I’ve got to admit that I’m very discouraged by the news that I’m following these days. The stories that I’m paying close attention to are:
- Healthcare reform. As I commented not long ago over at OTB I wouldn’t oppose a single-payer system in the U. S. if (and only if) it were accompanied by measures that would actually control costs. In the absence of such measures IMO we’ll just have a the most expensive single-payer system in the world that we can’t afford, either. In the presence of such measures we wouldn’t be worrying about the unaffordability of healthcare insurance in the first place.
- China-U. S. relations. I think that the mutual testing and saber-rattling is unhelpful, a prelude to a genuine trade war (or worse) that will benefit neither China nor the U.S.
- The U. S. economy. I am very concerned that the desperate moves to “get things back to normal” are actually preventing the new normal from taking form. We’ll never have a U. S. car market dominated by U. S. automakers again and the car business is unlikely to be a growth business. Subsidized alternative energy products bought from overseas companies are unlikely to help the U. S. economy. Keeping unrealistic promises made to public employees’ unions won’t help, either. It’s cruel to say but bankrupt car companies and insolvent banks need to be allowed to fade away.
- Iran. I have no confidence whatever that the “green” movement in Iran will result in anything other than a bunch of people being beaten and killed by the basiji. I also think that we’re going to need to reflect seriously on how we’ll deal with a nuclear-armed Iran since it’s probably too late to prevent them from developing nuclear weapons now.
We seem to be a collective deer caught in the headlights. Deeply discouraging.
Cynicism is affecting a lot of people, me included. It appears to me things will get worse before they get better.
I don’t do the foreign stuff like you Dave, so I can’t really comment knowledgably.
However, on the economic side of things…I’m pretty much in agreement with your assement of the current situation. We differe here and there on how to address the problems, but I agree we have problems.
I’d also add that I think our country has gotten itself into a fiscal straight jacket. We have a problem with too much deficit spending, but right now we can’t cut back nor raise taxes (weak economy), but if we don’t we’ll likely have weak economic growth and higher deficits (than they otherwise would be) as a result in the future. Then there are the problems with Medicare and Social Security, that means even higher deficits and possibly even lower economic growth.
And I don’t think technocracy will get us out of it, as such Obama is the wrong man…not that McCain was the right man either. In fact, I’m not sure there is a right man, one of my things is that I don’t believe there is this all wise philosopher-ruler who will lead us to the promised land.
Drew…where’s that scotch? Pour me some…and its not even 11 am yet. 🙁
Basically, I think that, after a couple of generations spent kicking the can down the road, we’ve reached the place where the can went and there ain’t a great deal more road.
yup, the time to address these issues was several years ago.
On China, since foreign policy is my first interest most days, I think back to the day they shot down a satellite. That was the day it was clear that they made it clear they had serious intentions on the global stage including confrontation if needed. We are very dependent upon GPS. The financial crisis has also emboldened them. As I look back I am thinking more and more that the two wars were a major mistake, especially Iraq. Osama bin Laden wanted to destroy us financially.
We need the two parties to work together soon, both realizing they will not get exactly what they want.
Steve
Well, Steve, the truth be told I’m a wino. In particular, Bordeaux. Concerning scotch, I tend to be satisfied with MacAllan 12, Laphroig, or a few others.
But hey, it’s got to be after six o’clock somewhere, right?
This new Dragon voice recognition software is a pain in the ass.
Unfortunately, I share Dave’s view of the US economy. And readers of this blog know that to be true for some time. I say this out of no political context or desire. Rather simply out of an observation of the current policy mix which I think is counterproductive and not taking us to a good place. I base these views on my experience in the business world, which is extensive, and the mindset of the small to medium size business owner who I talk to almost on a daily basis.
I’m not worried about a trade war with China, or a real war for that matter. I’m more worried about China’s internal difficulties becoming acute leading to instability.
On economic growth I have a perhaps naive question: upon what product or service are we basing our growth?
Finally, I thought it was supposed to be five o’clock, not six.
That’s what I’ve been asking for some time. I just don’t see any likely prospects.
Like Dave says, I don’t know…and that is the scary part. Housing? No. Finanicial services? No. Manufacturing? No. Health Care? No since that is like 50-60% government. Education? No, same problem as health care. Not much left.
On the weekends I usually go with 4 o’clock myself. During the week, when I get home, after an hour of traffic who wouldn’t need a drink?
I don’t want to be a stick in the mud. 5 o’clock it is.
By the way. Tonight, in honor of my wife’s Birthday, we shall open a nice bottle of the 2000 Vieux Chateau Certan. For those who are not winos, this is from Bordeaux sub-region of Pomerol. That is, this is a “right bank” wine based on the lucious Merlot grape.
Now this is good wine.
Okay, so appealing to all the learned gentlemen here:
I just glanced over a story the essence of which is that the unemployment rate is not at all high among the upper classes and is basically a lower-class phenom. (This fits with my own observations of life in prosperous but not wealthy Irvine, CA where the recession seems to be at the margins.) The top few deciles seem to be pretty near full employment.
We agree there’s no obvious candidate for an economic sector ready to propel us back to normalcy.
So is it possible that this unemployment — concentrated overwhelmingly among the less educated, lower achieving — is a long term fact of economic life, the inevitable result of technology and other efficiencies? Was this sort of embryonic long-term problem just concealed by a generalized illusion of prosperity? Is this the new normal, and was this new normal not caused by, but merely accelerated or revealed by, the recession?
And last question: am I right that whatever economic phoenix rises from the ashes it’s not likely is it to be built on the labor of those now unemployed since they are apparently the low-achievers?
Drew:
I’m jealous. Are you drinking it as a stand-alone or enjoying it with food?
First, unemployed people are unemployed resources…productive resources. Granted if it is mostly among the lower skilled/less educated then they may not be the most productive resrouce. However, I’d be curious as to where unemployment was most common in past recessions. I don’t know where to look, and I’m heading home so googling will have to wait. Anyhow, productive resources not being used while bad is also an opportunity. Thus, I’m skeptical that it will be this way for a long time. Of course, that doesn’t mean the transition period will be an easy one.
The normal may have lower economic growth and higher unemployment, but lower than what we are seeing today. We might be moving more towards what we see in European countries where there are more unemployed and lower growth. Is this good? I’m inclined to say no.
I hope this is true but I wonder. I walk through the various jobs that can be held by people with low levels of skills — and I suspect low levels of intellectual resources — and aside from home health care workers I wonder what those jobs are.
One indicator to me is the military which, once upon a time had lots of openings for less educated, lower skilled folks. But the number of grunt slots has declined rapidly and a person with below average IQ who might have been an excellent rifleman 50 or even 20 years ago no longer has much of a place.
I think you’re leaving one piece out of the puzzle. My interpretation of what is happening is that for some time now we’ve been removing protections from the trade in goods while imposing or increasing them on services, intellectual property, and so on. The protections are imposed in the form of licenses, regulations, gatekeeping, and flat-out prohibitions. There are actually good reasons for many of these restrictions.
As a consequence of these actions, we see a rising disparity between the protected and the unprotected. That’s bound to create social stresses that I think will only increase with time.
None of the prospective remedial actions are particularly appealing. We could re-impose trade barriers. That would tend to raise the value of unskilled and semi-skilled labor but it would also tend to lower standards of living, which would fall particularly harshly on the poor.
We could remove the various barriers that we’ve imposed. That would be hard on those who’ve gambled on educations for remunerative professions and investments in intellectual property. And the reason that we’ve imposed many of the barriers would remain: quack practitioners, excessive risk-taking, fraudulent operations, and so on.
We could tax those who benefit from the barriers and give the proceeds to the rest. That goes against the grain of our culture and depends on the beneficiaries of the new system staying put. It also creates endless opportunities for political corruption.
Protect everyone; protect no one; tax away the value of the protections; or accept a society of haves and have nots.
Steve, I think there are several problems with your suggestion.
First, due to a combination of globalization and open borders the value of unskilled and semi-skilled labor has fallen drastically. Add to that that we’ve imposed fiat pricing for unskilled labor.
Then we’ve also got subsidies in place that create a floor. I don’t think that leaves a lot of room for opportunity. At least not in the legal marketplace.
What about population vs productivity? Productivity increases reduce the need for labor so maybe we’re at the point where we are so productive that we can’t keep our growing population employed. Are manufacturing and eventually services going the way of agriculture – becoming so productive they require little labor? What can replace them to keep people employed?
I keep thinking of thinking of the late Republic in Rome where a combination of slave labor, war and economic difficulty resulted in a mass of unemployed Plebians and the rise of populism that eventually destroyed the Republic.
Andy:
Exactly. I can’t agree with Steve’s point that unemployed persons are unemployed resources. I think in many cases — an increasing number perhaps — unemployed persons are just straight-up drags on the economy.
I don’t think I buy Dave’s belief that it’s a function of protections for a particular class, I think it’s basically just IQ. (Granting all the ambiguities and imperfections in that measurement.) I think there was a time in history when a person with an IQ of 60 or 70 could be gainfully employed. I think that time is pretty much past. And I suspect the IQ threshold is creeping north and now dooms a significant portion of the population to permanent unemployment, and a larger portion to employment at a less-than-self-sufficient level.
If that’s what’s happening we are almost certainly looking at more redistribution of income not less. Unless we plan to institute an IQ test for voters.
The most brilliant guy I’ve ever known is the son of an assembly-line factory worker. He’s one of the very few people I would unhesitatingly say is smarter than I am. Off-hand I’d say his IQ was four standard deviations over normal or better. Maybe 170 or 180. He’s a PhD in applied mathematics but has struggled to make a decent living. IQ is a fairly poor predictor of income.
The areas of our economy that are growing the fastest are those that are subsidized and protected the most. Maybe it’s a coincidence.
High IQ may not be a predictor, but I’ll bet low IQ is.
One of the few occupations where people with low IQ’s can make a decent living only has 535 positions. (Rimshot.)
BTW, Michael, I get what you mean but “productivity” probably isn’t the word you’re looking for. Productivity is basically just another word for income. Taking the practice of medicine as an example, productivity, as it is measured has increased enormously in real terms over the years.
However, outputs per input has been falling for decades, too. That’s been well-documented both here in the United States and in Britain.
The same is true for education. There’s even a term to describe the phenomenon: Gammon’s Law.
Permanent unemployment for a large segment of the population is only going to happen when productivity gets to the point where we have cornucopia machines and the marginal price of most products is zero. Every now and this spectre raises its hoary head: we’ll never see unemployment go down, these people will be permanently unemployed and we will likely add to that number. Bollocks, as the British would say.
Part of the problem is that people don’t see where the next round of employment opportunities are going to come from so thus there is never going to be another round of unemployment opportunities. Problem is that this has never obtained anywhere in history.
Now, does that mean we wont have a painful transition period? No. Does it mean that we might not have an extended period where unemployment is higher than it has been in the last 20 years (a period I would add that has had extremely low unemployment–you’ve set a very high bar, IMO) or so? No. Does it mean we will return to the way things were in the 1990’s and 2001 – 2007? No. But I reject these variations on the reserve army of the unemployed. Can we please toss Karl Marx into the trash can? And failing that how about the discount book bin? We can put him next to Thomas Malthus and Paul Ehrlich.
And I will also say this. Creating more government is not the solution. Really it isn’t. While some activities that government does promote trade and productive activity others do not or their impact is questionable (the debate over spending multipliers vs. tax cut multipliers). This is why Dave has said that government and its hand maiden industries wont save us. As such looking for savior via a technocrat such as Obama probably is not going to work.
Take for example our financial sector, it is in serious need of reform. Will we get it? No. Oh sure, we’ll get some stupid bill passed and Obama will sign it with some decleration of how it will assure that the recent events never repeat themselves. Of course it isn’t true. Why not? Because as Dave and I have noted a serious part of the problem is the revolving door between DC and Wall Street. Wall Street has in effect captured not just the regulator agencies (SEC, etc.) it has captured all of DC. It has captured the legislative process, the executive branch, and probably even the Federal Reserve! As such really meaningful reform is just never going to happen. Ever.
I pointed to the suggest by Edward Leamer and Lawrence Kotlikoff on limited purpose banking. Dave’s first response was Wall Street with hate and thus it will never happen. He’s right of course, but that just shows that real reform that could really go along ways towards preventing similar financial crisises like we’ve recently scene cannot happen. See my comment above about Wall Street capturing DC.
The way forward to fix this mess and I’m talking the financial sector, health care, budget deficits, etc. is no longer open to us IMO, if it ever was. There are too many with vested interests to keep us from going down that road. And to make it even more amusing (in a gallows humor sort of way) is that because these vested interests have closed off that road, they are likely going to be the root cause of their own suffering…well until tax payers bail them out again. Unfortunately the rest of us have to go along with them. I think that we will have another financial bubble. It seems to be the new black in politics these days. Create a bubble, take credit for the economic prosperity. Happened with Clinton, happened with Bush. Will it happen with Obama? I’d say there is a good chance. And tax payers will always be on the hook to bail out the big money people if necessary. The current system that we have now is one where the losses for Wall Street are largely covered by the taxpayer. That is what Obama is protecting. The status quo. And I’m not trying to be partisan here. McCain would have done the exact same thing in terms of goals, his approach might have been somewhat different. But ultimately he’d preserve, more-or-less, the status quo for Wall Street as well.
The new normal is going to entail the following:
-Unemployment will eventually be lower than it is now, but higher than we’ve seen in the past 20 years.
-Growth will be lower than it has ever been, on average, just guessing here but I wouldn’t be surprised if 1.5 – 2% is considered “good” from now on.
-We will have more bubbles, possibly one every 15 – 20 years maybe even more frequently.
You know its funny. I write this and to me it looks radical. It calls for radical reform and a new regulatory structure. Greater protections for the taxpayers. Not bailing out the big money interests on Wall Street. And yet…yet…it is the liberals the “progressive” who hate it. They despise it and attack me (hi Bernard). The liberal progressive transform like something out of the last transformers movie and become Conservatron arguing for a continuation of the status quo.
Michael Reynolds-
It was taken with dinner, thank you. The pearl necklace went over well also.
Steve Verdon-
Much of what you observe is true Steve. I would note that regulatory capture is an issue that Milton Friedman pointed out in his book Free to Choose concerning the early 1900s railroad industry, of all things, decades ago.
I have to say, though, my take on how to solve some of these problems is different from what most people write here. Until we have term limits I see no progress being made, at least no material progress.
Steve:
I hope you’re right for very personal reasons. We have two kids with roughly a 70 point IQ gap between them. We’re pouring resources into both and I suppose we’ll see whether there’s a place in the economy for a kid with passion, courage, resilience and a low-average IQ. Or whether the neurotic, abrasive genius comes out on top. The drag about being a parent is that almost nothing stays theoretical, and you’re always gambling with chips you can’t afford to lose.
Michael Reynolds-
I have to confess I had to pause after I read what you wrote. Setting aside how such a disparity could occur, as a parent I feel for you as I think this is going to present some interesting challenges over the years. Our family has had not such an IQ gap, but a character gap. It presents serious problems.
Separately, I find it a bit odd this to and fro that’s occurred here about the relationship between income and IQ figures. I think as a general proposition you take IQ, plus motivation and risk-taking aptitude and you’ve pretty much got it. And IQ would place high there. I don’t think it makes much sense to the cite things like dumb as a box of rocks basketball players or movie stars who make a fortune, or to cite math whizzes who take positions in academia, which are inherently lower paying, or the brilliant mathematician who decides that his real life’s dream is to dance for the Joffrey ballet, and say this just disproves any relationship between IQ and income. That’s just silly. These are minority data points.
In any event best of luck with that situation you have. In my world, which is commerce, I’ve seen all kinds make it, although basic intelligence is a first order factor. On the other hand, let’s not confuse income and a “good person.” And as we all know, if we even take a cursory look at the press, even those who seem to be at the top at times take the mighty fall not because of IQ, but because of certain character and personality traits.
Michael,
My guess is probably the one that is more of a people person will do better, but both will probably do just fine. So long as they finish high school, don’t get married before 25, don’t have children till they are closer to 30, and if they go to college (and don’t take on too much debt as a result) they’ll almost surely avoid bing in the bottom half of the income distrubution. Well, historically that has been the case. Getting married at 18, dropping out of school, and having 2 – 3 kids before one is 25 is usually a recipe for disaster income/prosperity wise.
But I know how you feel. You want your kids to not only do well in life, but hopefully even do better than you. Thats what I want for my son, to have a life better than my own. Not that I think of my life as being bad or anything.
“Getting married at 18, dropping out of school, and having 2 – 3 kids before one is 25 is usually a recipe for disaster income/prosperity wise.”
I could tell you stories. Family stories..
Is it five o’clock yet?
Steve V,
My comment was half in jest, but you are wrong about history. Specifically, there is the late Roman Republic that I mentioned where that is exactly what happened. Plebians lost not only their land, but their opportunity for productive labor due to the consolidation of farming under aristocratic families and the use of imported slave labor. With no means they went to the cities by the thousands where they existed for centuries on the government dole and were politically active rent-seekers. I tend to think you are right and that employment will return, but my conjecture is not unprecedented. I think you also have to consider that there are a lot of places with high structural unemployment.
I don’t think bigger government is the solution either, but that, too, has historical precedent and it seems to be the direction we’re heading, like it or not.
As for IQ, I don’t consider it to be the most important trait. Will and dedication are much more important. I’ve seen plenty of very smart people fail due to laziness.
What a shock, government screwing over the little guys. But there is a pony in there somewhere!!
Sarcasm aside, thats not bad that you have to go back over 2,000 years to find such an example and one due not to the natural result of market forces but due to corrupt government policy. I think this is the exception that proves my point.
Government or the aristocrats? At some point, one can have so much wealth that one can control government. Remember Ben Stein’s comment about class war (from memory).
Of, course there is a class war, and the rich are winning.
Steve
” And yet…yet…it is the liberals the “progressive†who hate it.”
The only people I see making suggestions for reform that might really work are people like Simon Johnson. Reduce the size of the banks. Warren has been advocating a regulatory approach, which has worked in Canada, but I am dubious.
Steve
So today we have market forces and not corrupt government policy?
Look, I don’t want to make a direct comparison to that period of Roman history despite the parallels. I don’t think we’ll be a nation where we have half the population supporting the other half. However, I’m also not going to simply assume that magical job creating ponies will inevitably appear to bring back the jobs lost in this recession.
Adoption. The well-adjusted, joyful, bold and competent one is adopted. The snide, manipulative, neurotic, temperamental genius is biological.
I know: go figure.
Sometimes a soft ball is served up…………..and you just have to control yourself and move on.
It isn’t magical ponies. Or if it is, its ponies that have been at work for sometime. Market forces are like the tide. No matter which politician thinks they can hold them back they fail. Look at Nixon. Look at Roosevelt. Nixon tried price controls and that was a disaster. I’m old enough to recall the long lines and the odd/even days in the early 1970’s due to price controls as well.
Roosevelt felt that competition and low prices were the problem during the Great Depression and made efforts to reduce competition and raise prices, including wages. Predictably unemployment stayed rather high. Price floors have a tendency to create a glut. In the case of labor/workers that glut are people in the labor market, but unable to find jobs which is what leads to higher unemployment.
Time and again the market has provided jobs. Shocks to the economy such as technological shocks (e.g. moving from a largely agrarian economy to a manufacturing economy) have been handled. Was the transition rainbows and honey? No. But it wasn’t continuing immeration of the working class either. Now we are in an era where we maybe transitioning from manufacturing to an economy based on something else. What…I don’t know (and if I did know I wouldn’t tell any of you because I’d want to get stinking rich off of it). That is the great weakness in my position, but when we look back we see that things somehow muddle on. Frankly I see it as a good thing in that instead of people working on assembly lines in large factories they can maybe work somewhere else that is less physically demand, less prone to injury, and possibly (hopefully) even more enjoyable and still enjoy the same or even better quality of life that they have enjoyed in the past.
My view is that market forces are amoral whereas corrupt government policy is immoral. I’ll take the former over the latter every time. I’d also argue that even government policy with the best of intentions can lead to perverse outcomes. Hence the title of Hayek’s most popular book. The road to serfdom is paved with good intentions. Hayek didn’t postulate that the politicians he saw in his life were evil men, but well intentioned. The problem is that with a large economy even the best of intentions can lead to public policies that have very undesirable outcomes.
We can look to our current health care mess. Roughly half (IIRC) of the health care is via government. A big reason is Medicare. Medicare’s introduction has a huge effect on costs. I suspect that when the boomers retire there will be another huge effect due to demographic shifts where people get very heavily subsidized health care (more so than they did pre-retirement). Government is also responsible for the employer provided health care which is likely a driver for the high growth rate of health care costs. The reason? Back when there were wage and price controls during WWII (IIRC) employers wanted to offer health care benefits and have them be exempt from the wage controls and taxation. This is how firms competed for workers back then. It also created an incentive to “gold plate” health care plans that is still in effect today. And it has had another impact that we often hear (only part of). Since health care costs are rising rapidly, and since health care is often part of total compensation, I’d be willing to be a bottle of Bowmore 12 that the stagnate wages we’ve seen recently are due to rising health care costs.
Now was all of this due to immoral politicians? No. I’d be willing to bet the politicians who favored these policies really did want to help those who were not so well off. But have they? Maybe it helped back when they first put it in place, but now it is threatening the economic future of this country. Good intentions leading to a really questionable outcome IMO.
Sure one could point to immoral corporate policy, but that is not the same thing as market forces, IMO. Immoral corporate policy is only going to be an issue in those markets where there are a small number of large firms. But when do we tend to see this? When there are barriers to entry into a market. Now this can occure as a natural result of that specific market (e.g. large sunk costs). But just as often, if not moreso, it can be the result of government policy. Take for instance the financial industry. Why are there a few giant firms that dominate the market? Are there large sunk costs? I don’t think so, but if someone wants to make that case go for it. I’d be willing to bet that it is that revolving door between DC and Wall Street at work. And look where it has helped get us. Too big to fail anyone?
Thanks, but I’ll take my chances with market forces.
Steve, my concern is that the government policies in place are actually preventing the transition.
I think you are right to be concerned, but I doubt the could prevent the transition, but most likely would draw it out. Even during the Great Depression unemployment did go down….just not that fast.
Steve,
Please don’t confuse analysis with advocacy. I’m not advocating for government job growth – far from it.
Normally your arguments would convince me, but I keep thinking back to this.