Tag: economics

One thing that most people probably don’t realize is that in the pre-Samuelsonian era, depressions were generally viewed in terms of the supply and demand for labor rather than a via a money metric of consumption. One of the more remarkable things for a young economics student reading Keynes’s General Theory today is discovering how it reads more like an Austrian logic-based text than a modern macroeconomics statistical digest. Today, the employment level doesn’t even factor into the modern determination of whether the economy is growing or not. Hence the new economic oxymoron of “a jobless recovery”.

But by the older perspective, it is obvious that the USA is still in the same depression that it was in 2008. Consider the following labor report:

About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months – a higher percentage than during the Great Depression.

Moreover, another little known fact is that the unemployment numbers provided for the Great Depression on an ex post facto basis by post-WWII economists were overstated because the BLS economist responsible, one Stanley Lebergott, counted many government workers as being unemployed. Michael Darby corrected for this and came up with the following numbers:

Year L D
1929 3.2% 3.2%
1930 8.7% 8.7%
1931 15.9% 15.3%
1932 23.6% 22.9%
1933 24.9% 20.6%
1934 21.7% 16.0%
1935 20.1% 14.2%
1936 16.9% 9.9%
1937 14.3% 9.1%
1938 19.0% 12.5%
1939 17.2% 11.3%
1940 14.6% 9.5%

Note that by this corrected measure, even the woefully misleading U3 unemployment measure is presently at the same level as 1937, and worse than 1930. At 15.8, the more relevant U6 measure is worse than 1931 and every year except 1932 and 1933, the absolute nadir of the Great Depression. It may be worth noting that adding the current 20.3 million government workers to the ranks of the unemployed, as per Lebergott, would increase the current U3 rate to 22.3 percent and the U6 rate to 29 percent, which exceeds even Lebergott’s calculation for 1933.

Given the slide in housing prices, the unemployment rates, and the length of joblessness, two things should be readily apparent. First, the economic contraction has not ended. Second, the GDP figures notwithstanding, it is a larger scale event than the Great Depression.

Mark Perry omits a key factor in attempting to defend international free trade:

Bottom Line: To argue against free trade among countries, one would also have to object to free trade among American states, counties, cities and individuals, see my edits below of Fletcher’s article that hopefully make this point.

That simply is not the case. In fact, Perry misses a vital point, which is that in order to argue FOR free trade among countries, one has to accept a similar free flow of labor between countries as presently exists between American states, counties, and cities. And how sizeable is that free flow?

In 2009, 4.7 million Americans moved from one state to another. Keep in mind that the entire American employed labor force is only 140 million. If we conservatively divide the number of domestic migrants by the average household size of 2.6, we’re looking at 1.8 million workers, 1.3 percent of all American workers, who moved intrastate.

This suggests that if the world were to adopt international free trade, more than a million Americans would need to move to China, Mexico, Japan, Germany, and Canada in order to find employment on an annual basis. It would be necessary to know the amount of intrastate trade vesus international trade to provide a precise estimate of how many Americans would need to emigrate every year, (53% of them to China), under a free trade regime, but I find it unlikely that many Americans are likely to prove supportive of a trade system that would require them to move to places like India and Bangladesh as freely as it now forces residents of Detroit and Minneapolis to move to Scottsdale and Naples.

Being an American expatriate myself, I know much better than most that it is possible to change one’s international residence. And due to my extensive, long-term international experience, I can say that I find this particular aspect of the free trade argument to be naive to the point of absurdity. Most American expats to even first-world European countries don’t last two years due to the significant language and cultural differences. The concept is a complete non-starter and therefore the equivalence is false.

Given the following factors:

1. Gross Domestic Product (GDP) is the statistical measure for the size of the national economy.
2. The formula for calculating GDP is C+I+G+(x-m).
3. In the most recent BEA report, current dollar GDP was 15,010 billion. Exports (x) were 2,020 billion and imports (m) were 2,591 billion.
4. In Q1-11, international trade reduced the size of the US economy by $571 billion. Without any international trade at all, GDP in Q1-11 would have been 15,581 billion, representing a healthy rate of 4.8 percent annual growth from the 14,871 billion of the previous quarter instead of the 0.9 percent reported.

This is the challenge: justify the continuation of international free trade utilizing reason, logic, and conventional macroeconomic theory in light of these figures. This means no resorting to Austrian-based skepticism concerning the validity of economic statistics or ideological objections to government intervention. For the purposes of this exercise, we are assuming that the Samuelsonian metrics are valid, relevant, and a legitimate foundation for national policy.

You may recall that my prediction that the U3 unemployment would exceed 11 percent in 2010 was “incorrect”. The BLS reported U3 at only 9.8 percent even though fewer people were working due to a concomitant increase in the number of people who had mysteriously decided to exit the labor force in the midst of the “recovery” That’s why I revised my 2011 prediction as follows: “U-3 unemployment will climb above 10 percent. The real unemployment rate will be much higher, but it will be masked by a decline in the Labor Force Participation rate below 64 percent. The employment-population ratio will fall below 58 percent for the first time since 1984.

Needless to say, I didn’t find it quite as inexplicable as some economists have to see that the current employment trend is defying “the rules of a normal economic recovery.”:

The labor force — those who have a job or are looking for one — is getting smaller, even though the economy is growing and steadily adding jobs. That trend defies the rules of a normal economic recovery…. The percentage of adults in the labor force is a figure that economists call the participation rate. It is 64.2 percent, the smallest since 1984. And that’s become a mystery to economists. Normally after a recession, an improving economy lures job seekers back into the labor market. This time, many are staying on the sidelines.

Their decision not to seek work means the drop in unemployment from 9.8 percent in November to 9 percent in April isn’t as good as it looks. If the 529,000 missing workers had been out scavenging for a job without success, the unemployment rate would have been 9.3 percent in April, not the reported rate of 9 percent. And if the participation rate were as high as it was when the recession began, 66 percent, in December 2007, the unemployment rate could have been as high as 11.5 percent.

Translation: the real U3 unemployment rate has been over 11 percent since 2010, as I originally predicted. However, the BLS has concealed this very high rate of unemployment by the simple tactic of reducing the size of the labor force despite the growing population of the country. This is only one of the many reasons that Mises was correct to condemn the use of statistical empiricism in economics; the statistics are neither reliable nor represent a consistent metric.

There is no mystery and it is not true that “nobody is sure why it’s happening.” The reason it is happening is completely obvious: there is no economic recovery. The Bureau of Labor Statistics is playing games, just like the Federal Reserve and most of the other Federal agencies, to conceal the observable fact that the Great Depression 2.0 has been underway for 30 months already. And their ability to hide it is gradually crumbling.

UPDATE: BLS report today: U3=9.1%, LFP=64.2%, E/PR=58.4%.

Murray Rothbard expands his logical case against empiricism in economics, specifically, explaining how the systematic gathering of statistics tends to lead inevitably to bureaucracy and increased government intervention in the economy:

[S]tatistics are desperately needed for any sort of government planning of the economic system. In a free-market economy, the individual business firm has little or no need of statistics. It need only know its prices and costs. Costs are largely discovered internally within the firm and are not the general data of the economy which we usually refer to as “statistics.”

The “automatic” market, then, requires virtually no gathering of statistics; government intervention, on the other hand, whether piecemeal or fully socialist, could do literally nothing without extensive ingathering of masses of statistics. Statistics are the bureaucrat’s only form of economic knowledge, replacing the intuitive, “qualitative” knowledge of the entrepreneur, guided only by the quantitative profit-and-loss test. Accordingly, the drive for government intervention, and the drive for more statistics, have gone hand-in-hand….

Suffice it then to say that a leading cause of the proliferation of governmental statistics is the need for statistical data in government economic planning. But the relationship works also in reverse: the growth of statistics, often developed originally for its own sake, ends by multiplying the avenues of government intervention and planning. In short, statistics do not have to be developed originally for politicoeconomic ends; their own autonomous development, directly or indirectly, opens up new fields for interventionists to exploit.

Each new statistical technique, whether it be flow of funds, interindustry economics, or activity analysis, soon acquires its own subdivision and application in government.

In the RGD chapter entitled “No One Knows Anything”, I demonstrated how wildly inaccurate, mutable, and untrustworthy the economic statistics on which so much government policy is predicated are. But the problem is that regardless of how inaccurate or even irrelevant they are, they will be used to justify government action in various areas of the economy and inspire public malinvestment while simultaneously exacerbating private malinvestment. If statistics are the eyes of the state, the central flaw with them that they will always be short-sighted, astigmatic, subject to optical illusions, and prone to aggressive intraocular lymphomas.

The headline on Drudge made me laugh.

“‘WE ARE ON THE VERGE OF A GREAT, GREAT DEPRESSION‘”

Really now? I am… so very surprised!

“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it. We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer.”

This was all entirely predictable. It was, in fact, predicted. My timing was a little off, as usual. I thought the media would start realizing the reality of the situation towards the end of 2010, not the middle of 2011. But the situation remains precisely the same one I described in the Introduction to The Return of the Great Depression and I see no reason to change a word of it.

“Due to the sizeable bear market rally that began in March 2009, many, if not most, economic observers are presently convinced that the global economic difficulties of last autumn are largely behind us now, courtesy of the aggressive, expansionary actions of the monetary and political authorities.

They are wrong. It is not over. It has only begun.

I believe that what we have witnessed to date is merely the first act in what will eventually be recognized as another Great Depression.”

A Greek official finally admits the obvious:

Greece must take tough measures to deal with its debt crisis or it will have to return to the drachma, the EU’s Fisheries Commissioner Maria Damanaki said on Wednesday. “I am forced to speak openly,” Damanaki was quoted as saying in a statement by the semi-official Athens News Agency. “Either we agree with our lenders to a programme of tough sacrifices … or we return to the drachma.”

I’m hoping Italy will return to the Lira, myself. I still have a few of them sitting around somewhere in the old filing cabinet. Anyhow, this “forced restructuring” is the only valid option since the ECB, the EU, and the bond-holding banks have repeatedly refused to cut Greece’s debts in a manner sufficient to permit repayment.

It would seem the solution to cowbell is MORE COWBELL:

“Today there are very substantial risks, to be sure, but the economy is growing, unemployment is falling and financial conditions are normalized,” said Summers, who was director of the White House National Economic Council in the Obama administration from 2009 to 2010.

Summers said the “central irony” of a financial crisis is that it’s caused by too much confidence, borrowing and lending, and is resolved by more confidence, borrowing and spending.

There is no irony there because it isn’t a solution. This is exactly what I meant by “buying time” and what others have meant by “extend and pretend”. There is little chance that Summers actually believes this, but the financial charlatans of the world now have no choice but to keep clinging to the tiger’s tail while hoping for a miracle.

Karl translates Alan Blinder’s unusually frank remarks in the Wall Street Journal:

The only reason we have not recognized an economic Depression is because of utterly unsustainable government borrowing and spending of money it does not have and which it has no hope or intent to ever take in via taxes in the future. In other words, the Government has been lying to you.

There has been no economic recovery and we are in an economic Depression right now and have been since 2008.

There was no economic recovery after the 2001 Nasdaq collapse. The government borrowed and spent about 5% of GDP at the time every year to fake a recovery and we ran a debt-based false “recovery” when in fact we were in a five year long recession marked by an orgy of false “wealth” through bubbling home prices.

Now we’re borrowing and spending 12% – more than double that amount – a year to fake a recovery that has shown up in stock prices, and it mathematically must end the same way.

This is exactly what I attempted to warn everyone of in my economic columns in 2008 and in RGD. GDP is a terrible measure of economic growth because it is so easily gamed through the G component, government spending. What the 78% increase in government debt since the second quarter of 2008 has done is to create $4.1 trillion of fake growth. Needless to say, this is substantial in a $14 trillion economy.

The ironic thing is that if the pre-Keynesian measures that Keynes himself utilized in determining economic growth and contraction are used, it would already be recognized that we were in a depression due to the number of jobless people across the country. But due to the development of sophisticated statistical measures, the government is now able to claim that there is “real” economic growth even as the employment-population ratio continues to fall. Even many economists have forgotten that metrics such as GDP and U3 are merely measures of an observable underlying reality.

But as I have repeatedly pointed out, the map is not the territory, and unfortunately, the present economic map is becoming increasingly inaccurate.