Tuesday, September 07, 2010

The present economic situation, in technical terms

If a seasoned blogger like Brad DeLong can steal ("quote") an entire blog post from Karl Smith, well, who is TBA not to emulate his bettters?
There is a critical point that I fear the commentariat is just not getting. In my darker moments I fear that some of my fellow economists aren’t getting it either but we aren’t going to go there.... We have very low capacity utilization (75%) and very high unemployment (10%). That is, we have factories sitting idle for lack of workers – low capacity utilization. At the same time we have workers sitting idle for lack of factories – high unemployment. There are machines waiting to be worked and people waiting to work them but they are not getting together. The labor market is failing to clear.

This is a fucking disaster.

Excuse my language, but you have to get that this is a big deal. This is not a big deal like the GOP doesn’t appreciate public goods. Or, Democrats don’t understand incentives. Or some other such second order debate that could reasonably concern us in different times. This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.

Let me say that again because I think it fails to sink in – literally trillions of dollars in value are not being produced. Not misallocated. Not spent on programs you don’t approve of or distributed in tax cuts you don’t like. Trillions of dollars in value are not produced at all. Gone from the world entirely. Never to be had, by anyone, anywhere, at any time. Pure unadulterated loss.

Time and time again I see people speak about recessions as if they are a bad harvest – an unfortunate event wherein we have to figure out how to go with less. Some say we should all sacrifice – some say the sacrifice should be based on X or Y. Some say each family should take their lumps as they come.

However, they are all getting the basic idea wrong. This is not a bad harvest. The problem isn’t that there is less to go around. The problem is that we are creating less, building less, making less.

We have people who would be working but are instead watching Judge Judy. We have machines that could be spinning but are literally rusting for lack of use. This is a coordination disaster.

The question is how do we end this thing as quickly as possible. How do we stop wasting our basic resources (men and machines), day-after-day, month-after-month, year-after-year.

So when I hear this debate drift oft into how Republicans don’t appreciate the value of infrastructure – I suffer infinite eye roll. This is the time for this? You would watch the core economy grind down while you argue over the need to fix a pothole!

When I hear the GOP running some nonsense about how Obamacare is scaring small business I find myself beating back the desire for autodefenestration. Can we let this go already! There are real issues that need to be dealt with.

Now maybe some people want to explain to me how what appears to be a massive market failure is actually something else: a skill mismatch, a great recalculation, etc. I am willing to have that debate.

Of those that agree that this is the result of insufficient aggregate demand we can debate the fastest means of spurring such demand: aggressive monetary policy, payroll tax cuts, something else we haven’t thought of – I am all ears.

However, these are the limits of rational disagreement.

Side arguments that are basically proxy battles for your general theory of government are sadistic tribalistic grandstanding. You chatter and dawdle while Rome burns.
See the original post for charts, update, etc.


  1. Guilt-inspiring. I'm given to chattering and dawdling as much as anyone, I suppose.

  2. Okay, TBA, I'll bite. And by the way, I agree with the post.

    We pay people not to work in this country. We say that we have to have illegal immigrants because they do work that "Americans won't do." Well, between the artificially depressed wages that these immigrants cause and the free money on welfare, I suppose Americans won't do the work. But if they were faced with the prospect of work or starve, guess what? They would work.

    Back when they raised the minimum wage, it was observed that most people earning the minimum wage were young people. Is it any wonder that the youth unemployment rate is now the highest it has been since 1948? Most young people can't produce enough to make their hiring worthwhile, and many adults can't either. And if forced heathcare makes the effective minimum wage go even higher, it is going to push the unemployment rate through the roof! So people are forced to do nothing, instead. Lower the minimum wage so employers can afford to hire these people!

    By the way, our entire economy is disfunctional. We subsidize the rich by giving them a mortgage interest deduction on their mansions and other counter-productive tax breaks. We tell the poor not to work if they don't want to and give them free housing and food. And so we've created a screwed up world.

    Let's just let the dollar drop to nothing and eliminate all the handouts. It will mean no more foreign travel for a while! But it will also mean we will have to manufacture what we use and put America back to work.

  3. Chattering and dawdling is what the internet is all about, I thought.

    ... Reb, I am skeptical how many people "won't work" because they are "on welfare." I agree that illegal immigration is a wage-depressing problem, but obviously the employers directly benefiting from those low wages are doing a good job frustrating reform.

    What is the age range of the "youth unemployment rate" you mention? I tend to regret that kids under 18 are allowed to work at all.

    Agreed re: the dysfunctional economy, but I'm not sure that autarky is much of a solution; it certainly isn't a political possibility. Tho perhaps the GOP's efforts to destroy the economy have that aim in mind? One would like to think they had *some* grand goal.

    Hope you saw the updated post on that Great Famine book, btw -- I left out the link to the book review at first.

  4. TBA, the welfare-work link is complex, as you know. I think Daniel Patrick Moynihan had it right 45 years ago, except that it is now destroying the white family structure as well as the black family. I do not doubt that many women sitting at home with three illegitimate children might not decide that they really rather would work than be on welfare. Of course, by then it is too late; they simply can't work and take care of their children, and the cost of child care will far exceed their earning capacity. But it is the welfare system that allowed and encouraged them to have three illegitimate children in the first place.

    I agree that employers are frustrating immigration reform. Also frustrating reform are liberal professionals who like their nannies. These people can't stand the idea of hiring an Anglo to raise their children, because they will have to confront the concept of class differences every day (plus pay more). So they hire illegal immigrants and cloak it in liberal dogma. I just don't understand this issue. Unchecked immigration clearly hurts unskilled working class Americans, yet liberals want to eliminate all border control. The addition of countless millions entitled to affirmative action (why?!?) means that there is eventually going to be less available for blacks, yet black leaders support letting all of these people in. (Where colleges require SAT subtests, blacks are finding it virtually impossible to compete against Hispanics, since the latter group invariably chooses Spanish as one of their subtests!).

    Youth unemployment is generally defined as people between the ages of 15 and 24. The minimum wage really has gotten high enough that these people simply can't produce enough to make their hiring worthwhile. I think you are dead wrong about kids under 18 not working; far better that every child under 18 be required to work a minimum of eight hours per week at some wage -- ANY wage. I agree there are a few kids working too many hours, but it would do them all good to work a few. If you want America to be a society of producers, get 'em started young.

    Politics aside, I think a foreign exchange policy in which we attempted to balance imports and exports would solve much of the problem. When imports exceed exports, we should try to push the dollar lower. When exports exceed imports, we should push the dollar higher. We have allowed China to artificially prop up the dollar when we should have pushed back, hard. Of course, the funny thing is they are going to end up with paper that is worth about half what they paid for it.