Sideways, Surplus, and Structural Problems

The economy sidles along. Sideways has become the constant theme this year and none of the news contradicts the notion that our malaise will linger. In view of the lack of leadership from Washington – the never ending American election cycle militates against actually doing anything other than run for re-election – we cannot expect dramatic policy initiatives of any stripe or color.

The exception being that the House rather pointlessly passed the budget proposal put forward by Paul Ryan, current darling of serious commentators everywhere.

His budget will certainly be defeated in the Senate. Rightly so too since it is an abomination, and, despite the plaudits it draws form the commentariat, is basically an ideologically driven attack on the poor, the middle class, and all else except big business and the super rich. What I love most particularly about the Ryan plan is just how little close scrutiny it gets from the serious folk posing as experts in the media. It is continually being presented as a “bold” attempt to rein in the Federal deficit, yet it is actually a string of traditional Republican policies tied together: it reduces social spending dramatically, it gets rid of Medicare and replaces it with a voucher system that caps payments, it leaves defense spending largely alone, it reduces tax rates, especially for the top tier, and thus creates an enormous hole in the budget. This hole is then closed miraculously by way of a vaguely worded re-vamping of the tax code which is supposed to offset the giveaways with a series of loophole closing and base broadening initiatives none of which is spelled out. The serious folk don’t get into details, so they don’t get vexed about that lack of said detail. They simply take it on faith that Ryan will produce a rabbit from his hat when asked.

This is rubbish of course. The Republicans have never been worried about the deficit. In fact they rather like it. It gives them a hammer with which to attack social spending. It is no coincidence that every single Republican plan produced during their prolonged and painful primary election process would have made the deficit much worse. None was serious. All were ideological in content and aimed at the poor and underprivileged.

This charade in the House is being lauded in serious corners as being a genuine attempt to deal with an iconic issue. Then again serious corners are not serious, so all this fawning is to be expected.

As for the economic news: there really is not much to comment on. The trade gap widened. New claims for unemployment assistance stayed put. The Fed continues to prattle on about a need to hold the line on inflation – even in the total absence of inflationary pressure. GDP potters along at sub-par rates. People continue to leave the workforce which makes the unemployment rate improve for all the wrong reasons. Housing is still stuck in a rut, although not as depressed as it once was. And every other indicator meanders about aimlessly.

Yes, the general direction is correct. No, the pace is nowhere near fast enough.

But.

Yea!! Ring the bells. In April the US government posted a budget surplus. It was in the black to the tune of $59 billion, the first surplus since just before the implosion of Lehmann. This means nothing. The surplus was created by better than expected tax revenues – a sign of a healthier economy – but also cuts in education spending, which don’t augur well if they last. Some quirks in defense spending also helped along the way. Needless to say the White House is pointing to the surplus as evidence of improvement. Which I suppose it is. But it won’t last. Besides, the last thing an economy stuck in sideways motion needs is a bout of austerity. Sucking demand out of the economy is hardly the way to get things rocketing along.

Except if you are a serious person.

Then the only way forward is austerity.

I happen to think that austerians – as opposed to Austrians which sometimes amount to the same thing – are simply frustrated by the evident failure of their three decade long project to re-cast the economy in the image of free market theory.

Which gets me to structural problems.

Our sideways moving economy is so lame that the unemployment rate persists at higher than acceptable levels. People like me argue that this is evidence for more stimulus. We see the issue as a cyclical one. Demand is weak in the private sector as households fix their balance sheets and deal with disgorging the debt they accumulated during the succession of bubbles and other years of Reagan/Bush policy making. I should add that Clinton perpetuated rather than reversed those policies. The blame spreads to both sides of the political divide although it clearly began on one.

The self proclaimed serious people who inhabit the upper echelons of our elite laugh at the obvious, in their eyes, naivety of this cyclical diagnosis. They argue, without a shred of empirical support, that the malaise reflects deep and sinister issues. The structure of our economy is out of whack. We have a bout of structural problems.

Others have debunked the structural problem thesis far better than I. Suffice to say that the structuralist argument is full of wind. It is insubstantial. It is vacuous. It is, like the Ryan budget these same folk adore, a non-starter. But it has legs. It keeps getting trotted out. Usually it is accompanied by a snide and paternalistic reference to us cyclicalists. We are just silly to think that throwing more government money at the problem will save the day. Grown-ups all realize that our problems are deeper than that. They are really deep. Down in its foundations our economy has suddenly been exposed as rotten. Our workers are dumb. They lack the skills needed to compete in this “hyper-connected” globally bounded economy. Our “hyper-efficient” firms can get by with fewer workers, whether dumb or not. So we are faced with a need to provide extra incentives to those hyper-efficient firms to expand their operations and invest even more than they already do. Our education system sucks. It doesn’t produce engineers. Our government regulates way too much and lays a heavy hand on our entrepreneurs. And our banks are being stigmatized such that they will not, or cannot, lend to flood our great economy with the benefits of their financial genius.

In short we are stuck up a river without a paddle.

We have structural problems.

This is a bit like discovering you have some dreaded disease. Serious people all intone in calm and authoritative ways that the medicine will be bitter. It will also take years to show its effects. Along the way we all must try to hang in there, not get despondent, and look to the long term, when the economy will surely blossom. That far off spring will be nourished by an army of clever, hyper-productive, adaptable, and, presumably, low cost workers all of whom will be willing to accept flexible wages, lower benefits, and insecure employment. This re-structured workforce will be the envy of the world. It will allow the platonic vision of permanently low taxes to be coupled with permanently high profits, personal rugged self-reliance will displace flabby reliance on government hand outs, and our economy will soar. Just like it did in the Reagan years. [Insert wistful yearning noises here]

Meanwhile the unemployed should endure. Yes this is a sad and rotten thing. But, hey, re-structuring takes time. And we have no alternative. None at all. No gain without pain is both a cliche and serious economic advice.

The attraction of this ridiculous proposition is that its results are a long way off and it allows structuralists to avoid doing anything in the near term. They can be content that they have tried. They have thought things through. And they have found that nothing can be done – seriously anyway – about our high unemployment rates. Yes it is indeed a rotten and sad thing. But that’s the way of the world.

Hogwash.

The odd thing about structuralists is that they are the very same crowd who got us into this mess. If we have structural problems it is because of their policies. Think about that. They were the advocates for massive deregulation. We were assured that the market magic they so fervently adore would act to eliminate problems. The market will take care of it. With “it” being whatever problem your cared to highlight.

The relentless pursuit of shareholder value would ensure, inevitably ensure, the correct and efficient allocation of our nationals resources. After all shareholders are private folk, and we all know for certain that private folk know exactly what to do with resources. Better than the horribly inefficient government anyway.

Workers will respond to their growing insecurity by throwing themselves into a frenzy of re-education and skill acquisition. The market will ensure, inevitably ensure, our workforce has competitive skills. Its about the incentives. We don’t need government subsidized training. We need to make people responsible for themselves. They’ll get on with it just as soon as the dead hand of government is lifted.

The list goes on.

The structuralists won the debate back in the early 1980’s and went on a binge of structural correction. They recast the economy in image of their free market theory. They deregulated, attacked institutional rigidities [aka unions], stomped over wages, slashed at training programs, and happily structured away through two bubbles and a near historic economic collapse.

In the aftermath of which they announce that our problems are all structural.

A simple, refutation goes this way: an economy out of whack would have hot spots of high activity associated with weak spots where the structural problems were most corrosive. Some industries would be desperate to hire, would be paying high wages to attract labor, and would be booming along. Others would be shrinking, shedding labor, and be rife with bankrupt firms.

None of this do we see.

The weakness is across the board. No industries are hot spots. Employment is rotten throughout. And, curiously, corporate bankruptcies are relatively quiescent. There are no signs of the kind of lopsidedness typical of an economy laden by structural problems.

And the recent record of our deregulated banking system is hardly great testimony to the asset allocating prowess of market magic.

What’s are structuralists to do? With the project wallowing in its own mess, they double down. They cast aspersions at the cyclical argument to divert attention from their own failure and to prevent the public getting a proper and balanced view. They pose as being serious. They disparage alternatives. They discourage debate. They puff themselves up and engage in a self sustaining closed loop of a discussion.

From which no effective policy will emerge because structure is not our major problem. Sure our education system needs buffing up – it has been neglected and underfunded for way too long. Sure we need better training for our workers – it was big business who slashed training programs first in the name of cost cutting. Sure we need to cut the burden of health care costs. Sure …

But the fact remains. We have a demand problem. A cyclical demand problem. Our economy is stuck in a low gear because people are unwilling or unable to spend. Simple. Easy.

But not fixable while the serious people dominate policy making.

Sad. No?