Thursday, September 6, 2012

A Nation Of Idiot Savant Accountants

Image credit: Cujo359

There are days when I wonder if anyone with a national audience can tell the truth about the economy, and the effect it has on politics. Robert Reich wrote this yesterday, concerning that subject:

The biggest political news this week won’t be the Democratic convention. It will be Friday’s unemployment report.

If the trend is good — if the rate of unemployment drops and the number of payroll jobs is as good if not better than it was in July — President Obama’s claim we’re on the right track gains crucial credibility. But if these numbers are moving in the wrong direction, Romney’s claim the nation needs a new start may appear more credible.

The Most Important Political News This Week

He goes on in that article to say, in effect, he's not sure how true it is that this is what will affect voting, but it clearly will affect the political class in DC. We've had this conversation before, of course, but this just strikes me as a sign of just how far removed our political class is from what is going on out here in the Land Beyond The Beltway. The plain truth is that when it comes to voters' opinions at least, all economics is local. What is going in our own personal economies is what's going to matter. All the unemployment numbers are is one more indication of how things might be going in those most local of economies.

Ian Welsh put it pretty well the other day:

1) the majority of new jobs are bad.

2) the economy has still not recovered all lost jobs, either in absolute #s or as a percentage of the population

3) so there are fewer jobs, and what new jobs have been created are worse. They pay worse.

4) The upper middle class job market has recovered, which is why those folks are no longer panicking and are telling you that the economy isn’t so bad as all that.

Some Basics On The Economy

That's the start of a long list of rather depressing observations. Number 4, I think, is particularly relevant to the subject of personal economies. When you get right down to it, the personal economies of our political class are doing just fine, thank you. DC never really had an unemployment problem, not at the top, anyway. Out of work politicians can become news pundits and lobbyists. The people who make decisions in DC don't usually have to live with the consequences these days, which is one of the reasons things are the way there are. Speaking of which, on that subject Ian made another observation worth noting here:

8) the developed world is in depression, it never left depression. During depressions there are recoveries (such as they are) and recessions, but the overall economy is in depression.

Some Basics On The Economy

Lest you think I believe that's the end of the important observations in that article, I don't. If you haven't read it, I suggest you do. Ian's put it way more succinctly than I have, and while I might quibble about a few observations, they're as close to the truth as you're likely to read.

All the idiots (mostly Democratic Party functionaries) crowing on the news about how 150,000 jobs gained means we're recovering are just that - idiots. As Dean Baker has pointed out:

Okay, some cheap [Washington Post] bashing this morning, an article on Bernanke's speech at Jackson Hole, described a rate of job growth of 150,000 a month or more as "robust." Sorry, that isn't close to right.

The economy is down by more than 9.5 million jobs from its trend path. We need roughly 100,000 jobs per month to keep pace with the growth of the labor force. This means that at 150,000 jobs per month, we are making up the jobs shortfall at the rate of 50,000 a month. At this pace it will take us close to 16 years to get back to the economy's trend job growth path. A rate of job creation that gets us to full employment in 2028 is not robust.

150,000 Jobs Per Month Is Not Robust Growth

Nor will it last. However modest they might be, times of economic growth (beyond population growth, at least) do not last long. If you think we're going to have 50,000 or more jobs added per month between now and 2028, you're an even bigger idiot than most of the "economics experts" you see on TV.

What's more, as Ian Welsh noted in his "postscript":

20) The economic numbers you hear don’t mean squat. Headline inflation does not matter, ask yourself instead “what are my fixed expenses?” Start with food. Jobless claims #s cannot be compared to prior numbers because less people have the sorts of jobs that let you make those claims. For the #s to make sense you’d have to adjust them for the reduced # of jobs which allow claims. The unemployment rate has dropped even though there are, in absolute terms, less jobs, because people have given up looking.

Some Basics On The Economy

I don't think the numbers mean squat (one of my few quibbles), but they mean very little without the context, and that's where most economics reporting these days continues to fall down badly. For instance this badly misinformed individual stopped by the other day to "set me straight" concerning various things related to labor unions and work in general:

Have you considered how much unemployment minimum-wage laws cause?

Labor Day: comment by DisplayName

As I explained to him, I'd considered it, and it's complete nonsense. Yes, you can probably find a few times in our history when increasing the minimum wage can be related to increased unemployment. But this ignores the larger picture. Here's an illustration:

Image credit: Chart made using Libre Office by Cujo359 (See NOTE 1)

[Please be kind, I don't do charts very often. GDP growth is the scale on the left, minimum wage in 1996 dollars on the right. Click on the graphic to see it full size.]

Do you see any correlation here? Neither do I. We've been conducting an experiment in whether the minimum wage has a significant effect on our gross domestic product, and the clear answer is that it doesn't. The wage is raised every once in a while, and yet the GDP shows no sign of being affected. Employment depends on the strength of the economy, yet there is clearly little, if any direct effect here. The only effect I note is that, since the value of the minimum wage peaked in 1968 at $10.35 (in 2012 dollars), we have seen a general slowdown in economic growth. After 1984-86, the years when the voodoo economists first started having a real effect on our economy, we have not seen more than 4 percent growth. Correlation doesn't equal cause, but if there's one thing we've learned over the years, it's that conservative ideas about what makes an economy grow aren't reflected in economic growth.

Something else that's somewhat correlated with our economic growth is the United States' Gini index, which is an internationally accepted measure of the equity of the distribution of income. The higher it is, the more unequal is the distribution. Here's how ours looks:

Image credit: Chart made using Libre Office by Cujo359 (See NOTE 2)

Once again, the obvious thing to observe is that as our Gini index has risen, our economy has grown at a lower rate. Once again, correlation does not prove cause, but it's fairly clear that the numbers don't favor voodoo economics. Michael Lombardi, an MBA working for Profit Confidential, delivers the bottom line:

Economic growth occurs when there is rising demand for goods and services. Historically, in the U.S., this demand has largely been due to the middle class.

Currently, the American middle class makes up about 51% of the U.S population, compared to 61% in 1971. In the 70s, the middle class earned 62% of the nation’s income and the wealthier Americans received 29%. Compare that to now. In 2010, the middle class earned only 45% of the nation’s income. (Source: Associated Press, August 22, 2012.)

U.S. Middle Class on Verge of Collapse?

If there's any relationship between the minimum wage and unemployment, that's it. He goes on to note:

According to a recent study released by Pew Research Center, 85% of middle class Americans say it is now more difficult than a decade ago to maintain their standard of living.

Thirty-two percent of those who responded to the study said their household situation is worse than before the 2007 recession began. Of those who said they were worse off, 51% of them said that it will take at least five years for them to recover, while eight percent said that they will never recover!

U.S. Middle Class on Verge of Collapse?

What that tells me is that, at least in a political sense, the unemployment numbers for the next few months don't mean squat, to borrow Ian's phrasing. We know how our personal economies are going, and by and large they are not going well.

Of course, there are lots of reasons why saying there is a direct relationship between minimum wages and employment is specious at best, and downright nonsense at worst. One of them is reflected in some experience from my own personal economy. An amateur theatre group I work with, despite its having received a good deal of praise from the arts community, is having trouble paying its bills. Why? There are two reasons. One is that the local government that provides the theatre its "space" (the auditorium and stage in which it performs) is raising the rent, because their tax base is shrinking. The other is that attendance is down. The middle class is shrinking, and as people who can afford to do things like go to the theatre become fewer, the amount of revenue coming in declines, as well. As studies have shown (PDF), even though very few people find real employment in the arts, they make a community richer, both in terms of the quality of life, and in terms economic health.

National economies are not simple things that follow P-Q curves. There are complex interrelationships and feedback loops that make simplistic statements like "government deficits retard economic growth" and "higher minimum wages cause more unemployment" obvious nonsense. Yet governments try to balance budgets, no matter how much damage they do to the communities they serve, and people would rather see folks trying to get by on ridiculously small wages rather than step back and see the big picture.

At least, they'd rather do that as long as they don't have to look the people they've screwed in the eye and tell them how we're all better off thanks to them being out of a job, or unable to do the things they love.

We've become a nation of idiot savant accountants, at least when it comes to much of the economics reporting and opinion-making these days. People obsess about particular numbers, but they overlook the big picture. Often as not, that big picture is pain for millions of people, who have to live with the diminished lives an economy that passes them by has left them with, because the people who look at numbers don't have to see them.

Afterword: It doesn't quite fit into the preceding narrative, other than to show how ridiculous our national economic discourse has become these days, and how a national economy doesn't work on the basis of simple economic theory, but Dean Baker reminds us that conservatives aren't the only ones who can talk nonsense on the subject:

The Democrats' discussion of the loss of the Clinton budget surpluses is a tale of paradise lost. Unfortunately, it was an illusory paradise that serious people should not concern themselves with. That is why it is disappointing to see Ezra Klein give us more tales of the evaporating budget surplus.

The huge surpluses of the last Clinton years were the result of a boom that was driven by a stock bubble. The boom was great. Millions of people got jobs who would not have otherwise. We also saw real wage gains up and down the income distribution for the first time since the early 70s.

Clinton's Surpluses Were Due to the Stock Bubble

People getting good-paying jobs, even when those jobs were largely due to a complete misunderstanding of the value of the Internet and the supporting technologies, made for a federal budget surplus, and the best economic growth of the Era of Voodoo Economics (which I'd roughly define as the era after that one last spurt of growth during the Reagan Administration).

While one lasting good effect of that bubble was the Internet infrastructure we are still using to this day, most of the other effects of the stock bubble were short lived, at least for the middle class. The rich got to keep their money.

NOTE 1 Source for these data: GDP growth: U.S. Bureau of Economic Analysis (BEA); minimum wage: (1955-2011), and DOL minimum wage chart, plus the BLS CPI inflation calculator (1938-1954).

NOTE 2 Source for these data: U.S. Census (Excel spreadsheet).

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