Yesterday I wrote a post considering the United States as a turnaround candidate. (http://seekingalpha.com/article/232267-can-the-u-s-successfully-achieve-a-turnaround) My fourth point in the post was that a turnaround needed to begin with a change in culture and that the change in culture had to begin at the top and everything that the leader did or said should reflect that change in leadership.
A change in culture, however, cannot be achieved overnight. In doing turnarounds one must understand that it takes a long time to complete the effort and people can get discouraged and frustrated and anxious during this time because one can go a through long stretches without seeing much improvement.
A turnaround can be compared with a person returning to health after a serious illness, an illness that cannot just be cured over night. Just to take a simple case, let’s assume that the doctor tells the sick patient that to return to health the patient must change his or her lifestyle, lose a substantial amount of weight, and stop living on the edge.
Changing one’s lifestyle does not mean that a successful return to health is based on “short-term” efforts to correct a particular situation with respect to one’s current way of living.
Losing a substantial amount of weight under these circumstances would imply that the weight loss must be maintained and be consistent with the new lifestyle so that the weight, once lost, is not put back on.
And, if one is to “stop living on the edge,” then that person must stop pushing and pushing and pushing and jumping from one extreme situation to another.
Obviously, I would like to compare this picture with the larger problem of bringing the United States economy back to health. Furthermore, I would like to argue that the problems of the United States economy are not transitory in nature and require a substantial amount of time to heal. The problems of the United States economy require a change in lifestyle, a disciplined approach to conducting business going forward, and a need to stop living “on the edge.”
In the first place, the United States has arrived at the place it is in by concentrating on “short term” results. I heard Fareed Zakaria speaking on the Charlie Rose show the other night. Zakaria made the statement that maybe one of the deficiencies of democracy is that democracy seems to encourage behavior focused on the “short run.”
I have commented on the fact that back in the 1970s and 1980s politicians focused upon a four-year election cycle because we have a presidential election every four years. Richard Nixon froze wages and prices and took the United States off the gold standard in August 1971 so that he could begin to re-stimulate the economy so as to get re-elected in 1972.
Now, the time-horizon of the politician has been truncated to two years because the mid-term elections have become so important that economic policies must be aimed at getting people re-elected no matter how much chaos is created in the meantime.
Zakaria stated that all that is considered in these elections are current problems and that there is no constituency that represents those people that would be facing problems down the road. But, of course, this plays right into the way that the quote by John Maynard Keynes is interpreted: “In the long run we are all dead.” Focus on the current problems and let people in the future be concerned about dealing with the problems we create for these future generations.
I have written about some of these longer term problems. (http://seekingalpha.com/article/232044-maybe-things-have-changed) Because the leaders of the United States have been focused on the short run in order to get re-elected they have created policies and programs that have resulted in long term outcomes that we now have to deal with. In this respect, “maybe things have changed” and this requires the leadership to change their economic policies to deal with current problems, not with the problems that they addressed in the past.
By sticking with out-dated policies they continue to make the problem worse and contribute to the reality that keeping on the same track will only make it more difficult to regain full health going forward.
Other information on this situation has been attracting our attention recently. Some of this work has been summarized by Tom Friedman in the New York Times this morning. (http://www.nytimes.com/2010/10/27/opinion/27friedman.html?_r=1&hp=&pagewanted=print) Friedman quotes a recently released report of the National Academies called “Rising Above the Gathering Storm Revisited: Rapidly Approaching Category 5”. The subtitle, Friedman writes comes from “The committee’s conclusion…that ‘in spite of the efforts of both those in government and the private sector, the outlook for America to compete for quality jobs has further deteriorated over the past five years.’”
By focusing on the short run goals over the past fifty years, America has fallen from “Number 1” to a less lofty position in the world. And, we are currently seeing the consequences of this decline almost daily. (See http://seekingalpha.com/article/229112-the-imf-bowl-u-s-vs-china and http://seekingalpha.com/article/232007-the-do-nothing-g20.)
Then Friedman quotes some of the discouraging results of the study: The United States ranks “sixth in global innovation-based competitiveness, but 40th in rate of change over the last decade; 11th among industrialized nations in the fraction of 25- to 34-year olds who have graduated from high school; 16th in college completion rate; 22nd in broadband Internet access; 24th in life expectancy at birth; 27th among developed nations in the proportion of college students receiving degrees in science or engineering; 48th in quality of K-12 math and science education; and 29th in the number of mobile phones per 100 people.”
You can’t keep America competitive by trying to put people back to work in the jobs they were just laid off from; you can’t keep America competitive by stimulating businesses to continue to use their existing capital base; and you can’t keep America competitive by encouraging them to take advantage of inflation (as in housing and cars and other consumer-based capital goods) rather than by working to be productive and also to become more productive in the future.
Yet, these are all the things that the United States government has been trying to achieve over the past fifty years: putting people back to work in the same jobs they were laid off from; keeping businesses using their same existing capital base; and by encouraging people to leverage up their debt loads and take on more and more risk within an inflationary environment with bubbles popping up here and there.
My prediction is that the economic environment we would like to see is a long way off. “Quantitative Easing” on the part of the Federal Reserve System and further fiscal stimulus on the part of the federal government is just more of the same old medicine that has been tried for fifty years or so. It is an attempt to achieve a “short run” solution.
The sad thing is that more of “the same old medicine” will just exacerbate the longer run problems mentioned by Friedman, the National Academies, and myself in the above cited work. Unfortunately, we are now living in the “long run” as seen by the leaders of the American government over the last fifty years. Are we going to pass this “long run” on to others in a more devastating “long run” of the future?
Showing posts with label fiscal stimulus. Show all posts
Showing posts with label fiscal stimulus. Show all posts
Wednesday, October 27, 2010
Tuesday, July 20, 2010
The Long-Term Jobless in the Current Economic Malaise
I have been concerned for some time about the changing nature of the United States economy and the structure of the United States labor market. There seems to be a tremendous mis-match between the two and this portends an unhappy near term for economic growth and employment.
An article in the Monday New York Times by Peter Goodman, “After Job Training, Still Scrambling for a Job” captures the whole dilemma (http://www.nytimes.com/2010/07/19/business/19training.html?_r=1&scp=2&sq=peter%20goodman&st=cse). In this article, Mr. Goodman presents a well-developed argument that even after job training, many people in today’s economy cannot find jobs. One of the individuals Mr. Goodman interviewed stated in extreme frustration, “Training was fruitless. I’m not seeing the benefits. Training for what? No one’s hiring.”
Yet, Mr. Goodman argues that some industries are hiring. Some experts point out that “even with near double-digit unemployment, some jobs lie vacant, awaiting workers with adequate skills.”
“’There’s plenty of jobs in health care, in technology,’ said Fred Dedrick, executive director of the National Fund for Workforce Solutions.
Some of the aggregate figures point up this mis-match between labor and industry. First, the capacity utilization figures tell a dismal tale. Since the 1960s, capacity utilization in the United States has fallen. Every cyclical peak of capacity utilization over the past fifty years has been lower than the previous one. In the 1990s, capacity utilization reached a peak of around 85%; in the middle 2000s, the peak was around 82%; and currently it is languishing around 74%. United States industry does not seem to be “tooled-up” for the right output.
Second, the under-employment of the working-age labor force has grown constantly over the past thirty years or so. The “measured” rate of unemployment indicates that about one out of every ten workers is currently unemployed. My estimate for the under-employed is that about one out of every four workers is under-employed in today’s economy.
How did we get this way?
I believe that the economic policies of the United States government helped to create this employment situation!
The reason I give for this conclusion is that every time economic growth started to slow over the past fifty years, the federal government stepped in to stimulate the economy and put people back into the jobs they had just lost. This was the Keynesian approach to the problem of unemployment.
This approach to stimulating the economy worked well in the short-run but in the longer-run failed to take account of shifting technologies and the job skills of the work force. This mis-match did not show up so much in the short-run because, especially in the earlier years, technology was not changing rapidly. However, as the last fifty years moved along changes in technology occurred at a faster and faster pace. The dislocation between the new technology and the “legacy” industrial capacity in place grew, as did the chasm between many in the labor force and the skills needed to handle the new technology in the new industries being created.
This is an unusual happening for it is nothing more than the working out of Joseph Schumpeter’s concept of “Creative Destruction”.
Applying Keynesian fiscal stimulus to this problem over and over again just exacerbated the situation. Why? Because people were either put back into “legacy” jobs or were given minor training and shoved back into the job market. Goodman writes, “Most job training is financed through the federal Workforce Investment Act, which was written in 1998—a time when hiring was extraordinarily robust. Then simply teaching jobless people how to use computers and write résumés put them on a path to paychecks.”
Goodman quotes Labor economist Carl E. Van Horn: “A lot of the training programs that we have in this country were designed for a kind of quick turnaround economy, as opposed to the entrenched structural challenges of today.”
The conclusion to this story is that over time the continued application of these Keynesian stimulus efforts causes a loss in impact. Each cycle this policy prescription seems to be less and less effective as the cumulative effect on industrial capacity and human capital grows. Capacity utilization declines and more and more workers become under-employed.
Given this conclusion, one can ask whether or not there comes a time when the fiscal stimulus program becomes almost totally ineffective? Have we reached a point where the cost/benefit tradeoff of more fiscal stimulus becomes almost all cost and very little benefit?
This, however, is not the only point that needs to be mentioned at this time. Most of the advocates of Keynesian fiscal stimulus policies are very concerned about the growth in income and wealth inequality over the past thirty years or so. The continued application of Keynesian-type fiscal stimulus packages during the past fifty years, I believe, has contributed substantially to the greater inequality in income and wealth that has occurred in the United States.
There are three primary reasons for this growth in inequality. First, the fiscal stimulus programs put people back to work in the jobs that they formerly held. The largest number of the short-term unemployed came from large firms so that the stimulus had to encourage the growth of these companies so that the workers that were laid off could be re-hired. The fiscal stimulus packages “subsidized” the growth and wealth of the big, already implanted companies. Thus, the salaries and employment packages in these areas could continue to grow over time even as the capacity utilization in these industries continued to fall.
Second, as more and more people in these industries became under-employed, their incomes dropped relative to other sectors of the economy and their future prospects also fell. This, however, did not keep these people from piling up debts to buy cars and houses and other consumer items. These people felt confident that over time, they would continue to generate income, even if it might be somewhat sporadic. Furthermore, the inflationary environment of the past fifty years made it sensible for these people to go into debt for the inflation depreciated the value of their debt over time.
Third, the wealthier segment of the economy took advantage of the continued fiscal stimulus of the past fifty years (gross federal debt rose at a compound rate of seven percent every year) and the fact that, on average, inflation rose at a compound rate of more than four percent per year over this time period. Wealthier people have always been able to position themselves better than the less-wealthy, especially when macro-trends become as predictable as the economic policy proscriptions of the United States government, whether Republican or Democrat.
Furthermore, wealthier people have always been able to find their way into the professions that provide, over time, the greatest opportunities to earn income and create wealth. Certainly these professions would include medicine and health, legal, finance, and management some of the biggest gainers over the past fifty years.
Given these factors, how long will it take for the United States economy to re-structure itself? In the 1930s it took a long time. Will it take that long this time around?
An article in the Monday New York Times by Peter Goodman, “After Job Training, Still Scrambling for a Job” captures the whole dilemma (http://www.nytimes.com/2010/07/19/business/19training.html?_r=1&scp=2&sq=peter%20goodman&st=cse). In this article, Mr. Goodman presents a well-developed argument that even after job training, many people in today’s economy cannot find jobs. One of the individuals Mr. Goodman interviewed stated in extreme frustration, “Training was fruitless. I’m not seeing the benefits. Training for what? No one’s hiring.”
Yet, Mr. Goodman argues that some industries are hiring. Some experts point out that “even with near double-digit unemployment, some jobs lie vacant, awaiting workers with adequate skills.”
“’There’s plenty of jobs in health care, in technology,’ said Fred Dedrick, executive director of the National Fund for Workforce Solutions.
Some of the aggregate figures point up this mis-match between labor and industry. First, the capacity utilization figures tell a dismal tale. Since the 1960s, capacity utilization in the United States has fallen. Every cyclical peak of capacity utilization over the past fifty years has been lower than the previous one. In the 1990s, capacity utilization reached a peak of around 85%; in the middle 2000s, the peak was around 82%; and currently it is languishing around 74%. United States industry does not seem to be “tooled-up” for the right output.
Second, the under-employment of the working-age labor force has grown constantly over the past thirty years or so. The “measured” rate of unemployment indicates that about one out of every ten workers is currently unemployed. My estimate for the under-employed is that about one out of every four workers is under-employed in today’s economy.
How did we get this way?
I believe that the economic policies of the United States government helped to create this employment situation!
The reason I give for this conclusion is that every time economic growth started to slow over the past fifty years, the federal government stepped in to stimulate the economy and put people back into the jobs they had just lost. This was the Keynesian approach to the problem of unemployment.
This approach to stimulating the economy worked well in the short-run but in the longer-run failed to take account of shifting technologies and the job skills of the work force. This mis-match did not show up so much in the short-run because, especially in the earlier years, technology was not changing rapidly. However, as the last fifty years moved along changes in technology occurred at a faster and faster pace. The dislocation between the new technology and the “legacy” industrial capacity in place grew, as did the chasm between many in the labor force and the skills needed to handle the new technology in the new industries being created.
This is an unusual happening for it is nothing more than the working out of Joseph Schumpeter’s concept of “Creative Destruction”.
Applying Keynesian fiscal stimulus to this problem over and over again just exacerbated the situation. Why? Because people were either put back into “legacy” jobs or were given minor training and shoved back into the job market. Goodman writes, “Most job training is financed through the federal Workforce Investment Act, which was written in 1998—a time when hiring was extraordinarily robust. Then simply teaching jobless people how to use computers and write résumés put them on a path to paychecks.”
Goodman quotes Labor economist Carl E. Van Horn: “A lot of the training programs that we have in this country were designed for a kind of quick turnaround economy, as opposed to the entrenched structural challenges of today.”
The conclusion to this story is that over time the continued application of these Keynesian stimulus efforts causes a loss in impact. Each cycle this policy prescription seems to be less and less effective as the cumulative effect on industrial capacity and human capital grows. Capacity utilization declines and more and more workers become under-employed.
Given this conclusion, one can ask whether or not there comes a time when the fiscal stimulus program becomes almost totally ineffective? Have we reached a point where the cost/benefit tradeoff of more fiscal stimulus becomes almost all cost and very little benefit?
This, however, is not the only point that needs to be mentioned at this time. Most of the advocates of Keynesian fiscal stimulus policies are very concerned about the growth in income and wealth inequality over the past thirty years or so. The continued application of Keynesian-type fiscal stimulus packages during the past fifty years, I believe, has contributed substantially to the greater inequality in income and wealth that has occurred in the United States.
There are three primary reasons for this growth in inequality. First, the fiscal stimulus programs put people back to work in the jobs that they formerly held. The largest number of the short-term unemployed came from large firms so that the stimulus had to encourage the growth of these companies so that the workers that were laid off could be re-hired. The fiscal stimulus packages “subsidized” the growth and wealth of the big, already implanted companies. Thus, the salaries and employment packages in these areas could continue to grow over time even as the capacity utilization in these industries continued to fall.
Second, as more and more people in these industries became under-employed, their incomes dropped relative to other sectors of the economy and their future prospects also fell. This, however, did not keep these people from piling up debts to buy cars and houses and other consumer items. These people felt confident that over time, they would continue to generate income, even if it might be somewhat sporadic. Furthermore, the inflationary environment of the past fifty years made it sensible for these people to go into debt for the inflation depreciated the value of their debt over time.
Third, the wealthier segment of the economy took advantage of the continued fiscal stimulus of the past fifty years (gross federal debt rose at a compound rate of seven percent every year) and the fact that, on average, inflation rose at a compound rate of more than four percent per year over this time period. Wealthier people have always been able to position themselves better than the less-wealthy, especially when macro-trends become as predictable as the economic policy proscriptions of the United States government, whether Republican or Democrat.
Furthermore, wealthier people have always been able to find their way into the professions that provide, over time, the greatest opportunities to earn income and create wealth. Certainly these professions would include medicine and health, legal, finance, and management some of the biggest gainers over the past fifty years.
Given these factors, how long will it take for the United States economy to re-structure itself? In the 1930s it took a long time. Will it take that long this time around?
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