Now What?
After the steady drip of weak to bad news over the last few days – and weeks – today’s rotten employment figures from the government are no surprise. We are entering the summer on a decidedly down note. The much hyped recovery of last fall and winter is dissipating and turning into exactly the mucky and unsatisfactory stagnation I feared would develop.
We could have, and should have, avoided this. But here we are.
First the numbers:
The US economy added a paltry 54,000 jobs last month. That is the smallest increase since last September, and well below the widely expected figure of 125,000. Remember that the ADP report last Wednesday, that report showed an increase of 38,000 in private sector payrolls, was so rotten that the original expectation was cut from 175,000 to 125,000. So the pundits totally underestimated the mire we have walked into. Pundits are usually off target: they tend to overshoot on both the upside and the downside, but this miss is testimony to how difficult it has been for our Wall Street and business elite to embrace the current weakness. Their market magic has a tarnish to it they just don’t want to admit to. Worse still: the unemployment rate ticked up to 9.1% ending its decline from the peaks at the worst of the crisis. Remember that much of the gain has not come from job generation so much as from people leaving the workforce. This exodus has pushed workforce participation down to very low levels which debilitates the economy by withdrawing potential productive resources – experienced workers – from our capacity. It used to be that the US had higher participation rates than other industrial countries. It now lags.
At this stage of a supposed recovery a jobs figure of this nature is awful. It spells trouble ahead. And it speaks directly to our accumulated policy failure. It isn’t as if we have not been aware of the problems in the job market. They didn’t just pop up from nowhere. This is a longstanding and insidious issue that our leadership has chosen to ignore. They hoped, presumably, that magic would solve the problem before they had to become further involved. The mistake was made at the inception of the Obama regime when he fell for the argument that policy should stave off the worst and that magic would then do the rest. I used to pin the blame on Larry Summers, but let’s now spread that about a bit more. The entire crew failed.
The issue now is: what do we do?
Now what?
Not a lot, seems to be the answer.
I have repeatedly beaten the drum about our dysfunctional politics. This is where that toxicity bites hardest. It may be that our elite can see the problem. How can they not after numbers like these? But the persistent need to run for election and, worse, to raise cash to support a campaign, implies that there is no respite from political cut and thrust. There is no time for policy debate or implementation. There is only time for political to and fro. The margins between our election seasons have been blurred to nothing. Contemporary politicians are in perpetual election mode. Not only does this numb and confuse the voters, but it prevents discussion and compromise. Or, rather, it makes those things highly unlikely. Inaction is thus preferable if it produces an election advantage. Even if it makes matters worse within the budget or the economy.
Ironically this is not a problem of bad politicians. It is a problem of a bad political system. Which makes it far less likely to be resolved. Americans are raised to believe in the supremacy of their system. They deny that the cause could be systemic, so they over react to the people – the politicians – within it. Hence the recent volatility of voters and the attraction of extremist solutions. This kind of systemic breakdown is not unusual in history, and it may not be fatal in this case, but few expected America to fall towards banana republic bickering, corruption, and outright ineffectiveness so quickly after the apparent victory of the Cold War.
It isn’t as if we don’t know what to do. We have the policies. We have the ideas. We simply cannot act. On one side of the ledger we have leaders too frightened to act because it would open up a political disadvantage. On the other side we have leaders who are ideologically predisposed to the destruction of the economy as we know it. It’s a tussle between radical social re-enginering – the Republicans – versus clinging onto the status quo – the Democrats.
It is bizarre to watch and listen to policy discussions – or what passes for policy discussions – that are full of the very ideas that caused the Great Depression and almost devoid of the ideas that solved it. It is as if we are determined to repeat the errors of the late 1930’s. Presumably the average voter is unaware of this. They see and hear only what they take to be current ideas. But that is not so. The similarity with 1937 is uncanny. The arguments are almost identical. Yet the last few quarters have been an excellent real time test of the clash of ideas that dominated the 1930’s, albeit in updated form. At every turn the successful ideas, back then, have worked once more. At every turn the failed ideas, from back then, have failed again. But those failed ideas keep on being surfaced and pressed forward.
It is as if our entire economics and political elite has gone through a determined and thorough effort to forget what was successful. The reason for this voluntary amnesia is that an implication of the successful ideas is that governments and institutions are critical to economic success. Critical. Since this is unpalatable to an elite raised on market magic – both parties to varying degrees, with business, and the academic mainstream as well -they would prefer to forget and plunge us into the abyss as if this were a totally novel set of problems. It isn’t. History is repeating itself. Unfortunately we have failed to learn from it. So we are doomed, or appear to be doomed, to repeat it. At least in some form.
I realize that there are those who argue we have learned. I agree only to the extent that the ideas still exist and are available. What they ignore, and what I put a great emphasis on, is that the context into which those ideas have to be placed in order to have effect has regressed.
Within the narrow confines of economic theory the ideas exist. In the much broader context of an actual economy, replete as it is with complex interplay between institutions, technologies, knowledge, culture, social networks, and the variability of geography it is much less obvious that those ideas exist any longer. Indeed I would argue they have been thoroughly expunged.
When a country falls prey to its own success and eliminates diversity of thought, as the US has done with its obsessive belief in capitalism, it opens itself up to failure. Indeed, failure becomes inevitable. It becomes a one trick pony. So when it is confronted with a change in its environment, its ability to adapt is impaired. Possibly fatally so. Maybe be not in our case, but perilously close to it.
This is why I decry systemic efficiency: it implies that future problems will mimic past problems, so that all we need to do is to solve for the most effective way to deal with those problems. And then forget everything else. In business this is called a niche strategy. The notion is to locate a niche in the market and then optimize against it. That’s fine as long as the niche exists. The risk is enormous, however, if the niche goes away. The US has become a niche player: all it knows and can do is market magic. If that doesn’t work it drifts as if there isn’t anything else to do.
I advocate an alternative: keeping a balance. I believe we cannot know the future sufficiently, so we will always need to learn new things. That means, inevitably, that what we know today is not enough. We need to remember what worked and when. And we should never, ever, fall prey to the notion that a monoculture is a stable strategy for survival. We need to avoid the arrogance of assuming certain knowledge.
Nature, and in our case the economy, has laughed in the face of that arrogance before.
It is laughing in our face now.
