This post from RealClearMarkets makes a very interesting point:
America’s jobs figures reveal more than high unemployment, they show a declining productive capacity. Job loss remains a major U.S. problem, but the loss of productive capacity, which lies beneath it, is an even greater and longer-term problem. And unlike unemployment, it is something the vagary of statistics cannot long hide.
March’s jobs report showed a curious anomaly: low job growth (just 88,000), yet a fall in the unemployment rate from 7.7% to 7.6%. The reason such a push-me-pull-you result could occur was a fall in labor force participation by 663,000 and in the participation rate from 63.5% to 63.3%.
Looking askance at this interaction is not looking a gift horse – job creation and unemployment’s rate fall – in the mouth. It is about asking a fundamental question: How long is the continuing decline in America’s productive capacity sustainable?
If you are to maintain a Keynesian strategy for dealing with our present economic doldrums, you must maintain that there is a gap between present potential production and our present production. The usual illustration of this is to extend 2007 GDP in a straight line and point out the separation between where that line would be now and present GDP.
The large of number of unemployed persons is taken as prima facie evidence that the production gap such an illustration reveals is something real. My position is that at least some of that gap is, in fact, illusory, the product of the housing/financing bubble. Nothing in Lord Keynes’s theory suggests that you will increase production beyond the supposed production gap by boosting aggregate demand.
As the number of people in the labor force and the labor force participation rate shrinks doesn’t the production gap shrink along with them?
Nothing in Lord Keynes’s theory suggests that you will increase production beyond the supposed production gap by boosting aggregate demand.
That is because Keynes argued at full output you’ll have full employment. Forcing demand beyond productive capacity can only generate inflation, because there are no more resources to utilize until additional investment expands capacity.
Another way to think about it Dave is that prior to 2008, we had a bubble and that lead to investment in various parts of the economy, that absent the bubble would not have taken place. After the bubble bursts, that over investment, indeed malinvestment, is now no longer able to be supported by a non-bubble economy. This would give you the L-shaped recession. The reason is that the losses the economy sustained when the bubble burst are permanent which makes it a different category than what you’d get with a standard recession (down turn in economic activity followed by a sharp increase, then a return to trend).
Or to put it yet another way, using the pre-Great Recession years as “normal” will likely give you misleading results. And the “recovery” in the sense of getting back to employment, production and so forth following the bursting of the bubble will take very long. Because we are going to start at a permanently lower position with little hope of strong economic growth.
It is questionable that (government) spending will help speed up the process since it will basically be like trying to put some air back into the bubble.
Steve V
Is it your view that inflation does not follow the general tenants of the quantity theory, or that it happens only under certain circumstances?
According to who’s version of Austrian Business Cycle Theory?
Red,
It is my view that the “quantity theory” is an identity. As such it isn’t really a theory. Any theory of money or even more broadly macro economics should be consistent with those identities. But trying to derive a theory…especially a behavioral theory, from accounting identities can be problematic.
How’s that for a non-answer (technically, any theory that discusses inflation should be consistent with MV = PQ).
As for Ben’s comment, there are different thoeries about money than just the Austrian Business Cycle.
Malinvestment is part and parcel of ABCT. It’s fine if you aren’t familiar with that school of though.
I wasn’t using in line with ABCT, but to indicate it was investments we would not have made if there were no bubble…and since bubbles are usually bad, the investment is also “bad” hence the modifier “mal”.
Stop focusing on a single word and then making assumptions that are not warranted.
Your usual imprecision is the problem, Steve. No one who wants to be understood uses a term wholely associated with a specific school of thought as a catch-all term for making a bad bet. Furthermore for the entire economy to have been caught up in a torrent of malinvestment would require a coherent theory of malinvestment, which you’re apparently saying you don’t have. This renders your earlier assertion that malinvestment did it meaningless.
“If you are to maintain a Keynesian strategy for dealing with our present economic doldrums, you must maintain that there is a gap between present production and our present production.”
Which is why I thought the stimulus was good to help stop the slide, but not so much for getting back to full employment. Much of our growth since 1980 has been based upon credit. That debt needs to be paid off, but maybe even more importantly, do we know how to have growth again without running up massive levels of private debt? If you look at what a lot of the PE guys did in the booms of the 80s, 90s and 2000s, it was all beta and no alpha. What do they do when they cant leverage?
Steve
Another complication is that Keynesian stimulus is a strategy of the short term. Eventually, it’s not the short term any more.
Technically, that is how the ABCT uses it. I just used it in my explanation. No where does it say I have to be a cult like follower of any school of thought…oh, wait…yeah that would be you Ben the cult like slavishness in following a single school of thought. (By the way, I believe John Mills used the term too.)
Where do I imply this. I’d say the over-investment, or “malinvestment” would definitely be in housing and finance. Something the government has been working over time to prop up in both cases.
Hardly. You are making up a position for me and then refuting it. Classic straw man argument. Besides, I don’t see how the idea of malinvestment-people making unwise investment decisions due to a bubble economy-is anymore problematic than animal spirits.
Oops. Piece on labor rate Imeant to put here.
http://www.newyorker.com/talk/financial/2013/04/29/130429ta_talk_surowiecki
Ben- Lots of use the term malinvestment. Few of us are thinking ABCT.
Steve
Steve V
I guess what I’m getting at here, is that printing money willy-nilly seems self evident to cause inflation. The money doesn’t go into a mattress. And of course I’m a good Chicago-trained boy. But despite my cock-sure posture here I actually rethink assumptions all the time.
I understand velocity issues. I understand consumption gaps. But doesn’t it eventually have to revert to mean? I was at our bakery company yesterday. Soft wheat prices up. Cherries and other fruitsup. Fats and oils up. Eggs up. Double digits. And what are we doing? Pie prices up……..double digits. And this ain’t the corner bakery. We make pies and cakes by the handy million. Wal-Mart is the biggest customer. Those prices flow through to Everyman.
I don’t get it (the no inflation notion). We generally own 10-12 businesses. Currently only 6. So smaller sample size. But all but one are putting through big price increases. If that’s not inflation I don’t know what is.
As a guy who sees an awful lot of businesses and speaks to an awful lot of business owners……he who doesn’t think we are inflating must be in an alternative universe.
Red,
In some cases I would agree that printing money willy nilly could lead to inflation, but it isn’t showing up in the various indexes yet. Could the indexes be wrong? Sure, but I’m skeptical of that.
To paraphrase/expound on Milton Friedman’s comment about inflation. Inflation is likely everywhere a monetary phenomenon, but price increase are not every due to inflation.
What Drew is describing is what I see in the cost increases relating to our own business consumption — building supplies from A to Z.
Someone like Dr. Steve will relate this to anecdotal bias. But, people around me remark on the upward pricing march of goods as well. The main measurement showing relative small growth, though, are government stats. It makes one wonder why the disparity between main street consumer and government/Ivory Tower economist?
“Inflation is likely everywhere a monetary phenomenon, but price increase are not every due to inflation.”
That’s a fair point, but what I was really saying is we cover a pretty wide swath. We may be good investors, but we don’t only pick companies with pricing power. We are reacting to inputs (producer pricing index if you will) and going from there.
Something is going on out there.
@ Steve Verdon
One aspect of the problem is a common definition of inflation.
If the money is going towards new products or expanded existing products, there would not be any price increases. A lot of this newly printed money will be used to create credit, but this is dependent upon somebody wanting to borrow.
Money/credit is somewhat like water. It takes the path of least resistance, and it seeks its own level. New products are like fissures, and water (money/credit) flowing into them do not raise (inflate) the overall level. This does not guarantee the fissures will be the best place for the money/credit. (This is just a quick and simple example.)