What You Should Think About Unemployment

June 6, 2011

“Lost time is never found again.”

–Benjamin Franklin

The United States of America is a capitalist country.  Like the uncritical institutionalization of any other -ism, this is unfortunate.  Most of our citizens are neither informed nor passionate enough about economics to actually qualify as ideologues.  Among the rest, it could hardly be said that all of us are capitalists.  Nonetheless, it is the policy of this nation to treat free markets like magical sacrosanct entities.  To tamper with them, however vital and useful this tampering may be, is to commit a serious political transgression.  In spite of frequent invective characterizing him as a socialist, even the sitting President has given earnest voice to the first statement in this paragraph.

As a result, our policies reflect the priorities of capitalists.  Even the slightest of additional business regulation, like a hiatus on deepwater drilling in the immediate aftermath of a major ecological disaster, is often characterized as “the heavy hand of government preventing job growth.”  Never mind the important work to be done in fisheries and the loss of tourism dollars.  The balancing of interests, even legitimate economic interests, is not to be considered when it is possible to make the immediate leap from “mean ol’ guv’m’nt regulated an industry” to “we’re losing jobs!”  A more sensible approach would promote balancing economic interests in those situations where the advance of one impedes the growth of another.  Heck, a more sensible approach would even promote balancing non-economic interests like environmental quality and workplace safety with economic interests.

Alas, a more sensible approach means an approach in which there is less nonsense.  Since nonsense is essential to the exploitation of fears and hatreds that motivate irrational voting behavior, the party out of power will often see and act on opportunities to profit from the popularization of nonsense.  So it is with the nation’s mad and futile dash toward full employment.  Almost every modern American President has echoed the sentiment that ideal conditions would see to it that every adult who wants a job will have a job.  Precious few of them have been astute enough to expand on that sentiment with the observation that not every job is suited to every worker, or vice versa.

Yet this is a crucial observation to getting anywhere near and ideal economy.  Were every unemployed American to take the first position available to him or her, our collective output would be devastated by a combination of underemployment (overqualified people unhappily toiling away at less valuable work than they might otherwise perform) and overemployment (people unhappily enduring jobs so demanding that an inappropriate work-life balance can have serious long term medical consequences.)  One of the constructive functions of unemployment is to give growing employers and active job seekers time enough to get past the first possible employment situation and into a truly suitable working relationship.

Of course, there is much more to it than that.  Eager to achieve short term economic growth while facing increasingly absurd demands from Newt Gingrich’s majority in Congress, President Bill Clinton agreed to a host of draconian measures sheltered under the umbrella term “welfare reform.”  Though states have tailored some of these reforms in different ways, one common outcome of this mid-90s “reform” was a phenomenon known as “workfare.”  The idea is that the government subsidizes the pay of workers hired off welfare rosters so that businesses have more access to cheap labor and the chronically unemployed have more opportunities for “the dignity of work.”  Almost none of these jobs are actually dignified.

Worse yet, it is commonplace for these workfare positions to involve compulsory labor by single parents who are then compensated little more than the cost of obtaining child care for the span of time that they must be on the job.  His personal life is not the only way in which the former Speaker of the House utterly failed to live up to his many loud public commitments to family values.  However much he may have contempt for single parent households, surely taking those single parents out of the home and demanding the best of their energies be put into toil alongside minimum wage employees does no service to their innocent children.  Workfare as a policy may have stimulated a measure of short term growth, but it has also generated developmental and educational problems sure to be a long term negative force working against the cause of sustainable American prosperity.

It is bad enough that, since the start of Ronald Reagan’s Presidency, all real economic growth in the United States has been concentrated in the hands of the most wealthy 20% of our citizens.  Making matters worse is the fact that, during this same time, workers have been caught in the vice-like grip of our hypercompetitive economy.  Longer hours, fewer benefits, and increasingly inhumane conduct by management at businesses both large and small — all of it does much to increase the quotient of misery in this nation.  Economists look only to metrics like the unemployment rate and the consumer price index when attempting to gauge human misery.  They wear professional blinders that prevent them from a deeper understanding of just how much suffering would persist even if unemployment and inflation were to drop back to historic lows.

At this same time, we have conservative political voices calling for measures like a higher retirement age.  Few of them seem to recognize the antagonistic relationship between the quest for lower unemployment and the push for a higher retirement age.  A robust national pension plan or a shorter standard work week might offend some ideologues’ worship of almighty capitalism; but these measures would be relatively painless, even downright joyful, methods of decreasing unemployment.  Enhancements to retirement security policy would make it easier for elderly workers to retire in dignity, which in turn would make it easier for young people to launch their careers by landing suitable jobs right out of school.  Likewise, mandating that large enterprises support ample vacation time and/or a shorter work week would mean that business units would require slightly larger workforces to maintain the same levels of productivity.  This too would be an uplifting way to drive down unemployment figures.

For much of the life of this nation, the American people were influenced by capitalism without falling victim to fundamentalist thinking in the area of market economics.  To the extent that our productive lives actually are influenced by economic thought, that fundamentalist perspective — that worship of the -ism — has festered into a national sickness.  It leaves us unable to even consider a broad range of sensible responses to identified problems.  It leaves us unable to recognize serious problems born of our own extremism.  It is a weakness unworthy of a great people.  Are we, the people of the United States of America, greater than capitalism?  I believe that we are.   Yet I also fear we who embrace this belief are grossly and chronically underrepresented in the halls of power.

What You Should Think About Economic Churn

December 11, 2007

“So now, as an infallible way of making little ease great ease, I began to contract a quantity of debt.”

–from Great Expectations by Charles Dickens

Wall Street’s elite and television news anchors seem largely of one mind when it comes to the recent decision to cut interest rates again. None of them seem to have a problem with the ongoing trend. To the contrary, their complaint is that the latest cut was relatively modest when continuing turmoil in the world of high finance is thought to constitute a demand for bold cuts to continue. Chronically drunk on loose credit, they find mere moderation of the trend cause to for vocal complaint.

The underlying thinking is simple enough. Lower interest rates mean that consumers and businesses may borrow more easily. All else being equal, this also means that consumers will make more large purchases and businesses will undertake more aggressive expansion. It also lowers the hurdles aspirant entrepreneurs must overcome to launch a new venture. So far, so good, right?

The problem with this nice neat simple thinking of this sort is that we do not actually live in a nice neat simple world. After all, if great economic success was automatically the result of lowering interest rates, why not slash them to the practical minimum with all possible haste? The answer lies in the fact that not all economic activity is actually a good thing. Sometimes new ventures actually are a bad idea, destined to waste resources then fold for lack of revenue. Sometimes existing businesses are not actually better off at a larger size. Sometimes consumers are not best served by another big ticket purchase.

One major influence on present economic conditions is proof enough that this is true. The ongoing problems with mortgage-related financial instruments in the United States have much to do with a mismatch between real estate acquisitions and suitable lifestyle choices. This goes beyond low interest rates and a shamelessly underegulated mortgage industry enticing homeowners to bite off more than they could possibly chew. The rise of media promoting lavish home improvement aspirations, even idealizing fairy tale rarities in which amateurs “flip” properties they have no intention of inhabiting, fueled a wave of cultural pressure to go big with real estate.

No doubt there are many Americans with the resources to live in large houses or even own multiple homes. However, there are also many Americans who attempt to do this in spite of lacking the resources to make it a sound decision. There was a definite sense of schadenfreude in the early 1990s when Japanese investors, coming from a crowded island nation, took tremendous losses on commercial real estate in the U.S. The idea that an office tower in a major city might actually be less valuable from one year to the next simply did not compute among analysts willing to be literally crammed inside trains for their morning commute.

When excessive capacity ran up against sagging U.S. demand for that urban office space, even world famous landmarks had difficulty holding their value. Somehow that experience, well-covered in financial media of the time, seems to have been forgotten by figures framing American real estate policies and practices this century. Year after year of steady growth in the sector was thought to be part of a perpetual boom. It seems to me anyone claiming to be an expert in economics and/or personal finance ought know better than to ever endorse the notion of a perpetual boom.

Yet what has happened to American housing lately is not all that divergent from what has been happening to American business lately. For years and years “more more more” has been the battle cry of pundits and policymakers alike. Yet more activity does not necessarily generate more real value. One healthy aspect of the business cycle is that downturns weed out marginal operations that are not thriving on their own merits.

An ideal economy has very little churn — makework activity or meaningless transactions that serve no useful purpose. The more churn involved in an economy, the more demands will be placed on working citizens without any compensatory increases in quality of life. To a simpleton spellbound by Gross Domestic Product and unemployment figures, there is no difference between churn and meaningful productive endeavors. Yet to the people actually doing the work, there are huge consequences for morale. Perhaps more importantly, to everyone participating in the economy, there are huge consequences for the quality of goods and services obtained by a given unit of purchasing power.

Replacing a lifelong pharmaceutical therapy or an expensive surgery with a simple remedy for a common medical condition is seen as bad for the economy by prevailing metrics. Yet who among us would prefer to live in a world where a $500/month treatment is widely promoted in spite of being no better than a $150 treatment that provides at least as much health benefit? A pro-churn paradigm has our nation favoring the perpetual prescription or the sophisticated surgery over simpler approaches. While the market ultimately promotes smart choices when they become available, it also discourages the development and popularization of smart choices when there are huge profits to be made from continued dependence on costlier alternatives.

The most recent announced decline in interest rates, as with all others, is thought by its proponents to spur new ideas and new investments that will advance the cause of American prosperity. Yet this method of growing the economy is more like blowing up a balloon than building up a structure. Absolute emphasis on quantity, with no regard at all for quality, drives greater levels of economic activity without driving any greater satisfaction of human needs or desires (save the desire to prop up specific economic indicators.) In the long term, it actually undermines prosperity by amplifying the extent of future losses when an inevitable reckoning comes to pass.

This is not to say that there is no place for manipulation of interest rates as a means to stimulate or fortify a national economy. In fact, the prospect of surging foreclosure rates in response to rising interest rates is precisely the sort of scenario in which a bold cut could accomplish some useful purpose. Unfortunately, this purpose — encouraging stability in the face of troubling fundamental conditions — is best accomplished when the bold cut stands out as a sharp contrast to historical changes. When national policy has long been “cut, cut, and then cut some more,” no practical cut will be bold enough to send the right signals, and anything less than continued sharp cuts only compounds the influence of troubling fundamentals.

If managing a national economy were like running a horse race, we would find America’s productive elements so heavily whipped that no further action is likely to bring about a more energetic effort. Had the implement been used more sparingly, then it would have much more potential to motivate a surge at this point in time, when there is a clear imperative for stimulating intervention. In this way it becomes possible to provide effective support as it is needed. Realism, sensitivity, and selectivity all have crucial roles to play in these decisions.

Alas, along with just about every other issue that has some political dimension, most discussions of interest rate policy have been dumbed down beneath the point of usefulness. “When rates go down it is good, when rates go up it is bad,” is just a slightly more nuanced perspective than Frankenstein’s monster’s thoughts on fire. Yet widely respected financial analysts seem unable to do better in their assessments of Federal Reserve actions. This mindset is a wonderful thing for promoting even more economic churn, but when it comes to promoting real productivity and building real value in the American economy, it is anything but wonderful.