Higher global unemployment is the result of lower global labor share… thank you Michael Pettis
There is so much to reflect upon with Michael Pettis’ new post, Economic Consequences of Income Inequality. I have been in total agreement with the way he looks at income inequality. Yet, he said some things that surprised me… things I hadn’t realized.
He restates his view of how changes in labor share, which he calls household share, affects national savings. And then how changes in national savings can only be resolved with certain economic reactions. Some reactions are sustainable, some are not.
A brief summary is that a fall in labor share causes a rise in national savings, which can only be resolved by 1) increased investment, productive (S) or non-productive (NS), 2) rising inventories (NS), 3) a rise in credit-fueled consumption (NS), 4) a rise in unemployment (S). … Sustainable = (S), Not-sustainable = (NS)
There are only two sustainable outcomes. A rise in productive investment or a rise in unemployment. The problem with productive investment is that when effective demand is low, there is less incentive to invest in productive activity. Therefore, when labor share falls, and productive investment is not the outcome, eventually unemployment rises on a sustainable basis.
This is in agreement with the equation from my research into effective demand…
effective labor share rate > utilization rate of capital * utilization rate of labor
The labor share rate is the upper bound on the utilization of capital and labor. If labor share falls, we would eventually realize a sustainable fall in the utilization rates of capital and labor. The result is increased unemployment just as Mr. Pettis explains, and explains very well.
But here are two things that surprised me from his post…
- “If Spain leaves the euro, Spanish unemployment will decline sharply, but total unemployment will not, which means that German unemployment will rise.” … Thus, Germany has a selfish reason to fight for countries like Spain and Greece to stay within the Euro-zone.
- “The solution to excess savings, in other words, is not for low-saving countries (Spain for example) to cut back on consumption. This will only increase global unemployment. … What is very clear from this analysis is that there are really only three sustainable solutions to the global crisis in demand. Either the world has to embark on a surge in productive investment, or we need to reduce the income share of the state and of the rich, or we must accept that unemployment will stay high for many more years.”
Number 2 is what I have been writing about here on Angry Bear blog. What surprises me is how clear he has made the case. He has put it into simple terms. You either raise labor share or accept higher unemployment. Take it or leave it. Those are strong words, which give policy makers really no choice.
But think some more… Krugman and other economists are calling for loose accommodative monetary policy to push unemployment down. Yet, high unemployment in the US and other countries is the result of the imbalance in global savings. If we push down our unemployment without raising labor share, that only pushes up unemployment in other countries. We will experience a push-back on this from the other countries. Eventually someone has to be stuck with high unemployment, all due to the fall in global labor shares.
Mr. Pettis says…
“So what are the policy implications? Clearly Europe, the US, China, Japan, and the rest of the world must take steps to reduce income inequality.”
“But redistributing income downwards is easier said than done in a globalized world, especially one in which countries are competing to drive down wages. The first major economy to attempt to redistribute income will certainly see a surge in consumption, but this surge in consumption will not necessarily result in a commensurate surge in employment and growth. Much of this increased consumption will simply bleed abroad, and with it the increase in employment.”
So if a country takes the lead and raises its labor share in order to bring down unemployment, most likely they will just bring down unemployment in another country, not domestically. Wow! The global economy is in a trap. and the only way out looks to be global cooperation to raise labor share. We are doomed because we live in a world of people who think like Milton Friedman. Unions and minimum wages are bad. Maximization of profit to shareholders is the prime goal.
“Less global trade, in other words, will create both the domestic traction and the domestic incentives to redistribute income. In a globalized world, it is much safer to “beggar down” the global economy than to raise domestic demand, and so I expect that there will continue to be downward pressure on international trade.”
The ramifications of his words are staggering. He knows it and others deny it.
“This means that rising income inequality must eventually lead to more productive investment or to more unemployment. There is no other conclusion. Can this argument be attacked? Of course it can.”
He is absolutely right… and I defend his argument.
Western Europe has much less income inequality than the U.S.. Yet, Western Europe’s per capita real GDP is over $10,000 a year less than the U.S.. Moreover, Western Europe lags the U.S. badly in the Information and BIotech Revolutions.
“…rising income inequality must eventually lead to more productive investment or to more unemployment…”
Obviously, the U.S. had much more productive investment, along with much less unemployment, than Western Europe.
So, we should praise U.S. investment, and not follow the Western European economic model.
We need to put idle capital and labor to work.
You are framing the dynamics into your own view of how the economy SHOULD work.
Realize that putting capital and labor back to work is not that simple. The lack of labor share is a problem. It creates a dynamic that actually blocks “full” employment of labor and capital. The message is that labor share has to rise, but on a global basis to work. Short of that, the global problems will continue.
Actually, the US and many other countries in Europe had too much non-productive investment. Remember the housing bubble?
well, I agree. and moreover I think it has been obvious since about 1946.
except of course to the people who want to increase “capital’s” share.
which was obvious before about 1929.
I knew you were waiting to hear from me.
Edward, my views aren’t about how the economy should work, they’re about how the economy actually works, which is supported by your article.
I’ve explained before how more pro-growth policies and fewer anti-growth policies will not only raise living standards, but also go a long way in correcting a “market failure” in low-wage income.
You, and many others here, want the economy to work in a way that cannot work.
Where have you been?
You once said that if wages were lowered, the LRAS curve could shift left or right depending on whether wages were high or low to begin with.
Am I remembering correctly?
if wages were too high, then lowered, the LRAS curve would shift right.
If wages were too low, then lowered even more, the LRAS curve would shift left.
Is that what you would say?
Edward, in the production function, or aggregate supply curve, Y = t(L, K, R, E,…X), unless increases in technology or productivity (t) offsets higher production costs, e.g. labor, capital , raw materials, energy, etc., then real output falls. However, it’s been shown a higher wage can reduce other production costs, up to a point.
Labor makes money laboring. NO jobs, no laboring, no money. Infrastructure improvements could create MANY new jobs and get the economy moving upward. It won’t be cheap and with so many deficit hawks (Cruz, Boehner etc.) in Congress borrowing is almost out of the question.
TAXING THE RICH (a labor of love) is the simplest, fastest solution. If I may be redundant, 91% works well as history has shown, from FDR to LBJ & IKE loved it too.
LOCAL infrastructure improvements keeps LABOR LOCAL and the money gets spent at the LOCAL grocery store.
“I’ve explained before how more pro-growth policies and fewer anti-growth policies will not only raise living standards, but also go a long way in correcting a “market failure” in low-wage income.”
That’s what this post is about. Unfortunately, there is no way pro-growth policies like higher marginal tax rates, increased regulation and increased government spending are going to get any traction in the current political climate. There’s a reason blue states are wealthier than red states. It’s their politics.
Kaleberg, you have it all backwards. For example, why would anyone risk capital or work hard when the gains or income are taxed so heavily? Without risk and work, there’d be no growth.
There’s lots of old money in the blue eastern states. The rich are doing great. The working class and poor deal with a high cost of living.
When I lived in Colorado, it was a red state, Colorado had a low cost of living and a high quality of life. I moved to California, a blue state, and noticed there’s much more inequality and it was much more expensive, along with ridiculous state and local taxes.
If I worked this hard in Colorado, I’d be living three times better.
You should see how much better Americans live in the red Rocky Mountain states. Of course, good economic policies are neither red nor blue.
You may want to look at red and blue by county:
Maybe, the rich are paying-off the poor to vote for them, preferably with other people’s money, like the struggling middle class. The rich sure have the money and the power.
Colorado is trending blue and is only recently backsliding red because of exploitation of red meat neanderthal issues like guns and abortion in the sparsely populated hinterlands using quirks in the constitution and recalls.
The battle lines come down along the issues of education spending and infrastructure. Your red free market worshippers would decimate both in favor of tax breaks and bet the farm on the tracking fairy. If this is a prescription for the future, I am really glad I am old enough not to have to live through too much of it.
“Either the world has to embark on a surge in productive investment, or we need to reduce the income share of the state and of the rich, or we must accept that unemployment will stay high for many more years.”
How should the productive investment be financed? Should the government be doing this investment?
One way to solve this would be if the capital base was more widely owned and not so concentrated. If the returns from capital were evenly distributed loss of income from labour would just be replaced by gained income from capital. Therefore distribution of income would stay the same. Unemployment could be addresed by shorter work weeks, longer holidays etc…
Sounds communist though. Would there be any way the that capital could be more widely owned?
Maybe import tariffs targeted at producers that use exploited labor to compete isn’t such a bad idea. Maybe production self sufficiency isn’t such a bad idea. Maybe fewer global treaties which reward the exploitation of labor isn’t such a bad idea. I’m not saying that “Buy American” is the right idea. I’m saying that exploitation economies in an age of global trade is a very bad idea. Though it isn’t a new phenomenon.
I looked at income distribution and unemployment at:: http://anamecon.blogspot.com/2011/09/unemployment-average-wage-and.html
My conclusion was that the wealthy take such a high proportion of the national income that not enough is left to pay for full employment. Particularly, that for each reduction in the national income share of the top 1%, (It is currently about 23%) by 1%, the national unemployment rate could be reduced by about 1%.
A broader conclusion is that the wealthy, in their single minded pursuit of private gain, are mismanaging the economy at large. In the long run, or not so long run, they are undermining their own prosperity, and the well being of the rest of us as well.
The Rich have only one thing to fear and that’s fear itself. They ALREADY believe the poor are going to go Nazi on them and say so in the news. If the are letting that kind of conversation out to the public, just imagine what they talk about in private.
FDR got a 91% TAX instated by telling The Rich he would let the Communist have them. This was BEFORE WWII and long before the Red Scare. Its probably easier that WE think.
Greg, your conclusion doesn’t make sense and the article you cite is oversimplified.
Raising the minimum wage, in itself, will have a small positive effect on growth and a small negative effect on employment (e.g. through higher productivity and lower overall production costs). The positive income effect may exceed the negative employment effect up to $15 an hour.
Also, government, not the private sector, tends to allocate resources inefficiently (China is an extreme example). Tax avoidance and overregulation are “undermining” everyone’s prosperity.
Moreover, I may add, the U.S. has more global competition. It’s not like the 1950s and 1960s when Europe and Japan were rebuilding, and dirt poor countries became more involved in the global economy to begin raising their living standards at faster rates.
GW, yes, Colorado is trending blue. Unfortunately when counties trend blue, there’s more inequality, between “the rich” and “the poor,” and a higher cost of living for everyone, particularly the poor. Moreover, small business start-ups and expansions will be more difficult, at least for the “middle class.”
And, GW, obviously, you dislike the free market. However, there wouldn’t be falling prices and rising quantity and/or quality of output, over time, without the free market.
Of course, there should be appropriate taxes and regulations in the free market, e.g. to correct for “market failures.” However, excessive taxes and regulations cause higher prices and lower quantity and/or quality of output.
Moreover, it should be noted, federal taxes have become more progressive:
CBO:Top 40% Paid 106.2% of Income Taxes; Bottom 40% Paid -9.1%, Got Average of $18,950 in ‘Transfers’
December 9, 2013
“The top 40 percent of households by before-tax income actually paid 106.2 percent of the nation’s net income taxes in 2010, according to a new study by the Congressional Budget Office.
At the same time, households in the bottom 40 percent took in an average of $18,950 in what the CBO called “government transfers” in 2010.
The households in the top 20 percent by income paid 92.9 percent of net income tax revenues taken in by the federal government in 2010, said CBO.”
I don’t ‘dislike’ a free market. I simply note that there is no such thing and those who espouse such a thing are either delusional or have a hidden agenda. A market is a tool not an idealized objective. Not a secular religion.
Thank you for continuing to post your comments. Most of the folks in the comment section have already constructed their logically consistent narratives. I suggest you look to your peers for feedback.
Some of the dialogue here is absurd. Take care.
Yes David….I second that.
David, yes, I’d like to hear more of Edward’s comments rather than comments that are hopelessly political, lack economics, simple declarative statements without any support or proof, contradictions in “logically consistent narratives,” and other “absurd” “dialogue.”
You seem to have a lot of spare time.
as part of my ongoing service to those who are spinning their wheels all i can say is that you are true believer. and that means not likely to learn anything new.
this is not a put down, just an “as others see us” service.
Coberly, I believe in what works and learned what doesn’t work. And, I learn new things.
What’s with the put downs?
as i said, it wasn’t meant to be a put down. ALL humans, as far as I am aware, including me, suffer from a kind of mental blindness. sometimes if we know this about ourselves we can partly overcome it. you say things here that just make jaws drop, because we don’t share your revealed truths (we have our own). examples include “economics is true” as if you hadn’t noticed that at least half of economists say the other half is nuts. “i believe in what works” as if you had any idea what works… as if economists, including central bankers, had any idea what works.
as said, you are hardly the only one who suffers from such misplaced confidence, but you stand out here for the sheer breathtaking beauty of your faith. not only completely divorced from any experience whatsoever, but divorced from any possible experience.
sorry if you take that as a put down. i also really know how utterly worthless my observation is to you. but sometimes i can’t help myself.
Coberly, I place my “faith” in mathematical and empirical models. You haven’t disproven anything I stated. You just make up statements that aren’t supported by anything, and your statements about me really apply to yourself. If I popped your dreams, too bad. However, I suspect, you’ll cling to your beliefs, regardless of reality.
Your statements, including about my experience, just reinforces your display of ignorance. I suggest rather than being closed minded and pounding square pegs into round holes, you should try to figure out how the pieces of the economics puzzle fit.
When you disagree with my economics statements, you’re disagreeing with mainstream, or orthodox, economics. Also, I may add, economists agree with much more than you think, although there are differences in value judgments. If you’re interested in optimizing the macroeconomy, for example, you’ll need to be unbiased.
We have yet to see those mathematical and empirical models you speak of frequently. How about showing us on a blog of your own?
“So if a country takes the lead and raises its labor share in order to bring down unemployment, most likely they will just bring down unemployment in another country, not domestically.”
What if it raises its labor share by employing people? E. g., with programs like the CCC and WPA?
or as Sandwichman might suggest shorting the work week and maintain the same pay.
I have read the Micheal Pettis piece very carefully.
He article is based on the global economy. In my opinion that leads to the problem of each country gaming the system. At least with tariffs there was some control which could be invoked quickly. Now the controls are pushed off to the WTO, where some alliance of countries could act in their interests and against ours or delay, delay, delay. And there doesn’t seem to be any punishment for those manipulating their currencies. Etc, etc, etc.
It is no accident that we became THE net importer. China could have been concentrating on domestic demand over the last 15 years but instead they went for the export trade and the same is true of the rest of southeast Asia.
The United States is THE net importer and the only country able to control our inequality, if we have the intelligence and the courage to do it. We just have to demand some balance in trade.
And he doesn’t mention that possibility. It is more difficult to raise global domestic demand because independent countries all go for the short term advantage of the export trade, and we can not stop them.
In his table, he says that a “Linear change in consumption” is “Sustainable but seemingly impossible outcome”. Isn’t that exactly what happened in the US between 1946 and 1980?
It seems to me that Marriner Eccles (Fed Chairman 1932-1948) agrees with Irving Fischer that excessive debt brought on the Great Depression. It just took some secondary sudden event to cause creditors to reverse course. As you know, I believe that our current Great Recession was brought on by excessive debt. Of course in both cases something acted to cause consumers to accumulate excessive debt. (Probably low labor share in both cases.)
In the comment section there is a link to a Dean Baker article which is brutally honest:
But he just scratches the surface. Our entire discussion about taxes and who should pay them is flawed. We don’t tax corporations based on CASH FLOW but we tax people based on, you guessed it, CASH FLOW. Why aren’t the standard tax deduction and the exemptions large enough to live a life based on something greater than abject poverty?
run75441, you have seen them. The equations and the literature are in my statements. Look them up. They reflect, and support, my statements.
JimH, international trade is balanced. The balance of payments balance. Both the U.S. and China benefit from trade through the Law of Comparative Advantage. So, both countries raise their living standards through trade.
The imbalance of goods is offet by the imbalance of capital.
So, the U.S. is able to consume more than produce, free-up limited resources to expand the economy, and cheaper capital allows the economy to expand, while China is able to raise employment, employ resources, and raise global consumption for its goods, to at least maintain employment.
Here’s what James Fallows said about China:
James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.
Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.
Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.
This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.
Trade with China raised both U.S. imports and exports, while U.S. capital account surpluses offset current account deficits:
China Exports to the U.S. (selected years)
1985 $3.8 billion
1990 $15.2 billion
1995 $45.5 billion
2000 $100.0 billion
2005 $243.5 billion
2010 $364.9 billion
U.S. Exports to China
1985 $3.9 billion
1990 $4.8 billion
1995 $11.8 billion
2000 $16.2 billion
2005 $41.2 billion
2010 $91.9 billion
Which is better: Raising per capita real GDP from $50,000 to $52,000, i.e. $2,000 or 4%, or raising per capita real GDP from $4,000 to $5,000, i.e. $1,000 or 25%?
JimH says: “Dean Baker article which is brutally honest.”
Brutally political or biased is more appropriate.
And, it’s not a bubble, unless it bursts. It’s not inevitable.
Real wage growth hasn’t kept up with productivity for low-wage workers. Many immigrant workers were willing to work harder for less. That, in itself, raises income inequality.
However, it should be noted, much of the real growth for low wage workers went into compensation, e.g. health care, which has increased much faster than inflation. If you look at heavily regulated industries, you’ll see rising and higher prices, which reduced real wages and real compensation, including through inflation and employment.
A combination of raising the minimum wage and reducing regulation will raise living standards of low-wage workers substantially, along with inceasing demand and, therefore, employment.
And, if you want to help those in poverty, faster GDP growth is needed, which will raise tax revenue and reduce spending on the unemployed, as the country moves towards full employment..
By your own statistics in 2010 the US exported $91.9Billion to China and China exported $364.9billion to the US.
So in 2010, China is exported $273billon more to us than it imported from us. And that does not include the rest of the world which is running a trade surplus with us too.
You very seldom provide any data, so I thank you for making my case.
In 2013 China exported $318billion more to us than it imported from us.
The remainder of your comments are your usual economic mumbo-jumbo and propaganda. Spout that nonsense to someone else.
JimH, it seems, the case you’ve been making is raising taxes, including tariffs. If China wants to sell its goods too cheaply and lend its dollars too cheaply, to generate a virtuous U.S. consumption-investment cycle, then why stop it with tariffs?
And, the U.S. has lots of idle capital and labor to expand. I agree, low income labor isn’t paid enough, including through the distribution of profits and compared to high-income workers. Some of that capital would be put to good use to raise low-wage income. However, capital needs to be employed in productive assets, e.g. technology, buildings, machinery, etc., to expand the economy and create jobs too.
For example, all large businesses started as small businesses:
NFIB Chief Economist William Dunkelberg:
“The economy is not doing well and little is happening in Washington that would lead owners to think otherwise. All policy is focused on the (2014) election, pandering to special interests, not the interests of the “middle class” which simply wants to see better economic growth and serious job creation (along with improving compensation).
Most important problems for small business: Government regulation, taxes, and poor sales.
Low TAXES and borrowing from China just creates more debt($4,000 per citizen per day as PT has proposed, let say for example). It puts US EXACTLY where WE are today. It isn’t working.
Governance ain’t free. One can either borrow or TAX (just like paying in cash) to pay for it. TAXES are the cost of civilization. Living on debt is living in servitude.
Regulation IS the business of government and the COST of the privilege of doing business.
In this video , a top .01% insider – who makes 1000x what a typical worker makes – spills the beans , exposing the lies propagated by the elites :
Nick Hanauer : ” How the Rich Have Stolen Your Past and Your Present , and Will ( with the help of propagandists like PT ) Steal Your Future ”
Speaking of propagandists , Greg “Pass-Through” Mankiw has had a surge in bowel movements lately. Here’s a recent “deposit” :
He seems to be seeking assistance on the propaganda front. Might be a few bucks in it for you , PT……
Marko, people like you aren’t serious about helping the poor, low income workers, or the middle class. You want to bring down the rich.
Maybe, you think you’re Robin Hood wanting to take away from those who have and give away to those who don’t have (inherited or earned wealth doesn’t seem to make a difference to you).
And, where do you think that additional $5 trillion of federal debt (which isn’t pocket change), over the past few years, came from?
Marko: THANX for the Nick Hanauer video. It is an excellent speech, IMHO.
One wonders, considering the several years of the existence Occupy and other such groups, that WHEN the day comes and THE RICH can no longer buy their lives, what economic theory, what list of statistics, will they spout before the angry mob? HISTORY has already proven the price of abject inequality.
Peak Trader: That 5 trillion did NOT go into YOUR pocket, but it most certainly will come our of YOUR pocket.
The economic policy of some people here basically amounts to invading rich and upper middle class neighborhoods, steal their belongings, burn their houses down, and give away the loot to lower income people.
Thanks for the link. I listened to all of his speech in which he advocates a $15 per hour minimum wage.
But in my book, increasing the minimum wage gets second prize.
First prize goes to putting the unemployed and underemployed back to full time work. I speak out against Global Free Trade because that is where the jobs are. We are importing products that Americans can make and not too long ago they did.
I am selfish. I want men and women to work for a living, not get government welfare. Make no mistake about it, these unemployed and underemployed are not going away. They won’t emigrate or die. They will earn an income that they can live on or their income will have to be supplemented by government welfare. The underemployed have increased the rolls of those drawing food stamps which is driving conservatives crazy. What do they expect them to do, starve?
The religion of Global Free Trade has failed miserably. It did not live up to its promise to be “a rising tide that would lift all boats”. It is time to demand some balance between imports and exports.
The rest of the world has had 20+ years to grow domestic consumer demand in their countries. They should thank us for that. I understand that we have lifted millions of people out of poverty around the globe but the price has been too high for our workers. If democracy is to mean anything then government must look after its own people first.
If the wealthy find that too odious then perhaps they should emigrate to China or Russia. Where they will fair better until they do not .
JimH, globalization has benefited the U.S. tremendously, in raising domestic consumption (e.g. more shopping malls), and in raising domestic production (e.g. in the Information and Biotech revolutions). If a U.S. trading partner adopts an inferior economic policy, e.g. trade barriers or tariffs, that’s our gain. As a matter of fact, the gains in U.S. trade are larger than our trading partner’s “gains-in-trade.”
Globalization isn’t holding back U.S. growth. It shifted production from low-end manufacturing intto high-end manufacturing and facilitated explosive growth in emerging industries, while we imported offshored goods at lower prices and higher profits. What’s holding U.S. growth back is too many anti-growth policies, e.g. excessive government regulation, excessive government spending (crowding-in some growth short-term and crowding-out growth longer-term), and excessive taxes (both progressive and regressive).
Moreover, a higher minimum wage, e.g. to $15 an hour, would go a long way to correct a market failure, since low wage income hasn’t kept up with productivity. Furthermore, a higher minimum wage will make capital relatively cheaper to increase productive investment (e.g. in capital equipment), which results in higher paying jobs.
I agree that full employment has to be the #1 goal. Still , I think that a decent minwage provides incentives towards achieving that goal – for the workers , importantly – not to mention the benefit of increasing demand.
If you had a minwage of , say , $15 , and a gov’t – guaranteed job for the otherwise-unemployable at a MAX wage of , say , $10 , the incentives would be there to try to move out of the gov’t-guaranteed sector into the private sector , and welfare costs would probably decline , if anything. In any event , some useful work could be done that would not otherwise occur. Building of useful job skills should be an integral part of the gov’t jobs program to aid in migration to the private sector.
Beating down the very top end is an important part of improving the incentive structure as well. Think of the slope of the line relating pay vs job skills for the bulk of the workforce – the 90-99% that will be in private sector jobs. The steeper the slope , from $15 at the low end to whatever at the high end , the more the workforce is incentivized to strive – to seek education , to improve their skills , to increase productivity of their current firm , etc. By limiting the take ( income and wealth ) at the very top – whose incentives have only driven them to commit fraud , buy politicians , engage in rampant speculation , and all the rest – you provide the income and wealth that allows maximum steepness of the incentive curve for everyone else. Again , not to mention solving the aggregate demand problem.
This is exactly what happened in most advanced economies post-WWII , and it was policy choices that caused it , as Piketty documents. The higher growth rates in gdp and productivity of that period – which was not dependent on ever-rising debt/gdp as in recent decades – could have simply been the result of improved economy-wide incentive structures.
The Reagan experiment failed , miserably. It’s time to re-run the FDR experiment.
I hear you, and I understand that we could always wait to see if our unemployment and underemployment problems could be resolved by less urgent means. But the truth is that the Republicans will fight any changes. They are screaming bloody murder at the idea of a $10 an hour minimum wage. Raising the minimum wage is going to cause at least some increased inflation and the Republicans are going to be all over that!
So which makes a better political sound bite. “We demand fairness. We demand that our trade partners import from us as much as they export to us”. Or “Let’s raise the minimum wage to $15 an hour and accept a little more inflation”.
And remember this Great Recession has already been going on for over 5 years. How many more years would it take to get to $15 an hour and then how much longer to grow the economy. Too long, I think. It would be much quicker to get to full employment by reducing our trade imbalances.
Full employment would help us with the federal deficits too and we should get that help as soon as possible. (I am not a Republican, just a realist.)
Or we can do nothing and just wait for the magic of government statistics to indicate a 5% unemployment rate and an even lower labor partition rate than it is now. But even if we don’t count them, they are still a drag on the economy.
Frankly, Global Free Trade is an ongoing nightmare for those working at the bottom half of the income scale. We will have to deal with it sooner or later.
In 2013 China exported $318billion more to us than it imported from us. If that is not too large then what should the limit be? Would $3.18trillion per year be too much?
Your last response is just more economic mumbo-jumbo. You want to continue policies which put us right where we are! Edward Lambert’s documentation of Labor Share and Effective Demand Limit points to the source of our economy’s problem. I believe that cheap imports damaged American labor’s power to get higher wages and deprived some of them of jobs over the last 20+ years. Continuing this is insanity.
The wealthy have done very well in the United States and I expect that to continue.
I agree with you ( and Dean Baker ) about the trade deficit. We should adjust our exchange rates over time to eliminate the deficit , since “free markets” refuse to do this job. We’ll need to compensate those most impacted by rising food and fuel costs , however.
The pending trade deals would provide the perfect leverage to get other needed policy changes if only we had a President and Democratic Party who gave a crap about workers. You know the mainstream Repubs are salivating about these trade deals. This is just when the Dems should demand compensation in the form of policies that guarantee that any gains from trade are shared across the income distribution , and that any harms are mitigated. Otherwise , kill the trade deals and let the Repubs suffer the wrath of their business donors for failing to cooperate.
Is not the housing bubble a case of THE RICH raiding the neighborhoods of those with less and taking what little they had and redistributing it to their banks? Isn’t that what QE is, fraudulent sub-prime loans, fraudulent early foreclosure processes, exactly? Stealing their belongings because it won’t ALL fit into one suitcase or survive in a tent? Leaving Their home under a Sherriff’s order only to have it sit idle, to rot, to be stripped by salvagers and finally bulldozed down, the land sold at auction or worse, sold for the price of a candy bar? ALL their days of labor, ALL they have saved, taken by crooked banks, crooked politicians, crooked judges?
For what end? The good of community? For good of the economy? For the good of the world? Or for the RICH TO GET RICHER?
TAXATION at a high rate is the EASIST way out for ALL concerned. Walk down the street, its a pissed off world out there.
The Great Depression started in 1929 and lasted to 1946 (soldiers don’t get rich dying on a battlefield nor does a widow’s pension make a wealthy family) That’s a long time to go hungry, to go homeless, to see one’s family go without.
you are right about one thing: i have NO respect for “mainstream economics”. and i can tell you as a one time maker of mathematical models: the math is the easy part. the hard part is making the model fit reality in enough detail to be useful. it is a fact of human (and all) brains that they are taken over by the models they construct and accept so that it becomes impossible for them to think “outside the box” in spite of incorporating “think outside the box” into their model. from time to time a few individuals.. usually young enough not to have “learned” the model… make some progress. except in economics, which is handicapped by its need to flatter and serve the rich. as far as i know all the models that flattered and served the poor have not done any better. and have the disadvantage that the poor are always out gunned and out organized. this seems to be a law of nature… another model if you will… but the rich,the predators, have always been cut down by their own success in reducing their own food supply. humans, who arguably have the mental capacity to see this inevitable result in time to prevent it, have instead invented the means to destroy all food supplies whatsoever, including their own, and that may what old Anaximander was getting at: “All things arise,” he said, out of chaos through injustice, and thither are they returned in retribution according to the order of time.”
the “free enterprise” model, among its other faults, is a model for predators, and assumes an infinite universe (of resources), and a kind of child’s faith in “bang, bang, you’re dead. but of course get up again to resume the game.”
Coberly, mainstream economics, i.e. the Scientific Method of NeoClassical Economics, contributed enormous value to society, for the masses, not just the rich, particularly in the 20th century, in fields e.g. Macroeconomics, Microeconomics, International Trade, Money & Central Banking, Econometrics, etc., even spilling over into non-economic fields.
Mathematical models supported by rigorous empirical models explain reality, and often proved conventional wisdom wrong.
The free market is the core of moral philosophy that made Western civilization wealthy and raised living standards for the masses. The alternative is the social philosophies of the old Soviet Union, Cuba, North Korea, Venezuela, etc..
Unemployment that we are witnessing has nothing to do with productivity issues or fall in labor share. Lack of effective demand in the market for the commodities produced is the main reason of such a situation. The prognosis done here is done on the basis of wrong assumptions themselves. So, the analysis is bound to have misplaced results.
Our economy has the inherent tendency of getting away from the equilibrium not due to labor productivity issues but due to lack of investment from surplus generated by the entrepreneurs. The falling share of investment from the surplus earned is the main reason of loss is growth of employment generation. In fact, a large chunk of the investable surplus is gong to portfolio investment rather than manufacturing sector. This is where the basic composition of the economy is getting hurt. In cases like now when the entrepreneurs are not finding much incentive to invest their surplus, direct government investment through government schemes are need of the hour, which will create more direct jobs, leading to expansion of market, which ultimately will give more incentive to the entrepreneurs to invest voluntarily. However, for some unknown reason everyone is bypassing this route and waiting for the entire world economy to collapse, paving way for worldwide anarchy.
calling mainstream economics “the scientific method” is delusional.
you are like someone standing on the temple tower about to jump off secure in your faith that your mathematical model will support you on the wings of angels. and when i say you can’t do that, you say “why the put down?”
“Unemployment that we are witnessing has nothing to do with productivity issues or fall in labor share. Lack of effective demand in the market for the commodities produced is the main reason of such a situation.”
If government spending was the solution, we should have already recovered. The government spending in the first 3 years after the start of the Great Recession was defensible. But continuing to do what does not produce the desired result is insanity. When would it end?
Too many people believe that the end of the Great Depression came about as a result of government spending.
The true cause for the end of the Great Depression was a multi step proposition. During the war, 13 million men were in the military, most in war zones where spending was at least reduced. The war brought on full employment and brought many young women into war production plants. Personal incomes were quickly raised which caused inflation which inspired wage and price controls. Next came rationing, it was a key component of the very large increase in personal saving, and as a bonus, rationing created pent up demand. Personal savings was between about 25% for three years and not much less for another year. That accumulated savings was a major factor in the recovery. The war ended in 1945, young men came home and married young women and during 1946 they used their personal savings for personal consumption expenditures. Inflation in 1946 was a very high 18.1% as pent up demand emptied the shelves and caused manufacturers to quickly convert back to a consumer based economy. That was the end of the Great Depression and it came when consumers had pent up demands and money to spend. This is backed up by US government statistics.
So unless you are advocating rationing and the government spending required to reach zero percent unemployment for 4+ years then don’t expect to get the same results. I say zero percent because they actually brought millions of women into the workforce who had not been looking for work before WWII started. Even that may not be enough since US consumers are sitting on a mountain of debt.
Total Household Debt was $4.7trillion in 1999, peaked at $12.68trillion in 2008, and is now $11.52trillion.
As I have been saying for the last 5+ years, “Consumers cannot spend what they do not have and producers will not produce what they can not sell”. (Therefore there is no reason for producers to hire new employees.) We’re caught in a trap.
Before you deny labor share as a factor you need to read Edward Lambert’s documentation of Labor Share which contributes to Effective Demand Limit which acts to limit GDP. Here is a link to his synopsis http://effectivedemand.typepad.com/ed/synopsis-of-the-effective-demand-research.html.
Here is his work used on past recessions with graphs:
Coberly, just because you can’t see invisible forces, like mathematics and economics, don’t mean they don’t exist. Try to use some logic (another invisible force, particularly in your case).
JimH, massive idle resources for long periods of time, e.g. over the past five years, is completely unnecessary. The country just needs more pro-growth policies and fewer anti-growth policies.
you missed the part where i admitted to being an old maker of mathematical models… not all of which “worked.” i got you beat there. it’s one thing to believe in things unseen, it’s another to believe in the tooth fairy. free association is not what most people mean by logic. though “logic” is what most people call their free associations.
i want to agree with some of what you say. but you spoil it a bit with your history of the new deal and the great depression. the key here may be that the “government spending” that has not ended the great recession was spent by giving it to the banks… pushing on a rope. government spending by creating jobs, either government jobs, or lending to real businesses,… which i think is what you might be advocating… should have a better result.
the effect of the War on the Depression may have been much as you say, but without the New Deal there is no reason to think the outcome would have been anywhere near as good.
and there was a good deal of government spending underlying the good economy following the war… even if it was mostly “defense spending.” like other things, it all depends on other things that are not equal.
you are quite preposterous.
back in the day when computers were still fun, some programmers created a program that pretended to be a psychotherapist. it answered your input in a way that sounded like a real therapist, for a little while. but it didn’t take long to realize that the program was just reaching into a list of stock phrases and selecting one based on a word match algorithm. which leads me to ask:
are you sure you are not a computer?
it’s been fun.
Coberly, I didn’t miss your comment about “mathematical models” and I’m not surprised they didn’t work. Perhaps, you should look at mathematical models that do work, e.g. in microeconomics to start.
“Mathematical models supported by rigorous empirical models explain reality.”
Models cannot be empirical. Measured phenomenon are examples of empirical data and models are assumptions which may have been constructed by interpreting empirical data. Mathematical models are the assumptions stated in numerical terms. The quality of the model is only as good as the quality of the assumptions that underlie the algorithms. And once you start injecting concepts like the “free market”, for which there is, and maybe cannot be, any empirical definition, you have overstated the assumptive character of your model.
Jack: Well said!
you need to work on your reading comprehension skills. i said they did not ALL work. i was trying to make the point that mathematical models do not guarantee “truth.”
to put it another way, “not all mathematical models of economics work.”
In which case, you would be correct. Financial Engineering and its financial models failed miserably pre-2007/8 crash of Wall Street and also earlier with LTCM. http://www.nytimes.com/2008/11/05/business/05risk.html?pagewanted=all&_r=0
“Perhaps, you should look at mathematical models that do work, e.g. in microeconomics to start.”
Models don’t work. Models are an effort to explain relationships between the variables at play in regards to a phenomenon, either micro or macro. That is your problem, PT. You seem to think that efforts to explain phenomenon and/or predict outcomes are the reality of the process when they are only the look back at what was or the guess work at what will be. And even the look back at what was is often fraught with errors in either measurement or observation. None of this stuff as it occurs in economics, as in most of the social sciences, is science with precise measurements. There are too many assumptions regarding the plethora of variables that are generally involved in all behavioral activities.
Mathematical models explain how variables interrelate and empirical models explain how those variables interact.
The same variable can be used in many mathematical models, e.g. in partial equilibrium models, input-output models, optimization models, contemporaneous models, etc. to see how that variable fits in multidimensions and there are data for that variable for empirical models.
Coberly could’ve failed, e.g. up to 99.99…% of the time, based on his statement (and his response to my statement lacks logic and makes false assumptions), because he may have mostly been attempting to create a general equilibrium model, e.g. to completely explain a large macroeconomy or measure the effect of climate change caused by humans. However, no one can think in hundreds of dimensions, simultaneously.
Nonetheless, you can tie-together partial equilibrium models for a crude understanding and still make appropriate choices (the Fed does that all the time, e.g. beginning an easing cycle in 2007, while oil prices continued to rise and peaked in mid-2008).
run75441, you can’t expect the unexpected, even when reducing the error term.
P.T., “The same variable can be used in many mathematical models, e.g. in partial equilibrium models, input-output models, optimization models, contemporaneous models, etc. to see how that variable fits in multidimensions and there are data for that variable for empirical models.”
You are a hopeless obfuscator, bringing nothing to the conversation other than semantic twists and turns of popular concepts. Your statement makes no sense beyond throwing out a group of words that sound like those that are heard in intelligent discussion, but having little intelligent relationship to one another in your use of those words. Your approach to discussion is typical of current right wing ideology whether in regards to economics, social concepts or politics.
Read through these two links and see if you can find any comprehensible support for your comments.
I especially like your distinction between mathematical and empirical. I wonder if it has any use in the real world of science. Try this link for a more intelligent understanding of the relationship between the two,
Jack, why don’t you read your own links. They support my statements. And, let me know when you figure out the difference between a mathematical model (e.g. the Mundell-Fleming) and an empirical model (e.g. a regression).
“Coberly could’ve failed, e.g. up to 99.99…% of the time, based on his statement (and his response to my statement lacks logic and makes false assumptions)”
actually this is not logical. based on my statement “they did not all work” I could have failed 100% of the time. The logic is that “none” might be included in “not all,” but “not all” is not included in “none.” that is because “not all” might include “some”, but “none” does not include “some.” Similarly his original response to my statement which appeared to assume that “not all” implied “none” was not logical, because “not all worked” could have meant that 99.9…% did work. This is the usual implication in ordinary discourse.
peak fails the logic test. I generally don’t insist upon strict logic, but when you see a person twisting and turning to force “logic” to give the answers he wanted, you have to suspect that he does the same thing in the privacy of his own mind.
Our hour is up. Please see the receptionist on your way out if you want to make another appointment.
Coberly, you originaly said “not all of which “worked.”” Why would you use “which” if none of them worked? Which ones worked and which ones didn’t?
My history of the improvement of the lot of consumers during WWII is factual. Arguing about rapidly rising personal incomes, inflation rates, rationing, and personal savings during the war is not helpful. I have sources for all of those, which I have not included so as to keep the comments brief. I believe that I have included them in other comments.
I don’t believe that is the source of your doubt anyway. You seem to want to believe that Keynesian government stimulus can end depressions or panics but I don’t believe that is practical.
Applying the lessons I glean from the Great Depression I believe that the stimulus would have to be very direct to consumers, the stimulus would have to be very generous, and the stimulus would have to continue for years. Then weaning the economy off the stimulus would also be a problem since consumers would decrease spending as it ended.
The political will just does not exist to do the described stimulus in the face of the government debt. And this ignores the problems with very high total household debt.
But your argument about spending in the New Deal improving the results, is not without some limited merit. In general, the CCC, WPA, and other public works programs put money in the hands of consumers and helped them to keep body and soul together. But they also propped up the overall economy, keeping it from additional slowing caused by the destruction of private businesses. The message that I take away from that is, the government should increase spending in the face of drastic economic downturns. But the government-spending-inspired-economy should never be confused with a normal consumer-based-capitalist-economy. I believe that was done in 1936-1937 when the government saw improving economic statistics and confused them with a recovery which inspired them to reduce government spending which caused degrading economic statistics. (They couldn’t believe how successful their government spending programs had been or the political pressure to cut spending overcame their doubt about the perceived recovery.)
I do agree with you that using the Great Recession as an excuse to bail out the banks was “pushing on a rope”. The hope that banks would promptly make large numbers of new loans, or modify existing failing loans was largely futile. (That is not in their nature and their near catastrophic experience was mind altering.) And using the stimulus to hire additional government employees was like the New Deal in that it propped up the economy but could not end the Great Recession. Currently we have a job poor recovery and slowly but surely the evidence of unemployment is being removed from the statistics. But the growth in Real GDP is dismal.
As Edward Lambert has pointed out, the size of the US economy has been reduced.
The Great Recession will end when consumers have pent up demands and money to spend. The way we are going, it will be a very long drawn out recovery.
As a side note, I do agree with your analysis of Social Security.
P.T., I expected your reply as it is no different from what you have already described as your own belief system in regards to the issues under discussion. You have one view of the reality economic process and its various ideologies and no presentation of facts and alternative ideas will cause you to understand things in any different way. Yours is not an uncommon approach understanding your world. I am fascinated by the post from Daniel Becker, above, that addresses such phenomenon as in your example. An interesting finding though I wouldn’t have expected it.
“Oxytocin and lying from a psychology and ECONOMICS study center researcher” – See more at: http://angrybearblog.strategydemo.com/2014/04/oxytocin-and-lying-from-a-psychology-and-economics-study-center-researcher.html#more-22691
Thank you Daniel. It’s an interesting read.