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Five Years Already

Amazing. It’s roughly five years since the economy tanked, since Lehmann folded, and since we began to discuss the worth or otherwise of bailouts. Five long years. Five fairly rotten years. In that time we have been stuck in more ways than one.

First: economic policy has been somewhere between pathetic and horrible. The Obama administration came into power after the bottom had fallen out and seemed to assess things wrongly from the start. The big error made by the White House – one that reverberates to this day – was that such a dramatic economic collapse would inevitably be followed by an equally dramatic recovery once the bleeding had been stopped. So the policy goal was to provide just enough help to stop the free fall, let the automatic stabilizers like unemployment benefits kick in, and wait for things to come screaming back.

So much for that.

It was a strategic error of monumental proportions and one which was easily avoidable had someone – anyone – in the administration paid attention to recent history. I am being too harsh, people like Christine Romer did pay attention. Unfortunately Larry Summers has a louder voice and seems top have won the day. From that moment forward economic policy was inadequate.

Compounding this was the deep connection between Tim Geithner and Wall Street. Come to think about it, Larry Summers has such a connection too. That Treasury department and Wall Street nexus prevented an effective response to the banking crisis that roiled the economy throughout 2009. Instead of nationalizing Citibank – something deemed too radical and de-stabilizing in the good old US of A – taxpayers were forced to ante-up and allow the shareholders off the hook for their deplorable oversight of the bank’s management. The behemoth banks were allowed to wallow in their own mess and gobble up fallen peer banks so as to fatten up and thus book profits sufficient to offset their prior lunacy. Bank reform when it did arrive was too little, too late, and ridiculously complex – the lawyers are still arguing over the fine print and mush of the “reform” is not yet enforced.

Yes, it has taken five long years for the bureaucrats to put in place an insipid and pathetically ineffective so-called reform. Yet the White House looks on approvingly. Heck the heavy odds are that the White House wants to bring Larry Summers back to run the Federal Reserve Board as if he is a conquering hero and not a stooge of Wall Street.

Five long years indeed.

Unemployment is still too high. The economy generates jobs at a tepid rate. We have had more false starts than I care to remember. Housing has only recently staggered back to life. Demand is weak. Consumers have paid down debt, but with wages languishing they are likely to build debt up again. General Motors is still alive. Yea! But largely because it now builds lots of cars in China. Boo!

We have health care reform styled along Republican party lines, yet opposed ferociously by the Republicans. We have a Congress so mired in dysfunction and subject to extremist blackmail that it cannot do anything to fix the economy. Not that the Republicans want to do anything because they are beholden to right wing economic theory that says the economy will correct itself if only the government gets out of the way.

Which brings us to today.

There is a debate going on about how correct that right wing theory is. Well, it is correct. Economies do del-correct. Eventually. Sometime. Maybe. That isn’t the proper focus of discussion though. What we ought to be talking about is just how desirable that self-correction might be. Let’s use an analogy: most diseases can be fought off by the human body. Eventually. Sometime. Maybe. But we don’t think it sensible to let that happen. We intervene with medicine and treatments. That shortens the period of illness, accelerates recovery, and thus limits the long term damage.

Our economic policy debate has been – or ought to have been – about whether we administer medicine or not, and about whether we shorten the period of illness or not.

The doctors lost. Indeed, they weren’t even consulted.

Let’s review a little history.

The crisis was caused by excessive debt and loose or exploitive banking. That debt build up was in the private sector, where households were struggling to maintain a lifestyle in the face of stagnant wages. Rising inequality syphoned off too much income for the wealthy and left the middle and lower end of wage earners no longer able to keep up. And, don’t forget, wages adjusted for inflation have been stuck for thirty years. The entire Reagan era has been terrible for workers and average families. So, just as happened prior to the Great Depression, the vast majority of workers reacted to wage stagnation by borrowing. And, just like it did in the 1920’s, the debt bubble burst. It had to burst. The cost of all that debt became too burdensome in the absence of wage increases. The real estate bubble was just one part – albeit the most noticeable part – of a wider and deeper malaise. The infamous 1% was trashing the rest and starving the economy of demand.

So the bottom fell out, and the private sector began a long period of lower spending while it shed debt. Cash was used to pay down debt instead of for buying stuff. That meant sales dried up and businesses fired workers. That drained even more cash from the economy, raised fear and uncertainty, and made the slump worse.

With demand slumping and the banks near bankrupt, the Fed responded with aggressive monetary policy. The problem was that interest rates were already low – the Fed had kept rates low during the early 2000’s because the economy was weak after the 2001 recession – and so could not go too much lower before they hit zero. A further problem was that even zero rates was not enough to induce anyone to borrow and then invest because they were too focused on getting debt burdens down.

We were trapped. Rotten economic policy from the 1980’s on, lowering taxes for the rich, pushing up inequality, favoring business, deregulation, and the reliance of markets instead of government, had combined to create an unsustainable economy. It was going to break down sometime. It came apart with a vengeance in 2008.

Five long years ago.

Since then right wing economics has, by and large, ruled policy. The stimulus of 2009, so reviled by the right wingers, was pathetically small. That inadequacy was born directly from the miscalculation I referred to above. It was designed to be a stop-gap, not a curative. The White House believed in market magic and the self-healing properties of the economy. They imagined a small stimulus would do.

It didn’t. It couldn’t.

It stopped the rot. It did not build a recovery. We were left discussing whether it worked because it was never designed to work clearly enough to be obviously successful. It was intended to be in the background while things returned to normal. Which they were never going to do quickly without lots more medicine.

The problem is this: an asymmetrical economy, one where profits boom as wages stagnate, where the top 1% get to rewards and the rest flounder, where deregulation allows banks to over-lend without consequences, where business is preferred to consumers, where the safety net is weakened to save the government money, and where government spending is cut even as the private sector shrinks, is one that will, eventually, implode. And when it does that vaunted self-correcting ability of right wingers love to talk about is seriously weakened. The economy’s immune system cannot function properly.

Yes, the classic right wing recovery will turn up one day. A weak upturn in investment is inevitable once all the old machinery needs replacing. But it won’t be sufficient to get us back on our feet alone. The elimination of strong wage growth will impinge on business investment plans. Why invest if there’s no one out there with cash to buy what you are making? The economy needs demand as well as supply.

On an emergency basis that demand has to come from the government going into debt and spending what it borrows. Simple. Simple medicine. A simple remedy.

And it needs wages to get back to their historic share of the economy so that workers have spare cash to spend and don’t have to crimp on everything. That means profits have to fall as a share of the economy – down from their current near historically high levels.

And it means we have to stop obsessing over budget deficits. Not that we will. The Federal deficit has fallen sharply, and Federal employment is dropping quickly too. The states are busy in deep austerity measures. Combined these things are slowing us down and costing us jobs. We are busy creating our own headwind. Policy is hurting not helping.

And we are now having a discussion about whether economies can self-correct? Really?

No, I mean: really??

After five long years of stagnation and policy failure?

After five wasted costly years?

Who cares if they self-correct?

Not the unemployed that’s for sure.

 

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Mid Summer Blues

No I haven’t disappeared. This is mid-summer and the living is supposed to be easy. And it would be were it not for the perpetual lunacy in Washington. I wonder whether America has ever been this ill served by its collective leadership.

Last week were treated to an outpouring of enthusiasm based upon the new GDP numbers. Growth was 1.7%. Wow. In normal times, back before the banks trashed the economy, the endless bailouts, various fiscal showdowns, tepid reforms, and Congressional gridlock – you know all those years ago – a 1.7% growth rate would have been greeted as the harbinger of bad times. Now, in our new world, people get almost giddy over it. Such is the distortion to our perspective that the failure of our leadership has wrought that we genuinely laud a weak report. It is as if we are so starved that any small morsel looks like a veritable banquet.

How did America get to be so small?

Small in attitude. Small in outlook. Small in opportunity. And small in scope.

The so-called land of opportunity is clearly gone. And we behave as if we want it gone. Nowhere is there the anger at the lack of leadership needed to break free of the mediocrity into which we have settled. Or, rather, the mediocrity into which we have been forced to settle.

I think if more people realized that our economic plight could be solved quite easily had we the courage to attack the problem they would rise up against the Washingtonian elite that throttles everything.

Within that elite, with it stunning lack of imagination and its numbing groupthink, lies the cause of our malaise. The rotten employment figures last week – 162,000 new jobs – and that weak GDP figure are the deliberate outcome of the actions of our leaders. Stagnation has become acceptable to them. They are scared. They are rudderless. They have no ideas. And they simply squabble.

The Republicans in the House have now voted forty – yes 40 – times to repeal Obamacare. This is farce. Worse, it isn’t humorous farce. They cannot succeed, yet they continue these entirely symbolic acts. At taxpayer expense. I have no clue in which world they now exist, but it isn’t this one.

The Republicans also continue their objection to each and every move the White House makes, no matter whether they previously espoused the same policy. This is not opposition. This is obstruction. Opposition is constructive and presents an alternative. Repetitive negation is no alternative.

This comes across starkly in the discussion – if that is what we can call the mud slinging – over the Federal budget.

The divisions within the GOP are now so deep that they cannot even bring a bill to the floor of the House. They disagree so strongly with each other. The extremists treat the sequester level of government spending as the starting place for further cuts – they want to get rid of all social spending if they can. Another group wants to roll back the sequester and start over at a higher, and less severe, level. This conflict produces gridlock within the Republican caucus, leaving the Democrats bemused onlookers.

It will get worse.

The budget is supposed to be in force by October 1st. That’s when the Federal fiscal year for 2014 begins. So we will be hearing about a succession of budget – aka appropriations – votes during September. Such is the gridlock, however, that it is extremely unlikely any substantive votes will take place. The Republican split prevents them bringing any of the multitude of annual appropriation bills to the floor for a vote. They failed just last week in such an effort. So the specter of a government shutdown looms once more.

Once we are beyond October 1st. Congress will fund government through what is called “continuing resolution” legislation. That is, they simply vote to keep that last budget continuing until they vote for a new one. This presents a sitting target for the extremists. All they have to do is to block a continuing resolution and funding ceases. This year is ripe for such obstruction. It is the first full year of funding for Obamacare, which the extremists revile. Any bill that includes health care reform funding will be fought over tooth and claw. This year, too, Speaker Boehner is demonstrably weaker – his control over the GOP caucus is diminished to the point of being negligible. This makes eruptions from the extremists very likely. Then, too, the gap between the House and Senate Republicans has widened. Indeed the dialog between them has almost vanished. The Senate GOP, or at least a big chunk of it, would like to adopt a more constructive approach and has thus lost patience for the trench warfare the House loves to toil away in. So we are likely to get two very different versions of Republican budgets, adding more confusion and reducing the prospect for progress.

In the middle of all this Republican dysfunction we have the Democrats who appear to be losing patience, and are less likely to lend Boehner a hand in passing legislation. Given that the Republican majority is split so badly, to get any legislation passed will need a bi-partisan vote. Currently the Democrats see no need to help Boenher find a way out of the hole he dug for himself.

It gets worse.

The law governing the sequester budget cuts has them kicking in a few days after Congress adjourns. But the Republicans are fearful that Obama may use adjournment to tinker with appointments to some of the huge number of empty jobs that Congressional opposition has opened up. So they want to extend the legislative session as long as they can. This means that the fights over the sequester will most likely take place sometime in January or February – a good four or five months into the 2014 fiscal year. If nothing else this will add confusion for the media reporting on the budget wars because it adds another moving part to an already helter-skelter legislative program. And the media is not renowned for understanding these things when they are static, let alone when they are in motion.

Phew.

Then, naturally, there is the idiocy of the Obama administration and its obsession with discredited economists.

The bun fight that broke out over the Bernanke succession is both unseemly and unnecessary. Apparently Obama has a clear preference for Larry Summers. Equally apparently, most Democrats don’t. Summers will always be associated with the go-go years of Clinton, with Robert Rubin, with ill-fated bank deregulation, with opposition to derivative regulation, and a host of other errors. His arrogance has prevented him from any form of public contrition. His political ineptitude is legendary. And his intellectual vanity epic. Yet he continues to exert a hold over Obama. That his name even came up in the context of the Fed chairmanship – a position demanding diplomacy as well as an economic know-how – is baffling.

More baffling still is that Obama first turned to Tim Geithner to sound him out for the job. Really?

Between them Geithner and Summers created a bulwark within the administration preventing effective bank reform. Neither is qualified, on that score alone, to be Fed chairman.

Finally, in this list of gloom, we have Obama’s clockwork like calls for a “grand bargain” on the budget. By grand bargain he invariably means significant cuts to social programs in exchange for a few negligible tax increases. This time he is calling for a cut to the corporate tax rate and a concurrent reform of that tax to close loopholes.

By the way: I have never understood the logic behind social spending cuts. We are told these programs are somehow unaffordable at some future date, and are thus likely to need cutting back. And in order to avoid those future cutbacks we have to cut them back now. So we are being forced to make cuts … in order to avoid future cuts. And the logic here is what exactly?

Anyway, never has an Obama made a more pointless proposal. Most large corporations pay little or no tax. So the top line tax rate is irrelevant. Those same corporations have bought and paid for Congress through their lobbying and donation efforts. The chance that we get tax reform that isn’t twisted out of all recognition by special interest pressure is zero. So Obama’s call was senseless.

Then again, being the acute Washington insider that he is, Obama knows all this. He was simply playing to the audience, whilst knowing full well that he could have said anything and the Republican reaction would have been the same.

Which is to say they would oppose him.

And this is why the mid-summer blues are particularly blue this year.

We have all this to look forward to.

Time to go to sleep under the tree and to dream of when 1.7% GDP growth invoked concern and not good cheer. Those were the days. I wonder whether we will ever get back there.

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Employment Numbers: Endless Drift

This morning we have been treated to an odd spectacle. Wall Street was very wrong about the number of jobs generated by the US economy last month, and is now scratching its head about what it all means.

First the figures: the economy added 195,000 new jobs to non-farm payrolls in June. Moreover, both the prior months were revised upwards, so that the average for the entire second quarter came in at 196,000 per month, only a little down on the first quarter’s 207,000 per month average.

Second the Wall Street view: by and large analysts had been expecting a much weaker figure – something in the region of 155,000. This comparative weakness was based on recent data that suggested the economy was slowing down somewhat from its first quarter pace. Manufacturing reports had indicated a slowdown, as had some of the other reports. Add in the view that the combination of tax increases and sequester spending cuts will slow growth down from its already anemic pace – 1.8% in the first quarter – and the prospect for strong job growth evaporates. Oh, and there’s the widely held opinion that the steady unrolling of Obamacare will inevitably stunt hiring because it requires businesses to provide health care coverage. This latter factor looms particularly large within the minds of those within the generally right wing oriented echo chamber that is Wall Street analytics.

Third: then there’s the bizarre way in which Wall Street analysts express themselves. Put bluntly: they say nothing, but talk a lot. Here’s Jane Foley of Rabobank:

“Very strong data should be good for risk appetite. However, the market’s likely reaction is complicated by the interpretation of what the numbers will mean for the Fed’s decision to taper QE. 

On June 26 the market celebrated the downside revision of US Q1 GDP on the assumption that this would lead to continued QE. This implies that a lacklustre improvement in US June payrolls could conversely fail to offer support to investor sentiment”

Or some anonymous source at Societe Generale:

“The Bureau of Labor Statistics’ (BLS) update on the employment situation in June will be the first of a trio of such reports that the Federal Open Market Committee (FOMC) will consider in advance of its 17-18 September meeting.

A reversal of May’s labour-force induced rise in the civilian jobless rate, combined with yet another above-consensus payroll print, likely will reinforce expectations of an asset-purchase tapering announcement at that time.”

Then there’s Paul Dales of Capital Economics:

“The recent survey evidence leaves us content with our forecast that US payroll employment (13.30 BST) rose by around 150,000 in June. That would be slightly smaller than May’s 175,000 gain. The 188,000 rise in the ADP measure of private payroll employment in June and the rebound in the employment index of the ISM non-manufacturing survey in the same month bode well for official payrolls. But the employment index of the ISM manufacturing survey fell to a four-year low. If the alternative household measure of employment and the labour force also both rose by around 150,000, then the unemployment rate would have been stable at 7.6%. A pick-up in jobs growth in the coming months would leave the Fed’s QE3 tapering plans on track.”

I lifted all three quotes from the Guardian this morning. I can’t quite make out whether the Guardian thought these quotes meant anything, or whether it was spoofing Wall Street.

None of them actually talk about the meaning of the numbers in any real sense. They are all obsessed with what the numbers mean for the Fed’s potential relaxation of its current QE policy. I understand this is important to the world of finance, but it would be nice to hear what analysts thinks about what the numbers mean for the rest of us. Let’s face it the financial world is long departed these shores and now seems more inclined to trade amongst its own based upon gossip, and reactions to interpretations of hearsay and insider tips exchanged at the bar last night. What’s going on in the real economy matters not a lot. What matters is how other traders will react to the expectation of how other traders will react.

Yes, I just said that.

The obsession with the Fed is understandable within such a byzantine world. Money is made by judging the meaning of nuances, innuendos, style, and the way in which Ben Bernanke combs what’s left of his hair. Money is made by watching and guessing the next move of the ratio between two indices, not by giving a hoot about the substance of what is driving those indices. In other words, money is being made by speculating in mid air, with the speculators not needing an understanding of what’s going on down there on planet earth.

Hence the vapid analytical statements.

For the rest of us, here’s what I think of this morning’s figures:

They are not very good.

They show that the economy is withstanding the negative impact of current economic policy. But only just.

They indicate that we are limping along in quasi stagnation and that the economy is generating just enough activity to keep the employment situation out of the panic zone.

They suggest, to me at least, that the economy would be about 0.5% to 1.0% better off were it not for the lunacy that is Washington policy.

They are too weak to push the Fed into changing its mind on QE any time soon. So interest rates will stay low for a while longer.

And, given that the job market is usually the epicenter of inflationary pressure, they suggest that the prospect for higher inflation is close to zero – despite what the right wingers keep saying.

Let’s all face it: a 196,000 per month hiring average is not very good given where we were. It barely keeps up with population growth and is not enough to bring the unemployment rate down – the headline unemployment rate is stuck at 7.6%.

Perhaps the biggest problem we have is that this limping along is just sufficient to prevent anyone in Washington having to dig in and do anything. Policy can stay anti-growth, and high unemployment can elicit a shrug rather than any concern. Remember: there are plenty of studies that show the unemployment rate doesn’t have much impact on elections. What matters to voters is the change in unemployment in the run-up to an election. Apparently voters can get used to high unemployment, and only worry if a shift seems to signal a threat to their own job. That makes sense, but it means that policy can sometimes allow for endless drift.

And endless drift is where we are.

 

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Human Capital – The Knowledge Dimension

The very words have a bureaucratic ring to them. At least to me. Nancy Folbre has written an interesting article about the ending of the Golden Age of Human Capital, her main point being that there has been a major change in the landscape for higher education. The value of a college degree is not what it used to be, and the cost of getting one is becoming prohibitive.

The second part of that statement – about the cost of education – is testimony to the shockingly irresponsible shambles that academia has become. The cost of providing an education is way out of line, affordability is declining rapidly, student debt shackles the young and reduces their ability to attain the creature comforts of the old middle class, and the future value of college is increasingly murky. Academics decry the cost of getting an education, but offer little by way of a remedy. The productivity within academia is a challenge to say the least, and odd ball solutions like opening up campuses of our universities in China solve nothing. Indeed they make matters worse by building the supply of graduates and thus eroding the return available for all graduates.

Folbre hints that there may have been a shift in the demand for educated workers, at least here in the west, with employers now focusing on more specific skills rather than the old fashioned generalists pumped out en masse by liberal arts colleges.

Let me add my voice to this discussion.

Corporate America is awash with highly educated bureaucrats. The demand for such folk rose strongly during the 1980’s as big businesses sought to upgrade the talent of their management teams. Prior to then it was not unusual to find a large corporation being run by a raft of ‘corporation men’ – invariably men – who had risen through the ranks and benefitted from employer specific training. Sometime around the early 1980’s in-house training was identified as being too expensive. Those programs thus became an early example of outsourcing, with the cost of management education being pushed onto the employee and off the corporate income statement. This was acceptable to employees as long as the returns to the cost they were now covering was significant enough, which, as we all know, they were. By the end of the 1990’s most employer specific management training programs had disappeared and had been replaced by minor technical training, and, sometimes, the subsidy of employees who sought their own education whilst at work.

This is, of course a generalization, but notice two convergent trends within this history.

First, the early 1980’s was also the onset of the single minded pursuit of shareholder value. Experience and education became costs to be cut or outsourced like any other cost. The drive for efficiency – to pump up returns on equity – drove corporate America to abandon many older methods and ways of doing business. Among those jettisoned notions was lifetime employment and the ‘corporate man’. Instead of providing training big businesses turned to the marketplace to hire already educated employees. This created a boom in demand for anyone with a higher education. Thus the emergence of the Golden Era for Human Capital that Fobre regrets the passing of.

Second, this surge in employment for educated people built the supply of able bureaucrats capable of seeking the very efficiencies that had caused the outsourcing of business education. The ranks of business swelled with accountants, lawyers, consultants, and other highly educated workers whose pay seemed immune to the stagnation witnessed by less educated workers as efficiency became ever more important as a source of profit. These ‘knowledge workers’, as they began to be called, were the ones leading the efficiency charge. They were the ones steeped in the latest management and economic doctrines, and they were the ones reaping the rewards from the slimming down and streamlining they led with such gusto.

It wasn’t the pursuit of innovation that drove the demand for knowledge workers, it was the drive for efficiency. Creativity was valued more for incremental tinkering with corporate costs, not for breakout product or process changes. Despite all the hype from management gurus, innovation was the lesser source of short term profit, by a long way, than was the search for efficiency. As long as costs could be cut the demand for bureaucrats willing and able to cut them was near insatiable.

Sooner or later, though, the fat had been trimmed and the demand for such bureaucrats tapered off. The newly lean corporations could manage themselves with fewer managers. The relentless pursuit of shareholder value brought the high cost of those bureaucrats into focus. Business decided it needs fewer. It began to outsource the activities they occupy. The drive for efficiency entered a new phase.

Which is where I think we are.

The value of those higher educations has diminished for many, leaving ever larger spoils for those who manage to remain. The top 1% of wage earners began to separate from the top 5%. The skilled bureaucrats began to feel the same heat that they applied to lesser educated workers.

Let me step back and add a wrinkle to the story.

In an economy there are two kinds of knowledge. What I call ‘primary’ and ‘secondary’. They are distinguished by the role they play rather than the content. This is different from the tacit/explicit dichotomy of Michael Polanyi in his 1966 book “The Tacit Dimension”, and which has become so popular amongst management and consulting theorists.

The two kinds of knowledge relate to the two impulses upon which an economy is based. Innovation creates the long haul rise in wealth that we all benefit from – and which the McCloskey book I commented on last week brings into sharp focus. Efficiency re-arranges the existing resources to reap greater rewards from them.

In my terms: primary knowledge is the source of efficiency; and secondary knowledge is the source of innovation.

Primary knowledge is embodied in the skills of workers doing repetitive tasks, in the capital machinery and technology that clutter the business world, and in the management methods that dictate the structure of production processes. Primary knowledge allows the pursuit of efficiency because it can be economized upon. It can be replicated exactly. It can be transferred. It can be coded. It can be compressed. It is the stuff of corporate process. These qualities allow for the reliable reproduction of product. Because they are so predictable and replicable, they allow for the minimization of cost and the maximization of profit – don’t forget that the pursuit of a maximum requires a stable and well known set of inputs for the computation. Primary knowledge needs known problems with known solutions. It assumes a future that mirrors the past so that its efficacy can endure.

Secondary knowledge is very different. It is embodied in the problem solving ability of workers and machines capable of ‘thinking’. It is how we deal with new problems and issues. It does not assume that the future is a mirror of the past, but that there exists a capability to innovate when presented with a need or an opportunity. It creates new solutions to new problems. But there is a downside: it cannot be economized upon since it exists as a vague potential up until the moment of problem solving. This, by the way, is why McCloskey can subtitle her book: ‘why economics can’t explain the modern world’ – standard economics deals only in a world of primary knowledge and maximization and has nothing to say about ad hoc problem solving. Secondary knowledge is also expensive since it requires a complex of available routines, thought processes, and associated information, much of which may never be called into action. It is idiosyncratic and personal, making it intractable to both to business, and to standard economic theory. Yet it is the source of the breakthroughs that constitute innovation.

This dichotomy adds, I think, a dimension to Folbre’s analysis. The surge in interest in human capital coincided not with a heightened interest in creativity or innovation – despite the claims at the time – but with the need expressed by corporations to translate their existing secondary into more efficient primary knowledge. In other words the drive to embody existing knowledge and ring the last ounce of profit from it produced a demand for bureaucrats to re-invent older products and processes rather than to invent new ones.

Once that drive had run its course, and as our economy had been compressed to produce the most profit, the demand for ever greater bureaucratic armies ebbed.

Interestingly, this narrative explains some of the macro trends that others attribute to structural problems in the economy. People like Tyler Cowan, for example, predict a diminished trajectory for GDP growth because our economy is not innovating as well as it once did. According to Cowan, our latest inventions have a far smaller impact on future wealth creation than did those of a century ago. This conclusion feeds into his standard right wing cry for freeing up enterprise and the reduction of social entitlement programs. He says we cannot afford those programs because of the diminished future, and if we want to move the growth curve back upwards we need to reduce government controls.

But my narrative produces a different interpretation: the cause of our diminished future resides in the private sector’s single minded pursuit of profit being extracted from efficiency rather than from innovation. We have succeeded mightily in squeezing profits from our current set of  ideas. But at the cost of thinking about and finding the innovations that build the future.

We have become overly bureaucratic, technocratic, and reliant on primary knowledge.

I think the Golden Age of Human Capital is yet to come. The age of problem solving, that is. Not the age of rote learning.

 

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Monday Blues

Meanwhile back in the economy …

I read with some amusement that Standard and Poor’s, part of the axis of evil that brought us the crisis, has now announced that it sees a brighter future for US government debt. It thus re-affirms its AA+ rating for that debt and spoke of the strengthening economy and the beneficial effects of the spending cuts and tax increases that have stalled the pace of the build up in debt. This is odd because those same things – spending cuts and tax increases – are the cause of a weaker recovery than some of the underlying data would suggest. Our government, primarily, but not exclusively, Congress, is doing everything it can to slow the economy down. S&P, possibly anticipating a turn for the better in policy making, intones against doing anything positive like adding debt to accelerate growth. That would highlight just how erroneous S&P’s basic analysis has been for ages. Remember those AAA rated derivative  junk bonds? They were put together by clever buddies of the analysts at S&P, so they were worth the AAA rating. US debt is issued by the dummies down in Washington so it’s only worth an AA+. This is odd given that the dummies own a printing press to make good on their debt, whereas the clever people don’t. But we shouldn’t allow such details get in the way of our super sophisticated ratings thought process – it might make us look foolish.

I must admit that I agree with S&P over one thing. This period of quiet in the Republican war on everything Obama touches cannot last. There is more stupidity in our future when the next debt ceiling debate starts in earnest.

Which reminds me: what is it about the debt ceiling that riles right wingers so much? Raising the ceiling has nothing at all to do with future policy. All it means is that the current policies – some of which hark back to George Bush days and even earlier – need to be funded by raising debt. It is not a sign of the runaway ‘socialist’ tendencies of Obama. It has everything to do with paying for things we’ve already bought. Given the torrent of homespun homilies about sensible budgeting and paying-your-way we are treated to from Republicans in Congress, you’d think they would understand the difference between reneging on your debt – which is what a refusal to raise the ceiling implies – and incurring that debt – which is what the budgeting process is for.

Then again how can we expect them to think clearly when the budget is improving so quickly, and the medium term debt situation looks so much better, thus eliminating their key argument.

There is no debt problem.

Poor dears, they’re going to have to think of something else to panic about.

Perhaps they should worry about Social Security.

Maybe not.

The latest report from the trustees of the Social Security system was relatively upbeat. Payments, as currently calculated, will be paid in full through 2035. Only after then does some adjustment have to be made to keep full payments being made.

This is hardly a crisis.

But I imagine we will still read impassioned arguments in the media, and especially in the right wing establishment media, about how we have to make draconian cuts in entitlements in order to ‘save’ the system.

I have to admit I have never quite understood the logic of the doomsayers. Reduced to simple terms their argument is that we need to make cuts in entitlements now in order to avoid making cuts in entitlements some other time. Got that? We need to make cuts so as not to be forced to make cuts. That’s plain weird. If the plan is underfunded out there in twenty or more years why don’t we top up the funding? That way we avoid making cuts of any kind. Now or then.

Besides twenty of more years seems like a very long time in which to think of something better to do. It certainly suggests we don’t need to panic right now.

Speaking of the long term. It never arrives. We all live in a long series of short terms. So making policies to fend off a potential problem out there in the murky future is silly. Who knows what will happen in the interim? No one. That’s who.

Apart from economists of course. They adore the long run. Their theories that look really stupid in the short run because all the evidence contradicts them are all said to be correct in the long run. This is convenient because no one ever goes back to check, and all the short term messiness hides the errors. So when a learned economist tells you that the so-and-so ‘law’ of economics works in the long run, you can safely ignore that law. What they are really saying is that they wish it would work in the short run, but it doesn’t, so they then want to pretend that it will all work out eventually. It’s an academically polite way of being clueless but sounding clever at the same time. Economics is chock full of laws and other phenomena that work in the long run. None of them are relevant to now, to today, or even to tomorrow, but we are all supposed to take it as an article of faith that sometime and somehow the long run kicks in and the heavens align differently so that all that mumbo jumbo becomes crystal clear accurate prophecy. So, for instance, we are assured that the economy, if left to its own devices, is headed toward some sort of equilibrium. All that turbulence you see around you, and all that manifest disequilibrium is just short term adjustment going on. That this short term adjustment has been going on since time immemorial is no reason to wonder whether it is the normal state of affairs that needs an explanation.

This would be useful if all the focus on those supposed long run things was simply a way of getting a fix on the short run mess. By shedding a light on it, for instance. But so enamored of the long run have economists become that they have drifted off into their idealized dreamland entirely. So they simply makes statements like ‘all well-informed economists know that such-and-such a law works in the long run’, and then promptly stop thinking. It’s a way of stopping debate by assertion.

To which the rest of us merely have to say that we experience the world as a never ending flood of short term events, and that to assert that we know for sure that something will work out in the long run flies in the face of our reality, infused as it is with uncertainty. By the way that uncertainty is not just about the future. It is also about the past. We are all just as vague about the deep past as we are about the long term future. We all know as much about our ancestors ten generations back as we know about our descendants ten generations forward. Which is to say we know nothing about them.

And, as a very wise man once said, in the long run we are all dead. Yes I know that’s not exactly what he said, but the meaning remains clear. We should worry about today’s, and the easily foreseeable future’s, problems as we can, and not be so arrogant that we know enough about the distant future – that long run – to fix it all now. Modest adjustments are all we can do. Sometimes that’s all we will ever need to do.

Like to Social Security, for example.

And we don’t need ‘grand bargains’ for budgets where there’s nothing grand to bargain about.

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