In March 2013, orthodox
economists were brimming with optimism. There were some rough patches in
2012, to be sure, but the Fed stepped up with a QE3 in MBS and then a
QE4 in UST. Since the power of monetarism is a central pillar of the
orthodox outlook, the future could only be even brighter than it was.
The lackluster recovery to that point was thought, even after an
"unusually" cold and snowy winter (the first of three, and counting), to
be finally and completely accelerating. That was good news not just for
the US but the entire global economy:
Hollywood might not have
been able to propose a better, more uplifting script. The happy ending
was at last in view and economists were the heroes. Stocks surged as did
the corporate bond bubble, leaving behind what they were already
calling at that point the bursting pessimism bubble. As if right on cue,
gold was just about to crash which only furthered the certainty to
which all this was given.
Just two years later, most, if not all, of that is gone. Gold (and later credit) was not occasion for giddy but a stark warning
that "something" wasn't right with the screenplay. Europe, Japan,
China, Brazil, etc., have not seen any translation from the purported
labor surge as none of it transitioned into wage growth and then
spending growth. In fact, the only part left of the March 2013
celebration is the raw job count and even that is slowing.
There are a great many
wrongful assumptions that have to be made to be on the wrong end of all
this. In terms of making such predictions, there were grave warnings
even then that should have accosted the economic carnival. The alarming
slowdown in 2012 was the first, as why did the Fed "need" two more QEs
in the first place? It has taken a few years, but even GDP now shows
the reasons for it - it was a severe downshift in economic fortunes
right at the moment economists were claiming the opposite direction.
Even though
contemporarily GDP was much more charitably disposed, there were many
other serious incongruities. Despite an assumed payroll surge, the
pooling labor force did not rush to join. There is a surprising apathy
in true labor mechanics against that assumed backdrop, as the great hole
left by the Great Recession did not permanently alter the willingness
of labor to participate but seemingly instead their ability - demand not
supply. In other words, while the BLS may have measured more job growth
the lack of forward momentum in joining the labor force argued quite
more forcefully against it.
That naturally has
created a world of problems not just in the real world but in all the
downstream and bridging statistics. I have discussed at length the idea
of productivity in exactly this light, how productivity is a spotlight
on the fact that recovery expectations are and have been so very far out
of place.
It hasn't gone unnoticed
by the orthodoxy - quite the contrary. But their notice amounts to
further evidence of all that is and has been wrong. That starts with the
fact that economists take these productivity figures at face value, and
then develop interpretations from there. It's an odd and backward
approach, but it makes sense since nobody in the mainstream will ever
challenge the mainstream statistics even when it leads to opinions that
stray further and further from lucidity.
The dropoff in productivity - a trend that's occurred worldwide - is a more daunting challenge. No one really knows why it has slowed.
The dropoff in productivity - a trend that's occurred worldwide - is a more daunting challenge. No one really knows why it has slowed.
Since productivity as a concept (rather than purely a statistic) is vitally important to any and all economies it wouldn't just be unusual, such an outcome should develop great skepticism from the ground up. Instead, again, it is just accepted.
Throughout its history, the U.S. has been a productivity powerhouse. The amount of goods and services produced by American workers increased by a healthy average of 2.7% a year since 1948. It even grew by a whopping 3.3% annually from 1998 to 2005. Yet productivity began to slow about a decade ago and it's grown by a meager 0.6% annualized average in the past 21 quarters."That's a scary number," said Gad Levanon, managing director of economic and labor market research at the Conference Board. "Productivity has never grown that slowly." Economists offer a variety of explanations.
So there is something highly unusual, in fact "never grown that slowly," that dates to around 2006? In fact, the "explanations" that have been proposed are, in the main, just silly; that easy innovation, the lowest hanging fruit of industrialization, has already been plucked; demographics and the Baby Boomers; globalization; not enough "optimal outcomes" meaning more centralization. And so on.
The trajectory of productivity, as a statistic, offers quite a compelling story that more than suggests a misguided focus. Starting from the realization that productivity as an economic measure is only a plug-line calculation between the BEA's "output" and the BLS's labor stats, it is really the balancing variable in a three variable system - the third being "inflation."
In a truly healthy
economy, there would be less "inflation" (consumer prices) for a given
nominal GDP regime. That would mean, and the statistics would calculate,
more "room" for both productivity and labor utilization - the best of
all worlds for both business and labor. That hasn't occurred in our
history since before the Great Inflation (first clue). Instead, even
during the PR-coded Great "Moderation," NGDP has been falling. With that
top line decline that means at least one of the three components had to
likewise shrink. Economists convinced the world they had found the
secret recipe with which to only shrink "inflation" while leaving the
others to offer better than "moderate" prosperity.
That may have actually
been the case, at least during the first burst of expansion out of the
double dip episode of the early 1980s. Somewhere, though, that
consistency was lost. We know this without question because of the
"sudden" appearance of huge asset bubbles in the 1990s (as well as an
entire monetary evolution and regime alteration, the eurodollar
standard's speculative phase, but that is a separate, if still related,
topic). Asset bubbles are a tricky prospect particularly in an age
qualified as "moderation."
In our general terms
here, the asset bubbles simply propose strong evidence of orthodox
economics being wrong about their models and these assumptions - being
able to manipulate only inflation while leaving labor utilization and
productivity as "market" determined advances. That discrepancy has
become wide open in the 21st century, with productivity at its center.
First, as noted two days ago,
labor gains (wages as one very prominent expression) parted historical
experience at the dot-coms. Since the orthodox figures assumed less
"inflation" too, the gap was bridged by what appeared to be much higher
productivity (this is taken as "globalization" efficiency). Given the
labor element, it might instead propose that GDP itself was overstated,
if also in combination with the undercount of "inflation." The asset
bubbles themselves propose no less, as asset inflation in raw economic
terms is highly, highly inefficient. When accomplished through vast
expansion of debt, the rise of productivity is at best an illusion of
that debt (which is, again, one form of inflation). Borrowing funds from
home equity (the inflation) to pay for goods imported from China is not
high productivity except for China (if artificial).
In actual function, away
from what are presented in the statistical calculations, the economy was
likely more closely resembling this:
Thus, the assumed
economic gain is all or nearly all an illusion of that "money"
circulation as altered by redistribution. The "other" side of the Great
Recession bears that out, and highlights this modification quite well -
in addition to calling out these various statistical oddities.
Now we have NGDP
shrinking yet again, and by a large amount (even more than what is shown
in the NGDP chart above, the average for the latest period does not
include any measured recession as the other averages do), less than even
that which prevailed during the pre-crisis era, but the BLS is adamant
that the labor gains are large and continuous. The only way to reconcile
these conflicting views (along with still-lower inflation) is to shrink
productivity to zero or negative. So the focus on the labor component
as distinct from the productivity component is, in the end, quite
misleading. Taking no productivity is to simply accept these numbers for
what they appear, with no regard for how they have been consistently
revised, and attempt to reconcile from that assumption.
Under a more general
view, one that is more aligning and thus appropriate, these "problems"
are simply means by which the real problem is being expressed.
The problem of
productivity is that the economy is shrinking and these statistics are
not constructed to incorporate it. It was never assumed this was
possible, and so it is simply not factored into either the numbers or
the interpretations of the numbers no matter how odd and perplexing they
(both the numbers and the interpretations) become.
For economists, again
with productivity, they see the results but not the causation. In other
words, they see that the economy is "off" but do not propose as to why
that may be except captured within the picture painted by these
statistical malformities. Secular stagnation is exactly that, an effort
to recognize the problem without actually seeing it - to say that
productivity has slowed without admitting the entire economic system has
been altered by interference.
Economics thus does not
allow itself to consider beyond its own self-imposed subset. The
productivity "mystery" has become, in secular stagnation, a defective
economic system all its own, completely and totally sapped of vitality
for now and for the long term. Because they can't see beyond the flawed
figures, which are even telling them to look beyond, the depression
becomes all that there is and could be:
Private economists and the Federal Reserve predict sub-3% growth over the next three years. Looking beyond, the nonpartisan Congressional Budget Office predicts the economy will expand by an average of just 2.1% through 2025. "I am not going to say we can't get to 3%," said John Silvia, chief economist at Wells Fargo and a former senior economic adviser in the U.S. Senate. "But 2% to 2.5% is probably the best bet, at least for the next few years."
Private economists and the Federal Reserve predict sub-3% growth over the next three years. Looking beyond, the nonpartisan Congressional Budget Office predicts the economy will expand by an average of just 2.1% through 2025. "I am not going to say we can't get to 3%," said John Silvia, chief economist at Wells Fargo and a former senior economic adviser in the U.S. Senate. "But 2% to 2.5% is probably the best bet, at least for the next few years."
The more economists have attempted to manage the economy the less economy that has resulted. The equation of correlation there seems to be quite straightforward and does not need an alignment of productivity or inflation, though they would in this view be far more intuitively coalesced and consistent. In other words, orthodox economics is a useless tautology that is revealed even under their very philosophy - managed and planned economics creates less economy therefore there is less economy. Seeing the first part as the real problem opens up the world to tremendous possibility and optimism that is not constrained by what is limited to whatever inflation central planning can bend and redistribute.
If you believe you are
the ultimate, global hero, it is almost impossible to entertain the idea
that you are instead the villain. Economists see themselves as the
"good guys" doing the world a great favor, but even their numbers are
telling them to look in the mirror.
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