The Invisible Hand and Our Jobless Recovery

As the Obama depression wears on, there seems to be no relief in sight for the unemployed.  This ought to be yet another demonstration of the utter failure of Democrat socialist policies, but with the help of their media sycophants, the Democrats are turning long-term unemployment into a weapon against Republicans.

The current big political debate centers around those stingy Republicans who refuse to extend unempoyment benefits for those poor unfortunate souls who have been without work for years now.  No one asks why there are no jobs even after all these years!

For regular readers of Scragged, many reasons are well-known, beginning with the policies of the man in the White House and working all the way down to the local bureaucrats who stymie useful construction.

The New Normal?

The Economist, however, presents a new and somewhat novel theory: they argue that we have spent the past few decades in an unusual period where the returns to capital were uncommonly low.  They suggest that we've now returned to the long-term equilibrium that's been in effect for most of history in which the rich get richer and everyone else bumps along but only if they're lucky.

From 1700 until the first world war, the stock of wealth in Western Europe hovered at around 700% of national income. Over time the composition of wealth changed; agricultural land declined in importance while industrial capital—factories, machinery and intellectual property—gained prominence. Yet wealth held steady at a high level.  

Pre-1914 economies were very unequal. In 1910 the top 10% of European households controlled almost 90% of all wealth. The flow of rents and dividends from capital contributed to high inequality of income; the top 10% captured more than 45% of all income. Mr Piketty’s work suggests there was little sign of any natural decline in inequality on the outbreak of the first world war.

The wars and depressions between 1914 and 1950 dragged the wealthy back to earth. Wars brought physical destruction of capital, nationalisation, taxation and inflation, while the Great Depression destroyed fortunes through capital losses and bankruptcy. Yet capital has been rebuilt, and the owners of capital have prospered once more. From the 1970s the ratio of wealth to income has grown along with income inequality, and levels of wealth concentration are approaching those of the pre-war era.

The reasoning appears to be that in periods of stability, wealth accumulates at the top.  In periods of upheaval, change, and particularly economic growth brought about by new businesses, income spreads out.  In a sense, this theory resembles Reagan's "trickle-down" economics, in which a rising tide lifts all boats.

What we have today is a falling tide, but there the analogy fails.  In a real-world falling tide,  big ships get grounded first but the little dinghies stay afloat until the water is basically gone.  We see today that the big ships are able to put out to sea where the water is still deep enough for comfort, but the dinghies stay near shore and get grounded.

Legendary tech startup maven Jaron Lanier has a similar theory, that the centralization and stabilization of wealth is a consequence of the digital economy.

At its height, writes Lanier “Kodak employed more than 140,000 people.” Yes, Kodak made plenty of mistakes, but look at what is replacing it: “When Instagram was sold to Facebook for a billion dollars in 2012, it employed only 13 people.”

On the one hand, Lanier argues that modern technology allows us to do so much more with so much less that we simply don't need anything like as many people as we have.  On the other hand, the Economist suggests that population growth drives economic growth.  If the Economist is correct,  modern falling birthrates are bad for the economy.

Which is correct?  In a sense, they both are - which illustrates yet another consequence of bad education and statistical illiteracy.

Wealth, Statistics, and Confusing Big Numbers

Consider the standard measure of national wealth, Gross Domestic Product (GDP).  Fundamentally, the GDP number for a country is supposed to represent everything earned by everyone in the country.  If you make a wage, that's part of GDP; if Boeing makes a plane and sells it to Japan, that's part of GDP; if wildcat drillers frack a new well and sell the oil, that, too, adds to GDP.

How about drug-dealers making money selling cocaine on the mean streets of Newark, or hookers plying their trade?  In theory, that should be part of GDP.  In reality, illegal transactions are difficul to calculate and so don't always get into the numbers.  Likewise cash tips that don't get claimed on taxes, and various other under-the-table transactions.  Housewives - well, they're certainly working hard in the home, but they're not paid, so they don't count.

What happens to America's GDP when an illiterate Mexican illegally crosses our border and starts standing in a Home Depot parking lot to find casual work as an unskilled laborer?  Since he's under the table, his actual pay may not show up in the GDP, and if he sends most of his earnings back home to Mexico, that money is gone.

He still has to eat American food and sleep somewhere in the United States, however.  In some manner, his earnings will have a positive effect on America's GDP.  By coming to the United States and working at the lowest of jobs, an illegal immigrant is making America richer!

Except, of course, he isn't.  Would you rather live in Nigeria (GDP: $262.6b) or Luxembourg (GDP: $57.12b)?  There's far more money in Nigeria, so it ought to be a better place, right?

Nigeria isn't better because Luxembourg is tiny and Nigeria is huge.  What's important is GDP per capita, or per person - which in Luxembourg is $107,475 and in Nigeria is $1,555.  That's why Luxembourg seems like, and is, a wealthy country whereas Nigeria seems like, and mostly is except for the elite, a third-world hellhole.

Back to our illegal immigrant.  He has increased America's total GDP, yes, but he also increased America's population by one (himself), while earning far less than the average American (around $50,000).  Therefore, his presence drags down the GDP per capita, which is the perceived wealth that normal people experience on the ground.

This explains how both the Economist and our perceptions can be correct.  Yes, an increase in population will virtually always lead to an increase in total GDP, because almost everyone produces some value no matter how little.  If the population increase is mostly in people who are only able to earn below the average, the perceived wealth of the nation will drop because there will be so many more relatively poor people around.

Where the Invisible Hand Fails

Which brings us back to our current high unemployment rate.  There are said to be about three unemployed people for every open job, which is to say, for two-thirds of the unemployed there just isn't a job for them no matter what.  Put another way: there is a severe oversupply of labor.

The laws of supply and demand tell us that when a commodity is oversupplied, its price falls.  That's exactly what we see in the labor market: wages have been stagnant in absolute terms and falling in real terms for years now.  There's no reason to expect this to change: why should employers offer more when there are three applicants for every job?  If you get too greedy in your salary demands, your boss can go out and hire someone cheaper.

This happens with every other commodity, too, but there the solutions are neater.  Consider the price of wheat.  If the price is high, farmers plant more of it; next year there will be much greater supply so the price will go down.

Sometimes the farmers plant way too much, we have wheat coming out our ears, and the price crashes.  The next year, half the wheat farmers will plant something else instead, bringing the supply and demand back into balance.

Of course the market balance is never perfect, because there's a time delay between planting and harvesting, and because there can be external influences like droughts.  But by and large, over time, the prices will tend to respond to demand, and the supply will tend to respond to the price.

This does not happen with labor.  We've now had a labor oversupply for Mr. Obama's entire presidency.  What's going to happen to the unemployed?  They aren't going to go anywhere, unlike wheat stockpiles which eventually will get eaten by somebody.

What's more, we can't change the labor supply the way we can with wheat.  If the price crashes, next year there will be very little wheat raised, giving us a chance to use up the stockpile.  That doesn't work with labor, unless we start shooting the unemployed.

Now, in the very long term labor does respond to these pressures.  Look at family sizes between 1960 and today: people are having a harder and harder time making ends meet, so they have fewer costly children.  This takes twenty years before it has any effect on the labor market, and unfortunately, this beneficial reduction is totally wiped out by illegal immigration.

Hope Springs Eternal

There's another problem with the labor market: people don't look at their own children as dispassionately as they do other economic transactions.

Poor people may want to eat steak, but they know hamburger will feed them.  If they can't afford hamburger, rice and beans will do.  So most poor people won't invest in a barbecue grill to cook steaks they can't afford.

What parent is going to tell their kid, "Let's face it: you're too dumb for college and we don't have the money for it anyway.  You need to be a plumber's apprentice; that way you'll at least have a solid working-class job for the rest of your life."

No, we all want our kids to be doctors and lawyers even though statistically we know that isn't going to happen.  In all too many communities, all the energy is put into pursuing a dream of the NBA or NFL even though the odds of actually getting there are smaller than tiny.  But no, we're told to pursue our dreams no matter how improbable they may be.

Dreams do come true, sometimes.  For every rags-to-riches story in the NFL, however, there are ten thousand kids who spent the same amount of time and effort, got nothing for it, and now can't get a job at all because they have no useful skills.

Thus we have increasing numbers of kids graduating with a college degree that nobody wants, needs, or is willing to pay for.  Is this diplomaed surplus going to be content to work at McDonald's, or even as a plumber?  Mostly, no, even if it's plumbers that are actually needed.

There was a time when people "knew their place" - when unexceptional poor people wouldn't dream of college, but concentrated on accumulating skills and experience that were available to them and which would suit their station in life.

This was wasteful of the talents of some of the poor people and we've rightly abandoned the societal expectation that people will stay more or less where their parents were.  Unfortunately, we've replaced it with a different but just as harmful social pathology: the idea that everyone can be above average, and that the way to national wealth is to send everybody to college.

Our massive unemployment rate among recent college graduates demonstrates the fallacy: there are only so many jobs that need a college degree, and there's no point in spending money on more college degrees than there are jobs that need them.  Every unemployed college graduate, and every college graduate who's flipping fries or churning out cappucinos at Starbucks, represents not only a human tragedy, but a fantastic waste of time and money.  They could have gotten those jobs straight out of high school and been better off, not burdened with college debt and four wasted years.

This has always been true.  I have a friend who labored mightily to pay his way through 5 years at a prestegious university back before government subsidies raised tuition so high that nobody can work their way through any more.  He had to get from New York to Boston at a time the airports were snarled and ended up chatting with a bus driver of about the same age.

The driver had started right out of high school after spending a month or two learning to drive a bus.  He'd advanced in seniority enough to choose the Boston - New York - Washington run.  Drivers were paid by the mile, and freeways gave him more miles per hour than other routes.

He and my friend did some math.  My friend was earning more than the bus driver as one would expect, but it had taken him twenty years to make up for 5 years of giving every dime he earned to the college and starting up his salary ladder 5 years older than the driver.

Stuck in the Mud

So we come back to our unemployment problem: There are no jobs, because people aren't buying, because people have no money to spend, because they can't find jobs.  Our government prints and spends money, which makes everyone else's money worth less, thus they can buy less stuff with it, thus fewer jobs.  Our government taxes money, which cancels out, because for every tax dollar it takes and spends, that dollar was taken from someone who earned it but now doesn't have it to spend on themselves.

How do we get out of this cycle?  Growth - that is, new products, new innovations, more efficient extraction of resources from the earth and from space.  Or, alternatively, by getting rid of the unproductive or less productive.  It would be deeply immoral and unethical to simply do away with all the unproductive Hitler-style, but we could at least deport unskilled illegals and encourage skilled illegals.  That would help a lot.

Or, we could encourage innovators by getting government regulations out of the way and lowering taxes to increase the rewrds for cerating jobs.  That worked in the 80s and it would work now, but Democrats prefer that the unemployed remain dependent on government.  Voters who earn their own money don't like taxes to go up; dependent voters are fine with increased spending.

If you were a Democrat politician, which type of voter would you prefer?