When the summer livin’ is easy, I enjoy sitting out on the porch with a few tunes. Today’s lazing soundtrack was “Three Views of a Secret” by Jaco Pastorius as I went over some old posts to see if anything needed revisiting. And this piece from July 2011 popped out as a debate that is still raging – but with some resolution. It seemed to fit the tension that always builds in a Jaco piece.
Economists, as noted before, have widely divergent views about the economic situation and what should be done about it. But the experiments that have been running through various economies are teaching us all a little bit along the way as to who may be right. It’s worth revisiting.
Milton Friedman. He always had a wry smile like this.
The earlier piece, called “Moving the Economy Forward,” started with an analysis of the problem in very stark terms. The average amount of time people remain between jobs over the last 60 years has been about 14 weeks, although that level has not been seen since 2001. Since then, it spiked up to 20 weeks right after the official recession and then settled into about 17 weeks through the 2000s. It spiked again in 2011 to 40 weeks, a level unheard of since good records were kept in 1948, and has not yet fallen below 35 weeks. Something is terribly wrong.
For all the success we have seen in the last two years in turning things around slowly, this is the most stubborn and devastating statistic. The fact that there has been no clear course of action found to combat it has a lot to do with its persistence, too. If the economists can’t agree on what should be done, how can we expect government to?
That brings us to the three views of the economy, or at least the broadest categories. We’ve seen each of these play out recently. Each has a different view of how we get into messes like this and therefor what should be done about it. In no particular order:
The Fisherian View: Named for economist Irving Fisher, it tells us that major downturns (depressions) come from credit bubbles bursting, or an excess of cash that went into unproductive uses that created false valuations that could not be sustained. The solution is to control credit and allow the economy to right itself after a painful restructuring. This is the root view of austerity.
The Friedmanite View: Named for economist Milton Friedman, this view centers on the money supply but doesn’t necessarily place blame for downturns on bad policies or expansions. It tends to emphasize business cycles, and contends that counter-cyclical money supply expansion should do the trick.
Workers of the World, Unite!
The Keynesian View: Named for John Maynard Keynes, this view focuses on an overcapacity of the economy, generally in manufacturing but not limited to that, as the root cause of a downturn. The remedy is to boost demand back up so that the capacity is utilized again and a renewed need for workers keeps everyone employed.
There is value in each view, which is why none of them have really “won” the debate.
There can be little doubt that the global credit bubble of the 1990s that was reflated in the 2000s to even greater heights had a lot to do with how we got to where we are. But the austerity that has been the medicine of choice in Europe has, since 2011 at least, been shown to be a failure. What’s kept the US afloat during this time has been a Friedmanite expansion of credit by the Federal Reserve, which did wonders – but not a damned thing to fix the duration of unemployment. The Keynesian view has only recently been tried in Japan with great success, but no one thinks it is sustainable.
Jaco Pastorius
Why isn’t one view winning over the others? The truth of it is that the tension between these arguments all comes from a sense of harmony delicately played in a different era. We’re all waiting for the sense of an ending as any one of these plays their way out, but like a Jaco piece there isn’t a final resolution. The jam continues on, meandering without a strong coda.
The real issue is that we have all of the root causes identified by each view. Not only has there been a credit bubble, but we fit solidly into the timing of business cycle theory. And capacity was re-defined by globalism, wringing out excess in isolated local markets – at least until the developing world grows into what we have. But the competition between markets makes real Keynsianism very tricky, at best.
What should be done? First , listen to more Jaco. Second , let it jam on into the night. We’ll figure this out sometime, at least once the players all find their way onto the same chart.
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Jaco Pastorius? You have impeccable tastes, my lad.
Thank you. 🙂 Jaco is a real hero, IMHO.
A right wing myth (in my view) is that Obamacare (otherwise known as the Affordable Health Care Act) is forcing employers of general labor to hire part time and only temporary. I think this is far from the truth but it is better not to argue/debate with coworkers and managers.
Why is it that right wing myths are so palatable? In my view economies are very, very, complicated entities and we probably know less of them than we know of the human body. I’ve been getting upset lately with one of the Startribune editors who always throws in a dig (not factual) that supposedly keeps both sides happy/unhappy. I think the reason employers are going part time and temporary is the percei
ved need for hyper flexibility and because they can, esp. in the USA. They no longer have to hoard labor as they might have done in the past when the business cycle bottomed. They can shed and retain or hire anew at will. By the way I just spent $200 for a doctor’s visit when all I wanted was a strep test. Next time perhaps I will go to a target clinic and get it done for $75. It’s hard working for low wages and few benefits. More and more people are no longer calling themselves middle class but now are formerly middle class and on worker’s wages. Even USA Today came out against austerity and for stimulus. Perhaps we need to buy tvs, watch football, drink beer and eat pizza.
There probably will be some effect on employers hiring more part-time people, but the overhead per employee is still so high, even after health care costs, that this will be minimal, I think. We have to see how it sorts out.
The key is, indeed, getting money into the hands of people that spend it. Call me a Keynsian if that’s what that means, but the velocity of money is much higher among those who have little – they live paycheck to paycheck!
People are falling out of the “middle class” and that has to be reversed if we are going to get out of the Depression. That means jobs first and foremost, but it also means more money left over once the paycheck is collected. It’s important to have both.
Today (Friday) the Startribune has an editorial by a CEO of a temp agency extolling the benefits of such work. So far there have been 13 comments and 12 are negative.
It is the new economy, like it or not. We are simply not set up to handle a nation of temps, however, and it is very difficult to string together a living off of even a number of such jobs. So much has to be figured out, and we’re not even close to doing that.
There is so much to play out it really boggles the mind. I don’t doubt that economists have disagreement because there is a basic political belief in each of these views. What you say is that they are all right in their own way and I can see that but you will never get someone to change their mind if they can prove they are right! So we will always have a disagreement?
You are right that everyone is starting from their beliefs and working outward – and those beliefs are based on experience from the old economy. It’s very backwards thinking. Getting to a point of real pragmatism and truth about the next economy is very hard.
I think it was you who said earlier that no one knows what is going to happen. Telling us there is a big disagreement may sound different but it doesn’t make me feel any better. Clearly, everyone is winging it. Great.
Agree on Jaco Pastorius, haven’t listened to anything by him or Weather Report in years but that’s pretty good stuff on a late summer evening. Thanks for the rec!
Yes, everyone is winging it. And no, I don’t feel good about it, either.
But I feel good about Jaco, even with his short and sad life. He at least has a great legacy!
A wild year to enjoy the porch if you ask me. But its not like the economy is any different.
Yesterday was plain cold! And that is a lot like the economy. The analogy works better than I thought. Scary. 🙂
All I have are questions—no answers…other than Congress, at least the majority, are focused on sideshows. 😦
Yes, it is mostly a sideshow. This is the real meat – and no one knows what to serve up. A difficult time being filled with nonsense. Sigh.
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