At the New Yorker John Cassidy writes on the potentially permanent damage done to the U. S. economy by the Great Recession:
Trying to sort the signals from the noise in the jobs report is a tough task in the best of times: the margin of error for the payroll figures is plus or minus ninety thousand jobs. So instead I’ll say a few things about a new research paper by three economists at the Federal Reserve, which is getting a lot of attention because it suggests that the recession and its aftermath have not only done terrible things to the U.S. economy in the immediate sense—high rates of joblessness, tepid gross-domestic-product growth, falling incomes—but also seriously undermined the economy’s capacity for future growth. Gavyn Davies, of the Financial Times, drew attention to the study earlier this week; Reuters published a story about it; and, in today’s New York Times, Paul Krugman devoted an entire Op-Ed to it, which was perfectly justified. It deserves to be discussed widely.
The authors of the paper are David Wilcox, the head of economic research at the Fed, and two of his colleagues, William Wascher and Dave Reifschneider. Although the study uses some sophisticated statistical methods, its basic point is straightforward: in the long term, economic output (G.D.P.) is constrained by the quantity and the quality of economic inputs (labor, capital, and technology). If the growth rate and quality of these inputs decline, the potential growth rate of G.D.P. will fall, too—it’s just a matter of arithmetic.
Since the financial crisis of 2007, the authors argue, that’s precisely what has happened. With hiring rates down, many workers have given up searching for jobs and have dropped out of the labor force. (According to today’s employment report, the labor-force participation rate hit yet another low in October: 62.8 per cent.) With budgets tight, corporations and government departments have cut back on investments in new plants and machinery, computer hardware and software, and research and development. And, with investments in innovation depressed, the rate of over-all productivity growth has slowed down.
If you put all of these things together, they seem to suggest that the economy’s capacity for growth is lower than it was before the financial crisis. How much lower? The authors come up with a variety of numbers, including one that has received a lot of attention: potential G.D.P.—broadly speaking, the level of G.D.P. consistent with stable inflation—“is currently about 7 percent below the trajectory it appeared to be on prior to 2007.†According to the latest figures from the Commerce Department, the G.D.P. is now close to seventeen trillion dollars, and seven per cent of that figure is $1.2 trillion. This is a lot of money to have gone missing, especially if it will never be recovered.
He reproduces the familiar “potential GDP” graph, showing a shortfall of $2 trillion in GDP from where we might be if the growth trend of 2007-2008 had continued. I’m going to propose an alternative scenario.
Above I’ve reproduced his graph but I’ve introduced a solid green line that illustrates where we would be if the growth trend after the end of the dot-com boom had continued. It’s hauntingly familiar.
I agree with Mr. Cassidy that serious damage has been done to the U. S. economy. I disagree about when. Here’s my alternative story.
The dot-com boom was not caused by the policies of the 1990s. It was the consequence of more than a decade worth of capital investment in information and telecommunications technology that finally paid off. Our economy is now a mature economy like France or the United Kingdom rather than a developing one like China. We’ve adopted policies including fiscal, trade, immigration, education, healthcare, etc. that taken together have resulted in the growth we’ve seen for much of our history to slow. The dot-com boom offset the effects of those policies until it ended. When it did the Powers-That-Be were desperate to keep the party going and so adopted policies which resulted in the housing bubble of the Aughts.
The gains produced by that bubble were illusory. There’s no use wondering where all that potential growth went. There was nothing there. It never really existed.
But what about all of those unemployed people and unutilized assets? (I hear someone ask.) My explanation is somewhat along the lines of Tyler Cowen’s “zero marginal product” one. Businesses continue to invest but they’re investing overseas and what domestic investment they’re doing depresses employment. Despite that we continue to import large numbers of unskilled and semi-skilled workers and skilled workers in areas where employment isn’t growing. Businesses are convinced, with a confidence based in experience, that they’ll be able to import the workers they need and continue pushing wages down even as the number of unemployed or discouraged burgeons.
Despite that we continue to import large numbers of unskilled and semi-skilled workers and skilled workers in areas where employment isn’t growing. Businesses are convinced, with a confidence based in experience, that they’ll be able to import the workers they need and continue pushing wages down even as the number of unemployed or discouraged burgeons.
Thank you, elites of America.
I think you’ve missed a couple of factors here Dave. When it comes to employment automation had an impact. When it comes to growth you can’t discount the cost of energy.
You are certainly right about the housing bubble and the policy that led to it – it was never more than smoke and mirrors.
“The dot-com boom was not caused by the policies of the 1990s. It was the consequence of more than a decade worth of capital investment in information and telecommunications technology that finally paid off.”
Perhaps the largest spurt in productivity since electrification or mass transportation.
I listened to an interview with Alan Greenspan last night while driving (about his new book). Two points worth noting. The first was his observation, which I have pounded consistently (and consistently rejected by left leaners) that regulatory and cost of employment uncertainty is a fundamental drag on investment and employment. By now I assume everyone has seen the free cash flow to capital investment chart making the rounds. Awful. I say this not to pound my chest, but when you do what I do you see and hear about it in spades and know it is true.
Second, a close variant of Dave’s consistent point about malinvestment in certain sectors, Greenspan describes it in the context of halting the beneficial weeding out of low return vs high return sectors: higher education, health care construction to name three.
“regulatory and cost of employment uncertainty [are] a fundamental drag on investment and employment.”
Let’s suppose your economic New Jerusalem came to pass, and the uncertainty you cite was attenuated, greatly. How would that address the problem of the zero marginal product worker?
Tyler writes:
Why should we think that, given the situation as described by Cowen, and endorsed by Dave, lifting the uncertainty constraints wouldn’t just result in more of the same thing we have? Well, you might say, we’d have all these new companies producing all these new products. But why should we suppose that these new companies, relying for success on new technologies, would adequately address the problem of people rendered unemployable by companies utilizing similar, but perhaps older, technologies? If those folks weren’t employable under the older technological regime, why would they be employable under the new?
sam
You are rejecting the entire history of economic development. You could have made, and they were made, similar arguments about the adaptation from an agrarian to industrial society, for example.
What next, “get a horse” to employ buggy whip labor?
We currently reside in a period of historically low capex to cash flow ratio. Those “evil,” “greedy” and “profit seeking” capitalists have not suddenly become altruistic saints, refusing to chase filthy lucre. Capital is simply not employed at the same rate in a high risk environment as low risk. Nor is it priced similarly. Nor can you force it to be employed. And the biggest thing you and those of your political/philosophical persuasion cannot get through your noggins is that capital is more mobile today than ever. It will go where best used – pronto. And sometimes that best use is on the sidelines.
That is not an answer to the question I asked. The question concerns what Cowen and Dave call the “zero marginal product worker”. How would reducing regulatory and employment uncertainty help them? In large part, they’ve been made superfluous by advancing technology. How would he reductions you advocate address that very large and growing class of unemployed?
We could do business on the basis of any dollar value as long as we have a reasonable balance between the value of all goods and services if it were not for the debt structure. The debt structure has obtained its present astronomical proportions due to an unbalanced distribution of wealth production as measured in buying power during our years of prosperity. Too much of the product of labor was diverted into capital goods, and as a result what seemed to be our prosperity was maintained on a basis of abnormal credit both at home and abroad. The time came when we seemed to reach a point of saturation in the credit structure where, generally speaking, additional credit was no longer available, with the result that debtors were forced to curtail their consumption in an effort to create a margin to apply on the reduction of debts. This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction, but what in reality was underconsumption measured in terms of the real world and not the money world. This naturally brought about a falling in prices and unemployment. Unemployment further decreased the consumption of goods, which further increased unemployment, thus bringing about a continuing decline in prices. Earnings began to disappear, requiring economies of all kinds – decreases in wages, salaries, and time of those employed.
I repeat there is plenty of money today to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry and making it appear that there is a great shortage of money and that it is, therefore, necessary for the Government to print more. This maldistribution of our money supply is the result of the relationship between debtor and creditor sections – just the same as the realtion between this as a creditor nation and another nation as a debtor nation – and the development of our industries into vast systems concentrated in the larger centers. During the period of the depression the creditor sections have acted on our system like a great suction pump, drawing a large portion of the available income and deposits in payment of interest, debts, insurance and dividends as well as in the transfer of balances by the larger corporations normally carried throughout the country.
Let me restate the question more clearly. The “zero marginal product worker†has been made so in large part by advances in technology. New businesses coming online will employ the same or newer technologies. If those workers were made superfluous before by technology, why wouldn’t they remain superfluous in the future because of technology?
And by “future”, I’m not talking about some infinite time horizon. I’m talking about the next 10 years. We have a serious, serious unemployment problem that is growing. The history I’m familiar with teaches me that that is a very dangerous situation.
Ben:
No argument here. Marriner Eccles isn’t remembered by too many people these days.
While I recognize that technological obsolescence is a factor, sam, I don’t think it’s the most important factor. At least as important and possibly more so are the acceptance of one-way autarkies on the part of China and India, the importation of large numbers of workers, and, significantly, the expectation that we will continue to import large numbers of workers.
We can’t do much about technological obsolescence but those other factors are political creations and could be changed if we cared to do so. It’s worth a try. My reaction to the notion that doing anything about them would provoke a response and incite a trade war is so what? China, India, and every other country playing mercantilist games with us have more to lose than we do.
OK, so the cause is multivalent. I still don’t see how Drew’s recommendations in any way alleviate the problem. In fact, if the cause is multivalent in the way you state, the problem is even more resistant to solutions along his lines. Give Drew everything he wants. What would lead us to think the existing American companies and new American companies would act any differently than they are now? If American companies “are convinced with a confidence based in experience, that they’ll be able to import the workers they need and continue pushing wages down even as the number of unemployed or discouraged burgeons”, why would a lightening of the regulatory burden and a reduction in unemployment uncertainty (whatever that means) make them throw in a winning hand? If anything, I’d think they would just be empowered to act even more egregiously.
It may be that RB’s strategy and mine are different. The objective of what I’d like to do is to increase employment. I consider increasing GDP a means to that end but only one of several possible means and, given the factors I’ve mentioned, not a particularly efficient one.
My approach to reducing the regulatory burden may be somewhat different, too. I think there would be an advantage for companies that want to do business in multiple different jurisdictions in having fewer sets of regulations they needed to comply with. I’ve suggested something analogous to the UCC.
sam
zmpw is a theoretical construct and you are begging your question. The concept of zmpw exists, therefore no investment or growth can solve the problem.
I would ask you to look back 100, 50, 30, 20, 10 years ago at the jobs portfolio. At any point in time you could say some workers have been obsoleted, but you would also have to ask someone 100 years ago, “do you think we will need software programmers in the future?” Its only when you throttle the growth engine that you fulfill your own prophecy.
However, there is a point Dave makes repeatedly with which I am in total agreement – the importation of cheap labor. Its advocated by, as I call them, the “corporatist Republicans,” for economic reasons and of course the Democrats for voting/political reasons.
Its a vexing problem because to unwind this practice would be a real birtch, especially for agribusiness, not to mention the politics or scraping the immigrant wheat from the chaff.
And now you know why I simply don’t buy arguments like Reynolds that “it will all get resolved in the long run” on ObamaCare. No it won’t, it will be a miserable outcome in the future as well. Beware the camel’s nose in the tent.
sam
Growth, and……….if labor is made artificially high cost there will be increased impetus to replace it.
Dave – you and I actually agree. Growth and reducing incentives to not employ should be the policy, because employment and income growth are the prime directive. I hold no brief for a machine. Technology and mechanization will sort itself out as markets always do. There simply is no cause for putting into place headwinds to labor.
“zmpw is a theoretical construct and you are begging your question. The concept of zmpw exists, therefore no investment or growth can solve the problem.”
I’m sorry, but aren’t you doing some question-begging, too? You’re assuming what is to be shown, that the kind of growth we’ve seen in the past is possible now or in the future. Not theoretically but actually possible. Absent profound changes, revolutionary changes, the economic forces invested in maintaining the status quo seem to me far too powerful to allow such change. I think they benefit so greatly from things as they are, that they would marshal all that immense power to resist any change they believe would diminish that power. Certainly nothing I’ve seen in the young years of this century would lead me to believe otherwise.
@Dave
Your brief analysis in the post reminded me of Eccles when grappling with the fallout of the 1920’s excesses. I think he’d broadly agree with you regarding the ephemeral boom resulting from asset bubbles. He would also believe it important to note the productive capacity that existed at the bubbles’ height is still there and we just aren’t making use of it. In real terms we’re not a bit poorer as a nation but massive mal-distribution of incomes has created poverty among the majority of American households.
One of my areas of concern in the movement to increase the minimum wage, particularly to increase it sharply to $15 per hour, is that it will provide a strong incentive to employ workers “under the table” which in turn would increase the likelihood we’d import more unskilled and semi-skilled workers. That’s not a problem in a fairly controlled employment environment like a municipal airport but for a whole city?
The unprecedented portability of the factors of production introduce problems undreamed-of in Eccles time.
My biggest concern about a sharp (which I interpret as sudden) increase to $15 is that much of our workforce has been under-employed and will not be able to produce at maximum until their skills and knowledge knowledge catch up, a capacity constraint resulting from a rapid increase in aggregate demand. It’s potentially inflationary and should proceed in phases. I generally don’t consider minimum wage laws to be optimum policy for the reason you bring up; tight labor market policies are a better solution and one Eccles would wholly approve of.
Please note a Jobs Guarantee would be an effective buffer against inflation driven by capacity constraints. Just sayin’.
Don’t even read the prose, folks, just look at the graphs. Did technological change just happen out of nowhere in 2008? Oh, and I’m sure if you down some peyote you will see the Obama recovery Michael speaks of.
http://www.zerohedge.com/news/2013-11-11/10-uncomfortable-truths-about-growing-unemployment-crisis-america