Response to a Conservative by Bob Powell, 10/12/06

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Topics
1. Is Krugman a liberal? What's a liberal anyway?
2. What about that "unbelievable" French unemployment?
3. Why do conservatives demonize the French?
4.What about that "populist thinking"?
5. What determines unemployment anyway? Fed policy.
6. How the Fed Operates.
7. Are there government & business entities that oppose improving working conditions and wages?
8. The Fed promotes worker insecurity to hold down inflation
9. How does worker insecurity affect company performance?
10. Why Fed policy is biased and manipulative
11. What does affect the wages of jobs?
12. What's the real rate of unemployment?
13. What's the impact of Federal Reserve policy on wages?
14. What about those union leeches?
15. Who's the problem? Unions or management?
16. What about those government-mandated wages -- the minimum wage?
17. Is Federal Reserve policy a "conspiracy?"
18. So who are the real leeches and parasites?
19. Is retraining the answer to unemployment?
20. What about that U.S. "market economy" that's the "envy of the world?"
21. What about the U.S. being the "place for real opportunity?"
22. Will there be a "baby boom driven worker shortage"?
23. Should market principles even apply to " labor" and "land"?

1. Is Krugman a liberal? What's a liberal anyway?

"This is spoken like a true liberal."

I describe why liberal is the "center," not the "left," at Explaining Liberal Principles. I explain why what's now called "conservative" is really the far right of the political spectrum.

Krugman may be a liberal in the sense I describe, but I'm not sure because in the past he has been prominently in favor of "free trade," a far right extremist stance. I'm not sure, but I have the impression he's beginning to have his doubts and so perhaps he is moving to the liberal center, which I see as being neither for "no trade" nor for "free trade," but for "balanced trade," (see Buffett's recommendation in The Trade Deficit and the Fallacy of Composition and the Dorgan-Feingold Legislation Based on Warren Buffett Idea).

I first encountered Paul Krugman when I was reading the book, Fundamentals Issues in Strategy (1994, Harvard Business School Press) in trying to figure out where systems thinking fits with other approaches to strategy. For what I learned see Learning as an Integrating Concept for a Successful Company Strategy. In this book he wrote about how gas prices affect the formation of economic clusters in an article on "Location and Competition: Notes on Economic Geography."

What do you think? Would economic clusters be more likely to form and grow when gas prices are low or when gas prices are high? The answer is important for thinking about economic development. See the answer to this question at the end of this page.

Based on his analysis, I was impressed with his thinking. I continue to be impressed with his thinking.

If Krugman is "liberal," that's a centered and balanced position between government owning and running every business and privatizing all government functions. Note that even military functions are now being privatized. That's extreme because logistics, for example, is an integral part of the military operations and critical for military success.

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2. What about that "unbelievable" French unemployment?

"The author only need look at France as the best example of this failure and the unbelievable unemployment rate and social unrest associated with this policy of populist thinking."

This view of France as having an "unbelievable unemployment rate" is seriously flawed.

OECD Frequently Requested Statistics show STANDARDISED UNEMPLOYMENT RATES in the U.S. and France in August 2006 as 4.7% and 8.8%, respectively. So ostensibly unemployment in in France is 87% higher than in the U.S. But there's good reason to mistrust the comparison. Here's why.

I discovered disturbing facts about unemployment in doing a study on Labor Market Economics for the Colorado Springs Economic Development Corporation in late 1994.

The reality was nothing like I had been led to believe and I was truly shocked at much of what learned. This project was an education for me and the beginning of a major change in my economic and political views from conservative to liberal (I was a registered Republican for 18 years).

Here's an excerpt on comparisons of unemployment in different countries.

Unemployment is typically understood to be higher in Europe than in Japan and the U.S., but data shows that rates of unemployment are not all that much different ....

   Unemployment at the           U.S.    Japan    Britain    France

   end of 1993:       Official:      6.4%     2.9%    10.2%    12.0%

                         "Effective":    9.3%     9.6%    12.8%    13.7%

         effective/official ratio:     1.453     3.310     1.255     1.142

 

Official unemployment only counts those who are actively seeking work. "Effective" unemployment includes "discouraged" & "involuntary part-time" workers (but not under-employed). Britain and France are much more efficient in counting all unemployment.

[Reference: Amex Bank Review analysis using BLS data

and cited in The Economist, 2/5/94, p. 25]

YOUTH AT WORK By Simon Briscoe in the Financial Times

Published: March 18 2006 03:00 | Last updated: March 18 2006 03:00

 

The proportion of French youths without work is more in line with other countries than suggested by official figures that put French youth unemployment at more than 22 per cent, compared with 11, 12 and 13 per cent in the UK, US and Germany, writes Simon Briscoe, Statistics Editor.

 

FT research suggests that 7.8 per cent of under-25s are out of work in France. This is only slightly above 7.4 per cent in the UK and 6.5 per cent in Germany.

"In Europe you get unemployment insurance; in the US you get a low-wage, dead-end, part-time job."

Economist Lester Thurow. The Economist, 3/19/94, p 27

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3. Why do conservatives demonize the French?

"The author only need look at France as the best example of this failure and the unbelievable unemployment rate and social unrest associated with this policy of populist thinking."

Conservative antagonism against France goes at least back to the French "Declaration of the Rights of Man and of the Citizen." It is traditional in conservative thought that they do not believe in the "rights of man." To illustrate, here's a quote from the book that's widely considered to have inspired the conservative resurgence in America.

The collective wisdom of the species, the filtered experience of mankind, can save us from the anarchy of "the rights of man" and the presumption of "reason."

The "rights of man" violates the conservative belief in the need for classes and an aristocracy to preserve order in society.

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4. What about that "populist thinking"?

"The author only need look at France as the best example of this failure and the unbelievable unemployment rate and social unrest associated with this policy of populist thinking."

Definitions of populist:

• populist: "an advocate of democratic principles."
• populist: "an advocate of the rights and interests of ordinary people, e.g. in politics or the arts."
• Populism: "the political doctrine that supports the rights and powers of the common people in their struggle with the privileged elite."

If our world indeed is ordered in accordance with a divine idea, we ought to be cautious in our tinkering with the structure of society; for though it may be God's will that we serve as his instruments of alteration, we need first to satisfy our consciences on that point. Again, Burke states that a universal equality among men exists; but it is the equality of Christianity, moral equality, or, more precisely, equality in the ultimate judgment of God; equality of any other sort we are foolish, even impious, to covet.

Poverty, brutality, and misfortune are indeed portions of the eternal order of things; sin is a terribly real and demonstrable fact, the consequence of our depravity, not of erring institutions; religion is the consolation for these ills, which never can be removed by legislation or revolution. Religious faith makes existence tolerable; ambition without pious restraint must end in failure, often involving in its ruin that beautiful reverence which solaces common men for the obscurity and poverty of their lot. To inculcate this veneration among men, to consecrate public office, Burke believed that the church must be interwoven with the fabric of the nation.

Burke's denial of ... the one-man, one-vote idea of democracy is at its most vigorous in an earlier passage from the Reflections: ... Political equality is therefore in some sense unnatural, Burke concludes an aristocracy, on the other hand, is in a certain sense natural.

Who's right in France? William Pfaff

WEDNESDAY, MARCH 22, 2006

 

... The events of the past week in France have been a reaction to the threat of social descent and economic precariousness. ... The measure that provoked the current marches served to catalyze anxiety among the French because its message seemed to be that the young should no longer expect good jobs and security. The law gives employers the right to offer beginners jobs with a two-year trial period, during which they can be fired without formal cause.

 

Actually, French youth unemployment is not what it is usually made out to be, since free baccalaureate- and university-level education keeps young people out of the job market much longer than in most countries. As a result, as The Financial Times reported last weekend, the official figures are misleading. The newspaper calculates that 7.8 percent of French under-25s are actually out of work, as compared with 7.4 percent in Britain and 6.5 percent in Germany.

 

The ... foreign accusation [is] that France's problems come from its refusal to adopt the Anglo- American model of market capitalism.

 

A larger explanation occurs to me, that France is the coal miner's canary of modern European society. France's rejection of the European Union constitutional treaty two years ago caused an international shock because the French rejected the view, all but universally held among European elites, that continuing expansion and market-liberalization are essential to the EU, indeed inevitable. This proved to be untrue, to the general relief of the European public.

 

Similarly, it seems to me that the current unrest in France signals wider popular resistance in Europe to the most important element in the new model of market economics, its undermining of the place of the employee in the corporate order, deliberately rendering the life of the employee precarious.

 

The model's principal characteristic in the United States has been the transfer of wealth to stockholders and managers, and away from public interests (by tax cuts) and employees (through wage-depression and elimination of employee benefits).

 

In this perspective, what in France seems to be a sterile defense of an obsolete social and economic order might be interpreted as a premonitory appeal for a new but humane model to replace it. It could be Europe's opportunity.

In fact, as Naomi Klein explains in her article in Harpers on "Baghdad Year Zero" (print-friendly versions: Word and PDF formats), it's economic insecurity that has brought on much of the violence in Iraq. Iraqis who have lost their jobs and those afraid of losing their jobs have banded together to oppose the wholesale privatization of Iraq and the loss of their livelihoods to foreign workers for foreign companies. The neocon plans for a perfect "corporate utopia" morphed into a perfectly "ghoulish dystopia." This article is a "must read" for anyone wanting to understand what's happening in Iraq and what laissez-faire capitalism fosters.

What's the result of a lack of "populist thinking?" See the Rise of the Super-Rich. Also see "For Richer" and "The Tax-Cut Con" by Paul Krugman at Wealth Happens.

Maintaining a level of worker economic insecurity is a foundation of U.S. economic policy. See below how the Federal Reserve depends on worker insecurity to hold down wages and inflation. This has debilitating effects on workers, on organizational effectiveness, and on  U.S. economic productivity.

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5. What determines unemployment anyway? Fed policy.

"The author only need look at France as the best example of this failure and the unbelievable unemployment rate and social unrest associated with this policy of populist thinking."

The cause of unemployment is widely misunderstood. It's not caused in France or in the U.S. by populist thinking or policies. It's determined by the policies of a country's central bank (in the U.S. by the Federal Reserve). That is, unemployment is determined by capitalist policies.

Here, in the context of doing research on trade, is what I found in working on A Systems Thinking Perspective on Manufacturing & Trade Policy (p. 34) on a Harvard University course website for Economics 1420, American Economic Policy (I've checked since and the link is no longer active). What it relates agrees with my findings in working on The Tangle of Growth (see the Growth Facts of Life for a brief explanation).

"Trade is not about creating jobs. In trade debates, you hear supporters of free trade claim it will increase aggregate employment and opponents saying it will cost jobs. BOTH ARE WRONG.

 

Employment depends on the overall macroeconomic environment -- depends in the short run on aggregate demand -- depends in the long run on the NAIRU."

Reference: handout on "Trade Policy and Globalization," (unfortunately this link is no longer active)

This is a vital point and exactly correct. Employment and unemployment are determined over the long run by a country's central bank and its NAIRU target, the major consideration in determining monetary policy. The Fed compares unemployment against its NAIRU target to determine how to set monetary policy.

So the effect is that There is no 'free market' for Labor. The U.S. economy is regulated such that the Fed never allows "official" unemployment to fall below the approximate 4% or 5% official unemployment NAIRU target; the Fed maintains this is necessary to avoid setting off an inflationary wage-price spiral. In actuality this unemployment target represents a real unemployment of over 12% (see Unemployment: Official, Effective, Real).

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6. How the Fed Operates.

"It may be missed by the writer but it should be no surprise that it was the 70's when the woman entered the job market in force, thus supply and demand kicked in and a employer could pay someone less if there were more applicants for the job than available jobs.  Then we went into the global economy and worldwide the number of people that were willing to get paid less to do the less skilled jobs increased."

It's not "missed" at all. As explained above, the Federal Reserve manages the "labor market" to assure there's always a supply of labor that exceeds demand.

And it's not only the "less skilled jobs" that have more people willing to be paid less. It's all jobs, including the most technical (see below how we're losing high tech jobs, too).

As for women entering the workforce, the only way family income has even approached keeping up with expenses is that women have entered the workforce. To illustrate:

Dual Incomes: Masking a Middle Class Crisis?  April 26, 2006 at "In the Agora."

Here's your food for thought for the week. Are dual income households worth it? Or are they actually hiding a bigger problem for the middle class? Professor Elizabeth Warren writes in a recent issue of Harvard Magazine that today's middle-class, dual-income households are actually less financially secure than single income households of a generation ago.

Scholars, policymakers, and critics of all stripes have debated the social implications of these changes [switching to a dual-income model], but few have looked at their economic impact. Today the median income for a fully employed male is $41,670 per year (all numbers are inflation-adjusted to 2004 dollars)--nearly $800 less than his counterpart of a generation ago. The only real increase in wages for a family has come from the second paycheck earned by a working mother. With both adults in the workforce full-time, the family's combined income is $73,770--a whopping 75 percent higher than the median household income in the early 1970s.

Men's incomes are stagnant. But since household incomes haven risen 75 percent because of women entering the workforce, families are better off, right? Not necessarily. Fixed costs have risen correspondingly with the increase in household incomes, while discretionary income has actually dropped slightly. This means two-income families aren't exactly living it up. Indeed, counterintiutively, single income families of the 1970s lived more luxurious lives than today's two income families.

The bottom line: today's median-earning, median-spending middle-class family sends two people into the workforce, but at the end of the day they have about $1,500 less for discretionary spending than their one-income counterparts of a generation ago.

Today's families, far from coming down with affluenza, Warren writes, are actually living more frugally than their 1970s counterparts. The average family of four today spends 33 percent less on clothing than a similar family did in the early 1970s, 23 percent less on food (at-home and restaurant eating combined), and 51 percent less on major appliances than their predecessors (all of these numbers relative to inflation).

Warren writes, and blogger Chris Atwood makes the point even stronger, that all of that extra income has been eaten up by "basics"-- housing costs, health and child care (for obvious reasons), transportation, and higher taxes (from 24 percent to 30 percent of income). ...

Attempting to maintain household incomes, more women have been forced into the "labor market" because of Fed policy and "globalization," both of which undermine wages.

How the Fed operates is not understood by the vast majority of people. That included me before doing research on growth issues, which led me to understand the Fed's influence on "labor market" wages and the growth of infrastructure backlogs.

When, in the Fed's view, unemployment gets too low compared to its NAIRU target (or employment gets "too high"), it raises interest rates and/or restricts the money supply to slow the economy. When the economy weakens, the reduced economic activity means fewer jobs, less demand, downward pressure on prices, and restrained inflation.

Even though the NAIRU theory is nonsense (see the articles at Fed Policy, NAIRU, and the "Phillips Curve"), the Fed operates based on it and that's what determines the number of jobs.

This illustrates the systems thinking understanding that our "mental models" (beliefs) are a part of the "structure of the system." That's because our decisions and actions are based on them -- even when they're wrong -- and thus they affect the behavior of the system.

So the number of jobs is determined by the Fed and its NAIRU target, not by trade policy or by whether there are unions or by whether there are regulations that enhance workers' job security.

On the other hand, the wages those jobs pay is affected by trade policy and unions and worker protections, as well as by Fed monetary policy. More on this below.

What's even worse is that even though the inflation might result from any number of causes, the Fed's prescription is to raise interest rates.

One cause of Fed concern is speculation, and rightly so. Remember Greenspan's reference to "irrational exuberance" in the stock market in the late 90's?

Testimony of Chairman Alan Greenspan

The Federal Reserve's semiannual monetary policy report

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate

February 26, 1997

 

... History demonstrates that participants in financial markets are susceptible to waves of optimism, which can in turn foster a general process of asset-price inflation that can feed through into markets for goods and services. Excessive optimism sows the seeds of its own reversal in the form of imbalances that tend to grow over time. When unwarranted expectations ultimately are not realized, the unwinding of these financial excesses can act to amplify a downturn in economic activity, much as they can amplify the upswing. As you know, last December I put the question this way: "...how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions ...?"

 

Fed interest rate increases burst the stock market bubble and also hurt the economy (the Fed should have increased margin requirements to stop speculation).

The Fed raised interest rates to stop it. Note the chart shows that after the S&P 500 fell by ~1.5% in the third quarter of 1998 the Fed dropped the Fed Funds Rate by almost a percentage point to revive the stock market. Then it increased it by about 1.75% by the time bubble burst  ... only to precipitously drop the rate again once it realized the effects.

The bubble would have eventually burst anyway -- they always do. Raising interest rates is ineffective in addressing speculation because speculators gambling on a 20 - 30% return in 6 months are undeterred by even a 5% increase in interest rates.

But raising interest rates does nicely depress the economy, especially interest-sensitive sectors (e.g., homebuilders, auto sales), and puts people out of work. The prescription to actually reduce speculation would be to increase margin requirements (which the Fed can do).

Meeting of the Federal Open Market Committee

September 24, 1996

 

CHAIRMAN GREENSPAN.

 

... I recognize that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on. We have very great difficulty in monetary policy when we confront stock market bubbles. ... (p. 30)

 

We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. ... (p. 31)

Passing the Buck By PAUL KRUGMAN, 9/03/02

 

... Yet he never did increase margin requirements, that is, require investors to put up more cash when buying stocks. Indeed, aside from giving one speech about irrational exuberance, followed by a small rise in the Fed funds rate, Mr. Greenspan did nothing at all. He now says he could not have done more, but how does he know when he never even tried? What really happened, one suspects, was that in early 1997 Mr. Greenspan discovered that his tentative efforts to deflate the emerging bubble made investors furious, and lost his nerve. ...

7. Are there government & business entities that oppose improving working conditions and wages?

"Then we went into the global economy and worldwide the number of people that were willing to get paid less to do the less skilled jobs increased."

It seems some won't be happy until U.S. wages sink to the level of those in China. After all, that's the inevitable outcome of current policies that result in such an excess supply of workers.

This is especially true given that large corporations, despite rhetoric about how the "free market" and "free trade" "lift all boats," are determined that there be no increase in wages or improvement in working conditions in China or the U.S.

October 13, 2006
China Drafts Law to Boost Unions and End Abuse By DAVID BARBOZA
 
SHANGHAI, Oct. 12 ­ China is planning to adopt a new law that seeks to crack down on sweatshops and protect workers' rights by giving labor unions real power for the first time since it introduced market forces in the 1980’s.
 
The move, which underscores the government’s growing concern about the widening income gap and threats of social unrest, is setting off a battle with American and other foreign corporations that have lobbied against it by hinting that they may build fewer factories here. ..
 
Whether the foreign corporations will follow through on their warnings is unclear because of the many advantages of being in China ­ even with restrictions and higher costs that may stem from the new law. It could go into effect as early as next May.
 
It would apply to all companies in China, but its emphasis is on foreign-owned companies and the suppliers to those companies.
 
The conflict with the foreign corporations is significant partly because it comes at a time when labor, energy and land costs are rising in this country, all indications that doing business in China is likely to get much more expensive in the coming years. ...
 
China’s economy has become one of the most robust in the world since the emphasis on free markets in the 80’s encouraged millions of young workers to labor for low wages at companies that made cheap exports. As a result, foreign investment has poured into China.
 
Some of the world’s big companies have expressed concern that the new rules would revive some aspects of socialism and borrow too heavily from labor laws in union-friendly countries like France and Germany.
 
The Chinese government proposal, for example, would make it more difficult to lay off workers, a condition that some companies contend would be so onerous that they might slow their investments in China.
 
“This is really two steps backward after three steps forward,” said Kenneth Tung, Asia-Pacific director of legal affairs at the Goodyear Tire and Rubber Company in Hong Kong and a legal adviser to the American Chamber of Commerce here.
 
The proposed law is being debated after Wal-Mart Stores, the world’s biggest retailer, was forced to accept unions in its Chinese outlets.
 
State-controlled unions here have not wielded much power in the past, but after years of reports of worker abuse, the government seems determined to give its union new powers to negotiate worker contracts, safety protection and workplace ground rules.
 
Hoping to head off some of the rules, representatives of some American companies are waging an intense lobbying campaign to persuade the Chinese government to revise or abandon the proposed law.
 
The skirmish has pitted the American Chamber of Commerce ­ which represents corporations including Dell, Ford, General Electric, Microsoft and Nike ­ against labor activists and the All-China Federation of Trade Unions, the Communist Party’s official union organization.
 
The workers’ advocates say that the proposed labor rules ­ and more important, enforcement powers ­are long overdue, and they accuse the American businesses of favoring a system that has led to widespread labor abuse. ...
 
“You have big corporations opposing basically modest reforms,” said Tim Costello, an official of the group [Global Labor Strategies] and a longtime labor union advocate. “This flies in the face of the idea that globalization and corporations will raise standards around the world.” ...

The World Bank under Paul Wolfowitz is also working to reward countries that deliberately ignore basic international labor standards. Found at Sirotablog 10.18.06 under "Wolfowitz's World Bank rewards countries that crush workers." There's a link to the letter released by Sens. Durbin, Dorgan, Sarbanes, Biden, Dodd and Akaka on the World Bank's publication, "Doing Business 2007: How to Reform" on how "data on the ease of doing business inspires governments to reform." Excerpts from the letter:  

    "This year's edition [of the World Bank's major report] appears to discourage countries from upholding established standards of worker rights as set by the International Labor Organization ... The report ranks countries on various indices of the ease of doing business including 'Employing Workers.' In this category, countries which do not have a minimum wage and do not restrict the number of hours an employee can work are ranked high. Rewarding lax or non-existent labor standards contradicts ILO policy, which encourages countries to establishe a minimum wage and regulate housr of work and to pass and enforce laws protecting freedom of association and collective bargaining ... The mission of the World Bank is to alleviate poverty. We fail to see how praising countries for failing to guarantee a minimum wage and overtime pay lifts people out of poverty."

Also see, Global: The End of Labor by Stephen Roach, Jan 09, 2006

Also see Wal-Mart's War Against Wages By PAUL KRUGMAN, 10/6/06 

All this illustrates, as does the next section, that the class war is alive and well.

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The Federal Reserve is the most influential institution that holds down wages. Below is the Fed's explicit admission that, if workers get too secure, it will tighten monetary policy to decrease labor demand relative to supply.

Testimony of Chairman Alan Greenspan

The Federal Reserve's semiannual monetary policy report

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate

February 26, 1997

 

... although I do not doubt that all these factors [I have reviewed] are relevant, I would be surprised if they were nearly as important as job insecurity. ...
 

To be sure, an acceleration in nominal labor compensation, especially its wage component, became evident over the past year. But the rate of pay increase still was markedly less than historical relationships with labor market conditions would have predicted. Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity. In 1991, at the bottom of the recession, a survey of workers at large firms by International Survey Research Corporation indicated that 25 percent feared being laid off. In 1996, despite the sharply lower unemployment rate and the tighter labor market, the same survey organization found that 46 percent were fearful of a job layoff. ...

 

If heightened job insecurity is the most significant explanation of the break with the past in recent years, then it is important to recognize that ... suppressed wage cost growth as a consequence of job insecurity can be carried only so far. At some point, the tradeoff of subdued wage growth for job security has to come to an end. In other words, the relatively modest wage gains we have experienced are a temporary rather than a lasting phenomenon because there is a limit to the value of additional job security people are willing to acquire in exchange for lesser increases in living standards. Even if real wages were to remain permanently on a lower upward track than otherwise as a result of the greater sense of insecurity, the rate of change of wages would revert at some point to a normal relationship with inflation. The unknown is when this transition period will end.

 

Indeed, some recent evidence suggests that the labor markets bear especially careful watching for signs that the return to more normal patterns may be in process. The Bureau of Labor Statistics reports that people were somewhat more willing to quit their jobs to seek other employment in January than previously. ...

 

Given the lags with which monetary policy affects the economy, however, we cannot rule out a situation in which a preemptive policy tightening may become appropriate before any sign of actual higher inflation becomes evident. ...

 

I have already discussed the key role of labor market developments in restraining inflation in the current cycle and our careful monitoring of signs that the transition phase of trading off lower real wages for greater job security might be coming to a close. ...

 

A continued tight labor market, whose influence on costs would be augmented by the scheduled increase in the minimum wage later in the year and perhaps by higher growth of benefits now that considerable health-care savings already have been realized, could put upward pressure on core inflation. ...

 

 

Testimony of Chairman Alan Greenspan

The Federal Reserve's semiannual monetary policy report

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate July 22, 1997

 

... the capacity of our economy to produce goods and services is not without limit. If demand were to outrun supply, inflationary imbalances would eventually develop that would tend to undermine the current expansion and inhibit the long-run growth potential of the economy. Because monetary policy works with a significant lag, policy actions are directed at a future that may not be clearly evident in current experience. This leads to policy judgments that are by their nature calibrated to the relative probabilities of differing outcomes. We moved the federal funds rate higher in March because we perceived the probability of demand outstripping supply to have increased to a point where inaction would have put at risk the solid elements of support that have sustained this expansion and made it so beneficial. ...

 

Many observers, including us, have been puzzled about how an economy, operating at high levels and drawing into employment increasingly less experienced workers, can still produce subdued and, by some measures even falling, inflation rates. ...

 

In February 1996, I raised before this Committee a hypothesis tying together technological change and cost pressures that could explain what was even then a puzzling quiescence of inflation. ...

 

... the perceived quicker pace of application of our newer technologies ... has brought with it a heightened sense of job insecurity and, as a consequence, subdued wage gains. As I pointed out here last February, polls indicated that despite the significant fall in the unemployment rate, the proportion of workers in larger establishments fearful of being laid off rose from 25 percent in 1991 to 46 percent by 1996. It should not have been surprising then that strike activity in the 1990s has been lower than it has been in decades and that new labor union contracts have been longer and have given greater emphasis to job security. Nor should it have been unexpected that the number of workers voluntarily leaving their jobs to seek other employment has not risen in this period of tight labor markets. 

 

... Many of these forces are limited or temporary, and their effects can be expected to diminish, at which time cost and price pressures would tend to reemerge. The effects of an increased rate of technological change might be more persistent, but they too could not permanently hold down inflation if the Federal Reserve allows excess liquidity to flood financial markets. I have noted to you before the likelihood that at some point workers might no longer be willing to restrain wage gains for added security, at which time accelerating unit labor costs could begin to press on profit margins and prices, should monetary policy be too accommodative. ...

So if workers get "uppity" and want a larger share of the economic pie, then the Fed will have a less "accommodative" monetary policy to slow the economy, increase unemployment, and increase worker insecurity. Being so insecure that one is afraid to seek other employment is also not consistent with the recognition in the Declaration of Independence of a right to liberty.

Greenspan's testimony continues:

... The Federal Reserve is intent on gearing its policy to facilitate the maximum sustainable growth of the economy, but it is not, as some commentators have suggested, involved in an experiment that deliberately prods the economy to see how far and fast it can grow. The costs of a failed experiment would be much too burdensome for too many of our citizens. ...

And so the Fed won't "test the waters" to see if more people can have jobs without causing inflation. What the Fed ignores is the burden its current policies place on too many of our citizens.

Job insecurity is seen as a "good thing."

Meeting of the Federal Open Market Committee September 24, 1996, p. 20 (p. 23 in pdf file):

... CHAIRMAN GREENSPAN. Governor Yellen.

MS. YELLEN.  ... It is not uncommon to hear that it is now "impossible" to find qualified entry-level workers, whereas six months ago the word "difficult" would have been used more frequently. At a recent Dallas board meeting that I attended, one director described the pressures that an inability to hire entry-level workers was placing on supervisors who were forced to work overtime. He explained that quit rates were rising among his supervisors as a consequence. I think this is precisely the type of anecdote that one would expect to hear at the onset of an inflationary episode. If widespread pressures of this type emerge, it seems likely that firms eventually will be forced to bid up wages to retain workers and then pass through higher unit labor costs to prices. At the same time, though, the current episode has some unique features.  

While the labor market is tight, job insecurity also seems alive and well. Real wage aspirations appear modest, and the bargaining power of workers is surprisingly low. Although there is upward pressure on entry-level wages, more senior workers and particularly those who have earned wage premia in the past, whether it is due to the power of their unions or the generous compensation policies of their employers, seem to be struggling to defend their jobs and to avoid sacrificing the perks they currently enjoy. I would also interpret the UAW negotiations as indicating that we have aging auto workers who are focused on securing their own benefits during their lifetimes but appear reconciled to accepting two-tier wage structures with less generous packages for new hires. Of course, we hear reports of continued upward pressure on wages in skilled technical jobs, but that should hardly surprise us because the wage differential associated with skill and education has been widening secularly since the late 1970s, most likely due to technological shifts in the workplace favoring skilled and disfavoring less educated workers. And, of course, while wage growth has accelerated, compensation growth has increased only moderately because companies have offset more rapid wage increases with greater health care cost containment. We may hypothesize that that favorable trend is about to conclude, but anecdotal reports suggest that corporations remain confident of their ability to achieve further cost savings. ...

So job insecurity being "alive and well" is seen as a good thing. And obviously, "those who have earned wage premia in the past" could not have done so because they earned it, but only because employers were overly generous or caved to union demands.

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9. How does worker insecurity affect company performance?

It's paralyzing and debilitating. Why? Because people don't speak up about problems or admit mistakes when they're insecure. This makes it difficult to impossible for organizations to learn.

The reasons are explained in this Harvard Business School, Working Knowledge article:

Do I Dare Say Something?

HBSWK Pub. Date: Mar 20, 2006

 

Are you afraid to speak up at work? The amount of fear in the modern workplace is just one surprising finding from recent research done by HBS professor Amy Edmondson and her colleague, Professor James Detert from Penn State. ...

 

Q: What factors determine whether or not an employee feels safe using their upward voice? 

 

A: Our own and others' research have identified two types of factors that lead people to feel more or less safe speaking up: individual differences and contextual factors. 

 

Individual differences include personality dispositions such as one's level of extraversion or proactivity, or one's developed skills such as how to communicate in ways that don't evoke defensiveness, and also personal concerns about job security and/or mobility. These factors tend to be seen as applying across situations. For example, a person with greater communication skill might be more likely to speak up despite an unfavorable context. No news is not good news, from the point of view of senior management, or even bosses all the way down. 

 

In contrast, context refers to organizational factors, outside the individual, that provide cues about how voice is likely to be received. Leader behavior is one such contextual cue. Aspects of organizational culture and structure also matter, such as the degree to which an organization is hierarchical or egalitarian, or has explicit mechanisms for inviting upward input (e.g., suggestion boxes, regularly-scheduled meetings, surveys). ...

There's been extensive work on the problem of "defensive routines" that lead to downward spirals of organizational dysfunction. At the bottom of the Facilitating Group Action page there's a paper on "Defensive Routines" and how to overcome them. The skills for facilitation and avoiding defensiveness, along with the techniques described in Exponential Improvement and Create Strategic Focus, are foundational for organizational improvement.

Unless people can talk about what's really happening, it's almost impossible to improve organizational performance. An understanding of reality cannot be achieved. This learning disability is addressed The Fifth Discipline by Peter Senge.

That this is important is clear from a systems perspective because, before constructing a model of how things should work, one must construct a model of how things are to understand the structure that's determining observed behaviors.

It's this human "defensive routines" dimension of the problem, combined with the different thinking and different languages required to describe structure, that have blocked the wider acceptance and adoption of systems thinking and system dynamics. That's because their use reveals how organizations most often create their own problems. Managers, because of their own insecurity and defensiveness, most often don't want to hear it.

The article continues:

...

 

Q: Why are we so hesitant to take the risk and speak up? 

 

A: We think that fear of speaking up -- and therefore a tendency toward silence -- is over-determined by both the general nature of humans and the specific realities of the modern economy. Even from an evolutionary point of view, it seems we're all hard-wired to overestimate rather than underestimate certain types of risk -- it was better (for survival) to "flee" too often from threats that weren't really there than to not flee the one time there was a significant risk. So, we've inherited emotional and cognitive mechanisms that motivate us to avoid perceived risks to our psychological and material well-being.

 

Turning to the modern economy, most of us depend on hierarchical organizations and their agents (i.e., bosses) to meet many of our basic needs for economic support and human relationships. Thus, fear of offending those above us is both natural and widespread. One way we can get in trouble with those above us is to speak up in ways perceived as challenging of authority or critical of cherished programs. Given the exaggerated and real reasons to fear offending authorities, it isn't surprising that people clam up when the signals seem unfavorable.

 

Q: How hard is it to change a culture so that employees feel more comfortable expressing their opinions?

 
A: How do you change a culture of fear? It's difficult! Despite some well-intentioned efforts, we haven't yet worked with an organization that has fully transformed itself from one of fear to one in which most employees would rate the organization as open or conducive to speaking up.  ...

The presence of "defensive routines" answers Senge's question:

"How can a team of committed managers with individual IQs above 120 have a collective IQ of 63?

Peter Senge, The Fifth Discipline, 1990

So defensive routines are a major barrier to learning because of the innate human tendency to be defensive AND because organizations exist in an overall climate, created and promoted by government policy, in which workers fear they'll lose their jobs.

This connection between Fed policy and economic efficiency and effectiveness is the major realization I gained from the exercise of responding to the comments above.

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10. Why Fed policy is biased and manipulative

Remarks by Governor Laurence H. Meyer

At the Charlotte Economics Club, Charlotte, North Carolina

January 16, 1997

The Economic Outlook and Challenges for Monetary Policy

 

... At the moment, trend growth near full employment appears to be a reasonable prospect in the year ahead. Still we want to remain alert for challenges that might lie just over the horizon. In particular, there remains some uncertainty as to whether the current unemployment rate will prove consistent with stable inflation over time and we need to pay some attention to the challenge of how we approach our longer-term goal of achieving and maintaining price stability. ... 

 

We can also calculate a short-run or effective NAIRU as the unemployment rate consistent with stable inflation given whatever supply shocks are in play at the moment. In the case of an adverse supply shock, for example, the short-run or effective NAIRU would be higher than the long-run NAIRU. This simply means that the unemployment rate required to hold overall inflation constant in the face of an increase in oil prices has to be high enough so that inflation in the non-oil sectors will slow on average.

OECD Economic Outlook, Dec, 2000

 

The measurement of the NAIRU is also controversial. By its nature, it is non-observable and depends on a wide range of institutional and economic factors. It follows that even if one accepts the concept, it can only be estimated with uncertainty. Moreover, it may well vary over time -- European experience suggests that, in general, inflation would rise if unemployment reached the low unemployment rates associated with stable inflation in the 1960s. And at times, such as when there are large fluctuations in oil or raw material prices, it is clear that unemployment would have to rise or fall very steeply to stabilise inflation.

Note it's "non-observable"!!! Therefore it is, by definition, unscientific and invalid.

So for example, if oil prices increase and increase inflation, the Fed's belief and policy is that its NAIRU target (i.e., unemployment) should be higher (i.e., more people without jobs) to reduce overall demand sufficiently to counteract inflation from higher oil prices. This means those who work for a wage and interest-sensitive sectors of the economy (e.g., home building and auto sales) bear the burden.

Such a policy flies in the face of what are touted as "free market" principles. Here's why: If inflation is due, for example, to an increase in the price of oil, that increased cost should be reflected in those specific product prices. The increased prices of those products more than others would reduce demand for those higher-priced products and prompt lower demand, perhaps through product substitution, and therefore lower prices. So should not all affected prices be allowed to rise to reduce demand? After all, isn't that the theory of how the sacred "free market" system is supposed to work? Yes.

Instead, the Federal Reserve adopts policies to "wring that inflation out of the economy" by tightening monetary policy to reduce economic activity and put people out of work to artificially reduce demand.

That's exactly the kind of "command and control" and "social engineering" against which "conservatives" rail. This policy is based on a flawed theory that causes unemployment and poverty. Conservatives claim they deplore "command and control" and social engineering, but not if it increases returns to capital vs. labor.

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11. What does affect the wages of jobs?

There are many factors that affect the type of jobs and the wages paid by those jobs. Primarily it's manipulation to assure an excess supply of workers compared to demand, but there are other factors as well. The factors include:

• Federal Reserve policy that maintains a greater than 10% real unemployment as described below,
• "trade" that isn't trade, but is really "transfer of the factors of production (capital & labor) to other countries; that is, it's labor arbitrage that pits U.S. workers against an enormous reservoir of extremely low paid workers in China and India,
• labor laws passed in the U.S. that alter the balance of bargaining power between corporations and workers,
• H1-B visas (and the like) that allow lower-paid technical workers into the U.S. on the false premise that there are shortages,
• illegal immigration that allows low-wage labor to compete against U.S. workers even in the U.S., and
• technology that allows work to be transferred to low-wage countries without moving people at all.

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12. What's the real rate of unemployment?

The Federal Reserve gauges its actions by looking at "official unemployment." But that is a vast understatement of unemployment. While official unemployment in June 2006 was 4.8%, a more realistic estimate of unemployment was 12.3%. See the graphs of Bureau of Labor Statistics data at Unemployment: Official, Effective, Real that show time series of the different estimates of the number of unemployed and unemployment rates.

The higher 12.3% figure adds other categories that might well be described as unemployed. It includes those the BLS amazingly classifies "not in the labor market - currently want a job."  It also includes additional jobs needed to keep up with population growth since April 2000 when employment began to decline (again see the charts at Unemployment: Official, Effective, Real).

Here the Fed addresses unemployment:

Testimony of Chairman Alan Greenspan
The Federal Reserve's semiannual monetary policy report before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate July 22, 1997 
 
... Of the more than two million net new hires at an annual rate since early 1994, only about half have come from an expansion in the population aged 16 to 64 who wanted a job, and more than a third of those were net new immigrants. The remaining one million plus per year increase in employment has been pulled from those who had been reported as unemployed (600 thousand annually) and those who wanted, but had not actively sought, a job (more than 400 thousand annually). The latter, of course, are not in the official unemployment count.  ...  
 
To be sure, there remain an additional 34 million in the working-age population (age 16 - 64) who say they do not want a job. Presumably, some of these early retirees, students, or homemakers might be attracted to the job market if it became sufficiently rewarding. However, making it attractive enough could also involve upward pressures in real wages that would trigger renewed price pressures, undermining the expansion.

The ones who "had not actively sought a job" are those who do not "meet the offical test" described below. It's not that they weren't seeking a job, it's that they hadn't taken a specific required action during the official survey period. Their resume could still be active with potential employers or still posted on the internet. Here, from the Bureau of Labor Statistics, is the definition of Who is counted as unemployed?
 

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:

• Contacting:
  •       An employer directly or having a job interview;
  •       A public or private employment agency;
  •       Friends or relatives;
  •       A school or university employment center;
• Sending out resumes or filling out applications;
• Placing or answering advertisements;
• Checking union or professional registers; or
• Some other means of active job search.

Passive methods of jobsearch do not result in jobseekers actually contacting potential employers, and therefore are not acceptable for classifying persons as unemployed. These would include such things as attending a job training program or course or merely reading the want ads.

"Merely reading the want ads" is "passive?" How is that "passive?" So if there's not a suitable job, then the jobseeker isn't counted as looking. Simply amazing!

The Fed is of course explicitly aware of the "not in the labor market - currently want a job" category:

Meeting of the Federal Open Market Committee July 1-2, 1997 
 
... There are roughly six million people outside the labor force who say they would like a job if they could get one. They are not seeking one and therefore they are not in the unemployment pool. I am sorry; I think I just misspoke. I said six million were seeking jobs, and I think that number is wrong. What is the figure? [Pause] I take it back; it is 5.9 million. [Laughter] In any event, we obviously still have room in the economy, but we have a lot less than previously. The level of economic activity is getting to a point where something has to give. While one may argue that at this stage we are not seeing any evidence in the product markets that we are running into significant difficulties, clearly if we run out of labor at some point, capital basically will not help no matter how much we may have. ...

Gee, that really is funny, isn't it?

The actual number of persons classified "outside of the labor force" (!!!), "Not in labor force, Persons who currently want a job," in June 1997 was actually 4.92M; in July 2006, it's 4.90M (see Table A-1. Employment status of the civilian population by sex and age). Remember these people are not counted as "unemployed" because even though they want a job and have been looking, they haven't found one and are not counted as looking in the current reporting period.

None of this considers the underemployed, which adds considerably to slack in the "labor market."

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13. What's the impact of Federal Reserve policy on wages?

This makes it really obvious that the reason for declining wages is a vast reservoir of excess workers compared to demand. Anyone who believes even marginally in the economics of supply and demand knows that such an excess would necessarily drive down wages. This is especially true at the bottom; so it can be no surprise that the minimum wage now falls somewhere between zero and subsistence level.

One might think, according to "Economics 101," that the excess supply compared to demand would lower wages some, but not a lot. But game theory explains why Federal Reserve policy depresses wages so significantly, especially at the bottom. The book, Co-opetition, by Brandenburger & Nalebuff (1996) reviews game theory concepts as applied to business strategy. What they describe explains why a 10% excess supply of workers has such a drastic impact.

One section explains that when there are more cities wanting sports teams than there are teams, say 10 cities and 9 teams, the "added value" of that extra city is zero. Game theory tells us this means the added value of any city is zero. The sports league can say: "Do you want to be the city without a team? One of you will be." That gives the sports leagues leverage to extract big concessions from cities to build a sports stadium if they want to be a "blessed city." That section in Co-opetition is titled: "Sacking the Cities."

The same reasoning applies when there are 9 jobs and 10 workers wanting jobs: the "added value" of that 10th worker is zero. That makes the added value of any one worker zero. That's why the wages at the bottom fall to between zero and subsistence level. Brandenburger & Nalebuff could as well have written a section on "Sacking the Workers."

The nicely behaved supply-demand graphs in Economics 101 do not apply. In fact economics-in-practice does not work according to Economics 101; it's only part of the truth. Nevertheless, "conservatives" view the world through the lens of Econ 101.

It's not what you don't know that hurts you,

it's what you do know that ain't so. 

                                                --Will Rogers 

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14. What about those union leeches?

"... the unions have tried to hang on.  Like a leach with no real concern for their host, this behavior has killed many of the (union) companies by demanding more for their work than what it was worth on the global marketplace."

The game of "musical chairs" created by the Fed -- a game described in the context of sports teams in Co-opetition -- puts workers at a great disadvantage in negotiations. This can only be corrected if players in the game "change the game by banding together" (p. 47). For the labor market this means unions, that allow workers to negotiate as a group, are the only way to overcome the Fed's rigged game.

Capital organizes itself in corporations, "unions of capital." A labor union counterpart is an obvious and necessary counterbalance. Somehow "conservatives" have no problem with corporate consolidation that creates oligopoly and virtual monopoly conditions. But if workers organize to form a union, that's somehow seen as unfair.

So-called "right to work" laws passed in some states are simply a means to undermine union strength by letting some employees "free ride" on those who do pay dues. The insane equivalent in our democracy would be letting people opt out of paying taxes. Conservatives know that so-called "paycheck protection" is anything but that.

The ultimate irony is that corporations are virtual dictatorships, whereas unions are democracies. Because unions are democracies, they're just as messy to manage. And remember, The Conservative Mind does not believe in democracy.

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15. Who's the problem? Unions or management?

"... the unions have tried to hang on.  Like a leach with no real concern for their host, this behavior has killed many of the (union) companies by demanding more for their work than what it was worth on the global marketplace."

Back in graduate school, working on my Ph.D. in physics, I remember telling someone that "unions had outlived their usefulness." Was I ever wrong! Though I thought they were no longer needed, I never displayed the quite shocking level of venom toward them conveyed by this writer.

Actually, I've never belonged to a union. But I have worked in a company that had one. In fact, my job in Peripheral Equipment Engineering was to go over to the factory and find out what was wrong with the production process for manufacturing the thermal print elements used in commercial and military printers. While I was there, there was a strike with the company saying workers were paid too much and that it needed to reduce costs to be competitive.

That woke me up because it totally conflicted with my experience in the factory. The workers were not the problem that was costing the company a $1M per year. It was a management problem on two levels.

• First, and most fundamentally, it was company's management that had so far not invested to create a reliable process. The process was so bad they were lucky to produce any parts. The production of these parts was only in Florida because there was a strike in Ohio and they moved all the equipment to avoid it.
• Second, to meet quota, management in manufacturing shipped bad parts to Ohio when they couldn't meet required production shipments. Later the parts were shipped back, but the cost of that was enormous.

There was also a major problem in the way management treated the workers. They were exposed to fumes from the ovens that contained hydrochloric acid and heavy metals (tin and antimony). That this affected the workers was clear because they often had nose bleeds. I was shocked and appalled by management's lack of concern. The process was so inefficient that the company used more antimony than the rest of the U.S. combined.

Management's only concern was yield and cost. Never was any concern for the employees expressed. When I pointed out that the gutters outside the building were corroded from the fumes, the action taken was to raise the level of the external exhaust well above the roof, not scrub the emissions. Before I was hired the action taken when people complained about the noxious exhaust at ground level was to raise the exhaust to just above the level of the gutters. I, not management, took the initiative to design a vapor deposition process that used orders of magnitude less antimony and scrubbers.

Again, it's not unions that are the problem, it's management.

This idea that workers are "demanding more for their work than what it was worth on the global marketplace" is troubling. It implies that the wages of workers in the U.S. should have the same pay as those in China and India; after all, the same technology and know-how is available worldwide.

To the extent wages fall, the more the U.S. economy is undermined. More and more people will not be able to pay their mortgages; developers and homebuilders will not be able to sell homes; and taxes will be even more insufficient for infrastructure. Economic development professionals should be greatly concerned about this trend.

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16. What about those government-mandated wages -- the minimum wage?

"PAUL KRUGMAN is clearly a bias toward unions and government mandated wages levels and benefits."

The minimum wage, last raised in 1997, is a band aid on the symptom. Adjusted for inflation, the minimum wage is at its lowest level in 50 years. It does not address the root cause of low wages, which as explained is Fed policy that assures at least 10% more people needing work than there are jobs ... and consequent low wages. That is the "government mandate."

Conservatives argue against raising the minimum wage and even want to eliminate it. Their argument: such an artificial increase in wages violates market forces. And a higher price of labor decreases demand and would put many out of work. They say, "That's just simple Economics 101."
 
But Alan Blinder, a former Federal Reserve vice chairman who teaches economics at Princeton University, in a recent Bloomberg News article, Higher Minimum Wage No Longer Seen as Sure-Fire U.S. Job Killer, noted that this is a "simple-minded theory." Exactly.

As noted above, one need only believe marginally in the power of supply and demand to realize that wages will be depressed in a system in which Federal Reserve manipulation assures many more people than jobs

So what's the effect of this Fed game of "musical chairs?" The over 10% slack in the labor market means that the added value of that 10th worker, and indeed of any one worker, is zero. So wages at the bottom approach somewhere between subsistence level and zero -- effectively where the minimum wage is now. And this depresses all wages, not just those at the bottom.

One doesn't have the well-behaved, gently-sloping supply-demand curves illustrated in Economics 101. Wages drop off precipitously.

Those who say that a minimum wage interferes in the "free market" ignore this higher level manipulation that makes Economics 101 supply-demand theory irrelevant. For more on this, see There's no "free market" for Labor.

The problems caused by Fed policy go way beyond creating a need for a minimum wage. The Growth Facts of Life describes how this "managed" labor market affects growth, infrastructure backlogs, traffic congestion, and poverty.

Because there are too few jobs, regions compete for the jobs there are with lower taxes & regulations. So similar to the case for workers, the added value of any one region is zero. This creates an escalation structure that leaves not enough taxes for infrastructure anywhere. And that's why the nationwide infrastructure backlog is $1.6 trillion and growing. Many people are poor (10-20%) for the same reason you get stuck in traffic: Fed policy.

So a higher minimum wage would at least partially make up for the Fed's labor market manipulation. And it would actually stimulate the economy.

The reason why is related to where the economy is in what's known as the "long wave" cycle (see the graph In the Long Wave Trough). It's too much to explain here, but see A Systems Thinking Perspective on Manufacturing & Trade Policy that describes the origin of the long wave drawing on a paper by John Sterman at MIT (... no, the long wave is not a myth, please read the excerpts and explanation before calling it one). In short, since 1973 the US has been on the downslope of the long wave and we're now in the trough of the long wave when there's a glut of production capacity and supply.

When this is the case, cutting taxes to promote investment is the opposite of what's needed because there will be no investment without demand. That's why the tax increases of 1993 on higher incomes and lower taxes on lower incomes produced the longest economic expansion in history despite the dire warnings of "conservatives."

They want us to forget about it now, but here are some of the comments based on Econ 101 thinking from conservatives about the Democrat's 1993 tax increase, which passed with zero Republican votes:

• Sen. Pete Domenici (R-NM): "April Fool, America. This Clinton budget plan will not create jobs, will not grow the economy, and will not reduce the deficit."
• Stephen Moore, Cato Institute, predicted: "Clinton's plan will torpedo the economy".
• Newt Gingrich: "The tax increase will kill jobs and lead to a recession and the recession will force people off of work and onto unemployment and will actually increase the deficit."
• Sen. Phil Gramm (R-TX), economist: "I want to predict here tonight, that if we adopt this bill the American economy is going to get weaker and not stronger, the deficit four years from today will be higher than it is today and not lower? When all is said and done, people will pay more taxes, the economy will create fewer jobs, the government will spend more money, and the American people will be worse off."
• Rep. Dick Armey (R-TX), economist: "a job killer".
• Rep. John Kasich (R-OH): "This plan will not work. If it was to work, then I'd have to become a Democrat."

Perfect thinking according to Economics 101. But obviously, exactly wrong. It's a perfect illustration of the appalling extent to which conservatives do not understand economics.

Unfortunately for the economy and all of us, "conservatives" have used, and are still using, the same logic in pushing for Bush's tax cuts for the wealthy, even though they know full well they were wrong before. Conservative ideology ignores reality, which makes them incapable of admitting when they're wrong.

What should have been done was to cut taxes for those with lower incomes and to raise taxes on those with very high incomes.  The economy would again be booming had that been done.

Even some Republicans realized this.

Split in Ranks of Business and G.O.P. on Tax Cuts
11/29/02 By EDMUND L. ANDREWS ... excerpt:

... a growing number of business and political leaders, including at least one influential industry group, want to funnel more money to lower- and middle-income taxpayers in an effort to generate more demand for goods and services. ... 
 
The Business Roundtable, an organization of chief executives from large corporations, startled many of its normal allies last week by arguing that tax breaks for individuals would be more helpful than tax breaks for business. 
 
Indeed, the Roundtable's top recommendation was one favored by many Democrats: bolstering tax relief for low- and middle-income families by temporarily cutting payroll tax contributions for Social Security and Medicare.  

"There is substantial overcapacity in the economy, so we don't need more capacity right now," said John J. Castellani, the president of the Business Roundtable. "We felt it would be more prudent and effective to stimulate consumption." ...

No kidding. And this is why Bush's tax cuts have produced such anemic results and so much less investment than conservatives expected ... no demand, no investment.

Obviously, another policy to increase demand is to increase the minimum wage; those with lower incomes would by necessity spend the money.

The bottom line is that, if a business is based on paying less than a living wage, it is by definition "uneconomic" unless people are regarded as disposable commodities.

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17. Is Federal Reserve policy a "conspiracy?"

No. It's a transparent policy pursued in plain sight.

The Fed depends on worker insecurity to hold down wages. If workers get too secure and push for a greater share of economic returns, the Federal Reserve will act to make them less secure. That this is what's happening is no "conspiracy theory" because it's obvious; the stock market drops whenever unemployment gets "too low" from a fear the Fed will raise interest rates to slow the economy. The "market knows" how the Federal Reserve will react.

These articles illustrate that it's common knowledge that news of higher unemployment is good news for the stock market:

The Stock Market's Reaction to Unemployment News: Why Bad News is Usually Good for Stocks from the National Bureau of Economic Research

 

We find that on average an announcement of rising unemployment is 'good news' for stocks during economic expansions and 'bad news' during economic contractions. Thus stock prices usually increase on news of rising unemployment, ... A rise in unemployment typically signals a decline in interest rates, which is good news for stocks, ... For stocks as a group, and in particular for cyclical stocks, information about interest rates dominates during expansions ... .

 

The Economy Is Not The Stock Market

 

While the unemployment rates at the 'extreme' ends of spectrum was often a sign of a reversals, there is a nice correlation between the direction of the unemployment line and the direction of the market. The two typically move in opposite directions, regardless of what the current unemployment level is.

The press is quite explicit about the well-know trade-off between inflation and unemployment:

Steady course likely to go on, Fed signals By Edmund L. Andrews Published: January 31, 2007
 
... analysts and investors have scaled back their expectations that the central bank might reduce the benchmark interest rate later this year in response to a sharper slowdown in economic growth. ...
 
In a sign that the policy makers on the Federal Open Market Committee are staying put for at least the next several months, they repeated verbatim their policy stance of remaining slightly more worried about rising inflation than about slowing growth or higher unemployment.

It's important to note that in the United States the Federal Reserve is not a government agency. It is a private corporation set up to be independent of government. It is owned by its member banks. This corporation owes its primary allegiance to the stockholders of its member banks. It's primary allegiance is therefore to "capital," not to labor (those who work for a wage) or even to small business. 

So how's the split of the returns between labor and capital been going? Offshoring has certainly been effective in increasing returns to capital:

"Maybe We Could All Deliver Pizza . . .,"

Jodie T. Allen, 3/06/04, The Washington Post,  

 

Columnist James K. Glassman recently constructed a "Dobbs Rogue Fund" (taking its name from CNN commentator Lou Dobbs, who compiled a list of firms that have moved jobs overseas). Glassman calculates that, as a group, these 216 companies registered a remarkable 72 percent return over the last 12 months.

 

... More than 4 million workers, [Georgetown University economist Harry] Holzer notes, have run through their unemployment benefits without finding jobs and, in the last 12 months, inflation-adjusted hourly wages have barely risen.

 

... Since 2000, labor productivity has grown at a 3.7 percent annual rate, high even for a recovery period. Offshore outsourcing contributes to the trend, since hours put in by foreign workers are both cheaper and uncounted in traditional productivity measures. Home-shore outsourcing helps, too, by replacing full-timers with on-call piece workers who earn no benefits or overtime pay. In the past, higher productivity has translated into higher wages and more jobs as employers share the gains with workers. But this time that hasn't happened yet. Instead, the returns from higher productivity are going into higher profits and lower prices. Using official Bureau of Labor statistics, Johns Hopkins University economist Arnold Packer calculates that employees' share of the value added in the U.S. economy has fallen to its lowest point since records were first kept in 1947 -- and the rate of decline is accelerating. "The real damage is not the number of jobs, but their pay and quality," Packer says.

See how compensation has been lagging productivity since 1979 in the 2nd chart at Rise of the Super-Rich.

"Conservatives" like to maintain that the economy is not a zero-sum game, but their policies do not reflect such a belief. An example is their tax cuts, primarily for those with very high incomes, to "increase investment." But, as noted above, this is bad public policy as there will be no investment without demand.

The real leeches and parasites are those who externalize costs onto the public. Examples of the real leeches and parasites are the industries that pollute and growth industries that redistribute costs onto the public.

In the Growth Facts of Life I explain how growth industries -- developers, homebuilders, etc. -- socialize the long-term costs of growth onto the public, causing anti-tax backlashes across the country. They have used their ill-gotten additional profits to manipulate the political system to get "rules of the game" to allow them to even further redistribute costs. They are "socialists on the cost side."

The "Rules of the Game" is a self-reinforcing feedback process described by John Sterman his textbook, Business Dynamics. An excerpt on the dynamic is included following the column, "For Richer," by Paul Krugman at Wealth Happens.

Libertarian and "conservative" "free market" and "free trade" beliefs have been shaped by the seriously-flawed religion of Economics 101. It turns out that there are two types of socialism at the two extremes: redistribution of income at the communist extreme and redistribution of costs at the laissez-faire capitalism, privatize-everything extreme. It's to the latter extreme to which "conservatives" have brought us. 

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19. Is retraining the answer to unemployment?

"... the sooner our workers will let go of the past and prepare themselves for the coming baby boom driven worker shortage.  Employees must look to improve their value and take care of themselves, that is not the role of the unions (anymore) or the government (other than through public education - because of the unions - which is another subject).   Those that will let go of the past and learn or retrain to provide real value (talent and skills) to employers will be rewarded with higher wages because the supply is less than demand.  Really just economics 101."

September 1, 2006
Guest Columnist
Rendezvous With Oblivion By THOMAS FRANK
 
... in "The Disposable American," a disturbing history of job security, Louis Uchitelle points out that the New Democrats' emphasis on retraining (as opposed to broader solutions that Old Democrats used to favor) is merely a kinder version of the 19th-century view of unemployment, in which economic dislocation always boils down to the fitness of the unemployed person himself. 

Thomas Frank points out that this is the "blame the individual" approach. Instead, we should examine how the system produces the observed behaviors (note: doing this does not absolve some individuals of a share of responsibility).

Examining the structure of the system, we find that "retraining" is not the answer. As explained at More Education Isn't the Answer to Poverty & Health Care: "Even if everyone were to suddenly earn Ph.D.s tomorrow, there would still be 10% effective unemployment due to Fed policy."

In the recently posted How a Regional Economy Works, I include charts that point to the fallacy of the "if you're displaced, just get retraining" myth. Since Jan 2001 Colorado has lost about 40,000 (39,900) manufacturing jobs. And from Jan 2001 to July 06 Colorado lost 20,700 telecom jobs and 37,100 information technology jobs. These latter were the jobs for which many retrained when they lost their manufacturing job.

And we're losing high tech jobs, too. See the chart at The Trade Deficit and the Fallacy of Composition showing that the trade deficit in Advanced Technology Product went from a $40B surplus in 1991 to a $42B deficit in 2005. Few jobs are truly safe.

The inability to see the power of systemic effects is so powerful that there's a name for it. It's known as the "fundamental attribution error":

"A fundamental principle of system dynamics states that the structure of the system give rise to its behavior. However, people have a strong tendency to attribute the behavior of others to dispositional rather than situational factors."

... from "Learning in and about complex systems" by John Sterman, System Dynamics Review, Vol 10, Summer-Fall 1994, p. 308 and also in Business Dynamics: Systems Thinking and Modeling for a Complex World, Irwin/McGraw-Hill, 2000, by John Sterman, p. 28.  Dr. Sterman is Jay W. Forrester Professor of Management and Director, MIT System Dynamics Group.

"... blaming individuals instead of attributing the behavior to the system."

from The Fifth Discipline, The Art & Practice of the Learning Organization by Peter Senge, p. 42

Blaming individuals is easy ... and flawed because doing so ignores systems effects.

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20. What about that U.S. "market economy" that's the "envy of the world?"

"PAUL KRUGMAN is clearly a bias toward unions and government mandated wages levels and benefits.  Everything needed to establish Socialism and contrary to the market economy that has made America the envy of the world and the place for real opportunity."

This "envy of the world" economy is short-sighted, living high in the past and today at the expense of tomorrow.

Why do I say "short-sighted?" A major reason is due to what I call the "tyranny of NPV." Net Present Value return on investment calculations, integral to capitalism, devalue future returns.

Here's how it works. Private entities value $100 earned in year 1 as $100. But they value $100 earned in the 10th year, at a commonly-required investment hurdle rate of 30%, as worth only $9.43 ($100 divided by 1.3 to the 9th power). That's hardly worth counting. Only government, and perhaps churches, make truly long-term investments that benefit the whole of society.

Unfortunately, the U.S. economy is quickly being undermined by exponentially-increasing trade deficits, by exploding fiscal debt, and by rapidly increasing personal debt and bankruptcies. "Free trade" is perhaps the greatest threat, undermining even high tech and associated jobs. See The Trade Deficit and the Fallacy of Composition for the data and analysis of why the U.S. economy will collapse, within the next few years -- 2 to 4 years maximum -- under the weight of these burdens. The world will be reminding the U.S. of its hubris.

That the U.S. economic system is a house of cards is hidden by officially-reported statistics that greatly distort reality (see John Williams' Shadow Government Statistics).

That the U.S. "free market" economy is not "the best" is described in the November 2006 issue of Scientific American.

The Social Welfare State, beyond Ideology
Are higher taxes and strong social "safety nets" antagonistic to a prosperous market economy? The evidence is now in
By Jeffrey D. Sachs
Jeffrey D. Sachs is director of the Earth Institute at Columbia University.

One of the great challenges of sustainable development is to combine society's desires for economic prosperity and social security. For decades economists and politicians have debated how to reconcile the undoubted power of markets with the reassuring protections of social insurance. America's supply-siders claim that the best way to achieve well-being for America's poor is by spurring rapid economic growth and that the higher taxes needed to fund high levels of social insurance would cripple prosperity. Austrian-born free-market economist Friedrich August von Hayek suggested in the 1940s that high taxation would be a "road to serfdom," a threat to freedom itself.

Most of the debate in the U.S. is clouded by vested interests and by ideology. Yet there is by now a rich empirical record to judge these issues scientifically. The evidence may be found by comparing a group of relatively free-market economies that have low to moderate rates of taxation and social outlays with a group of social-welfare states that have high rates of taxation and social outlays.

Not coincidentally, the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.

On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP.

The Nordic countries maintain their dynamism despite high taxation in several ways. Most important, they spend lavishly on research and development and higher education. All of them, but especially Sweden and Finland, have taken to the sweeping revolution in information and communications technology and leveraged it to gain global competitiveness. Sweden now spends nearly 4 percent of GDP on R&D, the highest ratio in the world today. On average, the Nordic nations spend 3 percent of GDP on R&D, compared with around 2 percent in the English-speaking nations.

The Nordic states have also worked to keep social expenditures compatible with an open, competitive, market-based economic system. Tax rates on capital are relatively low. Labor market policies pay low-skilled and otherwise difficult-to-employ individuals to work in the service sector, in key quality-of-life areas such as child care, health, and support for the elderly and disabled.

The results for the households at the bottom of the income distribution are astoundingly good, especially in contrast to the mean-spirited neglect that now passes for American social policy. The U.S. spends less than almost all rich countries on social services for the poor and disabled, and it gets what it pays for: the highest poverty rate among the rich countries and an exploding prison population. Actually, by shunning public spending on health, the U.S. gets much less than it pays for, because its dependence on private health care has led to a ramshackle system that yields mediocre results at very high costs. 
  
_______________________

              Income per  
              working age
              Population                  Budget                R&D
              ($ in          Unemploy   balance              Spending
               purchas'g   -ment       as %      Poverty   as % of
               power)       Rate         of GNP    Rate      GNP

English-
Speaking   48,500       5.2