Is employment still a useful economic indicator?

I feel a little silly just typing that. I know what some of you are thinking – this cat is about to ignore around half of the macroeconomic theory built up over the last 80 years. Well I’m just getting started, so bear with me a while.

Firstly, this (click to enlarge):

Capture

If you ever wanted just one visual that encapsulates the inherent contradiction in post 1970’s capitalism, this is it. But what happened in the early 70’s to cause this disconnection? There are few theories and everyone favours their pet one, but I think it’s a mix of them all – the end of the Bretton Woods system of fixed exchange rates, the start of globalisation, oil price shocks, the beginning of the financialisation of the world economy and huge improvements in technology.

Now let’s look at the bigger picture of employment vs GDP per capita (for the US, data taken from the IMF’s World Economic Outlook database, using 1980 as the base year):

Capture econocat

Note that the point of this is to show the separation, not what is happening at the margins, which still clearly indicates that a change in GDP correlates with a change in employment. Bar some recessionary blips, the trajectory of economic output has been far steeper than that of employment, which leads me to conclude that a significant feature of today’s economy is that employment no longer matters. And if employment no longer matters, then we can dispense with much of macroeconomic theory. If the long-run Phillips curve is indeed vertical (meaning that beyond a certain point, additional fiscal and monetary stimulus only leads to rising prices), then it is perhaps no surprise that, as I noted in this post, neither the Keynesian nor the monetarist approach is working to restore the economy to full employment. Further, what does “full-employment output” even look like now? There’s no longer any such thing. The old rulebook should be thrown away; it’s time to move away from old style left vs right economics, and find out what works today.

(I’ve updated the post to include this, from the same data set mentioned above; GDP per person employed. If employment mattered, ie if we expect to see a relationship between employment and output, this would be a much flatter line):

Capture 2

It’s my prediction that what will eventually replace neoliberal capitalism is a two-tier economy. We should stop giving our money to the financial sector, shop local, use public transport, cycle, recycle and use green energy wherever possible. With so many of us having less and less share of the economy, we need to make our share count. If employment no longer matters, let’s get to where our money doesn’t either. Let’s watch the mainstream economy collapse under the weight of its own contradiction – the idea that their income is somehow unrelated to our wages.

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Is the Economic Rulebook failing us?

One of the questions I’ve always wanted to try to find an answer to is: Is there a level of economic growth at which our happiness (as in a general state of wellbeing) will start to decline?

That this is going to very difficult has never put me off; I believe it can be done, I just don’t know how yet, mainly because it’s going to take time to come up with reliable definitions that we can then attempt to measure. The subjective nature of happiness is only the start of the difficulties.

What has spurred my return to this question is the contrasting approaches to the latest global recession, and how none of them seem to be working. The spending approach of the US seems to be working marginally better than the austerity of Europe, but I fear the associated cost of this, huge deficits and unheard of levels of govt debt, compounded by monetary policy gone mad, are pushing the world economy toward a point of no return. By this I don’t mean apocalypse, just a painful re-set that in retrospect might not be such a bad thing. Things will not, and cannot, continue as they are.

Painting the picture with a very broad brush, this is what we have: unprecedented levels of economic activity, with most of the influence centred in the financial, not the productive, sector of the economy. Technological gains that have pushed output up, but with employment lagging behind, this coupled with downward pressure on wages since the 1980s has created a huge gap between what the economy is capable of producing (and is being pressured to produce by an out of control financial sector) and what people are capable of consuming. This results in consumption pressure, from direct means such as promoting easy credit and media-led lifestyle choices, to indirect ones such as built in redundancies and unnecessary packaging. This creates the credit bubbles that, when they burst, result in recessions. We then get slapped on the wrist for our poor choices, but are still encouraged to pay our debts and somehow find the money to keep the whole show on the road, while those who put the air in the bubble not only start again, but have the audacity to grade us on how we dance to their tune (the ratings agencies, fow whom I have a question: Once you’ve downgraded every country in the world, what then?).

I want to have a quick look at the US Federal Reserve, because the state of their finances is perhaps the best indicator of how things have changed in the last 30 years. In 1985 the balance sheet of the US Fed was just over 200 billion dollars. Holdings of US govt bonds accounted for about 80% of the assets, with notes in circulation making up abount 80% of the liabilities. In 2012, the balance sheet is over 2 trillion dollars, up tenfold since the 80s. This in itself is not the worry – you would expect your money supply to grow as your population does, and as the economy grows. But let’s look at the components: on the asset side, govt bonds are now about a third, with mortgage backed securities (including the crap that kick-started the economic collapse of 2008) another third. On the liabilities side, notes in circulation is down to about half, with the other half being the deposits held by commercial banks.

So what does this mean? Well the US Fed is buying up all the bad debt from banks, and also about 75% of the govt bonds being issued. They don’t exchange actual money for this, they increase the reserve deposit amount for that particular bank (whether it be a commercial bank or the US Treasury). It’s just an accounting entry. That bank can then proceed to lend out a multiple of it’s reserve deposit, the mechanism I described in this post. The purchase of govt bonds basically sets the interest rate; inflating the demand for the securities (by buying them up) increases the price, decreasing the yield, which is effectively the interest rate.

So currently we see interest rates near zero – this has always been the monetarist approach to stimulating an economy. But it’s not working. The US economy is recovering, but very sluggishly; and this with goverment spending at unprecedented levels (what’s it now – 16 trillion in debt?) and monetary policy reduced to buying your own products to make the demand seem high. This suggests to me that this time it might have gone too far. I mean it’s ok to buy up all the rubbish that’s already exploded in our faces once, and even to buy up your own securities and have a government in huge debt, as long as the rest of the world maintains its confidence in you. But you can’t keep it up forever, and when this one blows, that will be it.

Perhaps it’s about time we stopped using the word “recession” and started to recognise that unemployment is no longer a result of bad macroeconomic policies foisted upon us by our ideological rivals (as neither ideological approach is working). Instead, we need to see it as a sign that the economic system as a whole has let us down, that consumers just can’t keep pace with the level of output, and no amount of easy credit is going to make a bad situation look different – we’re starting to see it for what it is. Unemployment should be our signal that bigger is not better any more.

When I said before that we’re all responsible for Neoliberalism, I meant it. There’s no global conspiracy foisting this upon us, although there are players who benefit, and they are certainly not complaining. But we’ve all bought into this philosophy that we must achieve economic growth at all costs; the management of every corporation in the world is under pressure to deliver better results than the previous year, every year. But by cutting labour costs they are ultimately cutting off the branch they are sitting on – each one just thinks it won’t happen to them.

Can we find a way of using technology to actually make our lives easier, instead of just producing more? Couldn’t we use the enormous technological gains we have made to benefit more people – imagine an approach that values employing more people each to do less work, keeping production levels constant. And making benefits for unemployed people a mainstay of any civilised economy. This can be done in such a way that incentives to work and make profits are not removed, but this approach will result in a more even distribution of the fruits of the economy’s labour – not as an end to itself, but with the ultimate goal of ensuring a market place where everything that is produced can be sold without the need to go into debt.

In my next post I’ll be looking at my proposed tax and spending regime that will be designed to encourage the type of economic responses that I believe can save capitalism from itself.

Everyone is busy

The humans have been away on holiday and of course they switched off the modem before they left, so I’ve not been able to internetise for a while (as an aside, why is it that you humans switch off everything in the house except the fridge? From whence comes this trust in the fridge that is not shared with any other appliance?)

I hope to be back to more regular blogging in the coming days, once the human’s thing that he calls “month-end” (more like world-end if you ask me, the way he carries on about it) is finished and he brings his laptop home from the office. He’s always busy these days, busy busy busy which reminds me, please check out this post on Permanent Crisis, Neoliberalism is stealing our time. It’s the second in a series of posts on the subject of time, and the first posts in several months on that blog, which is a great source of information on the social and cultural impact of neoliberalism.

 

Must be a dirty word

The right-wing think tank American Enterprise Institute doesn’t understand what a balance sheet is. The linked article is another inept attempt to prove that inequality doesn’t really exist. Because, they say, instead of looking at income disparities, we should be looking at consumption. Look, an increasing percentage of poor people have microwaves, dishwashers, computers and printers! And more of them have heating and air-conditioning than at any time in the past! Are there no workhouses for these people? Ok, that last one was mine (actually Dickens’).

Now there’s a word missing from that article, which is astounding in the context of discussing consumption in the year 2012. I actually did a CTRL-F search for it, and it returned “0 of 0”. That’s right, the word DEBT is completely missing from that happy scenario. This is the equivalent of a corporate CFO reporting that the company has €10 million available in the bank, so let’s crack open the champagne, without mentioning that the funds are only available because the bank has given them an overdraft facility.

Almost any graph you look at giving consumer debt figures over the past few decades tells the same story. These are just a couple of them:

Since the 1970s wages have been forced down while productivity has increased. The outcome of this is a huge gap between the purchasing power of consumers and the output of the economy. How is this gap breached, without the economy collapsing in on itself? With debt, of course.  Now conservatives will want to tell you that we’re just coveting what rich people have, that income disparities aren’t really an issue. And in a way they’re right. Income disparities are themselves not relevant – they are, however, a good indicator of the real problem, which is the spending power – productivity gap.

Increasing debt levels is what is keeping the Neoliberal system going; in 2008 the system crashed, because it suddenly became evident that there was nothing behind the illusion of wealth. Now, neoliberals are trying to shift the debt burden to governments (“too big to fail” etc), in a desperate attempt to pretend that the wealth is still there, that it hasn’t been destroyed in a debt-fuelled explosion.

And conservatives will continue to blame the wrong people, because there can’t conceivably be anything wrong with the system, can there?

Michael O’Leary’s merry-go-round is in full tilt once again

Michael O’Leary, Ryanair’s flamboyant chief executive and chief mischief maker is back in the news again, once again trying to buy Aer Lingus. This happens every few years; Michael gets bored with crunching numbers in his Dublin Airport or London offices and decides to have some fun with the Department of Transport and the Competition Authority; trying to find new ways to turn the former into his downtown headquarters and the latter into nervous wrecks. This time he’s offered €1.30 per share, less than half what he offered in 2006. That’s fair enough, I suppose, Ryanair’s own shares are down by a similar percentage over the same timeframe. I can just picture (Minister for Transport) Leo Varadkar rolling his eyes and thinking “here we go again.” Everyone knows it will never happen, even if the government agreed to sell their stake in Aer Lingus, it’s unlikely our own competition board, let alone the EU, would sanction it.

Now don’t get me wrong – I think Michael O’Leary is great craic. I love hearing him on the news, laying into some hapless individual from the Dublin Airport Authority or the D.O.T.; I love the way he comes up with zany ideas just to get publicity, any type of publicity it seems. Remember “Spend a penny, pay a pound”? And everyone believed he would actually do it, but it was all just a publicity stunt. And all jokes aside, Ryanair is a strong company with a superb business model. They really have made travel in Europe cheaper for everyone, if perhaps a bit more irritating.

What continues to amaze me as an economist, however, is that every time Michael O’Leary is back in the news, some radio DJ will inevitably read numerous texts sent in to their show along the lines of “Michael O’Leary should be running the country, he’ll sort everything out.” This is a common phenomenon worldwide it seems – Mitt Romney’s experience as a venture capitalist alone qualifies him to run the US government, apparently. But countries are not corporations, not even remotely like them, and it’s a sign of how deep into Neoliberal thinking we all are that we think this way. When last did you hear some politician announcing that the country is “open for business” or calling us “Ireland Inc.” Probably not too long ago.

Michael O’Leary might, for all we know, make a very good Taoiseach (if he was even interested in the job, which he isn’t). But he might also be crap – we just don’t know until we hear what his policies would be. We know he hates unions and the €10 departure tax at Dublin Airport – that’s about it. There’s no earthly reason why a successful business person should be any better or worse at running the country than a successful person in any other field. Does anyone really think Michael Schumacher would automatically be a good transport minister because he’s a brilliant racing driver? Or should Padraig Harrington be minster of sport? Bono could take Arts and Culture; actually Bono could take anything, if Bob Geldof doesn’t get it first. But you see my point. An entrepreneur is just another profession, so you may as well elect a good entertainer, engineer, IT specialist, policeman, priest or cleaner.

I’ll have to end this with a Ryanair joke – this is apparently true…..I know a guy who knows a guy etc. Anyway, Ryanair flight about to depart for Gatwick is going through the usual safety brief that you humans who fly regularly are so familiar with – the recorded announcement with the stewards doing the actions – it gets to the bit with the oxygen masks. “Pull the mask down, placing it over your mouth and nose………” Someone shouts from the back: “and insert €2 for oxygen!”

I’m just going to come out and say it.

This is going to be a rare polemic. It’s because I find you humans so amusing, so tragic, and a lot of the time, so stupid. Morality may be an illusion, but, just like the monetary system, it’s an illusion that works. So why have you abandoned it? Why have you adopted an economic system that says nothing of good and evil, but only what “The Market” dictates? You truly have found a new religion, for The Market now leads you, has taught you the correct responses; it tells you what it wants. And what it wants is no less than total obedience to it; The Market is everything and nothing makes sense outside of a market transaction.

You need to restore your older, tried and tested morality. It may be boring and somewhat distasteful, but it’s the only thing that works for you. To move yourselves beyond good and evil may work for us cats, and it may work for some of you as individuals, but you humans cannot survive indefinitely as individuals.  You’re a society, social creatures. So start to act like it. Stop being so terrified that you might end up paying for someone else’s well-being. Their well-being is your well-being, that’s what society means.

There’s no point in harking back to the Golden Age of economic growth and prosperity (post WW2 to the 1970’s, when wages rose in direct correlation with economic output) without a recognition of Golden Age values. Remember, economics is a social science, and as such must necessarily integrate and correctly interpret data in the light of human factors.

I can understand the recent movement some of you have made to break the system. But I’m imploring you now, realise what it is you’re asking for. Total reconstruction of your economic system won’t come about peacefully. The only way it will happen will be through almost total destruction of humanity – nuclear holocaust or natural disaster, some sort of near-extinction event. I’m going to assume you don’t want that, so what then is your alternative?

You must work with what you have, and strive to make it more humane. You can and must change the way you value things – I don’t think it’s that hard.

 

 

Noam Chomsky on the financialisation of the US economy

See “Jobs aren’t coming back”. Noam Chomsky has written a piece on what he calls the de-industrialisation of the US economy since the 1970s, essentially outlining the neoliberal paradox that I wrote about before.

I don’t agree with everything he says; for example I think the Occupy movement was, unfortunately, a waste of time. A movement with with no concise message is never going to get anywhere. If there is to be salvation from neoliberalism, it’s not going to come by breaking down capitalism. It’s more likely to be effected by a change in mindset (and for this reason Occupy is not totally irrelevant) leading to changes in the way we measure things. This must involve everything from statistics to accounting standards and it will be a huge undertaking.

Chomsky’s article is, however, a nice summary of some of the themes I’ve been introducing.