jobs

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Productivity and Its Place In Our Story

The stock market is rising strongly today after yesterday’s plunge. I won’t bother to dignify this extraordinary oscillation with a comment other than to say that anyone who believes stock’s are “efficiently” priced has a lot of explaining to do. Precisely what, I wonder, is so positive today that it can offset yesterday’s negativity. More to the point, how come that positive news was unknown a mere 24 hours earlier? But as I said I won’t ask those questions.

What we can do, however, is to take a short break from bemoaning the absence of leadership in economic policy to reflect on yet another poor number: productivity seems to have tanked recently.

This morning’s data are far from rosy: productivity declined 0.3% in second quarter, while it was revised to a decline of 0.6% in the first quarter from what had originally been reported as a 1.8% gain. This is not good. This makes two successive quarters of decline which we hadn’t seen since 2008. Moreover, productivity has crawled up a mere 0.8% over the past twelve months, which is another bad performance and a sign of things being out of kilter deep within the economy.

The irony is that the weakness in productivity is coming from rising unit labor costs. Before you all fall off your chairs, let me remind you that unit labor costs are not simply a reflection of wages, but are, as they sound, a measure of the cost per unit of output – a ton of steel for instance. So if the labor effort rises more rapidly than output, productivity falls. In the longer term this cramps the space available for profit and wages, which is why we pay attention to productivity in the first place. But it is also something that is devilishly difficult to calculate, especially in service industries. Exactly how do we measure the unit cost of a legal brief? And what, exactly, is the output of a legal brief? Stop chortling, these are important things to consider, especially in an economy like ours which is heavily skewed towards service industries.

What appears to be going on at the moment, by which I mean the last six months, is that output has not risen as fast as the effort going in. And the cost of the effort going in is not a function of rising wages as much as it is a reflection of the extra hours being worked. In fact real wages – wages adjusted for inflation – are falling, by as much as 2.1% last quarter.

The problem with untangling the story from the numbers is that we can give two equally plausible accounts, but which contradict each other in a more general context.

First: productivity could be falling because businesses misjudged demand and over-hired relative to what they ended up needing to produce. According to this view we should expect that companies retrench and trim hiring to get back into a better, more profitable, balance. Or, second, businesses may have misjudged an increase in demand and have had to hire workers at a greater rate, implying that future productivity reports will reflect a better balance at a higher level of activity – the adjustment needed for those new workers to produce at an efficient level being the ongoing factor distorting productivity currently. This more positive view suggests we should see more hiring as businesses calibrate activity against unexpectedly large demand.

Naturally we need to look at other statistics in order to select which of these two narratives is the more likely explanation, and, unfortunately, I suspect we are led to choose the negative over the positive.

Why?

Because it fits well with our overall narrative that the economy has approached a stall velocity and that demand is weaker than many people – although not us – expected. As we slog through this part of the annual planning cycle in business we can surmise that the outlook for 2012 against which businesses will array resources is less hopeful than it was a year ago. This will exert caution. Budgets will be restrained, if not cut. New hiring will postponed as current staffing levels are re-assessed. And, in general, activity will be based against lower expectations.

Any economy wading its way through a major balance sheet adjustment, as ours is, will grow both fitfully and slowly. There will be many episodes of reappraisal as both households and business cast wary glances at each other. Households fear unemployment and face the risk generated by not being able to support debt loads. So they look for ways to trim expenses and pay off debt, rather than spend. Extra income is channeled towards debt reduction and does nothing to boost demand. This is a major factor why tax cuts have little stimulative impact: people save them. This attitude on the part of households causes business to predict weak demand, and so annual budgets reflect weak hiring and investment requirements. It may well be that, as is the case now, businesses are flush with cash. But they see no profitable investment opportunity other than to save labor costs by replacing labor with machinery. Cost cutting becomes even more a vogue in these circumstances and so households, in turn, worry even more. And so it goes.

Within this negative cycle there can often be moments of what appear to be recovery. Households and business both need to replace worn out things so not all spending can be postponed forever. Thus, even in a debt crippled economy, there can be quarters of growing demand. But that growth quickly dissipates as the longer term retrenching trend re-asserts itself.

It is this search for a solid footing with respect to debt levels that is dominating our economy. Our private sector is disgorging debt. It can do that through default which is the process we are still seeing in housing. Or it can take the much slower route and pay down debt from income, which is a trend we are seeing in aspects of consumer credit. This latter process is particularly difficult at the moment because incomes are not rising quickly, if at all, and inflation is very low, so the inflation burden of debt remains high. Getting average earnings to rise, or allowing a bout of inflation would both accelerate our recovery. Unfortunately neither looks likely.

Those of us who look at the economy through the prism of debt and balance sheet adjustment are not at all surprised by the recent string of bad news. It was always the more likely outcome. Policy has not been anywhere near sufficient to deal with the root causes of the crisis: not in terms of stimulus; not in terms of debt relief; not in terms of bank reform; and not in terms of enforced loss recognition. Policy makers seem to have viewed this recession/depression as yet another typical post-war recession. This was a gargantuan error. The accumulation of mistaken policy decisions, up to and including the US austerity effort, is making it harder to conclude the adjustment process. So we are faced with years of unnecessary malaise and uncertainty.

This narrative is a long way from the productivity report I began with, but, hopefully, you can see that, when viewed through the lens I have described, nothing in that report, or any of the other recent reports should be a surprise.

Expect more like them.

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This Stinks – A Rotten Jobs Report

Sorry. There is no other way to describe today’s employment report. It stinks. There is no saving grace. No excuse. No special circumstance to suggest it is an aberration. No. It just stinks.

One of the reasons I didn’t comment about this week’s ADP payrolls report was that I felt it would misrepresent things. In particular it excludes the public sector, and there’s a lot going on there worth waiting to hear about. What I didn’t expect, and as far as I can tell no one else did either, was just how rotten the private sector would be also.

The facts are deplorable.

Unemployment, in the narrow sense, rose from 9.1% to 9.2%. Not a huge change, but obviously in the wrong direction, and simply atrocious for an economy supposedly in recovery mode. Worse: the wider measure of unemployment – including the underemployed – also rose, from 15.8% to 16.2%. Both numbers better describe a failing than a successful economy.

The economy added only 18,000 jobs in June. This after a paltry 25,000 in May. Recall that April’s figure was a more respectable 217,000. Even at that April rate of progress we would take almost a full decade to get back to anything resembling a healthy jobs market. June’s data implies a much longer period of mediocrity. I have said it before, but let me shout it louder: we are stuck firmly in a stagnating economy, going nowhere fast. Remember: we need to add about 150,000 jobs a month just to keep up with population growth.

The gloom has forced large numbers of people to drop from the workforce. These people are not just retiring, they have just stopped looking for a job. Some may retire early. Others may simply fester and consume precious savings. Either way, the decline in workforce participation is a stark measure of both our declining productive capacity and the loss of faith in the economy. The message is ugly whichever emphasis you place on the data.

The big damage is coming from two sources. Private businesses are simply not hiring with much enthusiasm; and the public sector is in a state of contraction as states and local governments fore workers in order to cut spending. Please remember this: cutting government spending, especially at the local and state levels, means firing people: teachers, police, fire, and other government workers. That undermines those local economies and sucks what little wind we have from our sails. There is no way that such austerity builds an economy. On the contrary, it makes getting going much more difficult due to the loss of those incomes. In the vernacular it’s called cutting your nose off to spite your face. In economics it’s called austerity driven growth. In neither case does it make sense.

There are two explanations for the privates sector’s dismal hiring record. If you listen to Obama and the Republicans – yes they are in agreement on this – the reason businesses are not hiring is that they lack confidence about the future. According to this narrative, business is holding back and not investing or hiring because the Federal deficit and debt undermines confidence in the outlook for interest rates, taxes and all the other sensitive pressure points that can muck up business conditions.

The other narrative is one you construct if you actually listen to businesses directly, especially small business. Their number one issue, and their number one reason for not hiring, is that they see no increase in sales over the short to medium term. Hiring people is expensive. Especially in America where benefit costs also include the very high cost of health care. When the outlook for demand is weak, it makes no sense to hire. That seems straightforward to me. We have a demand problem. Not a supply problem.

The first of these two explanations is the one being tossed around in Washington by both the White House and the Republican leadership. They are in lock step. The solution, according to them, is to put first priority on cutting government spending. This will, they tell us, remove all that uncertainty and doubt stalling our doughty business leaders. Once the deficit is reduced, or, rather, when a plan to reduce the deficit is in place, a surge of confidence will unleash investment and hiring. And we will take off in a supply side zoom to renewed heights of wealth and fortune.

No we won’t.

The real explanation is the second. The one that business managers will tell you when they are not being politically correct. Demand sucks. It really, really sucks. And as long as these folks do their planning in the context of flat, or near flat, forecasts for sales, the economy will flounder.

The first explanation, the one being peddled by conservatives, right wing ideologues, and the White House, is fantasy designed to justify the downsizing of government. It has nothing to do with jobs. It is directed at the long desired goal, by the right wingers, of rolling back the New Deal. In order to attach credibility and practicality to this goal they wrap the failure of the economy to create jobs around their hidden agenda. By arguing that cutting government spending we create jobs they at least sound as if they care about the latter.

They do not.

Right wing economic policy, all of it, is currently focused relentlessly on the New Deal roll back.

The White House is either clueless about, or complicit in, this goal if it goes along. And all the current available evidence is that Obama is a supply side believer. He believes that the confidence fairy will pop back up if we cut spending. He believes in the inexplicable mysteries of market magic.

Faith based economics is running amok in Congressional and White House circles. Watch out: we will lose a lot more jobs as a result.

Oh.

One more thing.

The really bad news in today’s report – as if that jobs figure wasn’t enough – was that wages went down. Think about that. Wages actually declined. In an economy trying to shed debt and struggle back to life, a decline in wages is the very last thing we need. It makes debt reduction more difficult because there is less income to allocate to it. And it makes increasing consumption even more more so, since debt reduction is still the highest priority for a majority of our hard pressed households and thus squeezes any plans to spend.

The only problem worse than this would be if this combination of rotten employment and weak wages persists for a prolonged period.

I am glad you asked: the US economy has been stuck in exactly such a position since the end of the 2001 recession. The Bush regime oversaw the worst employment and wage years ever recorded during modern non-recessionary times. This dismal performance led households to pile up debt in the hope that they could pump up their standard of living. That blew up in our faces in 2007/2008. We suffered through a lost decade for most Americans between 2001 and 2011. Current policy seems destined to make sure to double that over the next decade.

A gentle reminder: wages adjusted for inflation, were precisely the same in 2007 as they were in 1996.

It needn’t be this way.

But Washington doesn’t care. Those folks have a different agenda all their own. And it isn’t about jobs.

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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.

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Historic Fog

Ugh.

The numbers are just horrible. We have wandered off into the desert and will not return for years. Here’s why:

  • Household debt is still way too high. It is well down from its peak of about 130% of disposable incomes, and is now “only” 115%. But that compares with an average of around 75% for the last few decades of the last century. Something tells me that we are still retrenching furiously. That undermines aggregate demand. That is why underemployment is a feature of the economy we will not eliminate any time soon.
  • One result of the retrenchment is the lack of consumer spending. America is a consumerist nation. It has built its economy around private consumption. But we have never seen such a prolonged period of practically zero growth in consumption as we are currently living through. This is a first for post-war America. Our elites have no answer. They are fumbling. All their policies fail to match up with the historic fog we are in. We have had thirteen straight quarters of weakness in consumption, and while those debt levels are where they are households are likely to keep a tight lid on spending.
  • Savings are deplorable. Despite the retrenchment and the reduction in spending rates, households are having a hard time saving. Yes the savings rate is up somewhat from its derisory levels during the years of illusion, but it is less that half what it was back in the latter part of last century. And things are getting worse: one of the great shifts of the decades of illusion was the movement of risk from businesses and government onto households. The shift from defined benefits to defined contributions is one example: it exposed millions of households to a risk they had never shouldered before and are not well equipped to deal with. As the baby boomers approach retirement they are realizing how short they are in terms of invested cash. With the slump in home values depriving them of wealth too – albeit paper wealth – this is the first American generation since World War II, to be faced with an urgent need to save instead of spend. An unintended consequence of privatizing all that risk is to bring upon us the end of the consumer boom. By putting the onus onto their employees, businesses have reduced the spending power in the economy and thus cut their sales prospects. That means the endless short term focus on profit is going to end up as a longer term loss.
  • The shift of risk to households would have been ameliorated had wages risen to compensate for the risk. But they didn’t. Businesses have tried to have their cake and eat it too. They cut their own risk by trimming benefits, but they have kept wages flat too. Indeed real wages have fallen by 1.6% over the last year. This is also historic: this is the first recovery ever, where seven quarters in wages have not risen. There is no way that consumption can rise if wages are held flat. No way, unless, that is, consumers are not inclined to pile up debt. And, as I have already said, they are not so inclined.
  • This accumulated freeze up of the consumerist spigot is having an enormous impact on smaller businesses. Not only are bigger businesses slashing costs in order to boost profits – this cuts into small business sales since they usually occupy a lower rung on the supply chain – but small business sales direct to consumers are being radically reduced. The National Federation of Independent Business, a small business trade group, has just released its survey of its members: the majority are freezing hiring in anticipation of lower sales volumes. Yes fewer are reducing payrolls too, but, for the first time in almost a year, they are not hiring either. The number one one concern amongst small business is the lack of sales. High taxes and government red tape – a perennial gripe of small business owners ranks third.

Even if we ignore the continuing instability of our financial sector – too big to fail will come back to haunt us sooner rather than later – this list of issues is not one that is easily solved. These are intractable and long term in nature. They imply a very significant shift within the economy – away from consumerism … but towards what?

Some people argue we need to pump our manufacturing up again, but this is a long term solution also and worldwide competition is ferocious. Plus it is not at all clear what we would manufacture. Does this approach portend trade wars? The imposition of tariff walls? The phrase “industrial policy” gets bandied about, but where do we invest? And, even if we back winners, who is going to buy all these domestically produced goods if we have shifted from a consumerist economy? The implication is that we are headed more towards a German, Japanese, or Chinese style export driven economy. Who, then, will take our place as consumer of last resort?

If the American economy is in a historic fog, and if our policy makers have only a set of policies built for the old style consumerist days, it seems clear that a decade of stagnation and frustration is the more likely prognosis.

And on the policy set: neither major party, no business group, and few if any academics, have yet been able to articulate anything new. They all appear to be in denial of the shifts I have outlined. Their prescriptions have all been tried and all have failed at least once. The last ten years have been a spectacular flop: we cut taxes with an historic verve only to debilitate government and produce no visible boost in growth. Wages stagnated. Profits soared. Debt became the only way most Americans kept up with rising costs. The years of illusion ended with a thud when we hit the wall and our banks imploded. The clean up, and the return to sanity, like those days after any binge, will be longer and grayer than it might have been had we recognized the pathetic emptiness of the ideas that led us so far astray.

Historic fog indeed.

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Bernanke At Bay … Again

Poor Bernanke. He has to explain in almost childish language some things that he probably assumes any half way engaged politician or business person knows well.

That’s the price economists pay for being deliberately disengaged from the economy. A century of self indulgent discussion and increasingly arcane mathematics has made economics impenetrable to anyone not accepted into the inner sanctum of academia. Instead those actively engaged in running the economy tend to pick up the tricks needed by way of direct experience, hearsay, gossip, and old fashioned trial and error.

Nonetheless people like Bernanke have, periodically, to mingle with the other side – those who form what we can call the actual economy. This produces a clash between the mind game economies of the theorists and the rough hewn ones of the practitioners. It is always fun to watch the dialog.

Like yesterday, when Ben came down and opined on the economy.

It is, he said, in a transition state. What is this we wonder? A transition between what and what?

Well the transition seems to be from good to bad to good. With us being in that bad bit in the middle right now. No fear though: it will pick up. This is because, Ben tells us, that the rotten things that rocked the economy in the first quarter are transitory. Transition – transitory: get it?

Take oil prices. They are high but trending lower. All sorts of bad things happened to oil prices earlier this year. Middle Eastern turmoil – although I, for one, don’t see this as unusual – caused uncertainty to rise and hence prices went up. Supply was disrupted, and demand is rising sharply as the emerging economies suck in more oil. Thus prices went up even more. None of this, please note, was due to the Fed flooding our economy with dollars. It wasn’t the Fed’s fault gas prices rose sharply. We should all blame those Middles Eastern types rallying for democracy, and those emerging middle classes around the world who aspire to drive cars all over the place.

He’s right. It wasn’t the Fed’s fault. It was those oddball things. And, yes, oil prices will calm down. Anyone with half a brain could look back over the last few decades and see similar blips up and down. The long term trend is upwards as cheaper sources of oil dry up and are replaced by much more expensive sources – the much ballyhooed oil shale in the US, Canada, and Europe is only worth exploiting if prices stay high, so even if they provide a good supply prices won’t drop.

So the blip in inflation will go away – as we all thought it would. And the cash drained from everyone’s pockets, and thus not spent on other stuff, will return and thus be available. Consumers will feel more at ease, and the economy should recover a bit.

A bit.

The rest of Ben’s talk was along similar lines: explaining simple things to an audience that has been whipped into an inflation fearing hysteria by a torrent of bad information and wrongheaded analysis.

The facts are ordinary now. The economy has slowed down from its modestly good pace of late last year. There are some reasons, like the ones Ben highlighted, that make this slowdown more dramatic than it might have otherwise been.

But is that all?

No. Not by a long way.

The point is that the economy was going to slow down anyway because the efforts to get it growing were never sufficient to give it the oomph – a technical economics term – needed in the first place. No one in power wants to admit this, so we are treated to this transition conversation as if it is the sole explanation of what’s going on.

It isn’t.

All this is common currency though, so I need not repeat it. Those of us who care about the average household need to hold our leadership accountable for any slow down. It was avoidable. If the economy was so weak that a few storms and supply chain disruptions in Japan can push us towards a double dip recession, then it wasn’t very robust to begin with. Those things happen routinely. That’s why uncertainty is central to any understanding of an economy. Robust economies withstand that kind of buffeting. Ours, evidently, cannot. That should tell us all we need to know about the efficacy or recent policy.

Ben assures us that this bad patch is temporary. We will be growing again nicely soon. Just you wait and see.

I wish that he hadn’t pointed to a recovery in the labor market as evidence of his expected pick up. It’s not a good example. Nor should he focus on the overseas profits of our biggest businesses, that doesn’t help our workers one bit. Nor should he prattle on about how the recent rise in stock prices has restored household wealth – not unless he wants to restrict his definition of household to the top 10% of families.

Oh. Wait.

Of course he does.

Silly me.

I forgot his target audience and the people he is concerned for.

Ben Bernanke is one of our leadership elite culpable for the current malaise. He is not alone, so we should not single him out. But nor should we forget his role. It might be tiresome for him to have to engage with the public. But they are, after all, his ultimate judges. If he fails them, he has failed totally. He might feel surrounded by reactionary ideologues calling for tighter monetary policy to combat an inflation that doesn’t exist. And he might feel constrained and unable to maintain the Fed’s series of extraordinary actions in support of the economy. But he could have the decency to say something not couched in circumlocution, bureaucratic obscurantism, and technical mumbo jumbo.

Oh. Wait.

Of course he talks that way.

He’s an economist. And a political one at that.

Aren’t they all?

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