Simpleton economists and the “puzzle of secular stagnation”

by Jehu

748Ryan Avent wants us to think economics is too complicated to be understood by anyone but simpletons — our economic troubles are all just too complicated:

“Economic puzzles have been in no short supply in recent decades. New ones keep appearing without waiting for old ones to be solved. The productivity puzzle that began in the 1970s persists, thanks to the apparent fizzle in productivity growth since the internet boomlet of 1996-2004—and despite what looks to many like an ongoing acceleration in technological discovery. The British economy has developed its own acute version of the productivity puzzle; over the course of the financial crisis and recovery productivity collapsed, shielding the economy from labour-market carnage. There are puzzles of wage stagnation and falling labour-force participation. There are savings glut puzzles and secular stagnation puzzles. The common thread linking the puzzles is that they almost always mean trouble of one sort or another.”

One really big “puzzle” is an apparent flip in the relation between improvement in productivity and capitalist crises:

“Prior to the mid-1980s productivity was very pro-cyclical, falling in recessions and rising in recoveries.  But this pattern began to shift in the recovery from Paul Volcker’s disinflationary recessions of the early 1980s.   Thereafter productivity became sharply countercyclical, contributing to the “jobless recoveries” of the Great Moderation era.”

The definition of the term “productivity” is not as clear defined in Avent’s article as it at first seems. You might, for instance, think “productivity” can simply be defined as the ratio output to labor inputs. The problem with this “simple” definition is that it is not clear if we are talking about real output to real labor or something else. We can measure real output in concrete forms, e.g., so many units of cars, for instance, that can be produced in a day.

But the simpletons seem to be discussing money, not real output. They seem to be discussing how much output in money terms can be produced with labor in money terms — i.e., total sales to wage costs. And indeed Ryan Avent seems to be arguing that prior to the 1980s the ratio of total sales to total labor cost increased during expansions and fell during contractions. After the 1980s, the ratio of total sales to labor costs fell during expansions and increased during contractions. As we shall see, the counter-cyclical pattern of the ratio between total sales and total wage costs cannot be explained on the basis of neoclassical theory, because its source is invisible to them.

Avent offers Van Zandweghe’s as explanation for “secular stagnation” that there have been structural changes in the labor market — companies found it easier to fire workers and to replace them with capital. And he suggests very low inflation also made it necessary for companies to fire workers and intensify the labor process: During recessions, companies fire large numbers of workers and do not tend to rehire at the same rate during expansions. The result has been three back to back jobless recoveries from recessions in 1990, 2001 and 2008.

This pattern can be seen in this chart by Calculated Risk blog:

calculatedriskemploymentrecovery

In contrast to the “v” shaped recoveries of employment prior to the 1980s, the Calculated Risk charts shows the recovery of employment after the recessions of 1990, 2001 and 2008 are bowl shaped, essentially jobless, recoveries. However, there is something Ryan Avent is ignoring here: the recessions of 1990, 2001 and 2008 are not just remarkable for slow job growth, but also for the fact the Federal Reserve did not cause them.

policyratesandrecessions

If you look closely at the above graph you will see that recessions before the 1990 recession were typically caused by the Federal Reserve tightening of credit. The 1990, 2001 and 2008 recessions were not caused by the Federal Reserve tightening, but while the Federal Reserve was actually loosening credit. If there was a change as Avent argues, this change also meant the Fed was not managing “the economy” but reacting to it.

There is also another interesting coincidence: the recessions of 1990 and 2001 come on the heels of attempts to constrain the federal budget and reduce deficit spending. The 1990 recession comes at around the time of the Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 and the Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 and the Omnibus Budget Reconciliation Act of 1990. While the 2001 recession comes on the heels of the Balanced Budget Act of 1997.

All of these acts were attempts to come to grip with the deficits created by the ballooning deficits beginning in the early 1980s. Every time Washington made an attempt to constrain the budget deficit, the economy seized up. Every attempt Washington makes to constrain its share of US GDP leads to a prolonged crisis. Moreover, prior to the 2008 financial crisis we find exactly this pattern of trying to constrain the state share:

totgovspend2

This is the problem the capitalists face: to produce an expansion requires an ever larger share of output going to the fascist state. The moment this tendency is constrained, the “economy” craters. But the mainstream simpleton economists assure us they can keep expansion “on track” without fascist state spending.

However, at this point, the only expansion of employment possible is unproductive employment by the state — directly or indirectly. At least in the case of the United States, repeated attempts to reduce deficits and constrain the growth of the state sector during periods of recessions has produced jobless recoveries. On the other hand, this also suggests attempts to boost employment by additional fascist state spending will only lead to slower productivity growth.

But how is productivity defined by the simpletons: total sales versus total labor costs. And the difference between total sales and total labor costs is what? Total profits, of course.

We can think of it this way: The “puzzle” of “secular stagnation” exists because there are two different and distinct “labor markets” at work. The first “labor market” is for the productive employment of labor power for purposes of production of surplus value. This is the market in labor power we are used to thinking about when we think about employment in the capitalist mode of production.

But there is a second labor market side by side with the first: the market for unproductive employment of labor power. This is the one Keynesians refer to when they talk about counter-cyclical fascist state economic policy. During periods of contraction, the fascist state steps in as “employer of last resort” to provide jobs and income to those displaced in the crisis. It also steps in as “customer of last resort” by engaging in public works — roads, schools, etc. — to offset the fall in demand. Finally, it steps in a “debtor of last resort” to offset the contraction in credit by borrowing excess capital.

However the expansion of this counter-cyclical activity produces no new value, and thus cannot add to profits. The employment that is added by this sector is not expressed in a corresponding increase in output. When it increases relative to the increase in the productive sector, the overall productivity of both sectors taken together falls.

Solving the “puzzle of secular stagnation” is difficult because in simpleton economics, there is no such thing as “unproductive employment” of labor power only all employment taken together. And this is because there is really no way to separate productive from unproductive labor except by means that appear subjective. Go through the NAICS database sometime and try picking out productive labors from unproductive ones:

Is construction productive or unproductive? It depends: are we talking about a house, a prison, or a military base? Is  the manufacture of shoes productive? It depends: are we talking about sneakers, construction boots or military boots. And what about construction boots worn while building a military base? Was the manufacture of the construction boots still productive employment when they are used for unproductive purposes? Even if a bourgeois simpleton accepted in principle the idea of unproductive labor, he still has no means to separate it from productive labor.

Thus, they have no tools at their disposal to solve the “puzzle of secular stagnation”.

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