Dispelling The Rubber Duck Theory

It’s hard to tell. The problem with a stagnant economy is that when news is announced there is a tendency to yawn and go back to sleep. That condemns us to further stagnation, but, as I have argued before, our elites have thrown in the towel. Either they don’t care, they haven’t a clue, or they are happy with what’s going on. Perhaps a bit of each.

Today’s news fits this pattern. The weekly report on new claims for unemployment assistance is dismal. Claims rose, not massively, just a bit. By 9,000 to be exact. That gets us back up to the 429,000 level, which is terrible for an economy this far into a supposed recovery and with the amount of slack we have. Something dire is wrong. And the reaction from officialdom? Yawn. Oh, and the data for the week before last was adjusted – upwards. That had the effect of making last week’s increase smaller than it would have been.

Meanwhile, sales of new homes fell 2.1% in May. That’s not quite as bad as analysts were expecting, but it perpetuates the long gloom in real estate.

Let me see what else is going on?

The activity index in the New York Fed district slipped back.

Consumer confidence is all over the lot, but generally people remain in a sour mood.

Long term interest rates are low, which under normal circumstances should encourage borrowing in the interest sensitive parts of the economy, but having no effect because households are still nervous about the future and need to cut debt even more.

The list goes on.

Every time we read a bad or weak report someone tries to brush it aside as an exception. Hence the current notion that we have hit a temporary lull in an other wise decent upward path.

As you know I have a problem with that line of reasoning. We have had far too many of these exceptions. So many that they are no longer exceptional. They are the norm. During the crisis there were plenty of analysts who argued that the depth to which we plunged implied a very rapid recovery. I call this the rubber duck theory: if you hold a rubber duck under water it will shoot up whenever you let go. The idea being that the original buoyancy is unaffected by being held underwater, and will re-assert itself as soon as the downward pressure is removed.The problem is that our economy was not a rubber duck, or if it was it now has a gaping hole in it so that original buoyancy has been drastically changed by the crisis. Our particular duck on water and is not bouncing back.

We all know why this happened, so let’s not repeat ourselves.

The general point being that our economy has been re-engineered significantly in recent decades, and so its bounce back capability has also been altered. This was, I think, an unintended consequence of the massive re-structuring of the past three or four decades during which we kicked away many of the institutional supports and frameworks that provided buoyancy. We shifted risk onto household shoulders by reducing wage growth while adding burdens like rising health care and education costs; reducing privately provided retirement security; increasing job insecurity; and allowing asset price bubbles. These all came about due to the opening up of the economy and the general deregulation program begun back in the 1980’s. In the face of this shift of risk onto those least able to sustain it, we not only slowed growth in good times – the trend line of the 2000’s was much flatter than the previous decade – but we altered the economy’s ability to recover. One of the most notable aspects of recent decades is the enormous lengthening of the employment cycle. The time it takes to recover back to the previous employment peak after a recession is now radically different from the early post war decades. We have introduced a lot of ballast into that rubber duck.

So instead of recessions being short and dramatic perturbations in an otherwise steady rate of growth, they have become longer and longer spells of disturbance. We have surrendered a great deal of wealth as a result. And more worrying, we may have shifted the long term trend line downwards as well. After all an economy with heightened risk is one with less overall confidence, and is thus likely to move more cautiously.

That’s where I think we are now. The average person is having to absorb much greater risk in their ordinary life decisions. Their day to day finances are more precarious. Their job outlook less upbeat. They see no end to the rising cost of health care and education – two of the biggest cost for most middle class families – and their prospect for decent pay increases seems like a dim memory.

Many of my colleagues apportion a lot of the blame for our malaise on the accumulation of debt that now needs to be paid down. I se that pile of debt a symptom not a disease. The deeper problem, as I have said many times before, is the imbalance in the share of productivity benefits accruing to wages or to profits. Previously, in our more regulated and institutionally more rigid economy, there was a more equable balance. Post deregulation, and in the aftermath of modern management techniques – both of which are grounded in a common economic theoretical basis – that balance was lost.

This led to the shift in risk I mentioned; to a surge in profit at the expense of wages; to a heightened privilege for capital owners; and to a diminution of labor. Since the vast majority of families provide for themselves and their futures through the provision of labor to the economy, it was inevitable that the social engineering of the Reagan/Bush era would alter the way in which the economy bounces back from any shock it endures.

On the surface it may appear that we introduced, or encouraged, flexibility by reducing structural blocks to change in the economy. And in those odd models some economists use such flexibility might appear to enable the economy to adapt more easily to shocks. But in fact the opposite is true. Those structural blockages were actually shock absorbers from the point of view of the average household. They mitigated the damage. By removing them, far from increasing adaptability, we have had the reverse effect: we have made the average household less capable of withstanding shock, and therefore we have made them more risk averse.

That risk aversion is the current drag that is dispelling the rubber duck theory.

To get our bounce back we need to re-introduce some of those structural and institutional supports to provide a framework within which average families can plan their futures with confidence. Then they can save and spend in a way that sustains the economy at a higher level of activity.

One last thing: privatization is just another word for piling more risk onto the already burdened shoulders of average families. It sounds nice, if that’s what you like, but that extra risk will reduce, not increase, the degrees of freedom households have to spend. The current proposals to reduce or eliminate Social Security and Medicare are nothing but a massive attempt to add to the burden that households have to bear. Arguing that they will have additional choice is specious. People only have choice if they can afford to exercise such choice. Additional choice without additional income is a cruel hoax. If wages don’t rise to compensate for this additional risk, all we achieve is to add more ballast to that rubber duck.

At some point it will simply sink.