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:

BPbn8cdCYAAGT_S

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:

fredgraph

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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What Do Rising Numbers of Welfare Claimants Really Mean?

As we know, food stamp claimants are soaring to new highs. But this just mirrors the numbers of people who are jobless:

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This isn’t a product of people getting lazy and choosing to live off the state. It’s a product of a weak economy that isn’t creating a large enough supply of jobs to meet the demand for work.

Because as we know, there are lots more job-seekers than there are jobs being created:

As I noted recently, solving the challenge of high unemployment is not a matter of job-seekers working harder to look for work. It’s a matter of the economy being able to create enough jobs and demand to absorb job-seekers.

I worry that we aren’t taking unemployment seriously even five years into a crisis that is defined by soaring unemployment. It may be hard for  policymakers and wealthy business people — the people who are in a position to spend to create jobs and seriously lower the unemployment rate — to have any idea what unemployment really means. After all, as a successful, wealthy person with a high quality of life, who has been successful in life from school, to university, to the workplace, then perhaps it is hard to empathise with the plight of people who are struggling to find a job. It seems easy to notice the rising costs of welfare, and the rising numbers of welfare claimants and jump to the conclusion that these things are caused by laziness or lack of discipline or immorality. Yet the simple, demonstrable fact that there are not at present enough jobs to go around entirely debunks this.

Trying to nudge unemployed people into looking harder for work seems like a futile exercise. If the government wants to get people off unemployment, the only real option is job creation.

Empirical Evidence of Employment Stagnation

Last week, I discussed the possibility that we had reached a depressed equilibrium, resulting in long-term or even permanent employment stagnation. I also discussed the possibility that the only routes out were large-scale technology shocks, geopolitical shocks or very large scale fiscal stimulus — events that drastically change broader market expectations.

Frustratingly, there are some superficial signs of recovery. Yet digging beneath the surface it is apparent that we are dealing with a depression in employment demand. These graphs produced by a blogger under the pseudonym Eugen von Böhm-Bawerk from Bureau of Labor Statistics data illustrate this well.

Since the recession, lots of part-time jobs have been created. Yet full-time jobs remain in much shorter supply:

fulltimeparttime

This has meant that the percentage of the population with a full time-job is just where it was after the recession:

percentofpopulationwithfulltimejob

There has been significant growth in low-pay jobs, but decline in high-pay jobs, again illustrating a weakening of labour demand:

highlowpay

The extent to which this is fixable and may fix itself is unclear. In the long run, the sea may be flat and the weather may be sunny. But what this trend has already led to is strong growth for corporate incomes, and a decline in labour incomes. If in the long run this trend does not reverse we will face a bifurcation of society between the capital-owning elites still thriving on rents, automated industry and foreign wage labour, and a squeezed middle deprived of the well-paying jobs and careers that once supported and grew the middle class and increasingly dependent on part-time jobs, temporary work and welfare. Without middle class job and labour growth, demand in the economy as a whole may remain depressed.

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:

WASCUR_Max_630_378

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:

EMRATIO_Max_630_378

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.

Jobs For Boomers

Via Zero Hedge — as two Boomers battle it out for the White House, plenty of jobs for Boomers, crumbs for everyone else:

And here’s last month’s data:

I’m 25. This age-bracket has consistently shed jobs since 2009.

While the underlying reality beneath the statistics is undoubtedly complex and multi-dimensional, one factor has to be that younger workers are stuck in a kind of Catch-22. Many younger individuals are trapped with job little experience. To get experience, they need to get hired, and to get hired they need experience. In a depressionary environment, employers may be less willing to take chances with new employees, and so when hiring may more often choose experience over youthful enthusiasm and academic qualifications. That wouldn’t be a problem if the Boomers were retiring en mass. But with plenty of older individuals still in the work force — at least in part due to the very low-interest rate environment where returns on savings are meagre, and due to the depressed housing market that has left many underwater on their homes — the elderly are snapping up jobs and experience, and so consigning many younger individuals — even those with degrees — to flipping burgers, making coffee, the unemployment queue, or writing blogs.

Should the Rich Pay More Taxes?

It’s a multi-dimensional question.

The left says yes — income inequality has soared in recent years, and the way to address it (supposedly) is to tax the rich and capital gains at a higher rate. The right says no — that the rich already create more jobs and wealth, because they spend more money, and why (supposedly) should they pay more tax when they already pay far higher figures than lower-income workers?

Paul Krugman made the point yesterday that the tax rate on the top earners during the post-war boom was 91%, seeming to infer that a return to such rates would be good for the economy.

Yet if we want to raise more revenue, historically it doesn’t really seem to matter what the top tax rate is:

Federal revenues have hovered close to 20% of GDP whatever the tax rate on the richest few.

This seems to be because of what is known as the Laffer-Khaldun effect: the higher rates go, the more incentive for tax avoidance and tax evasion.

And while income inequality has risen in recent years, the top-earners share of tax revenue has risen in step:

So the richest 1% are already contributing around 40% of the tax revenue, taxed on their 34% share of the national income. And even if the Treasury collected every cent the top 1% earned, America would still be running huge deficits.

Yet the Occupy movement are still angry. A large majority of Americans believe the richest should pay more tax. More and more wealthy Americans — starting with Warren Buffett, and most recently Stephen King are demanding to pay more taxes.

King writes:

At a rally in Florida (to support collective bargaining and to express the socialist view that firing teachers with experience was sort of a bad idea), I pointed out that I was paying taxes of roughly 28 percent on my income. My question was, “How come I’m not paying 50?”

How come? Well, the data shows pretty clearly that it’s unlikely that revenues would increase.

They may have a fair point that capital gains above a certain threshold should probably be taxed at the same rate as income, because it is effectively the same thing. And why should government policy encourage investment above labour by taxing one more leniently?

But more simply, people like King think the status quo  is unjust far beyond the taxation structure. A lot of people are unemployed:

A lot of people are earning less than they were five years ago:

28% of homeowners are underwater on their mortgages. Millions of graduates face a mountain of student debt, while stuck in dole queues or in a dead end job like Starbucks.

We live in dark times.

From Reuters:

Nearly 15 percent of people worldwide believe the world will end during their lifetime and 10 percent think the Mayan calendar could signify it will happen in 2012, according to a new poll.

With all this hurt, there’s a lot of anger in society. Those calling for taxing the richest more are not doing the same cost-benefit analysis I am doing that suggests that raising taxes won’t raise more revenue.

But they’re not unfairly looking for a scapegoat, either. While probably the greatest culprits for the problems of recent times are in government Americans are right to be mad at the rich.

Why?

This isn’t about tax. This is about jobs, and growth.

The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. The top 1% control 42% of all financial wealth. But that money isn’t moving very much at all— the velocity of money is at historic lows. It should not be surprising that growth remains depressed and unemployment remains stubbornly high.

And every month that unemployment remains elevated is another month that the job creators are not doing their job. Every month that the malaise festers, the angrier the 99% gets.  It is, I think, in the best interests of the rich to try and create as many jobs and as much wealth as they can.  A divided and angry society, I think, will find it even more difficult to grow and produce.

America needs the richest Americans to pay more tax dollars — but as a side-effect of producing more, and creating growth.

If the private sector doesn’t spend its way out of the current depression, eventually the government will have to, of course. But it can do that with borrowed money, not taxed money.

The Disaster of Youth Unemployment

This is a demographic disaster.

From the Guardian:

Unemployment among Europe‘s young people has soared by 50% since the financial crisis of 2008. It is rising faster than overall jobless rates, and almost half of young people in work across the EU do not have permanent jobs, according to the European commission.

There are 5.5 million 15- to 24-year-olds without a job in the EU, a rate of 22.4%, up from 15% in early 2008. But the overall figures mask huge national and regional disparities. While half of young people in Spain and Greece are out of work, in Germany, Austria and the Netherlands it is only one in 10. In a further six EU countries, youth unemployment is around 30%. Of those in work, 44% are on temporary contracts.

The same phenomenon exists in the United States:

And why is this such a staggering  problem?

Firstly, the psychological impact: a whole lot of young people have never become integrated with the workforce. Many will become angry and disillusioned, and more likely to riot and rob than they are to seek productive employment. There is a significant amount of evidence for this:

Thornberry and Christensen (1984) find evidence that a cycle develops whereby involvement in crime reduces subsequent employment prospects which then raises the likelihood of participating in crime. Fougere (2006) find that increases in youth unemployment causes increases in burglaries, thefts and drug offences. Hansen and Machin (2002) find a statistically significant negative relationship between the number of offences reported by the police over a two year period for property and vehicle crime and the proportion of workers paid beneath the minimum before its introduction. Hence, there are more crime reductions in areas that initially, had more low-wage workers. Carmichael and Ward (2001) found in Great Britain that youth unemployment and adult unemployment are both significantly and positively related to burglary, theft, fraud and forgery and total crime rates.

Additionally unemployment is correlated with higher rates of suicide and mental illnesses like depression. And of course, the longer the unemployment, the rustier workers become, and the more skills they lose. Frighteningly, the numbers of long-term unemployed are rising:


Second, the economic impact: people sitting at home doing nothing don’t contribute productivity to society. In a society faced with falling or stagnant productivity, that is frustrating; there are lots of people sitting there who could be contributing to a real organic recovery, but they are not, because nobody is hiring, and (perhaps more importantly) barriers to entry and the welfare trap are crowding out the young, and preventing the unemployed from becoming self-employed. It also means higher welfare costs:


That leads to higher deficits, and greater government debt.

So it is not just a demographic disaster; it is also a fiscal one.