Cursed by Success
Paul Krugman recently suggested that the root of current economic woes is a glut of investment cash with nothing real to invest in. This leaves us with a purely bubble-driven economy. Now, Thomas Friedman submits that this indicates a fundamental flaw in our entire economic model. I agree with this basic premise, but I think it is still too limited in scope. My theory is that, on a worldwide basis, humanity has just gotten too good at making things. This translates to ever lower demand for both capital and labor to make the same things.
Since I am linking to Thomas Friedman, it seems wrong not to tell a questionable anecdote of the international common man. I was in China in 2001 (which is when the current economic stagnation really started if you don’t count the intervening housing-bubble motivated artificial recovery). Through a series of bizarre events, I and two friends found ourselves as the lunch guests at a family farm in the shadow of the Great Wall. The family owned no tractor, one donkey, and one pig and lived in a concrete-floored three room house. Still, they had a nice-sized TV and DVD player. The farmer remarked that he pretty much had the same income as he’s always had, but that everything had gotten cheaper, especially electronics. Low cost manufactured goods from China have not only been flooding the United States, they have shown up in Chinese markets and markets all over the devloping world. Still, though, China is nowhere near operating at manufacturing capacity. There are still many more people available to work, to say nothing of people all over the world who have no jobs.
So here’s the problem. What do you do when you need only a fraction of the world’s available labor supply to take care of all the world’s needs? What happens when human technology outgrows the economy? Is this actually what’s happening? The symptoms are all there: Unprecedented levels of cheap goods, but with large swaths of the population still poor because they have no jobs such that they could buy even cheap goods. Too many investment dollars perpetually chasing too little actual investment. If this is actually what’s happening, how does it get fixed? I have no answer. The massive scope of the problem implies a solution equally massive in scope.
Comment by Vwhat the fudge on 8 March 2009 at 2:54 pm:
Ahhhhhhhhh…. to offer an analysis that might take into account both excess global production and insufficient global demand owing to the poverty of those who might be the putative markets for such goods (AKA ‘oversupply crisis’). Overproduction not Financial Collapse is the Heart of the Crisis: the US, East Asia, and the World
http://www.japanfocus.org/_Robert_Brenner__S_J_Jeong-Overproduction_not_Financial_Collapse_is_the_Heart_of_the_Crisis__the_US__East_Asia__and_the_World
Of course, even this analysis does not take account of the catastrophic environmental consequences of a humankind pursuing such prospects. For that, you need something much weirder. http://www.primitivism.com/future-primitive.htm
Either way, what passes for mainstream analysis is, as always, so ridiculous, so delusional, so preposterous, so as to be unworthy of comment.
Comment by Mike H. on 9 March 2009 at 9:13 am:
I don’t know enough to be able to judge the underlying premise, but if the problem really is that the demand to capital and labor is insufficient to employ everyone, then the answer is partly to restrict the supply of the current workforce.
I would suggest changing to a 30-hour workweek, anything above which would be overtime.
Accompanying this would probably have to be a wage increase to make up for hours lost by formerly 40-hour employees. However, reforming tax codes to offer significant tax credits/payments to low-income workers would supplement any shortfall.
Earners on the wealthier end, such as business owners, would pay more in income taxes, but with more people able to afford their products, their bottom line would still increase overall.
Comment by Brandon on 9 March 2009 at 10:38 am:
Mike,
That’s an eminently terrible idea. Restricting the work week to 30 hours at the same total wages would be a big hit to companies. With formerly 40 hour workers now working 30, companies would likely have to hire more people which would mean increased benefits. That would hit their profit margins pretty quickly because benefits are incredibly expensive. Besides, the people who are earning in the top half of money currently work far more than 40 hours a week. Ask any accountant, attorney, doctor, banker, the list really goes on. Point being that people who are already earning enough to afford stuff work far more than 40 hours a week, hours worked trend upward with income. If what you’re suggesting is that those people cut their hours at the same salary, it wouldn’t happen because they’re already being paid relatively well for their services. What you’re suggesting would also apply to governments, so we’d see something like a 20% increase in the size of government payrolls. Somehow I don’t think that would fly.
Comment by John Monchhichi on 9 March 2009 at 12:24 pm:
I think Mike is on the right track actually. If you have too much labor permanently floating around, you have two choices, reduce the amount of labor or divert it to something else. Brandon is right that reducing the amount of hours to 30 would make companies hire a lot more people and cost them more, but that’s the point. Companies would have to raise prices to cover their labor costs, which would make everything more expensive. However, there would be enough jobs so more people could actually buy the things they do need and everyone would have more free time to read a book or play with their children or do whatever it is that makes live worth living. The only people really hurt by this are those who like working too mcuh to buy crap they don’t need and those who are operating just above water to begin with, and the latter can probably be addressed with other programs.
Merely capping hours, however, won’t help if you have international actors with no labor standard or hours caps to undercut you. You would need some sort of international labor control board and you would have to restrict free trade from any country that didn’t sign on for it.
The other way we could go with this is, of course, employing the excess labor in another capacity. I’m partial to giant programs in science and space exploration, but your mileage may vary. Creating giant government programs to use the excess labor for the good of humanity would be really expensive and poorly suited for a government that raises revenue solely in terms of tax revenue. A possible alternative here would be to have the government natioanalize all industries that cause social negative effects and operate them as a monopolist. Utah does this with liquor retailers. I, for one, would start with tobacco, alcohol, gambling, and legalized marijuana. The government takes over these industries, subcontracts out the daily operation of them, jacks up prices to monopoly profitablity (which is, as you might imagine, higher than the profit-maximizing price for a competitive industry) and just rakes in the profits. That way, we can sustain a much larger government employing many more peorple without having outrageously high taxes.
Also, if everyone has not already read the interview at Mr. Fudge’s first link above, I sugest you do so. I am hitting on the same problem as Brenner is, but he has evidence and well-developed arguments and all that gibberish.
Comment by James Prescott on 9 March 2009 at 2:30 pm:
I think John is oversimplifying things with his corporations can just hire more scenario. This might actually lead to more unemployment, if corporations are hired to force more people. Prices don’t just jump up overnight, but if you hire more people, production costs do. The increase in overhead, training, and benefits costs will force more businesses to exit the market, further exacerbating the poor conditions for labor and leading to monopolistic actors who do the hiring and the selling. So now, you have more unemployed with a gradual increase in prices. You can force a company to only allow an individual to work x hours, but you can’t force them to stay in business.
The excess labor force is not a new scenario, historically speaking. Its just that the traditional response is to ship them off to colonize, explore or to capitalize on labor arbitrage opportunities by going across the ocean to the US. However, we got too good at minimizing arbitrage labor opportunities, prolonging human life, and things like that. It is surprising to me that the self professed liberal libertarian is a fan of monopolistic government actors in the market. However, the moderate Republican in me is also surprised that I am not quick to condemn government initiatives to expand human knowledge. At least this is in the vein of prior plans that, while no longer feasible as it was executed back then, did work. I just don’t think John’s advocacy of science or space exploration would work, although I can understand the appeal. Those programs would not do much to address the elements of the market we have an excess of; is there a glut of scientific based employees and engineers? I ask this genuinely, because I have no data one way or the other to confirm or deny my suspicion that there is none.
Either way, criticisms aside, this is a good question that needs to be asked. My main criticism with President Obama, at least in terms of macro economics, is that he has limited “bullets in his gun” so to speak, and he has been too hasty to use them with out maximizing their effect. This is the question with which all of the stimulus discussions should have begun with.
Comment by John Monchhichi on 9 March 2009 at 2:57 pm:
I don’t think I disagree with you, James. I just think we’re operating on different time horizons. You are still thinking in terms of the current crisis. Nothing I am suggesting here is short term enough to address the current crisis. I share Brenner’s take on the current crisis, which is essentially, let’s try some old fashioned Keynsianism because it could work and there aren’t any other options. I am talking about a major restructuring of the economy. Let me stress MAJOR. So, yes, I am not saying impose hour restritions overnight and force a bunch of companies out of business. That would be stupid. Nor do I suggest that NASA hire 50,000 people tomorrow. Maybe NASA will be able to hire a bunch more engineers if the foundation for major expansion is in place for 20 years from now. And by foundation, I mean both educational and expectational. I think the medium-term goals that Obama has for the stimulus is right, more green technology and green infrastructure. Even if we can get out of the current crisis, though, that doesn’t fix the greater glut problem, which promises an anemic recovery and another crisis in short order. So let’s restructure the thing for serious in the long term.
As for the strange notion of liberal liberaians supporting monopolistic government actors in the marketplace, it beats an 85% top marginal tax rate.