January 31, 2010 § 1 Comment
Stuck in Neutral? Reset the Mood, by Robert Shiller, Commentary, NY Times: The United States and other advanced economies may be facing a long, slow period of disappointing growth
He argues that
The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring. …
The implication here is that it is attitude. Nowhere do i see in the article that it maybe that we just have nothing to make that anyone wants (overstated by significant). H wants to make the agument.
After World War II, there was rapid growth in labor productivity until sometime around the early 1970s. But then there was a major break, roughly coinciding with three events of 1973-74: the oil crisis, a huge stock market tumble and the first significant depression scare since the Great Depression itself.
According to the Bureau of Labor Statistics, annual growth of business output per labor hour averaged 3.2 percent from 1948 to 1973, but only 1.9 percent from 1973 to 2008.
He then refers to an econoist/ social thinker I really like
Ever since the long-term productivity slowdown became visible, the economist Samuel Bowles, now at the Santa Fe Institute, has said that its causes are to be found as much in the loss of “hearts and minds” of workers and investors as in technology.This month at Yale, in lectures titled “Machiavelli’s Mistake,” he spoke of the error of thinking that a high-performance economy could be based on self-interest alone. And he warned of the overuse of incentives that appeal to individual gain.
But look how we are replacing economic analysis )in the best sense of raw materials to quality of life) with psychology.
In their coming book,… George Akerlof … and Rachel Kranton … argue that an economy works well when people personally identify with it, so that their self-esteem is tied up with its activities. … [A] relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery.
Mark Thoma responds
I always find Shiller’s psychology-based explanations less than fully convincing, but listen anyway because he has a pretty good track record at predicting emerging bubbles. But I will say this. Aggressive, effective job creation policy by the government — putting people to work — would go a long way toward repairing any problems in the hearts and minds of workers.
As for investors, their hearts and minds would be best repaired through strong regulatory measures that prevent the type of behavior that got us into this mess, or that substantially reduce the consequences when hearts and minds work together to cause this to happen again despite our efforts to prevent it.
The implication is that good work could exist. I question that.As for investors, there are those who made out well in the bubble, and those who did not. Obviously those who did are not dispirited in the same way as those who did not.
The failure to look athe the more fundamental physical/ technological/ competitive enviornment s really striking, and tells us lots about current economics that continually wants to see the economy as cyclical.
Note that the 2001 and current curves are much smoother than earlier ones. It is possible the big jumps in earlier represent interference in the numbers, but i suspect that the smoothness comes from the larger number of factors causing the losses. If we take out 1948 with its quick sharp dip (labor strikes?) then the current curve has no parallel.. Also it still looks down.
All talk i have with people who are employed or employ is that they are much more likely to see more loss and no gain. Each lost job is a multiplier by its effect on other jobs – purchases of services and hard stuff – because the workers can’t buy. Where will new purchases come from?
Bill McBride adds
And the graph is before the annual benchmark revision that will be announced next Friday, and is expected to show the loss of an additional 824,000 jobs.
Let’s turn to Reich who seems the best these days.
The President wants businesses that hire new employees this year to get $5,000 per hire, in the form of a tax credit. That will come to about $33 billion. It’s good step. He’s also supporting a cut in the capital gains tax for small businesses. That makes sense; after all, small businesses generate most jobs.
My take is that these “breaks” only help existing and lager businesses. You have to be paying taxes to get any benefit.Reich helps understnd this.
But here’s the problem. Both of these measures, and many of the other tax cuts he’s proposing, give ammunition to supply-siders who think the way out of this awful economy is simply to cut taxes on businesses
The answer, of course, is that across-the-board supply-side tax cuts for businesses don’t increase the demand for the things businesses produce
But then he adds
They’re useful only to the extent businesses are confident consumers are out there, able and willing to buy. Carefully targeted — as are the cuts the President is proposing — they can give businesses an extra nudge to hire. But without adequate demand, they’re useless.
which says there has to be demand, but what about the ability to produce anything somebody (or organization) wants?
But if the public learns the wrong set of lessons — that tax cuts for businesses are good, and deficit reduction starting now is good — there’s no hope for getting wise policies out of Congress. The debate is framed all wrong.
That would be amazing because I thought understanding deficits had gone deeper. But maybe, if the government is broke? Now, can it be? If the country is active, the country has wealth. How to increase that wealth (compliant with sustainability) is the task. It means rethinking what we make.
The only way to get them work when businesses aren’t hiring is for government to prime the pump.
With what pump? Where would the money go that would be semi-useful? The obvious are two
1. green tech
and 2, well Reich says it
One final lesson I wish he’d teach: The best and fastest way for government to prime the pump is to help states and locales, which are now doing the opposite. They’re laying off teachers, police officers, social workers, health-care workers, and many more who provide vital public services. And they’re increasing taxes and fees. They have no choice. State constititions require them to balance their budgets. But the result is to negate much of what the federal government has tried to do with its stimulus to date.
Shifting now to law and the legal status of corporations, a very good bried I can’t quote because not yet published. It will be a book Next year Pantheon.
Which leads me to
The task of liberating thought is to extend decency and compassion, rights and rules, opening society to deeper empowered individuals.