Economist's View: Is Economic Volatility Good for America?

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There seems to be a two-pronged assault on the idea that the economic security of American workers has been on the decline in recent years. One tactic has been to question the data and claim that economic security has not been increasing. Raising questions about the data is a common tactic when the results are unappealing. Another tactic is to say that if there is economic insecurity, it's a good for everyone, even workers. For example, this article from The Economist makes both claims. The argument in the second case is that we need business cycle downturns to wipe out old, unproductive capital so it can be replaced during the subsequent recovery by brand new efficient production techniques and this exchange of old for new helps everyone in the economy. Following along these lines, this is a discussion of a book by Brown, Haltiwanger, and Lane, "Economic Turbulence: Is a Volatile Economy Good for America?" that was published in October, 2006:

So, Is a Volatile Economy Good for America?, by Nick Schulz, TCS Daily: -- Economic Turbulence: Is a Volatile Economy Good for America? Clair Brown, John Haltiwanger and Julia Lane

Economic populism is one of the more striking features of our politics today. ... These populist concerns, voiced primarily on the left, are shared by many conservative Republicans and intellectuals. Writing in the Weekly Standard, Ross Douthat and Reihan Salam argue that "having risen to power at a time when most Americans were worried about losing their economic freedom, the [Republican] party needs to adapt to a new reality--namely, that today, Americans are increasingly worried about their economic security--and reorient its agenda to address those concerns."

A disquiet with our turbulent economic times is at the root of the political concern over economic security. And it has yielded an economic dialogue shrouded in pessimism and unease.

But is it entirely warranted? To answer that, it helps to know if the overall economic turbulence is beneficial or not.

The authors of the new book, "Economic Turbulence: Is a Volatile Economy Good for America?" ..., Clair Brown, John Haltiwanger and Julia Lane have studied the overall impact of America's dynamic economy on jobs, workers and firms by examining in depth five major economic sectors -- semiconductors, software, retail food, trucking and financial services...

The authors present no brief for laissez faire government policies. They frequently point out that there are workers who get pinched by economic changes and we would be wise think more clearly about how they might be empowered to cope better in a turbulent world. They make suggestions for a possible "interventionist policy" or two.

But more than anything they help clarify the picture of what's actually happening with job loss, job creation, and overall economic change in America. Yes, economic turbulence can yield a kind of psychic unease -- unease that's exploited for political gain. But that same turbulence is also the source of significant beneficent changes. If this is a War on the Middle Class, we should want a troop surge to keep it going. ...

I was going to address the claim in this essay that business cycles are good for workers and the overall economy, but a little digging revels that Paul Krugman has already rebutted this idea, so why reinvent the wheel?:

The Hangover Theory, by Paul Krugman: A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking--not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that ... the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion. ...

Powerful as these seductions may be, they must be resisted--for the hangover theory is disastrously wrongheaded. Recessions ... should be fought, not with austerity but with liberality--with policies that encourage people to spend more, not less. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression--with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. ...

The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity--of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes--investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don't say that it's obvious--although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought--a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles--was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.

Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods--implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.") But in that case, why doesn't the investment boom--which presumably requires a transfer of workers in the opposite direction--also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry--not just the investment sector--normally contracts. ...

The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone--horrors!--printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms--especially when it gives them a chance to lecture others on their failings. ...

That pretty much covers it.

Posted by Mark Thoma on January 16, 2007 at 10:08 AM in Economics, Macroeconomics | Permalink | Comments (61)


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Remember though that having governments increase the amount of money available implies "fiat money," and that, in and of itself is taken as enough to discredit the theory in many circles.

I'm going to beg your pardon and excerpt from something I wrote a while back:

In my first real job out of college, one year I got a big raise. This was back in the 1970s, and when my first paycheck reflecting that raise appeared, it was pretty disappointing. Turned out my marginal tax rate was just short of 50%, which isn’t wonderful.

I took account of my circumstances, however. I was working in environmental science, primarily on contracts that were either from government agencies, or from companies that were doing the work almost entirely because of various regulatory mandates. So I shrugged and said to myself, “the government giveth and it taketh away,” and refused to get too upset about it. The linkage was even more apparent during the Reagan years when taxes went down, but so did the money going to environmental research.

One of the flanks of the right wing is manned by the gold bugs, people who decry “fiat money” and want every dollar (or whatever) to be backed with something “real” like gold. It was either Ayn Rand or one of her acolytes who made a statement that all that backed up fiat money was the willingness of the government to tax the populace. They thought that was a bad thing.

But really now, the history of gold-backed currencies isn’t that pretty, matching every inflation with a painful deflation, yet still hostage to the international flows of specie, new mining (and other) discoveries, etc. Making your currency hostage to a single commodity might not be the best plan.

Then too, we have all those SF stories about what happens when gold is synthesized, or otherwise made cheap (Fred Hoyle wrote one about a solid gold asteroid landing in England). There’s nothing particularly natural or inevitable about the love of gold, and men’s willingness to accept it as a medium of exchange and store of value. Also, the conflict between “medium of exchange” and “store of value” can conflict. Convertible currencies are very good at producing “bank runs,” among other things. Bank runs seem quaint now, with many people only having seen it in “It’s a Wonderful Life.” Thank god.

On the other hand, consider the system that we actually have: the government issues currency (I’m greatly simplifying, of course), uses it to buy things, then goes out and demands it back in the form of taxes. That last part is important; it’s what gives money its value. The tax man shows up, you hand him “legal tender” and he goes away. Such a deal. You’d rather have to give him something with intrinsic value?

Just incidentally, although he became a gold bug in his later years, Heinlein gave one of the best capsule descriptions of the virtues of “fiat money” in _Beyond This Horizon_. You could look it up.

People do, naturally, want assurances that their tax money is spent on things that are good for them, and not on things that are bad for them. Politics arises when people differ on what those things are. Politics also occurs because many people would like a free ride (I wouldn’t have been annoyed if I’d not had to pay taxes on my earnings back on my first job). All that is common and natural.

It’s also common and natural for people to invent philosophies to make things they want seem like universal truths and absolute good. When people have a lot of money, they even spend some of it on think tanks and sycophants who will do the rationalizing for them. And one of the outputs of the sycophancy of the past several decades has been an attack on the very idea of taxation.

But there is a difference between taxation and theft, and that is the rule of law. An attack on the legitimacy of taxation is an attack on the legitimacy of government, and an attack on the legitimacy of government is an attack on the rule of law.

Of course, it’s possible to turn the chain of causation around: illegitimate governments destroy the rule of law and often destroy the legitimacy of money as well.

Posted by: James Killus | Jan 16, 2007 10:32:19 AM

"The Hangover Theory," is really the Stephen Roach * and why he knows that you, not he, should suffer for your sins of becoming economically more comfortable theory.

* Feel free to substitute the name of the bear's bear of you choice, for there are many.

Posted by: anne | Jan 16, 2007 10:46:42 AM

Even if volatility is necessary for higher overall growth rates (creative destruction and all that), its effect on the average happiness of workers should probably be taken into account.

It's a bit like the equity risk premium: you might feel pretty confident that stocks have a higher long-run rate of return than bonds, but the ups and downs can make you pretty queasy. You might be so queasy that you'll take the lower, but less volatile, return.

I think we should "risk-adjust" our GDP numbers. How much additional vol is the average family putting up with so that our GDP growth rate can increase by 1% ?

Posted by: steve | Jan 16, 2007 10:50:39 AM

What is interesting is the extent to which economic volatility has declined in America, then in other developed economies, from about 1980. Selected investors increasingly understood this these last 25 years, and Alan Greenspan increasingly based monetary policy decisions on this understanding. Not that caution is not needed, but that understanding the decline in economic and investment volatility has been essential for proper investing as opposed to speculating. Many analysts have failed to understand or at least acknowledge and failed to offer ways to be cautious even in not recognizing the change.

Posted by: anne | Jan 16, 2007 11:01:19 AM

If you look at the facts, the hangover theory is indeed quite absurd.

The biggest investments in new technology come about when wages are rising and everyone is optimistic. Conversely, when inputs (raw materials, labor) are dirt cheap, the sweatshop model generally wins out.

Posted by: yartrebo | Jan 16, 2007 11:13:42 AM

It's probably worth differentiating between vol in traded assets (like stocks and bonds) and in ordinary people's lives: what is the likelihood you'll lose your job and be unemployed for n months? that you'll lose your health coverage for n months? that you'll have to declare bankruptcy?

There seems to be a disconnect between these two measures of volatility. For the rentier class, it may be smooth sailing, but for the average family, things may be rockier than 20 years ago. The LA Times ran a nice series on this. You can find it on my blog if not elsewhere.

Posted by: steve | Jan 16, 2007 11:17:18 AM

So according to the theory when widget production capacity exceeds any reasonable demand for widgets, the widget assembly line workers must be laid off and hope to find other jobs.

Meanwhile the widget company executives - the people responsible for the bad decision to build lots of factories - collect fat salaries and bonuses and pensions, and get to stay on to help manage the company through bankruptcy. Because who better, after all, to return a company to profitability than those who in their wisdom ran it into bankruptcy?

When economic theories extol suffering for future benefits, it is always worth asking who suffers, and who benefits.

Posted by: Bernard Yomtov | Jan 16, 2007 11:20:28 AM

Agreed; but volatility in the economy and in investment markets have both declined and Alan Greespan noticed the decline in reflecting on our investment markets. The recovery from the severe and relatively sudden stock market decline in 1987 took a matter of weeks while the economy slowed little. Similarly the stock market decline in 1998 lasted weeks and did not slow the economy.

Posted by: anne | Jan 16, 2007 11:28:03 AM

It would be great if that volatility affected the top 1% just as much as it does the workers.
Perhaps the Economist staff needs to experience that volatility also.

That's the problem with these theories and theoreticians.

Posted by: evagrius | Jan 16, 2007 11:34:50 AM

It is always sort of shocking to read about the way some economists think about dynamic systems. The key questions that need to be asked whenever someone posits an "aggregate benefit" are: "Does the benefit sometimes fail to come back to the people who suffer the loss?" and (almost a specific instance of that question) "how do the timescales of loss and benefit match up?"

To take one absurd but perhaps illustrative example. Several areas of the Developed World were heavily dependent on old style heavy industries, like steel making and coal mining and the like. When those industries were wiped away to foreign places in an act of "creative destruction" by the market, empirical observation is that it has taken roughly 20-25 years for the local economy to recover in the absence of concerted government action.

Now yes, some people can move away etc. but the fact remains that in essence, this act of "creative destruction" threw away 25 years of human working potential (multiplied by whatever fraction of the community you accept were not going to move to where-ever to become a derivatives trader.)

So, 25 years later, the market has restored the prosperity of the region. But 25 years is a long time in most people's working lives. Whether those "optimising economic efficiency" like it or not, those affected are going to think that this is maybe not as good a deal as they describe. And, it is perfectly rational for them to think so. Aggregate gains to volatility are of little use when you lose the best 20 years of your working life to a downturn.

I think the reason certain economics types don't see this problem is that they spend their lives thinking about perfect markets or those that deal in virtual goods, like investment banking. Those industries seem to recover from downturns pretty quickly. I don't know many long-term unemployed investment analysts and bankers. Still, just because something works in one market, doesn't mean it works in every one.

Posted by: Meh | Jan 16, 2007 12:02:54 PM

But if we look at what has happened since economic volatility weakened in the early 1980s we see that this drop in volatility was also accompanied by a slowing of economic growth. Pre-1980 the long term trend growth rate of US real gdp had been 3.5% as far back as the data really goes. But since the early 1980s the long term growth rate of the US economy has slowed to around 3.1% -- a significant slowing. Investment theory says a drop in volatility should increase investor confidence and contribute to an increase in capital spending that all else being equall leads to an increase in economic growth.

The drop in volatility and trend growth may be related or they may be independent but we can not ignore that the drop in one has been accompanied by a drop in the other.

So, on balance has weaker volatility made the US better off. I do not know, but maybe economists should be discussing it.

Posted by: spencer | Jan 16, 2007 12:31:16 PM

I have a thesis that the drop in growth may be related to the drop in productivity that in turn may be driven by a very sharp slowdown in the capital stock per employee in the US private economy over the past quarter century. Prior to 1975-80 the real capital stock per employee grew at about a 2% annual rate.
But from 1975-80 to 1995 this growth rate fell almost in half before rebounding in the mid-1990s and falling again this cycle. Theory says that the growth in capital stock per employee should be a major factor driving economic productivity. Guess what, it has been a great leading indicator of productivity growth and appears to be leading the current cyclical slowdown in productivity growth we are experiencing.

Going back another step through most of US history labor has been the scarce factor of production so it paid to substitute capital for labor and again this generated strong productivity and rising living standards. But over the last quarter of a century there may have been a shift in the relative supply of the factors of production and labor has not been as
scarce as it use to be. So, with labor no longer so scarce, growth in capital per employee has slowed and with that the growth in our standard of living also slowed.

Posted by: spencer | Jan 16, 2007 12:44:16 PM

We can never have perfect economic security.


Five years after the end of the last recession and we still has increasing insecurity and the loss of quality jobs, with replacement by low quality jobs.

Seem like a problem to me.

Record bonuses on Wall Street though.

Posted by: save_the_rustbelt | Jan 16, 2007 12:44:58 PM

But that same turbulence is also the source of significant beneficent changes.

No one doubts that, but it just as foolish to think that more is always better, or that policies can't be adopted to ease the transition.

Posted by: Lord | Jan 16, 2007 12:56:55 PM

Krugman: "the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. ... But in that case, why doesn't the investment boom--which presumably requires a transfer of workers in the opposite direction--also generate mass unemployment? And "

Only someone who believes that labor is perfectly transferable from one type of work to another completely different.

Which is not the case in most instances. Ask any employment agency.

Posted by: Lafayette | Jan 16, 2007 12:59:50 PM

Krugman: "the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. ... But in that case, why doesn't the investment boom--which presumably requires a transfer of workers in the opposite direction--also generate mass unemployment?"

Only someone who believes that labor is perfectly transferable from one type of work to another completely different could believe these transitions, which is naive.

Do universities exchange economists with english literature graduates when there is more demand for the former than the latter? (Hmmn ... maybe they do, actually.)

Posted by: Lafayette | Jan 16, 2007 1:05:09 PM


25 years is a generation.

That should fairly simple to remember.

Posted by: evagrius | Jan 16, 2007 1:06:49 PM

If change is good, war must be great!

Posted by: Lord | Jan 16, 2007 1:28:55 PM

Interesting article from the macro perpective. From the perspective of the firm though, sometimes a slowdown is useful. Anyone who has worked in a booming industry knows a slowdown can be a time to implement systems and procedures, a time to retool and rethink.

Rising boats in rising tides hide too many operational sins.

Posted by: | Jan 16, 2007 2:05:41 PM

mark wonderful krug piece

never read it b4

my meme joust

this side:

the larry summmers view

twenty five years
of global price rise
settling down
and yielding steady and in the long run higher real out put

the otherside:

the yank jobblers view

25 years of gathering
boss guff
falling income expectations
and rising household anxiety

Posted by: slink | Jan 16, 2007 2:11:12 PM

So topical

If this is a War on the Middle Class, we should want a troop surge to keep it going.

cutting edge withit. The power of 3 minds (I am so generous) at work and not the mere hooting of disorganized populists...(who are on this trio's collective ass providing a better product for less...just as soon as we locate their employer). [You stick-in-the-muds ready for a little turbulence?]

Anybody notice the "turbulence" in the housing market on the way up? Do we in fact ignore the bright side of every fluctuation that we might call "turbulence"? Any pilots out there that are a tad upset about describing job dislocations as "turbulence"? [Are pilots running the economist's lexicon --consider "soft-landing" for example.] The poetic license is getting to even me: turbulence in minutes please, job dislocation in several months (years if retraining is necessary).

I want to hear this story anecdotally from one of the thousands of IT workers who were displaced and disconnected from those high-paying salaries. I don't want an eva-so-objective report by some well-established researcher(s) whose conclusion was going to be as fatuous as "turbulence is good", because we want aspirational sentiments, not negative negativity. [You have your objective bias but I have tons of explosive subjective power.]
The boat did not sink. The water rose and encapsulated it, providing an architectural element in an otherwise drab subterranean sea scape. The fish are happy. The scuba divers are happy. The sailors? Thinned out as usual --as is good and right for an efficient distribution of resources. [...They swim forchrisake]
Turbulence: the kernel of efficiency...not evidence of a misallocation of resources those hooters claim.

Posted by: calmo | Jan 16, 2007 2:13:35 PM


How much of that real GDP growth shift is demographics? Baby boomers were entering the work force in the 60s and 70s. By the 80s you have a relatively smaller rate of labor pool growth.

As for capital to labor ratios, I don't think the servive sector is as capital intensive as manufacturing. The transition to a larger servive sector and the export of manufacturing industries could account for the slowdown in capital stock.

And speaking of the structural shift from a manufacturing economy to more and more services, is the service economy inherently less volatile? Perhaps it's due to the relative absence of inventories and the reduced role of capex cycles.

Posted by: yan | Jan 16, 2007 2:15:49 PM

I read Nick Schulz' essay in its entirety, and Paul Krugman's essay is on a completely different topic. Krugman is writing about recessions. Schulz' essay deals with job losses due to downsizing through mergers or outsourcing. We are not in a recession but we still experience job loss, which Schulz argues results in positive job churn - i.e. for every four jobs lost, there are five jobs created.

The articles aren't really related at all.

Posted by: Tim | Jan 16, 2007 2:15:58 PM


Here's a quote:

"A disquiet with our turbulent economic times is at the root of the political concern over economic security. And it has yielded an economic dialogue shrouded in pessimism and unease.

But is it entirely warranted? To answer that, it helps to know if the overall economic turbulence is beneficial or not."

Overall economic turbulence is business cycles. He is saying variance (overall economic turbulence) is good.

Posted by: Mark Thoma | Jan 16, 2007 2:20:54 PM

seems clear
to "be a win win "

the amount of job creation
must exceeed job destruction
thats a no brainer

and with larger job market
entering cohorts
then exiting cohorts
by that amount net higher

also jobs can't be losing their wage rate average and maybe even their inequality must stay within bounds

but is this a call for just high rates of both here??

if so
yes that looks like faster development

and if that by itself creates anziety

welcome to the brave new world

thus is neo liberal utopia circa clinton white house

now go find outabout
the facts on the ground.....

Posted by: slink | Jan 16, 2007 2:49:27 PM

Yep - neocons, CEOs and other criminals and con artists believe government is bad whenever it doesn't shovel money into their entitled, welfare-mentality pockets.

And they clearly only understood the first half of what Keynes had to say.

But - and note this well - their ignorance has never stopped them from forcing their views on everybody else.

Free Market? Hah! The only market acceptable to the criminals running this country and it's large corporations is a market they can manipulate and steal from.

Posted by: fiskhusjim | Jan 16, 2007 2:53:48 PM

Volatility implies a system out of control. An out of control system can and often does self-destruct. So, what’s so good about volatility. Wouldn’t some sort of inherent self correcting capacity be better? One taking over before this volatility? True, volatility exists in natural system, but economics, very much a human construct, is not a natural system. Rather volatility, why not a corrective mechanism? With today’s data collection and computing power, everything is or could be real time. Surely turbulence is no substitute for intellect.

Posted by: ken melvin | Jan 16, 2007 3:19:08 PM

Trickle me down: The investor class thinks they may be able to do very well without the ever more unnecessary working class. They may be right. Depends on whether they can find someone to buy the product of manufacturing.

Those who work for a living, be they professional, skilled, or unskilled; will see a decline in their standard of living. Norquist is right about ownership in an investor society. Those who work with the withal can share in the wealth. How much depends on how much the investor class is willing to part with and this depends on how much they feel they need to part with.

The investor class, in alliance with those with some withal, will not want to support those without the wherewithal. They may even try to starve them out completely.

Heretofore, the wealthy have lived off the labor of the working class. Any wealth created required the input of labor. Today, very little and even no labor is required for a lot of manufacture. True, someone has to build the machines, but once built, almost no labor is involved in production beyond maintaining the machines. If the labor costs become too significant - build a machine to replace the worker.

When product supply exceeds demand, production can be cut back. When labor supply exceeds demand, people lose their livelihood. The question today is, will the investor class share or will they try to deny livelihood the no longer needed workers? Will the workers tolerate being shutout? Or, will they rise up in rebellion?

Posted by: ken melvin | Jan 16, 2007 3:23:30 PM

It's always pleasant when Krugman does his thing as a first-rate economist rather than a second-rate political pundit. Sometimes I wish I could grab him by the lapels, shake him, and say "You're an economist, stupid!" But I'm afraid he'd break, and anyway, he's way over there, and I'm way over here, and I'm feeling kind of lazy right now.

Posted by: Theragran | Jan 16, 2007 3:51:33 PM

"It's always pleasant when Krugman does his thing as a first-rate economist rather than a second-rate political pundit."

Rubbish; Paul Krugman has never been more of an economist than now and never will be again when this time passes. Wars for them that will not understand are a subject for economists, and it would be nice if more understood or were courageous enough to show understanding.

Posted by: anne | Jan 16, 2007 4:21:41 PM

"In my first real job out of college, one year I got a big raise. This was back in the 1970s, and when my first paycheck reflecting that raise appeared, it was pretty disappointing. Turned out my marginal tax rate was just short of 50%, which isn’t wonderful."

You'll be thrilled to know that from 1971-1978, the 50% bracket paid in the $44,000 range.

For your major it still pays about the same right out of college.

Hopefully the airforce will get those crowd dispersion weapons ready as soon as possible.

Iraq will make a nice testbed for it--next target, former holders of "non-value added" jobs in the USA.

Posted by: | Jan 16, 2007 5:18:16 PM

"Today, very little and even no labor is required for a lot of manufacture. True, someone has to build the machines, but once built, almost no labor is involved in production beyond maintaining the machines. If the labor costs become too significant - build a machine to replace the worker." -- Ken Melvin

Here's an interesting fact I picked up a few years ago. In some advanced semi-conductor fabs, a single rack of wafers can have a value on the order of a $250,000, which is more than the (offshore) worker carrying that rack will make in his entire time with the firm.

And that worker can drop the rack.

Posted by: James Killus | Jan 16, 2007 5:22:01 PM

PK said, way back at the beginning:

"Recessions ... should be fought, not with austerity but with liberality--with policies that encourage people to spend more, not less."

Just as sick people should be wrapped up warm, kept quiet and well hydrated*, and encouraged to recuperate.

Why on earth anyone would think the way to treat a feeble economy is to beat it with a stick, passes my understanding.

Joy and liberality go a long way to bringing life back to a desert.


* with appropriate admixtures of ethanol, crushed pineapple, coconut milk, a little sugar and cream... hang on, get a hold of yourself, Noni.

Posted by: Noni Mausa | Jan 16, 2007 5:36:35 PM

James Killus: FOUP and AMHS

Posted by: yan | Jan 16, 2007 6:33:03 PM

anne: "Not that caution is not needed, but that understanding the decline in economic and investment volatility has been essential for proper investing as opposed to speculating."

I hear you and I understand what you are saying. And pardon my superstition, but every crash and recession has been anticipated by "but this time it's different".

I become more and more cautious has prices for all asset classes go up. And I become ever more cautious as the prices ascend AND the volatility diminishes. Bonds denominated in currencies other than dollars keep calling to me, and I am hard-pressed to offer reasons why a substantial sum of retirement assets shouldn't be there.

Posted by: Richard | Jan 16, 2007 7:07:33 PM

I don't doubt that Keynes had it right. But I'm not willing to drink the Krugman Kool-Aid above. Instead I prefer to drink Minsky's.

Echoing Richard above: ...pardon my superstition, but every crash and recession has been anticipated by "but this time it's different".

Posted by: Dave Iverson | Jan 16, 2007 9:53:02 PM

you seem to have missed Steve's very good point, systemic fluctuations can be smaller at the same time as individual risk is higher if risk has been shifted. Corporations have been very successful (because of increased power) in shifting risk away from themselves, but this risk has been absorbed by economic players with less ability to absorb that risk.
As for the general point about the Austrian's painting the recession as being a necessary purging excessing to be welcomed (like pruning trees or culling herbivores?) the moralistic language is definitely not appropriate. However, it could none the less be that financially some cleanup must be necessary (i.e. there will be bad debts) and that moral hazard makes very expansionary responses potentially dangerous (i.e. it may encourage excessively risky investment). All those thinking that the current low volatility is evidence of future security should not forget Argentina, Indonesia and above all Japan. There may be large sudden adjustments to be made and the emotional scars thereafter could be longlasting.

Posted by: reason | Jan 17, 2007 1:55:15 AM

reason: "As for the general point about the Austrian's painting the recession as being a necessary purging excessing to be welcomed"

"Welcomed"? Are you sure of this? Or, did the Austrians mean "inevitable" and therefore "must be accepted", but not welcomed.

Any situation of excessive demand is self-correcting, since continued demand leads inevitably to higher prices, which - at some point - become too much to pay. Consumers refrain from spending, which cuts production to lower levels and can inevitably stop production altogether.

The important aspect of this cutback is by how much inventories are reduced. If the lack of demand persists, companies at first liquidate inventories to maintain staff, but inevitably also reduce staffing levels to maintain minimum margins (to at least break-even or avoid losses). Production will then go offshore when it becomes an acceptable alternative (cost plus shipping is lower than local production).

The notion that workers are uniformly interchangeable, meaning that construction workers in a building contraction will be "absorbed" by the IT industry is ridiculous. Construction workers first go on to unemployment, all the while reducing expenditures, and then - for lack of work - take lower paying service jobs. This is the only sort of workforce reabsorption that is observed. (Depending upon age, some may never return and therefore they do not permanently affect unemployment, but do have a negative impact on total wages and therefore consumer expenditures.)

In some instances - such as Europe's over the past ten to fifteen years - people are perpetually on short-term employment filling gaps wherever they appear. Europe's has a patchy performance, and France has known job-creating growth in only a few years over the past fifteen.

Only a sustained general economic growth above 2.5% will generate durable jobs. Before that rate happens, part-timing and temporary staffing will suffice to maintain manpower levels at a total acceptable cost. These types of employment act as bumpers between durable employment and layoffs.

All this is not theory but practice. Perhaps the Austrians were not particularly observant of what actually happened, but I doubt they thought that unemployment was "welcomed". Nobody, in their right mind, welcomes unemployment. It is unacceptable.

What we have learned since (historically) is that before inflation gets out of hand, the monetary breaks must be applied - which is what central banks do worldwide.

The magic that we've not yet learned is how to maintain growth AND full-employment by micro-managing pricing such that inflation is contained - continuously. Most developed economies are still prone to "boom and bust" cycles.

Anyone who gets an effective handle on that problem will have won themselves a Nobel Prize.

Posted by: Lafayette | Jan 17, 2007 4:59:47 AM

here's a paradox

non pure profit max outfits
are the one's
that need
a survival crisis
or at least a budget squeeze
to become more efficient

not profit maxers

and notice how news
of another round of massive planned lay offs
at high flying profit maxers
during "good times"
gets bad press about "greed"

to the degree large firms are constantly
in profit max mode
systemic crisis
should be un necessary

but if it takes
a bout of
" its you or me off over the side
or we all go under ..."
--- a thousand pointts of life boat morality ----
to cull......
to get the optimal purge work done
old andy mellon was right

to show a hortatory smile as he cried
in 1930
"liquidate liquidate liqudate "

Posted by: js paine | Jan 17, 2007 5:52:13 AM

you may be correct, but the Austrians certainly do like to make it sound like a moral issue.
But one thing I know they also talk about (and you don't) is "asset price inflation", which central banks are uncertain about. From my point of view this comes to uncertainity about "the natural rate of interest" (high prices for existing assets imply interest rates are expected to be low because returns on new investment are low). Are average real returns very variable over time? It seems to me this is a big issue for central banks - and it is important precisely because of the observed lack of short term corrections to exchange rate imbalances. In a very big economy like the US this is not so clear, but just imagine you are New Zealand or Iceland (for instance). Government and Central Bank efforts to inflate the economy may just flow out the balance of trade. Small economies with fixed exchange rates are in an even worse situation.

Posted by: reason | Jan 17, 2007 6:00:31 AM

Sorry my previous may read a big gabled, lots of thoughts coming together. Essentially I want to say, that rejecting the gold standard (and the essentially elitist anti-democratic ideas behind it) doesn't mean that every insight that the Austrian economists had was worthless. It may be that some active central policy is in some circumstances counterproductive, and that the CPI is not the only relevant index. Indexes cannot tell us much about big relative price movements (terms of trade changes) for instance. Investment bubbles are a sort of terms of trade change (between assets and consumption goods). It may be better to deliberately opt for short term pain to avoid longer term problems.

Posted by: reason | Jan 17, 2007 6:10:52 AM

A Brief History of the Post-Autistic Economics Movement

Theories, scientific and otherwise, do not represent the world as it is but rather by highlighting certain aspects of it while leaving others in the dark. It may be the case that two theories highlight the same aspects of some corner of reality but offer different conclusions. In the last century, this type of situation preoccupied the philosophy of science. Post-Autistic Economics, however, addresses a different kind of situation: one where one theory, that illuminates a few facets of its domain rather well, wants to suppress other theories that would illuminate some of the many facets that it leaves in the dark. This theory is neoclassical economics. Because it has been so successful at sidelining other approaches, it also is called “mainstream economics”.

From the 1960s onward, neoclassical economists have increasingly managed to block the employment of non-neoclassical economists in university economics departments and to deny them opportunities to publish in professional journals. They also have narrowed the economics curriculum that universities offer students. At the same time they have increasingly formalized their theory, making it progressively irrelevant to understanding economic reality. And now they are even banishing economic history and the history of economic thought from the curriculum, these being places where the student might be exposed to non-neoclassical ideas. Why has this tragedy happened?

Many factors have contributed, but three especially. First, neoclassical economists have as a group deluded themselves into believing that all you need for an exact science is mathematics, and never mind about whether the symbols used refer quantitatively to the real world. What began as an indulgence became an addiction, leading to a collective fantasy of scientific achievement where in most cases none exists. To preserve their illusions, neoclassical economists have found it increasingly necessary to isolate themselves from non-believers.

Second, as Joseph Stiglitz has observed, economics has suffered “a triumph of ideology over science”.1 Instead of regarding their theory as a tool in the pursuit of knowledge, neoclassical economists have made it the required viewpoint from which, at all times and in all places, to look at all economic phenomena. This is the position of neoliberalism.

Third, today’s economies, including the societies in which they are embedded, are very different from those of the 19th century for which neoclassical economics was invented to describe. These differences become more pronounced every decade as new aspects of economic reality emerge, for example, consumer societies, corporate globalization, economic induced environmental disasters and impending ecological ones, the accelerating gap between the rich and poor, and the movement for equal-opportunity economies. Consequently neoclassical economics sheds light on an ever-smaller proportion of economic reality, leaving more and more of it in the dark for students permitted only the neoclassical viewpoint. This makes the neoclassical monopoly more outrageous and costly every year, requiring of it ever more desperate measures of defense, like eliminating economic history and history of economics from the curriculum.

But eventually reality overtakes time-warp worlds like mainstream economics and the Soviet Union. The moment and place of the tipping point, however, nearly always takes people by surprise. In June

Posted by: Stormy Monday | Jan 17, 2007 6:21:13 AM

Yes; thank you for reminding me, Steve and Reason are right in that while systematic economic risk declined since 1980 there is ample reason to argue that individual risk has increased. I should not fail to point this out directly, and was indirectly pointing this out in stressing the need to spend on social benefit programs in the early 1980s, no matter the deficit. This was precisely why I defended the budget policy of the Democratic Congress. Budget policy in 1980 and 1981 and 1982, was completely warranted in protecting social benefit programs and stimulating the economy.

Posted by: anne | Jan 17, 2007 7:05:18 AM

There is an element that I am a little surprised no one has touched upon: the importance of pure and simple change. Most humans are inherently wired against it. It is biochemical. Tasks and ways of doing things, once learned, are reinforced and facilitated physiologically. Learning IS challenging. Change IS uncomfortable and difficult and takes unusual impetus to overcome the inertia and comfort of repitition and the familiar. Yet innovation, evolution, competition, growth, and progress are all predicated upon change. Schumpeter understood this implicitly. And make no mistake: adversity is a prime motivator of change, and there are few substitutes save unusually rare and enlightened leadership which is in far shorter supply than adversity. Perhaps there are cultural elements inherent in say confucianist societies that make a "Toyota" more likely than an ossxified "GM".

But I am fascinated by how the Germans and Japanese (and other Northern Europeans) adapted to higher energy prices, and much stronger currencies, which reminds me of the old saw "What doesn't kill you makes you stronger".

Sheltering people and organizations from change, like parents who attempt to prevent their children from failing thereby removing the lessons [and most important benefits!] of failure, seems to me to encourage death by a thousand nicks, rather than the more progressive and dynamic society that most of us would dream and desire.

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