of an epidemic of accounting control fraud developing and hyper-inflating a bubble.
Conclusion
The finance models tend to be lagging indicators of crises. Indeed, they are so bad and
so biased that they contribute to causing the crises. As I have explained in prior articles,
standard econometric studies are criminogenic if there is an epidemic of accounting control fraud
because the studies rely on reported profits or stock prices (which are heavily affected by reported
profits). Economists consistently recommended policies on the basis of such econometric studies
that produced disastrous results. In a regression analysis, whatever policies most aid accounting
control fraud will show the most powerful correlation with higher reported profits.
Examiners have a far better track record of being the first to warn of developing systemic risks.
Naturally, our response to the crisis was to put economists, and their models, in charge of identifying
systemic financial risk. Economists and their models are expert at creating severe systemic
risk and impeding regulators from stopping such risks.
Bernanke put one of the Fed's most anti-regulatory, failed economists in charge of Fed supervision
to ensure that Fed supervision would be further degraded. In a very funny line for an agency
utterly dominated by anti-regulatory economists in which Spillenkothen was the only seriously different
voice that Greenspan and Bernanke heard, Bernanke claimed that appointing an economist with no supervisory
experience the head of Fed supervision was a great leap forward because it would make supervision
multi-disciplinary. Instead, as Bernanke intended, appointing an anti-regulatory economist
as the Fed's top supervisor removed the only major source of multi-disciplinary thought among the
Fed's senior staff.
Under neoliberalism most Americans became debt slaves ("What is normal for many everyday
Americans is crippling debt levels, and no such thing is recognized in these theories. ")...
Quote: " I decided to look up how
the US personal savings rate is calculated. Turns out, it's another one of those whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not
even exclusively, because of things like this,
from a site called Take A Smart Step: "[The personal savings rate in] November 2012 was 3.6%, this is not even close to where
we need to be for financial health. This savings rate barely gives us enough to handle
emergencies, and makes us as a nation weaker. The government calculates the personal
savings rate as the difference between the after tax income and consumption of Americans.
So they include not only retirement savings, but debt repayments, college savings,
emergency fund savings, anything that was not spent. " "
That title may be a bit much, granted, because never is a very long time. I might instead have
said "The American Consumer Won't Be Back For A Very Long Time". Still, I simply don't
see any time in the future that would see Americans start spending again at a rate anywhere near
what would be required for an economic recovery. Looks pretty infinity and beyond to me.
However, that is by no means a generally accepted point of view in the financial press.
There's reality, and then there's whatever it is they're smoking, and never the twain shall meet.
Admittedly, my title may be a bit provocative, but in my view not nearly as provocative, if not
offensive, as Peter Coy's at Bloomberg, who named his latest effort "US Consumers Will Open Their
Wallets Soon Enough".
I know, sometimes they make it just too easy to whackamole 'em down and into the ground. But
even then, these issues must be addressed time and again until people begin to understand, and
quit making the wrong decisions for the wrong reasons. People have a right to know what's
truly happening to their lives, and their societies. And they're not nearly getting enough of it
through the 'official' press. So here goes nothing:
People are constantly exhorted to save, but as soon as they do, economists pop up to
complain they aren't spending enough to keep the economy growing. A new blogger named Ben
Bernanke wrote on April 1 that there's still a "global savings glut." Two days later the
Bureau of Labor Statistics announced the weakest job growth since 2013, which economists
quickly attributed to soft consumer spending.
The first problem with Coy's thesis is that even if people open their wallets, far too
many of them will find there's nothing there. And Bernanke simply doesn't understand
what savings are. His ideas through the past decade+ about a Chinese savings glut were always way
off the mark, and his global – or American – savings glut theory is, if possible, even more
wrong. In the minds of the world's Bernankes, there's no such thing as people opening their
wallets to find them empty. If they don't spend, they must be saving. That there's a third
option, that of not having any dollars to spend, is for all intents and purposes ignored.
The U.S. personal savings rate-5.8% in February-is the highest since 2012. "After years
of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow,"
Richard Moody, chief economist at Regions Financial, wrote to clients in March. Saving too
much really can be a problem when spending is weak.
The little man inside, when I read things like that, tells me this is nonsense. So I decided
to look up how the US personal savings rate is calculated. Turns out, it's another one of those
whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not
even exclusively, because of things like this,
from a site called Take A Smart Step:
[The personal savings rate in] November 2012 was 3.6%, this is not even close to where
we need to be for financial health. This savings rate barely gives us enough to handle
emergencies, and makes us as a nation weaker. The government calculates the personal
savings rate as the difference between the after tax income and consumption of Americans.
So they include not only retirement savings, but debt repayments, college savings,
emergency fund savings, anything that was not spent.
Making paying off your debt (i.e. money you've already spent) count towards your
savings is a practice fraught with questionable consequences. But useful for economists,
and accountants alike, no doubt. The problem with it is that it hides reality behind a veil.
Because debt repayments are not really savings at all; people are not free to spend what they put
into paying off debt, on something else, like iPads, cars or trinkets. Not even on hookers or
crack cocaine, for that matter.
For the vast majority of what is paid off in debt, there's no such thing as free
choices. People pay off debt because they must. Or, to look at it from another, wide lens, angle,
Americans would have to stop servicing their debt payments if they want to 'start spending'
again.
Going through the numbers from various sources, I can see that the US personal savings rate is
presently some 5.8% of pre-tax income, and debt repayment is close to 10% of disposable -after
tax – income. I'm still trying to make those stats rhyme. But no matter how you read and
interpret them, it should be clear that debt repayments are a large part of 'official' savings.
Even if they really shouldn't be counted as such.
Of what remains in real savings, retirement/pension savings must necessarily be a substantial
percentage, and it would be weird to call those things 'saving like there is a tomorrow', if only
because they are about, well, tomorrow. But that seems to be the new normal: creating the
impression that saving any money at all is somehow detrimental to the economy. A truly
crazy notion, if you ask me. Let's get back to Bloomberg's Coy:
There are only two things you can do with a dollar, after all: spend it or save it. If
you spend it, great-that's money in someone else's pocket.
In someone else's pocket, but no longer in yours. Why would that be so great? It's only great
if that someone has added value to something by doing productive work, not if you simply swap
paper assets.
If you save it, the financial system is supposed to recycle your dollar into productive
investment with loans for new houses, factories, software, and research and development.
That notion of 'the financial system is supposed to' refers to theories such as those that
Bernanke and his ilk 'believe' in. Theories that have no practical value. What is normal
for many everyday Americans is crippling debt levels, and no such thing is recognized in these
theories. After all, according to them, whatever amount of dollars you get in, you
either spend or save them. And if you use them to pay off previously incurred debt, you're
supposedly actually saving, even though you no longer have possession of the money in any way,
shape or sense, nor a choice of what to spend it on.
But if no one's in the mood to invest more and interest rates are already as low as they
can go (as they are in much of the world), the compulsion to save can sap demand and throw
people out of work. For the U.S. economy, the good news is that the jump in the personal
savings rate is probably no more than a blip. Three economists from Deutsche Bank Securities
in New York explained why in a March 25 report called 'U.S. Consumers: Still Shopping, Not
Dropping'. While noting a "deceleration" in consumer spending, they wrote, "we think that
concerns about the outlook for the consumer are overstated." Their model of the U.S. economy
predicts the savings rate will fall to 3% to 3.5% by 2017.
Oh sweet lord. Now a falling savings rate has become a beneficial thing, even when and
where savings are very low. Not saving will allegedly save the economy. How did that
happen? If we may presume that debt repayments will continue virtually unabated, and there seems
to be little reason to think otherwise, this means that by 2017 there will be just about nothing
saved at all anymore in America. Which means there'd be very little left of the 'If you save it,
the financial system is supposed to recycle your dollar into productive investment'.
The only 'growth' perspective America has left is to grow its debt levels continually,
continuously and arguably exponentially.
Other economists have also concluded that the spending dropoff is temporary, which is
why the slowdown in job growth, to just 126,000 in March, didn't set off many alarm bells.
"Consumer spending is starting to look more and more like a coiled spring," says Guy Berger,
U.S. economist at RBS Securities. One sign that consumers aren't retrenching: On April 7 the
Federal Reserve reported that consumer credit rose $15.5 billion in February, in line with the
recent past.
They got deeper into debt, and this is a sign they're not 'retrenching'? A
coiled spring? Really?
According to Deutsche Bank Securities, the first reason to think consumers will resume
spending is that their incomes are rising. Annual growth in average hourly earnings has
averaged about 2% since 2010, which isn't great but does exceed inflation. With more people
working as well, aggregate payroll outlays are up 4.9% from the past year, according to Bureau
of Labor Statistics data.
The rises in stock and home prices should make consumers more willing to live a little,
say the Deutsche Bank authors. They calculate that households' net worth is almost 6.5 times
consumers' disposable personal income. That's the highest ratio since before the housing
crash.
But that last bit is arguably all due to QE induced asset bubbles. Not an
argument the author would make, I know, but nevertheless. Coincidentally, another Bloomberg
article published the same day as the one we're delving in here is called:Why
Your Wages Could Be Depressed for a Lot Longer Than You Think. Perhaps the respective
authors should have a sit down.
No question, the high savings rate depresses spending in the short run. Purchases of
durable goods, from cars to couches, remain well below their 60-year average share of GDP. But
all that saving helps consumers get their finances in order, which will allow them to satisfy
pent-up demand for that sweet new Ford F-150.
No no no: they just paid off part of their debts. How can that possibly mean
they'll go out and get a new F-150? In real life, they spent their money instead of saving it.
Either way, they don't have it any longer to spend on a F-150. It would mean they need to get
into new debt. On top of what they still have left over even AFTER paying down part of it.
Fed data show that financial obligations including debt service, rent, and auto leases
are about their lowest in comparison to disposable income since 1981.
Hmm. According to Wikipedia, "Household debt as a % of disposable income rose
from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011." It's about 105%
today. So that's just a very weird statement. Someone's wrong, very wrong, and I think I know who
that would be. Maybe Peter Coy conveniently ignores mortgage payments when he talks about
"financial obligations including debt service, rent, and auto leases"?!
When consumers are ready to borrow more, it won't hurt that, according to the Fed's
survey of banks' senior loan officers, banks are easing lending standards.
See? That's what I said: they can only spend if they acquire new debt.
They're just getting rid of the last batch, and it's going mighty slowly at that. Lest we forget,
when debt as a percentage of income falls, that is due to quite an extent to people failing to
make any debt payments at all, and losing their homes and cars. This is a dead economic model.
This model is pining for the fjords.
These factors add up to an optimistic consumer.
Oh, c'mon. What is that statement based on? That 'sky high' savings rate that is
really just poor slobs paying off what they can in debt repayments so they won't get hit with
even more fees and fines?
What I think these factors add up to, is a delusional reporter. There is no
excess saving. It's ludicrous. As far as people have any money at all, they're using it to pay
down their previously incurred debts. And that gets tallied into their savings rate by the
government's creative accounting methods. That's all there is to the whole story. But it will,
regardless, induce a few more poor souls to sign up for more mortgages and car loans and feel
like happy American consumers on their way down into the maelstrom.
It's sad, it really is. Maybe we should first of all stop referring to the American
people as 'consumers'. That might help.
Speaking of things that never seem to change, tomorrow we will see the Non-Farm Payrolls report
for March. It would not be unusual to see it accompanied by the usual shenanigans, that are
often a favored choice for the insiders and plutocrats.
A
favorite trick of perception management is to put out a good number, and revise it lower, even sharply
so, in the next couple of months, thereby rolling over the material obtained to the more current
month, whether it be jobs, or factory orders, or whatever is on display. We saw an example
of this today with the Factory Orders.
They do it so regularly that is only remarkable that the mainstream commentators seem to fall
for it every time. Thereby we obtain a rolling enthusiasm of improvement, while in the
midst of a secular stagnation.
Far from being tools to increase knowledge and understanding, mathematical models are tools
of obfuscation.
The brouhaha about the spreadsheet error in Carmen Reinhart and Kenneth Rogoff's 2010 paper "Growth
in a time of debt" brings home an important economic truth. Not that Reinhart and Rogoff were in
error; their overall conclusion is clearly true, not to say obvious, and correction of the error
in their spreadsheet merely softened the conclusion without invalidating it. However the economic
truth is that the invention of computer modeling has for the last 40 years allowed charlatans to
peddle spurious models in the service of their political agendas, and policymakers and the general
public are all too ready to be fooled by these devices.
The attempt to model mathematically complex scientific and sociological interactions is popularly
thought to have begun with the computer model of nuclear interaction used in the 1942-45 Manhattan
Project, but the techniques and thought processes involved go back well beyond this. Perhaps the
most significant pre-computer use of model theorizing came from Rev Thomas Malthus, who postulated
that the increase over time in food supply was arithmetical, that in population geometrical, and
therefore population would always outrun the food supply.
The fate of Malthus' theory illustrates both the value and the downside of mathematical modeling.
On the one hand, a neat mathematical demonstration can make a theory infinitely plausible to voters
and policymakers. (Malthus later became a key advisor to the great Lord Liverpool, helping in the
design of the Corn Laws.) On the other hand, outside factors, not contained in the model, can make
its conclusions false - in Malthus' case, his otherwise plausible conclusion (which may well turn
out prescient in the very long run, if global population is not controlled) was at least for 200
years falsified by the Industrial Revolution, which hugely increased the productivity of agricultural
labor and, through crop improvements, agricultural land.
The first misguided economic forecast to use a computer was the Club of Rome's effort in 1971.
("The Limits to Growth" was published in 1972, but the model was showcased in the autumn of 1971,
when I attended a presentation thereof.) The presentation described an econometric model of the world
economy, including such factors as environmental problems and the possibility of starvation through
overpopulation, which was then projected iteratively 40 years forward, to about today.
The Club of Rome made one huge error compared with their climate change successors; they made
apocalypse inevitable. Every simulation, including those that were run with completely unrealistic
assumptions like an immediate 80% decrease in pollution or resource usage, ended with the collapse
of the global economy and eco-system within 40 years. There was thus no expensive program of redemption
that we could undertake; whatever we did, however ecological we became, we were doomed anyway. Unsurprisingly,
the Club of Rome had little effect on practical politics, even in the 1970s.
Its model was in any case erroneous. When I saw it at the presentation, I realized that the modelers
had made the same mistake I had struggled with in Cambridge's first, embryonic computer modeling
course six months earlier: they had extrapolated a set of equations containing exponential terms
forward through 40 iterations, without taking care of the rounding errors in the simulation (in those
days models were limited to six or seven significant figures, owing to constraints on computer capacity).
Pushed 40 times through a simulation containing exponentials, the error terms exploded in size,
forcing the graph catastrophically off the page, in one direction or another. (I tried to explain
this in the presentation's question period, but without success - bringing the light of truth to
a distinguished professor's model and his prejudices simultaneously was beyond me.)
Thus the Club of Rome's multiple, inevitable disasters were purely the result of computer errors.
Had they fixed the errors, they might have produced a more plausible (though doubtless still erroneous)
result in which simulations where pollution decreased by 80% or population growth stopped failed
to produce economic collapse, while only those with "naughty" policies resulted in disaster. For
the Club of Rome's backers, that would have been a much more useful outcome, giving them license
to nag policymakers for the next decade about the evils of the unconstrained free market.
"Value at risk" had the advantage over the Club of Rome's model that it wasn't faulty in its execution,
as far as I know. However its underlying premise was flawed, that financial instruments obey strictly
the laws of Gaussian random motion, in particular that their returns have the extremely thin "tails"
typical of Gaussian distributions.
When Goldman Sachs chief financial officer David Viniar wailed in August 2007 that he was seeing
"25-standard deviation events, day after day" it should have caused everyone using value-at-risk
models to bin them, because under Gaussian theory 25-standard deviation days are effectively impossible,
being 1 million to 1 against in the entire life of the universe. However, extraordinarily, it was
later revealed that JP Morgan was still using value at risk at the time of the London Whale trading
fiasco four years later.
Value at risk's prevalence reflects another problem with computer models: their results reflect
the prejudices and economic interests of the modelers. In the case of value at risk, traders and
mid-level managers want the apparent risk of positions to be minimized to top management and especially
to regulators in order that they can take the largest positions possible and thereby maximize their
profits and bonuses.
Furthermore, they like a system that undervalues the risk of "exotic" products such as credit
default swaps and collateralized debt obligations, as well as highly engineered options positions,
because those products are generally more profitable than "vanilla" products such as bonds, futures
and interest rate and currency swaps. When banks are "too big to fail", top management's risk/reward
profile is aligned with those of their traders, since failure means only a taxpayer bailout. Needless
to say, with flawed models such as value at risk available, that situation has an exceptionally unfavorable
risk profile for taxpayers.
Global warming models suffered from the problems of both the Club of Growth model and value at
risk: they were attempting to describe a poorly understood system with forward extrapolation over
a long period, and they were being designed by scientists with both a philosophical and an economic
interest in the outcome (since additional global warming fears brought them increased resources).
Professor Michael Mann's notorious "hockey stick curve", for example, was designed to demonstrate
that global warming in the 20th century was more extreme than in the entire previous millennium;
it suffered both from faulty data and from a skewed algorithm designed to produce a hockey stick
curve out of almost anything.
In all three of the above cases, the most surprising factor was the ability of a discredited model
to remain salient in the argument as a whole. As a former mathematician, I would naively imagine
that faulty mathematics would immediately get my work discredited, and that a model whose underlying
assumptions or methodology had been demonstrated to be wrong would be effectively useless.
In practice this appears not to be the case; constructing a faulty mathematical model of something
is a useful activity, since even after its faults have been discovered and demonstrated it remains
salient in the argument. The reality of course is that few of us are comfortable discussing the arcana
of mathematical models, and so continue to be convinced by them even after they have been proved
to be erroneous.
In the world of mathematical models, Reinhart and Rogoff were thus mere innocents. Their mistake
was both accidental and elementary, and was easily discovered by another researcher with an axe to
grind. Then, because their error was so easy to understand, it discredited their model more thoroughly
than much more egregious errors discredited the Club of Rome, value at risk and hockey stick models.
After all, even after the Reinhart/Rogoff error was corrected, the model continued to show their
conclusion to be generally valid, which was not true in the other cases.
The conclusion to be drawn is thus a depressing one. The output from mathematical models depends
crucially on the assumptions used to construct them, so even when no error is involved those assumptions
color the models' results to reflect the policy preferences or economic interests of their designers.
To take a simple example, gross domestic product (GDP), as designed by Simon Kuznets in 1934,
includes government spending at full cost, even when it produces no economically useful output. Thus
Maynard Keynes' economic recommendation to cure a recession, of using the unemployed to dig holes
and fill them in, is a self-fulfilling prophecy. It will automatically increase GDP because of the
definition of GDP, since the useless government spending will be counted as output.
Yet, except for any health benefits for the unemployed forced to spend all day digging holes,
no increase in welfare has resulted; indeed welfare has decreased because the government has incurred
more debt, the unemployed presumably have other things they'd rather do than dig holes, and some
of them might have found self-employment that produced genuine economic output.
In short, mathematical models, far from being tools to increase knowledge and understanding, are
tools of obfuscation. They take propositions that would be rejected by intelligent observers based
on qualitative reasoning, and add a dense fog of error, producing spurious results that even an intelligent
observer cannot easily deconstruct.
Keynesian economics, expensive environmental boondoggles and economically destructive trading
activities all rely on mathematical models for their justification. Until we have invented software
that can deconstruct other people's models and find their flaws, we should thus disbelieve any proposition
that is bolstered by such spurious artifacts.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be
found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists
of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle
edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com. Co)
Charles Seife is steaming mad about all the ways that numbers are being twisted to erode our democracy.
We're used to being lied to with words ("I am not a crook"; "I did not have sexual relations with
that woman"). But numbers? They're supposed to be cold, hard and objective. Numbers don't lie, and
they brook no argument. They're the best kind of facts we have.
And that's precisely why they can be so powerfully, persuasively misleading, as Seife argues in
his passionate new book, "Proofiness." Seife, a veteran science writer who teaches journalism at
New York University, examines the many ways that people fudge with numbers, sometimes just to
sell more moisturizer but also to ruin our economy, rig our elections, convict the innocent and undercount
the needy. Many of his stories would be darkly funny if they weren't so infuriating.
Although Seife never says so explicitly, the book's title alludes to "truthiness" - the Word of
the Year in 2005, according to the American Dialect Society, which defined it as
"the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts
known to be true." The term was popularized by
Stephen Colbert in the first episode of "The Colbert Report." The
numerical cousin of truthiness is proofiness:"the art
of using bogus mathematical arguments to prove something that you know in your heart is true - even
when it's not."
Seife emphasizes that numbers impress us. They carry authority. Joe McCarthy, for example, didn't
simply allege that the government was infested with Communists; he held up a sheaf of papers and
claimed it contained the names of 205 members of the Communist Party working in the State Department.
The specificity of the accusation made it seem more believable. So what if the number soon went up
to 207, then shrank to 57 a day later when McCarthy wrote to President Truman? What mattered is that
the numbers intimidated McCarthy's critics. As it turned out, he never
had any list and couldn't identify a single Communist working in the State Department.None of that stopped him from rising to national prominence on the back
of his numerical lies.
Falsifying numbers is the crudest form of proofiness. Seife lays out a rogues' gallery of more
subtle deceptions. "Potemkin numbers" are phony statistics based on erroneous or nonexistent calculations.
Justice
Antonin Scalia's assertion that only 0.027 percent of convicted felons are wrongly imprisoned
was a Potemkin number derived from a prosecutor's back-of-the-envelope estimate; more careful studies
suggest the rate might be between 3 and 5 percent.
"Disestimation" involves ascribing too much meaning to a measurement, relative to the uncertainties
and errors inherent in it. In the most provocative and detailed part of the book, Seife analyzes
the recounting process in the astonishingly close 2008 Minnesota Senate race between
Norm Coleman and
Al Franken. The winner, he claims, should have been decided by a coin flip; anything else is
disestimation, considering that the observed errors in counting the votes were always much larger
than the number of votes (roughly 200 to 300) separating the two candidates.
"Comparing apples and oranges" is another perennial favorite. The conservative Blue Dog Democrats
indulged in it when they accused the Bush administration of borrowing more money from foreign governments
in four years than had all the previous administrations in our nation's history, combined. True enough,
but only if one conveniently forgets to correct for inflation.
Seife is evenhanded about exposing the proofiness on both sides of the political aisle, though
we all know who's responsible for a vast majority of it: the other side.
He calls
Al Gore to task for "cherry-picking" data about
global warming. Although Seife doesn't dispute that the warming is real and that human activities
are to blame for a sizable portion of it, he chastises Gore for showing terrifying simulations of
what would happen to Florida and Louisiana if sea levels were to rise by 20 feet, as could occur
if the ice sheets in Greenland or West Antarctica were to melt almost completely. That possibility,
while not out of the question, is generally considered an unlikely "very-worst-case" scenario, Seife
writes.
Meanwhile, the Bush administration committed a more insidious form
of proofiness when it crowed, in 2004, that its tax cuts would save the average family $1,586. This
is technically correct, but deliberately misleading - a trick that Seife calls "apple polishing."
(Again with the fruit!) The average is the wrong measure to use when a set of numbers contains extreme
outliers - in this case, the whopping refunds received by a very few, very wealthy families. In such
situations, the average is far from typical. That's why, paradoxical
as it might seem, most families received less than $650.
In one of the book's lighter moments, Seife even looks askance at the wholesome folks at Quaker
Oats, who in addition to selling a "bland and relatively unappetizing product" once presented a graph
that gave the visual impression that their "barely digestible oat fiber" was a "medicinal vacuum
cleaner" that would reduce your cholesterol far more than it actually does. For the most part, though,
he is deadly serious. A few other recent books have explored how easily we can be deceived - or deceive
ourselves - with numbers. But "Proofiness" reveals the truly corrosive effects on a society awash
in numerical mendacity. This is more than a math book; it's an eye-opening civics lesson.
Steven Strogatz is a professor of applied mathematics at Cornell and a contributor to the Opinionator
blog on NYTimes.com. He is the author, most recently, of "The Calculus of Friendship."
On January 14, 2010, an academic economist took a rare stance. Tenured professors rarely lift
the veil from numbers that governments invent. In "Don't
Like the Numbers? Change 'Em," Michael J. Boskin, Ph.D., formerly, an economics professor
at Harvard and Yale; formerly, chairman of the Counsel of Economic Advisers in the George H.W. Bush
administration; currently, T. M. Friedman Professor of Economics at Stanford University; research
associate at the National Bureau of Economic Research; senior fellow at the Hoover Institution; and
board member of the Exxon Mobil Corporation, Oracle Corporation and Vodafone PLC (among others),
wielded his sword.
The Wall Street Journal devoted a half page to Boskin's list of offenders. Politicians
are interfering with the Gross Domestic Product calculations in France and Venezuela. They have toyed
with the inflation rate in Argentina. In the U.S., the Obama administration has taken the phony numbers
game "to a new level." Here, Boskin is writing of the current adminstration's calculations of jobs
"created or saved" from its stimulus bill.
The "created or saved" job calculation is nonsense, but the very last person one would
expect to decry the miscarriages is Michael J. Boskin.
In the early 1990s, Senator Patrick Moynihan from New York warned his fellow legislators about
rising social security commitments. Then the worm crawled out of his hole, so to speak. Federal Reserve
Chairman Alan Greenspan testified before the Senate and House Budget Committee on January 10, 1995.
He told the Committee the inflation rate was probably overestimated by 0.5% to 1.5%.
If Greenspan was correct, this was a godsend. Social security payments are increased each year
at an inflation rate calculated by the federal government: the change in the Consumer Price Index
(CPI). If the CPI could be increased at a lower rate in the future, benefits would rise more slowly,
without Congressional action. This would reduce government spending and delight politicians, who
knew of the looming crisis in social security but did not want to imperil their careers by reducing
benefits, or, in this case, by cutting the rate at which social security benefits were raised each
year.
The Boskin Commission
was duly formed. Michael Boskin was the right man for the job. He had served as chairman of the President's
Council of Economic Advisers (CEA) from 1989 to 1993, a post previously held by such government functionaries
as Arthur Burns and Alan Greenspan.
Jumping to the conclusion, the
Boskin Commission's
Report, as it was known (formally, the "Advisory Commission to Study the Consumer Price Index")
found that inflation was overstated by 1.1%. Several recommendations were made by the Commission
to the Budget Committee. These were instituted with great efficiency by the Bureau of Labor Statistics.
The changes have lopped off far more than 1.1% in most years since 1997. From
the time the changes were instituted through 2008, the compounding of an artificially low Consumer
Price Index reduced payments to social security recipients by about half (according to John Williams,
author of the newsletter Shadow Government Statistics).
How the CPI calculation was changed is not important here. (Chapter 12 of my
book Panderer to Power is devoted to the Boskin Commission.) One adjustment may help to understand
Boskin's contribution to the impoverishment of older Americans. "Hedonic adjustments" by government
number crunchers substitute imaginary prices for prices actually paid. Hedonic adjustments (purportedly,
the "quality improvement" of an item) reduce the CPI. (Hedonic adjustments had been employed before
the Boskin Commission, but sparingly. Afterwards, even the prices of textbooks – if they had color
graphics – were adjusted for quality.)
Steve Leuthold, founder and chief investment officer of the Leuthold Group, calculated the price
of a new car in the U.S. had risen from $6,847 in 1979 to $27,940 in 2004. Using
hedonic adjustments, the government calculated the price of a new car had risen from
$6,847 in 1979 to $11,708 in 2004.
The Boskin Commission was one scandal that economists actually denounced. Greg Mankiw, chairman
of George W. Bush's Council of Economic Advisers from 2001-2003, said at the time "the debate about
the CPI was really a political debate about how, and by how much, to cut real entitlements."
Barry Bosworth of the Brookings Institute called the revised CPI an "'immaculate
conception' version of deficit reduction in which spending is cut without Congress taking
the blame."
Jack Triplett of the Brookings Institute extended the argument: "What I liked least about
the Commission Report was exactly what made it so influential – its guesstimate of 1.1 percentage
points of bias….The Commission (and others that have followed) used ad hoc reasoning to come up with
a number…."
Jacob Ryten, from the Canadian statistical office, wrote in the same vein: "Without the guesstimates,
the Commission Report was just another dry, academic study to be perused by professionals… Conversations
with Committee members suggest that some, at least, were ill at ease themselves with guesstimates….
My personal preference is to resist the seductive blandishments of politics and politicians…."
Jack Triplett chided the Report as succumbing "to the lure of political statements in its
choice of language to describe the effect of CPI measurement errors on Social Security expenditures….
Professionals at any rate, should understand that improving the accuracy of the CPI is not the same
thing as improving the basis for allocation to the dependent population…."
Professionals, at any rate, have seen fit to keep Michael Boskin at the summit after he succumbed
to "seductive blandishments of politics and politicians." It cannot be said that Boskin
dishonored his profession, since he is still a superstar. Other professions institute bodies such
as the American Bar Association and the American Medical Association that take action against negligence.
Federal Reserve Chairman Ben S. Bernanke, another pliant alumnus of the CEA, sits before the Senate
claiming there is no inflation in the economy. He uses the CPI as his measure, taking the additional
step of removing food and energy costs.
Near the end of his Wall Street Journal effort, Boskin wrote of the Obama job numbers:
"One piece of good news: The public isn't believing much of this out-of-control spin." He's probably
correct, but spinning the number of jobs "created or saved" has no consequence, other than to increase
the public's distrust of government. The distortion of the CPI should have been censured by his profession,
if it is that.
Only 25% of personal consumption is discretionary spending. It is important to understand that personal
consumption reflects bloated health care expenses. The other interesting question and what is wealth
composition of the consumers (for example what percentage of the total is consumed by top 10% of wealthiest
Americans).
Invictus is a street insider, a long-suffering "lifer" whose close work with
Wall Street research teams gives him unique insight into the current strategist spat.
Enjoy:
~~~
It was noted
back in
October that a feud seemed to be simmering between the former Merrill Lynch Chief North American
Economist David Rosenberg (now at Gluskin Sheff) and those who succeeded him, Economist Ethan Harris
and Strategist David Bianco (who replaced Rich Bernstein).
Often nuanced in nature and discernible only to those who read the research from both shops, the
differences occasionally bubble to the surface, as they have in the past few days. The nub
of it, obviously, is that Rosenberg's outlook is decidedly dour, in sharp contrast to his successor(s),
who are much more bullish.
So nuke another bag of popcorn, as the gloves appear to be coming off.
In a research note last week, Bianco asserted that it is an "investor misperception" that the
consumer (PCE) is really 70% of U.S. GDP:
Personal Consumption Expenditures (PCE) do indeed make up about 70% of US GDP, making total
US PCE or household spending about 15% of the global economy and bigger than the entire Chinese
economy (Chart 2). How then can the US economy and the rest of the world grow with the US consumer
in retrenchment? To answer that, we take a closer look at the composition of PCE.
Only 25% of personal consumption is discretionary spending
What many investors fail to realize is that the majority of PCE is not made up of iPods,
handbags and dinners at the local Outback Steakhouse. Instead, about 75% of household spending
is non-discretionary in nature, such as housing, healthcare, energy, food eaten at home and other
household staples. We think it is worth noting that most of these non-discretionary items are
made in the US.
While there is certainly room to reduce non-discretionary spending, the areas of consumer
spending feeling the brunt of higher household saving rates are cars, travel, apparel, restaurants
and other discretionary items that make up about 25% of PCE, equivalent to 20% of US GDP (Chart
3) or less as many of these nondiscretionary items are imported. 20%
of US GDP is still significant, but far less than the 70% figure that makes the headlines.
Another figure sure to make the headlines this time of year is retail sales. The contribution
to US GDP from retail sales has actually been declining for over ten years.
Excluding supermarkets, retail sales are under 40% of total consumption,
or about 25% of GDP.
Bianco's piece was referenced in last Saturday's
Barron's.
On Monday, Rosenberg was having none of it:
The "Streetwise" column in the current edition of Barron's (It's Still Too Early to Worry
Too Much) runs with a series of assertions otherwise dubbed "common misperceptions" - one of them
being that the U.S. consumer is really not 70%+ of the economy because "only a quarter of it is
truly discretionary."
We'll get back to this in a second, but the fact of the matter is that much of what appears
to be non-cyclical is in fact, cyclical (like elective surgery in health care; veal chops in the
food category, etc). Second, even if this assertion is correct that 'only' 25% of consumer spending
is economic-sensitive, it begs the question as to why that is important in anyone's analysis.
Is 25% small? If it is, then what is going to be the driver for the economy going forward; government
spending? If 25% is small, then how is it that on average consumer spending manages to generate
300 basis points of growth for the economy coming out of recessions - because they are buying
more soap and toothpaste with the other 75%? Maybe that 25% (and that number is not correct but
it doesn't matter in any event) is a huge swing factor in recessions and expansions for overall
GDP growth. Once again, this is a classic failure to assess the economic shifts at the margin.
Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence
17.5% of GDP), that would still make it the largest cyclical component of the economy - almost
double capital spending and exports, just as an example, and almost eight times larger than housing
and commercial construction.
Stay tuned. I expect this one's not over by a longshot.
Byno:
This debate is long on bluster and short on rigor.
25% of whom? Is that an average ala Bill Gates and the bar full of firemen? [BR: All US Consumers]
75% of American families make less than 75k/yr according to the census bureau. Furthermore,
the BLS tells me that the average American family spends 17k/yr just for housing. In fact, food,
transportation, housing and healthcare account for 75% of the average family's annual expenditures.
What about insurance and hair cuts and clothing and student loans and cable and 401ks and cell
phones etc ad nauseum?
It's not enough that this duel is vapid; it's also lazy research on the authors' parts.
Rob Dawg:
It is over. Rosenberg wins by knockout. At that he is being kind to accept 25% of PCE as being
discretionary at face value. As the mortgage lenders and municipalities have learned most painfully
the modern consumer seems to treat even debt repayment and taxes as being discretionary. Even
healthcare. Our plan changes in January are causing my family to switch from top tier to second
tier. Technically between contributions employer+employee we will be paying less thus showing
there is elasticity to be found in the 75% Bianco considers a fixed cost. Don't even get me started
on cars, washers, other consumer durables.
Mannwich:
@Rob Dawg: My wife and I did the SAME thing with our health plan – we traded down. We're also
holding off on several big purchases like a car, refrigerator, oven, and dishwasher (the latter
three being very old too, but still functional) for the foreseeable future.
The only thing we did do was replace all of our second floor windows using the $1,500 Energy Star
tax credit. Thank you very much, Timmay-bucks.
bsneath:
I'm leaning towards the Rob Dawg conclusion.
I too have reduced a number of "fixed costs" myself, mainly in the insurance, finance, telecom
and household services sectors and plan more. It turns out that many fixed costs really are not
that fixed.
An interesting read on the real economy is railroad car loadings – chart over at CR. Both total
loadings and inter-modal loadings are about 85% of 2007 levels. This indicates to me that the
real economy, even with the artificial stimulus measures, is about 85% of what it once was. And
once the artificial stuff goes away?????
Transor Z:
First of all, retail ex groceries is moronic.
A lot of what Bianco wants to characterize as non-discretionary are
household expenses that are scaled to income. True, consumption of things like oxygen, water,
food calories, shelter and heat are non-negotiable below a certain threshold. But that's stupid
disingenuous analysis.
As Rosie shorthands it, food scales between Kraft Easy Mac and veal cutlets. Housing choices scale
between steam heat-included/ absentee-slumlord/firetrap family of four crammed into 1 BR and less
than 1000 sq feet to nicer digs. Energy costs are closely associated with housing choice.
As Manny notes, health care choices are scalable and indeed most large employers offer different
choices, scaling from VPI Pet Insurance to blue chip PPO.
Household sundries, same thing: generic vs name-brand. Clothing? Same.
I am so sick and tired of these motherfucking snakes on this motherfucking plane bad-faith analyses
that never start with a model household budget.
Bokolis:
I grew up across the street from the PJs, so I know that location and square footage are discretionary,
I know the type of shit you buy at the supermarket- to say nothing of whether you choose to clip
coupons and pack one of those club cards- is discretionary, and what type of coverage you get,
unless mandated, is surely discretionary…to say nothing of whether you rock Canali or Karako suits;
True Religion or Levi jeans.
Bianco must have had someone sit in for him in Sociology 101…you know, where they took all those
things you thought were natural and showed that they are choices you make based on your indoctrination
(I don't know what was said after that because I was in the quad playing soccer for most of the
rest of the semester). For that matter, it looks like Bianco was doing the same during his Economics
classes. Granted, the way they teach it renders it junk science. But, as Carlito explained, if
you can't see the angles no more, you're in trouble.
That said, I've always thought that the average wage slave (not unlike myself…I wasn't just ditching
Soc; I was at the track during Poli Sci) is hemmed into about 90% (hence, the slavery) of his
expenditures. In my own defense, I save 30% of my take-home (excludes the non-Roth portion of
my 401k); I'd overshoot on the other side. But, I am an expense manager, not your average wage
slave.
FrancoisT:
Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence
17.5% of GDP), that would still make it the largest cyclical component of the economy - almost
double capital spending and exports, just as an example, and almost eight times larger than housing
and commercial construction.
By factoring in the relative importance instead of the absolute number, we hereby declare this
round a win for Rosie.
J'ai dit!
Mannwich:
I would add the personal spending habits are sticky. People won't change their habits until
reality is FORCED upon them (generally), but it's quite surprising to find out just how much one
can "do without" or trade down when they really take a good look at one's expenses. Bye bye cable
TV, home phone (have a cell now, who needs a home phone), expensive wine and beer, eating out,
ballgames, those extras at the grocery store, that new winter coat (the ones in the closet look
just fine, thanks), new boots, hats, gloves, scarves, sneakers, yada, yada, yada, the list goes
on and on and one.
Following my rant about the
putzes at the NAR, a few people asked me to better explain the Seasonality Adjustment issues.
Here goes nuthin:
I certainly understand that we have to do seasonal adjustments. One cannot report that Retail
Sales fell 80% in January (for obvious reasons) but most of all, because to do so would be misleading.
The sources of data report information to inform the public, media repeats what is said, and we pass
along interpretations to make things clearer, to get at an objective truth.
The NAR does the opposite.
Let's look at the specifics of the adjustments this year and see where they went awry.
Whenever we have an outlier year - like Sept 2009 - then we know that seasonally adjusted results
will be utterly misleading. That is an issue when we seasonally adjust, as every statistician, economist
and number cruncher is well aware. An honest broker of information recognizes that, and reports
it the data in a way that is not misleading.
The NAR is no such honest broker (pun intended).
Most people are unfamiliar with what goes into the methodology of Seasonal adjustments, and how
they are performed. When people misunderstand statistical methods, it allows folks like the NAR to
make major misrepresentations, and get away with their misrepresentations. It is incumbent on the
people who are "numerate" - who understand mathematics - to explain it.
There is a mathematical assumption in SA that the annual seasonal changes will occur around the
same time each year. There is also a presumption that the month-to-month changes will be approximately
equal, or at least of similar magnitude, from season to season. This forms the baseline for the seasonal
adjustment.
Hence, when we are discussing EHS, the prior years' monthly August-to-September drops are the
basis for making the newest seasonality adjustment.
As
Rex pointed out, the past decade of August to September EHS changes were:
1999 -19%
2000 -17.7%
2001 -26%
2002 -17.1%
2003 -12.5%
2004 -15.5%
2005 -15.2%
2006 -19.2
2007 -28.9%
2008 -10%
This range was 10% to 28.9%. That averages to 17.2% in the typical September. This is the key
element in impacting any subsequent seasonal adjustment (different SA methodologies may use differing
time periods).
This year, the fall was 5.3%. Hmmm, that was highly aberrational - I wonder why? We (and
the NAR) know the reason: Due to ZIRP and the soon to be expiring 1st time home buyers $8,000 Tax
credit, the drop was minor – much smaller than it usually is when we go from August to September
in EHS.
The tax credit very likely extended the selling season by at least a month. It pulled some sales
forward, and perhaps created other sales where there might not have been.
But the seasonal adjustment does not know that; The math PRESUMES THE AUGUST/SEPTEMBER DECLINE
IS OF TYPICAL MAGNITUDE OF THE PRIOR 10 YEARS.
That creates a misleading - lets even say false - appearance when the seasonally adjustments
are performed.
Again, someone trying NOT to mislead will inform the reader of that directly. But calling it a
SURGE? Only if you are innumerate - or a liar. Any honest statistician who worked on these
numbers KNOWS that the seasonal adjustment was going to create a big bump, a misleading number, based
on the historical data.
And thats the whole point. The NAR knows that calling this a surge will mislead readers, but they
report the data - DOWN 5.3% - as a "SURGE." What else might their goal be BUT TO MISLEAD
THE PUBLIC?
I refuse to facilitate that. And I will call anyone an unprofessional liar, a distorter of the
data who claims this was surge. THIS MEANS YOU, NAR !
The folks who are unfamiliar with seasonal adjustments will get caught in the scam. This was not
an ordinary seasonal adjustment - it was highly misrepresentative.
I know better. And now, you know better. Unfortunately, most folks do not.
Mannwich:
Thank you, thank you, thank you, Barry. I can tell you in my immediate area that a lot of real
estate agents appear to be getting a tad desperate as homes languish longer on the market. The
ones that haven't sold by now won't have a chance at selling until spring unless they are significantly
marked down. The "surge" in home sales is over for the time being. And like auto sales, the next
few months are going to be an absolute bloodbath.
The NAR knows this, which is why they, and other real estate hacks are desperately pushing
for the credit to not only be extended, but to be expanded to $15K and to cover EVERYONE. My agent
even said this to me outright.
DeDude:
I think the honest spin free reporting would have stated the year-over-year increase with a
statement that "it is not clear how much of this increase was a result of the tax credit for new
home buyers". I also like the approach of averaging the last 3-5 data points when dealing with
something that has a lot of swings in it. Maybe a 3 month average of Y-o-Y changes would have
a better change of grasping at reality.
super_trooper:
Maybe I'm missing the point here, but why not just compare to the same month of the previous
year, or just calculate everything on a moving year, 12 month basis, compared to the previous
12 months. Also, there was a $7500 tax credit from april 1st 2008 until the 8k started, so you
have to take into consideration when you compare 07 to 08 and 09.
VennData:
"The production numbers are up, Comrades," says the N.S.S.R.'s General Secretary of the Party,
Yun.
Laguna Beach has seven hundred agents. There are currently about four hundred listings in the
MLS (historically high) which is not even one listing per agent…
…normally there are a hundred or so – with a six month inventory – means those 700 agents get
200 sales a year (at six percent of average asking price of 1.3M-ish …no one pays full commission
…you get the picture.) Furthermore the 80/20 rule means the star brokers get the lion's share
of that. In a city of about 10K units, with 20K comrades…
http://lagunabeach.areaconnect.com/statistics.htm
…there's a huge inventory of un-productive realtors there in the "realtor's paradise." I see a
re-allocation of resources ahead. Pot Farming anyone?
So, look for General Secretary of the Party Yun to begin incorporating "Co-operative Growing Statistics"
in future five-year plans.
One of our
favorite bugaboos is finally getting its due: The horrifically misleading Birth Death
adjustment.
It is finally being recognized in the mainstream as the massive data distorter that it is. The
latest BLS analysis and data revision shows that during 2008, the Birth Death adjustment caused NFP
payrolls to be significantly under reported.
NYT's Floyd Norris:
"It now appears that during the first half of 2008, when the recession was getting under way,
job losses averaged 146,000 per month. That is nearly three times the average of 49,000 jobs shown
in the initial estimates.
How did the government get it so wrong?
The official job numbers are based on a monthly survey of employers, augmented by something
called the "birth-death model," which factors in jobs assumed to have been created by employers
who are too new to have been included in the survey, and subtracts jobs from employers assumed
to have failed and therefore not responded to the latest survey." (emphasis added)
Triple the job losses than reported, and right at a crucial part of the economic cycle! Is it
any wonder policy response from central bankers and pols was so off? At the most crucial time, they
failed to see the oncoming headlights, because they were lost in a fog of data so massaged as to
have it completely and totally misrepresent reality.
About time this nionsense was recognized for the bullshit it is. We need to have BLS needs to
toss out the 2003 modification to the B/D. We should get back to actually counting, rather than imagining,
jobs.
As noted in Bailout Nation,
this fundamental reliance on garbage data led to one of the world's greatest economic catastrophes
of all time.
BR @ top "We should get back to actually counting, rather than imagining, jobs"
I'm just about sure the banks super-computerized infrastructure does (or could/should). That
would be very valuable right. But we don't share value, people pay for it. Government included.
Get your own info. So what does that realization bring. Maybe banks should be DISallowed to trade
in markets .. ie insider information paid for by all of us.
Numbers racket: Why the economy is worse than we know
Almost four decades have passed since the United States scrapped
its last currency ties to precious metals. Our copper and nickel coinage still retains some metallic
value, but not nearly enough for the purpose of currency tampering-the historic temptation of inflation-plagued
or otherwise wayward governments, including, at times, our own. Instead, since the 1960s, Washington
has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments
with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five
years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain
artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage
and financial debt even as real economic growth has been slower than claimed. If Washington's harping
on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the
use of deceptive statistics has played its own vital role in convincing many Americans that the U.S.
economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it
actually is.
The corruption has tainted the very measures that most shape public perception of the
economy-the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation;
the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy's overall growth; and the
monthly unemployment figure, which for the general public is perhaps the most vivid indicator of
economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks
in their decision-making but minor revisions in the data can mean major changes in household circumstances-inflation
measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living
increases for wages, pensions, and Social Security benefits. And, of course, our statistics have
political consequences too. An administration is helped when it can mouth banalities about price
levels being "anchored" as food and energy costs begin to soar.
The truth, though it would not exactly set Americans free, would at least open a window
to wider economic and political understanding. Readers should ask themselves how much angrier the
electorate might be if the media, over the past five years, had been citing 8 percent unemployment
(instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in
the 1 percent range (instead of the 3–4 percent range). We might ponder as well who profits from
a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and
affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive
cost-of-living increases for wages and pensions?
Let me stipulate: the deception arose gradually, at no stage stemming from any concerted
or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see,
the political blame for the slow, piecemeal distortion is bipartisan-both Democratic and Republican
administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like
financial sector. To see how, we must revisit forty years of economic and statistical dissembling.
A short history of "pollyanna creep"
This apt phrase originated with John Williams, a California-based economic analyst and
statistician who "shadows," as he puts it, the official Washington numbers. In a 2006 interview,
Williams noted that although few Americans ever see the fine print, the government "always footnotes
the changes and provides all the fine detail. Nonetheless, some of the changes are nothing short
of remarkable, and the pattern over time is what I call Pollyanna Creep." Williams is one of the
small group of economists and analysts who have paid any attention to the phenomenon. A few have
pointed out the understatement of the Consumer Price Index-the billionaire bond manager Bill Gross
has described it as an "haute con job," and Bloomberg columnist John Wasik has dismissed it as "a
testament to the art of spin." In 2003, a University of Chicago economist named Austan Goolsbee (now
a senior economic adviser to Barack Obama's presidential campaign) published an op-ed in the New
York Times pointing out how the government had minimized the depth of the 2001–2002 U.S. recession,
having "cooked the books" to misstate and minimize the unemployment numbers. Unfortunately, the critics
have tended to train their axes on a single abuse, missing the broad forest of statistical misinformation
that has grown up over the past four decades.
The story starts after the inauguration of John F. Kennedy in 1961, when high jobless
numbers marred the image of Camelot-on-the-Potomac and the new administration appointed a committee
to weigh changes. The result, implemented a few years later, was that out-of-work Americans who had
stopped looking for jobs-even if this was because none could be found-were labeled "discouraged workers"
and excluded from the ranks of the unemployed, where many, if not most, of them had been previously
classified. Lyndon Johnson, for his part, was widely rumored to have personally scrutinized and sometimes
tweaked Gross National Product numbers before their release; and by the 1969 fiscal year, Johnson
had orchestrated a "unified budget" that combined Social Security with the rest of the federal outlays.
This innovation allowed the surplus receipts in the former to mask the emerging deficit in the latter.
Richard Nixon, besides continuing the unified budget, developed his own taste for statistical
improvement. He proposed-albeit unsuccessfully-that the Labor Department, which prepared both seasonally
adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In
a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns, to develop
what became an ultimately famous division between "core" inflation and headline inflation. If the
Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would
simply exclude, because of "volatility," categories that happened to be troublesome: at that time,
food and energy. Core inflation could be spotlighted when the headline number was embarrassing, as
it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is
better called "inflation ex-inflation"-i.e., inflation after the inflation has been excluded.)
In 1983, under the Reagan Administration, inflation was further finagled when the Bureau
of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS
substituted an entirely different "Owner Equivalent Rent" measurement, based on what a homeowner
might get for renting his or her house. This methodology, controversial
at the time but still in place today, simply sidestepped what was happening in the real world of
homeowner costs. Because low inflation encourages low interest rates, which in turn
make it much easier to borrow money, the BLS's decision no doubt encouraged, during the late 1980s,
the large and often speculative expansion in private debt-much of which involved real estate, and
some of which went spectacularly bad between 1989 and 1992 in the savings-and-loan, real estate,
and junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee pointed out in his
New York Times op-ed, the Reagan Administration further trimmed the number by reclassifying members
of the military as "employed" instead of outside the labor force.
The distortional inclinations of the next president, George H.W. Bush, came into focus
in 1990, when Michael Boskin, the chairman of his Council of Economic Advisers,
proposed to reorient U.S. economic statistics principally to reduce the measured rate of inflation.
His stated grand ambition was to move the calculus away from old industrial-era methodologies toward
the emerging services economy and the expanding retail and financial sectors. Skeptics, however,
countered that the underlying goal, driven by worry over federal budget deficits,
was to reduce the inflation rate in order to reduce federal payments-from
interest on the national debt to cost-of-living outlays for government employees, retirees, and Social
Security recipients.
It was left to the Clinton Administration to implement these
convoluted CPI measurements, which were reiterated in 1996 through a commission headed by Boskin
and promoted by Federal Reserve Chairman Alan Greenspan. The Clintonites also extended
the Pollyanna Creep of the nation's employment figures. Although expunged from the ranks of the unemployed,
discouraged workers had nevertheless been counted in the larger workforce. But in 1994, the Bureau
of Labor Statistics redefined the workforce to include only that small percentage of the discouraged
who had been seeking work for less than a year. The longer-term discouraged-some 4 million U.S. adults-fell
out of the main monthly tally. Some now call them the "hidden unemployed." For its last four years,
the Clinton Administration also thinned the monthly household economic sampling by one sixth, from
60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities;
the reduced sample (and a new adjustment formula) is believed to have reduced black unemployment
estimates and eased worsening poverty figures.
Despite the present Bush Administration's overall penchant for manipulating data (e.g.,
Iraq, climate change), it has yet to match its predecessor in economic revisions. In 2002, the administration
did, however, for two months fail to publish the Mass Layoff Statistics report, because of its embarrassing
nature after the 2001 recession had supposedly ended; it introduced, that same year, an "experimental"
new CPI calculation (the C-CPI-U), which shaved another 0.3 percent off the official CPI; and since
2006 it has stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus
from bank credit activity. In 2005, Bush proposed, but Congress shunned, a new, narrower historical
wage basis for calculating future retiree Social Security benefits.
By late last year, the Gallup Poll reported that public faith in the federal government
had sunk below even post-Watergate levels. Whether statistical deceit played any direct role is unclear,
but it does seem that citizens have got the right general idea. After forty years of manipulation,
more than a few measurements of the U.S. economy have been distorted beyond recognition.
America's "opacity" crisis
Last year, the word "opacity," hitherto reserved for Scrabble games, became a mainstay
of the financial press. A credit market panic had been triggered by something called collateralized
debt obligations (CDOs), which in some cases were too complicated to be fathomed even by experts.
The packagers and marketers of CDOs were forced to acknowledge that their hypertechnical securities
were fraught with "opacity"-a convenient, ethically and legally judgment-free word for lack of honest
labeling. And far from being rare, opacity is commonplace in contemporary finance. Intricacy has
become a conduit for deception.
Exotic derivative instruments with alphabet-soup initials command notional values in
the hundreds of trillions of dollars, but nobody knows what they are really worth. Some days, half
of the trades on major stock exchanges come from so-called black boxes programmed with everything
from binomial trees to algorithms; most federal securities regulators couldn't explain them, much
less monitor them.
Transparency is the hallmark of democracy, but we now find ourselves with economic statistics
every bit as opaque-and as vulnerable to double- dealing-as a subprime CDO. Of the "big three" statistics,
let us start with unemployment. Most of the people tired of looking for work, as mentioned above,
are no longer counted in the workforce, though they do still show up in one of the auxiliary unemployment
numbers. The BLS has six different regular jobless measurements-U-1, U-2, U-3 (the one routinely
cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series produced unemployment numbers ranging
from 5.2 percent to 9.0 percent, all above the "official" number. The series nearest to real-world
conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time
employment as well as other members of the "marginally attached," a new catchall meaning those not
looking for a job but who say they want one. Yet this does not even include the Americans who (as
Austan Goolsbee puts it) have been "bought off the unemployment rolls" by government programs such
as Social Security disability, whose recipients are classified as outside the labor force.
Second is the Gross Domestic Product, which in itself represents something of a fudge:
federal economists used the Gross National Product until 1991, when rising U.S. international debt
costs made the narrower GDP assessment more palatable. The GDP has been subject to many further fiddles,
the most manipulatable of which are the adjustments made for the presumed starting up and ending
of businesses (the "birth/death of businesses" equation) and the amounts that the Bureau of Economic
Analysis "imputes" to nationwide personal income data (known as phantom income boosters, or imputations;
for example, the imputed income from living in one's own home, or the benefit one receives from a
free checking account, or the value of employer-paid health- and life-insurance premiums). During
2007, believe it or not, imputed income accounted for some 15 percent of GDP. John Williams, the
economic statistician, is briskly contemptuous of GDP numbers over the past quarter century. "Upward
growth biases built into GDP modeling since the early 1980s have rendered this important series nearly
worthless," he wrote in 2004. "[T]he recessions of 1990/1991 and 2001 were much longer and deeper
than currently reported [and] lesser downturns in 1986 and 1995 were missed completely."
Nothing, however, can match the tortured evolution of the third key number, the somewhat
misnamed Consumer Price Index. Government economists themselves admit that the revisions during the
Clinton years worked to reduce the current inflation figures by more than a percentage point, but
the overall distortion has been considerably more severe. Just the 1983 manipulation, which substituted
"owner equivalent rent" for home-ownership costs, served to understate or reduce inflation during
the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been
subjected to three other adjustments, all downward and all dubious: product substitution (if
flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to
move up to filet mignon), geometric weighting (goods and services in which costs are rising
most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely,
hedonic adjustment, an unusual computation by which additional quality is attributed to a
product or service.
The hedonic adjustment, in particular, is as hard to estimate as it is to take seriously.
(That it was launched during the tenure of the Oval Office's preeminent hedonist, William Jefferson
Clinton, only adds to the absurdity.) No small part of the condemnation must lie in the timing. If
quality improvements are to be counted, that count should have begun in the 1950s and 1960s, when
such products and services as air-conditioning, air travel, and automatic transmissions-and these
are just the A's!-improved consumer satisfaction to a comparable or greater degree than have more
recent innovations. That the change was made only in the late Nineties shrieks of politics and opportunism,
not integrity of measurement. Most of the time, hedonic adjustment is used to reduce the effective
cost of goods, which in turn reduces the stated rate of inflation. Reversing the theory, however,
the declining quality of goods or services should adjust effective prices and thereby add to inflation,
but that side of the equation generally goes missing. "All in all," Williams points out, "if you
were to peel back changes that were made in the CPI going back to the Carter years, you'd see that
the CPI would now be 3.5 percent to 4 percent higher"-meaning that, because of lost CPI increases,
Social Security checks would be 70 percent greater than they currently are.
Furthermore, when discussing price pressure, government officials invariably bring up
"core" inflation, which excludes precisely the two categories-food and energy-now verging on another
1970s-style price surge. This year we have already seen major U.S. food and grocery companies, among
them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices.
Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years
could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor
Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared
with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia,
from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years
of rapid growth in the supply of money from the world's central banks (not least the U.S. Federal
Reserve), as well as by massive public and private debt creation.
The U.S. economy ex-distortion
The real numbers, to most economically minded Americans, would be a face full of cold
water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere
between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic
growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes
of the superrich, and we are falling back into recession. If what we have been sold in recent years
has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion.
For what it would reveal is a nation in deep difficulty not just domestically but globally.
Undermeasurement of inflation, in particular, hangs over
our heads like a guillotine. To acknowledge it would send interest rates climbing,
and thereby would endanger the viability of the massive buildup of public and private debt (from
less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover,
the rising cost of pensions, benefits, borrowing, and interest payments-all indexed or related to
inflation-could join with the cost of financial bailouts to overwhelm the federal budget.
As inflation and interest rates have been kept artificially suppressed,
the United States has been indentured to its volatile financial sector, with its predilection for
leverage and risky buccaneering.
Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University
of Denver, pointed out last September, the subprime lending crisis "can be directly traced back to
the [1983] BLS decision to exclude the price of housing from the CPI. . . .
With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has
speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions
have been tricked into buying homes even though they only qualified for the teaser rates."
Were mainstream interest rates to jump into the 7 to 9 percent range-which could happen
if inflation were to spur new concern-both Washington and Wall Street would be walking in quicksand.
The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and
rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent
against the euro since 2002, could slip down an even rockier slope.
The credit markets are fearful, and the financial markets are nervous. If gloom continues,
our humbugged nation may truly regret losing sight of history, risk, and common sense.
While it has been widely advertised by chest-thumping bulls in the media that at least two-thirds
of the companies that have reported third-quarter earnings have beaten forecasts, there was less
than meets the eye to third-quarter profits as in many cases the "beats" were on lowered estimates.
What is often being ignored is how orchestrated
earnings season has become, not only that the beats are from lowered and depressed guidance but
that, in many cases, there have been high-profile forward-quarter guide downs.
The reality is that companies almost always beat consensus earnings forecasts, even during rough
economic periods.
Investor relations departments and Wall Street analysts are very good at getting numbers down
to the right level before reports are released. As a result, the actual results vis-a-vis expectations
or consensus do not vary materially from historical experiences, in good times and even in bad times.
Indeed, the concept of beating is one of the single-most overhyped
statistics extant given the
degree to which estimates move around prior to reports. Remember that even in the most recent
downturn, there were few companies pre-announcing negatively.
What should be more interesting to investors is the composition of the guidance (revenue vs. earnings,
higher vs. lower). Also, by category/sector and end market, is the company benefiting from restocking,
or is the company closer to consumption and end-market demand?
... ... ...
Our final analysis is taken from data recently delivered by Goldman Sachs' David Kostin. What
is most revealing is the manner in which he divides categories into (especially regarding end demand)
consumption vs. intermediaries.
As I have been writing, my conclusion is that if we back out semiconductors and the inventory
restocking side of the equation, the profit picture on the consumption side of the economy remains
less healthy than is generally recognized.
In support of this, it is Kostin's view that top-line results also suggest some preliminary cause
for concern:
Only 33% of companies beat consensus sales estimates by greater than one standard deviation
vs. 40% in the last 20 quarters.
The good news is that 10 out of 14 intermediary companies (distributors, etc.) beat sales
by more than one standard deviation, showing inventory restocks continuing (stronger than expected),
and
stocks went up 5%.
The bad news is that only six out of 33 end-demand companies (true picture on end demand)
beat sales estimates by more than one standard deviation.
Out of the seven companies that missed sales estimates by more than one standard deviation,
100% were end-demand companies.
There are several conclusions one could draw from today's column:
The third-quarter beats were overhyped as they are the outgrowth from lowered guidance.
If one divides the third-quarter earnings reports by end-market categories, differentiating
between the beneficiaries of restocking and those companies that are closer to the end markets
and consumption, it leads to two different pictures as to the
health of corporate earnings.
If end demand doesn't pick up (and pick up quickly), the 2010 earnings outlook for many industries
(such as semiconductors and other beneficiaries of restocking) will be in jeopardy, as will be
the now ambitious consensus for S&P 500 earnings of over $70 a share next year.
Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com.
For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary,
please click here.
Comments
The market is now all about hype and spin. It makes for good reporting on the business news programs,
including "Mad Money". Real companies and businesses must have long range plans to succeed, but are
forced to live up to three month projections by analyists and commentators.
Wall streeters believe they can manipulate the investors just like companies manipluate consumers.
They even believe that they are able to talk us out of the recession and now question are ability
to live a life without spending more than we make.
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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Canada makes it much more difficult to know its real unemployment rate. The official Canadian unemployment rate for February was 6.8 percent, a slight increase from January that Statistics Canada attributes to "more people search[ing] for work." The official measurement in Canada, as in the U.S., European Union and Australia, mirrors the official standard for measuring employment defined by the International Labour Organization -- those not working at all and who are "actively looking for work." (The ILO is an agency of the United Nations.)
For a limited time only, get unlimited access to On Point, The Big Picture, and the PS Archive, plus our annual magazine and a tote bag, for just $75.
no cost-of-living
adjustment to benefits had led some seniors to "distrust" government data, like the CPI-W?
Again, this hypothesis would be a lot better to test with a time series of data, comparing years
with benefit increases and without. But feeling shortchanged by the data may be understandable
