Is the British Economy Finally Recovering?

The British government would like us to believe that the British economy is finally recovering after a quarter of 0.6% real GDP growth, which if sustained over a full year would equate to 2.4% annualised real GDP growth.

David Cameron claimed:

To accept this argument, one would have to make oneself entirely ignorant of the facts of the current economic situation. Here’s the British economy’s post-2008 real GDP growth, compared to the United States which has also experienced a relatively lukewarm, disappointing recovery:

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We are still far below the 2008 peak. Even the United States has done better. Only Europe — which has adopted even greater fiscal austerity than Britain since the slump — has done worse.

On unemployment, we’re doing even worse. Since the slump, unemployment hasn’t even begun to come down:

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The truth is that the British economy is in a depression, very similar to the one experienced in the 1930s — what Keynes called a “depressed equilibrium”. The government now — as then — is not taking the malaise seriously, and would prefer to spew meaningless slogans about “building an economy for hardworking people” instead of focusing on job creation, which is the only viable short-term route out of the slump.

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Of Wages and Robots

There is a popular meme going around, popularised by the likes of Tyler CowenPaul Krugman and Noah Smith that suggests that recent falls in worker compensation as a percentage of GDP is mostly due to the so-called “rise of the robots”:

For most of modern history, two-thirds of the income of most rich nations has gone to pay salaries and wages for people who work, while one-third has gone to pay dividends, capital gains, interest, rent, etc. to the people who own capital. This two-thirds/one-third division was so stable that people began to believe it would last forever. But in the past ten years, something has changed. Labor’s share of income has steadily declined, falling by several percentage points since 2000. It now sits at around 60% or lower. The fall of labor income, and the rise of capital income, has contributed to America’s growing inequality.

In past times, technological change always augmented the abilities of human beings. A worker with a machine saw was much more productive than a worker with a hand saw. The fears of “Luddites,” who tried to prevent the spread of technology out of fear of losing their jobs, proved unfounded. But that was then, and this is now. Recent technological advances in the area of computers and automation have begun to do some higher cognitive tasks – think of robots building cars, stocking groceries, doing your taxes.

Once human cognition is replaced, what else have we got? For the ultimate extreme example, imagine a robot that costs $5 to manufacture and can do everything you do, only better. You would be as obsolete as a horse.

Now, humans will never be completely replaced, like horses were. Horses have no property rights or reproductive rights, nor the intelligence to enter into contracts. There will always be something for humans to do for money. But it is quite possible that workers’ share of what society produces will continue to go down and down, as our economy becomes more and more capital-intensive.

So, does the rise of the robots really explain the stagnation of wages?

This is the picture for American workers, representing wages and salaries as a percentage of GDP:

WASCURGDP

It is certainly true that wages have fallen as a percentage of economic activity (and that corporate profits as a percentage of economic activity have risen — a favourite topic of mine).

But there are two variables to wages as a percentage of GDP. Nominal wages have actually risen, and continued to rise on a moderately steep trajectory:

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And average wages continue to climb nominally, too. What has actually happened to the wages-to-GDP ratio, is not that America’s wage bill has really fallen, but that wages have just not risen as fast as other sectors of GDP (rents, interest payments, capital gains, dividends, etc). It is not as if wages are collapsing as robots and automation (as well as other factors like job migration to the Far East) ravage the American workforce.

It is more accurate to say that there has been an outgrowth in economic activity that is not yielding wages beginning around the turn of the millennium, and coinciding with the new post-Gramm-Leach-Bliley landscape of mass financialisation and the derivatives and shadow banking megabubbles, as well the multi-trillion dollar military-industrial complex spending spree that coincided with the advent of the War on Terror. Perhaps, if we want to look at why the overwhelming majority of the new economic activity is not trickling down into wages, we should look less at robots, and more at the financial and regulatory landscape where Wall Street megabanks pay million-dollar fines for billion-dollar crimes? Perhaps we should look at a monetary policy that dumps new money solely into the financial sector and which has been shown empirically to enrich the richest few far faster than everyone else?

But let’s focus specifically on jobs. The problem with the view that this is mostly a technology shock is summed up beautifully in this tweet I received from Saifedean Ammous:

The Luddite notion that technology might render humans obsolete is as old as the wheel. And again and again, humans have found new ways to employ themselves in spite of the new technology making old professions obsolete. Agriculture was once the overwhelming mainstay of US employment. It is no more:

farmjobs

This did not lead to a permanent depression and permanent and massive unemployment. True, it led to a difficult transition period, the Great Depression in the 1930s (similar in many ways, as Joe Stiglitz has pointed out, to the present day). But eventually (after a long and difficult depression) humans retrained and re-employed themselves in new avenues.

It is certainly possible that we are in a similar transition period today — manufacturing has largely been shipped overseas, and service jobs are being eliminated by improvements in efficiency and greater automation. Indeed, it may prove to be an even more difficult transition than that of the 1930s. Employment remains far below its pre-crisis peak:

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But that doesn’t mean that human beings (and their labour) are being rendered obsolete — they just need to find new employment niches in the economic landscape. As an early example, millions of people have begun to make a living online — creating content, writing code, building platforms, endorsing and advertising products, etc. As the information universe continues to grow and develop, such employment and business opportunities will probably continue to flower — just as new work opportunities (thankfully) replaced mass agriculture. Humans still have a vast array of useful attributes that cannot be automated — creativity, lateral thinking & innovation, interpersonal communication, opinions, emotions, and so on. Noah Smith’s example of a robot that “can do everything you can do” won’t exist in the foreseeable future (let alone at a cost of $5) — and any society that could master the level of technology necessary to produce such a thing would probably not need to work (at least in the sense we use the word today) at all. Until then, luckily, finding new niches is something that humans have proven very, very good at.

Economists vs the Public

They don’t agree:

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My responses:

Question 1 — Agree

Economists in Sapienza and Zingales’ study resolutely agreed that it is hard to predict stock prices. A majority of the public agreed with the statement, but not so resolutely. Stock prices are the culmination of transactions between humans, and human behaviour is hard to predict because it is often irrational and informed by cognitive fallacies.

Question 2 — Agree, with a bitter taste in my mouth.

Economists were vastly more bullish on the stimulus’ effect on unemployment than the general public. And the data is actually quite unkind toward the economists’ view — the real unemployment path was far worse than the path projected by those in the Obama administration who promoted the stimulus. However, this is more of a symptom of the stimulus’ designers underestimating the depth of the economic contraction that the financial crisis caused. There is no doubt that the stimulus created jobs and lowered the unemployment rate in the immediate term. Whether the jobs created were really useful and beneficial — and to what extent the stimulus was a malinvestment of capital  — is another question entirely, and one which can only be answered in the long run.

Question 3 — Agree

Economists overwhelmingly agreed that market factors are the chief cause behind variation in petrol prices. The public agreed, but to a lesser extent. Presumably, the dissenting public and dissenting economists see government intervention as a more significant force? Certainly, the present global oil market is a precarious pyramid of supply chains balanced on the back of the petrodollar empire. But the market reflects these factors.  When governments start a war, that is reflected in the oil price. That’s a force that the market responds to. If a central planner was directly setting the oil price (rather than merely influencing it) — as is the case in communist countries — that would be a price determined by non-market forces.

Question 4 — Uncertain

Economists were broadly certain that a carbon tax is less costly than mileage standards. I think this is far too general a question. Without nuts-and-bolts policy proposals, it is not really possible to assess which would be more costly.

Question 5 — Uncertain, leaning toward Disagree.

This was the only question where economists and the public were largely agreeable — and economists were largely split. As I stated above, the “success” of the stimulus package can only really be assessed in the longer run, and even then there are difficulties with measurement. Generally, I suspect very much that the various interventions in 2008 onward have preserved and supported economically unsustainable and inefficient sectors and industries that ought to have been liquidated and rebuilt (especially the financial industry, but also other sectors, e.g. Detroit). Had the government in 2008 followed the liquidationary trend in the market, the slump would have been much deeper, unemployment would have risen much higher, but the eventual rebound may have been much quicker and stronger.

Question 6 — Agree

This is where economists and the public disagree the most. It is the point on which the public was the most bullish, and economists almost unanimously bearish. Economists in general seem to believe that what they define as free trade is best, even when it destroys domestic supply chains and drastically decreases manufacturing employment. To economists, this means that the American government should not discriminate against foreign products but buy for the best product and the best price. This ignores some important externalities. Buying American certainly supports American jobs, because money goes to American companies, and toward American salaries. This might foster inefficient and otherwise-unsustainable industries, but if the American public chooses to favour American products for their government, that is their right. And a strong domestic manufacturing base is no bad thing, either.

Steve Jobs, Jobs and Reincarnation

Readers will know that my feelings toward Apple are profoundly mixed.

As I wrote back in July:

The notion of well-oiled blue-shirted brigades of lanyard-wielding corporate minions dancing, speaking and thinking in line to the beck and call of Steve Jobs goes beyond running an efficient operation. It’s obsessive-compulsive, and downright creepy. In my view, the sooner a competitor arises that delivers minimalist, solid and sleek computers at a similar price and without all this peculiar control-freakery, without the backdoor surveillance, and without the cultlike undertones, the better. I will jump ship as soon as I possibly can. But right now? Apple has no real competitors.

But there is no doubt Apple has a vast array of good qualities beyond having great products. There are three crucial ones: value creation, job creation and innovation.

From Sovereign Man:

While people like Warren Buffet are pleading with the government to raise their taxes and give away their wealth to sycophantic bureaucrats, Jobs showed time and time again that the best way to improve people’s lives is to create value and be productive.

Steve Jobs was one of the most productive human beings to have ever lived; he started several successful companies which directly employed tens of thousands of people. Indirectly, his businesses improved the livelihoods of millions across the globe, from Chinese factory workers to iPhone app programmers to Apple shareholders.

In building an empire and unimaginable wealth for himself, Steve Jobs enriched the lives and livelihoods of others by creating value. Not by forced redistribution. Not by giving things away. By creating value.

Ironically, just as I write this I am watching President Obama on Bloomberg Television trying to explain how many jobs his new plan will create– 1.9 million in his estimate:

“We’re just going to keep on going at it and hammering away… until… something gets done. I would love to see nothing more than Congres act… so aggressively.”

Politicians would do themselves and their constituents a great service by comparing their own track record for enriching people’s lives against Steve Jobs’ performance, and then kindly stepping out of the way. The path to prosperity is not paved in votes, but rather in freedom: the freedom to create, produce, risk work hard… and be rewarded for your efforts.

Well, amen to that. Our markets sorely need new value, new innovation and new jobs, and the answer to that conundrum — as I painstakingly pointed out here — is creating new wealth, not new taxes as many currently seem to advocate.

In my view, Jobs greatest contribution to the philosophy of economics (and something I have hammered on in recent months) is the importance of failure:

If you can’t succeed or fail, it’s really hard to get better.

The story of Jobs’ life, and the story of free market capitalism is very much one of trying and trying and trying again, learning from experience, and gradually improving. Look at the difference between a Power Cube G4 and a Mac Mini. The difference between a first-generation iPod and the new iPhone. Lisa and Mac OSX.

Sadly, as American Presidents heap praise on Jobs and his innovations, they’re not exactly heeding his advice. As I point out on an almost-daily basis, the highly interconnected global financial system has experimentally shown itself to be fundamentally flawed, and systematically broken. The establishment response — at both a national and global scale — has not been to put failures to one side and try new systems (hopefully ones that allow for less interconnection, less leverage and less risk — and subsequently less fragility) but to pump money and bail out failures to make the same mistakes all over again on a bigger scale.

So as Steve Jobs’ body begins its journey back into nature, back into the oxygen, carbon, nitrogen and hydrogen cycles — to be reborn, as we will all be, as new organisms — perhaps it is time governments started listening to his advice? Perhaps it’s time for the global financial system to die and be reborn…?

Farewell.

Bernanke Didn’t Pump, Equities Get Dumped

So what happens now QE3 hasn’t occurred? Let’s see what I wrote last month:

QE3 has already been priced in so there would be shock. Confidence would plummet, followed swiftly by asset prices, especially the blown-up pufferfish S&P, DJIA and Nasdaq. Two exceptions would be gold, which would shoot up — well above $2000 — and treasury bonds, whose yields would edge ever lower. And plummeting asset prices would mean debt-deflation, leading to more bank failures, and the debt-deflation spiral posited initially by Irving Fisher, and later by Friedman, Schwarz and Bernanke.

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Small Business: The Real Job Creators

The most annoying thing about the establishment’s ongoing obsession with maintaining the status quo, and supporting and bailing out older and larger companies?

Dinosaurs don’t create jobs.

From the Economist:

Research funded by the Kauffman Foundation shows that between 1980 and 2005 all net new private-sector jobs in America were created by companies less than five years old. “Big firms destroy jobs to become more productive. Small firms need people to find opportunities to scale. That is why they create jobs,” says Carl Schramm, the foundation’s president.

And it doesn’t stop there.

From Wikipedia:

In the US, small business (less than 500 employees) accounts for around half the GDP and more than half the employment. Regarding small business, the top job provider is those with fewer than 10 employees, and those with 10 or more but fewer than 20 employees comes in as the second, and those with 20 or more but fewer than 100 employees comes in as the third.

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