Friday, August 9, 2013

Unemployment in the Time of Plenty

The cold, hard truth is that we could have a 30% unemployment rate and still keep our same standard of living.

This is not a popular truth. And it's something that no policymaker will ever admit to publicly. But it's built in our economic models. It's been observed empirically, both in historical times and today. And it reflects the extraordinary technological progress we've made in making the economy more specialized and streamlined than it has ever been.

99.9% of humanity's existence has been spent living an extraordinarily penurious lifestyle. Whether that lifestyle was sustained through gathering, hunting, or subsistence farming, it was a very hard life. And everybody was "employed". Kids joined the workforce as soon as they were able to stand on their own two legs. Hobbes put it best. Back then, before the advent of civilization, when humans still banded together in very small tribes, the average life was solitary, poor, nasty, brutish, and short.

Progress came very slowly, at first. The first great leap into modernity was the formation of sedentary societies. Agriculture enabled tribes to expand to something bigger. A more predictable food source that didn't require large amounts of traveling to obtain made it possible for tribes to turn into societies. And the most successful societies grew to the point where it was impossible for any one person within the society to be fully cognizant of every other person within the society. That's when societies turned into civilizations.

Civilizations demanded something beyond basic human instincts. It required a great deal more cooperation. Roles became much more specialized. The vast majority of people would still be food producers (farmers, hunters, and gatherers). But others needed to have more technical skills. Blacksmiths created tools which drastically increased the productivity of any given farmer. Soldiers would protect the civilization from the incursions of other civilizations, which would allow farmers to work in peace. Princelings and chiefs would serve as arbiters and resolve disputes between people within the civilization.

But it wasn't enough. Civilizations could easily fail if the harvest failed or if a rival civilization came and conquered them. Because life was still so precarious, any agricultural surplus gained by the civilization would be immediately "spent" by procreation. A civilizations' strength was directly proportional to the number of people within the civilization. Most people would spend their lives as farmers. And the men would occasionally serve as warriors when the need arose. There were no other options, because any civilization that indulged (expending scarce resources) in things like art or entertainment would be taken over by a civilization who spent more of its resources on warfare and population growth.

For the vast majority of human history, it was a triumph of Sparta over Athens.

And then something changed. Technology had progressed to the point where it became possible to have both guns and butter. Productivity enhancements such as steam power, factory/assembly line work, looms, mills, and cotton gins made it possible for unskilled workers to become just as productive as an artisan who spent his entire life learning and perfecting his craft. This enabled society to become vastly more prosperous than it previously was.

Fast forward to today. We live in a society where it takes just 3 American adults out of 100 to feed the entire country. 200 years ago, it took 90 out of 100. And the employment rate of the US? The most recent data has it at 58.7%. And that excludes the 27% of the population that is deemed either too young or too old to work. The "real" employment rate is 43%. It takes 43% of the entire US population to create the goods and services that 100% of the US needs and wants. All the food, cars, houses, TVs, phones, toys, clothes, all of that. It just takes 4 out of 10 people to make all of that.

Think about how significant that is. We have so many kids who, by societal fiat, are economically unproductive. We've eliminated child labor because we don't need it. But every kid past the age of 5 worked full time, 60 hours+ per week, on their family's farm back in the days before the internal combustion engine. And we have a bunch of old people, long retired, who are past any point of being economically productive, living off of the collective effort of those still working. Back then, if you were old and you couldn't pull your weight, you were the first one gone when the next famine arrived. But famines don't exist in post-industrial economies.

43% supplies all the needs and wants of the 100%. And we have so many wants. Wants that have long since exceeded our needs. People who are poor are fat, instead of famished and near death. We've reached a point where living past the age of 50 is considered a fundamental human right, regardless of station. Our society deems that telephone (Obamaphones, anyone?) and TV (digital converter box coupons) service for individuals is important enough to warrant direct government subsidy.

During the worst depths of the "Great Recession", considered the worst period of economic performance since the Great Depression itself, unemployment peaked at 10%. It was considered calamitous. Our intelligentsia fretted endlessly over lost skills, experience, and the trauma of being chronically unemployed. And yet, a country like Spain, with an official unemployment rate of over 26%, is treading water as a large underclass of young adults and the elderly are being kept afloat by their parents and the generous welfare programs provided by their government.

During the panicky times of late 2008 and early 2009, employers shed millions of jobs. GDP dipped for 3 quarters and then came back in the summer of 2009, even as the country continued to hemorrhage jobs. At the very trough of employment, we had shed a total of 5 million jobs, and yet real GDP increased during that time. We cut 5 million people from the workforce and suffered no lasting damage from it. In fact, overall productivity actually increased. It implies that they were dead weight, and that a combination of technology and increased productivity from those remaining in the workforce was enough to make up for the loss of 5 million jobs.

The Pareto heuristic suggests that in many systems, 80% of the results are generated by 20% of the causes. If it holds true to the economy, it suggests that 20% of the workers produce 80% of the goods and services. And I can easily believe that it is very close to that. There are some extremely lazy people out there. And some extremely crappy jobs that add very little value to the overall economy.

What all this means is that, if push came to shove, our society could easily tolerate drastically higher unemployment levels than what we currently have. That is not a comforting thought. Especially when we're past the historical median point between recessions.

The US fought the last recession by doubling its publicly held national debt and by injecting 3 trillion dollars of money into the financial system, created out of thin air. It will be impossible to fight the next recession in the same way. That will result in drastically higher official unemployment as an underclass of Americans scrape by with menial labor that doesn't get counted in the official statistics.


  1. Why shouldn't productivity continue to grow during a recession? Even then the trend rate has dipped sharply since because businesses aren't investing due to a lack of AD.

    And yes, Rome is burning:

    1. Productivity AND GDP have both grown. By Q2 2010, we had recovered every bit of GDP we had lost in 2008 completely on the back of higher per worker productivity.

      I don't think Rome is burning. This is not some case of a person dying of thirst right next to a riverbed. This is the USA, where the poorest people are the fattest. I don't care that the actual construction rate for McMansions is 8% lower than our theoretical peak.

      The system we have today has made capital more important than ever. And it's made capital ownership easier than ever before. But capital is concentrated overwhelmingly in the hands of a few because the many squander it all to go into debt to buy the next generation iPhone instead of saving for the future.

      Saying that Rome is burning is pure hyperbole. The country is fine and it isn't fundamentally different than what it was before September of 2008.

  2. If we so desperately need more savings then why are interest rates so low?

    1. Lower income families need more savings. Interest rates are low because the Federal Reserve wants to boost spending as high as possible. That's leaving investors starving for yield and investing in riskier and riskier asset classes as the majority of Treasurys have been yielding negative real returns for over 3 years now.


  3. I read you and I see no coherent model of how you actually think the macroeconomy functions. You seem to mostly think in some sort of protestant morality play, where the recession and low capacity utilization is our just comeuppance for the sins of evil scary debt. Sorry but I don't see any reason why high debt and low savings should disrupt production on such a large scale.

    1. When you're in debt you have less ability to spend. That's pretty obvious. When the bulk of consumers have a lot of debt, that reduces demand for goods and services, especially when they already have durable goods that are perfectly fine. Could we build more cars and houses? Sure. Do we need to? Not really.

      The modern economy runs on 80% wants and 20% needs. Right now, collectively, we've made the decision that maybe we don't really need as much as we can theoretically produce. This isn't a bad thing. And it certainly doesn't mean that Rome is burning.

  4. Except you're not thinking like an economist. You're forgetting that for every debtor there is a creditor receiving payments. So if a debtor forgoes consumption to pay off his debts he is increasing someone else's cash balance who can either increase their consumption in the current period offsetting the decline or defer their consumption to the future (savings). Now because savings will allow for more consumption in the future those savings will be channeled into investments (hence the S=I identity) to allow for the economy to produce a greater number of consumption goods in the future. The result: no recession! Recessions only occur when the central bank allows the NGDP growth level to fall below its trend rate.

    1. Obviously a debt in one balance sheet is a credit on another, but that's not the issue here. We're facing a problem with too many debtors and too few creditors. If a debtor pays a creditor off, obviously the creditor can spend more. But guess what? The creditor is filthy rich and wants even more yield. The creditor class is small, extremely wealthy, and not prone to spending like how debtors spend their money. That's why they are creditors.

      It's supposed to increase our capital base but the low interest rate is causing misappropriation of capital. Investors are hungry for yield so many of them are playing defense and a lot of others are investing in risky asset classes for more yield. Good investments increase our wealth base. Bad investments driven by the Federal Reserve's near-zero interest rate policy is just shuffling money around with no productive purpose.

      And are you serious about that conceit of NGDP? How do you explain a country like Greece, which, even if they did have their own central bank, would have still experienced very real and very substantial reductions in their economy? You can't inflate your way out of a recession, it simply shifts the burden from debtors to creditors.

  5. Sorry but ABCT is a joke and has been debunked countless times. I'm not going to take this seriously.