Thursday, December 19, 2013

WordGames: Lost Decades

The professions of economics and politics have embraced a new fashion over the last few years. Whenever there's a somewhat extended period - several years, often around ten years - where economic growth is less than excellent, they now label this period a "lost decade."

And man, these lost decades are everywhere. The most famous of them goes to Japan, who's economic problems have been going so long that judgment against their performance covers two decades, starting in 1991 and arguably continues today.

European countries seem to be headed in a similar direction. Their financial crisis kicked off a period of stagnating growth pretty much everywhere except Germany.

And of course, there's the good ol' US of A. Particularly when your attention is riveted on employment and income, America has sucked for a solid forty years now. My alma mater recently hosted professor Edward Wolff, who explained the situation on fairly sensible terms: the mismatches in labor supply and labor demand, the rise in the superstar phenomenon, and globalism all played a part in pushing American incomes back to a standstill since 1973. Thus, a lost few decades for average American incomes.

Implied in the "lost decade" phrase is the idea that things should have and could have been better, if it weren't for some X factor which invariably gets politicized. Among the first people to talk about this was Paul Krugman, who identified Japan's lost decade and established the concept of liquidity traps, whereby central banks can no longer stimulate an economy by lowering interest rates, as they can only go so low - theoretically to zero, although negative interest rates have happened, where you pay people to take the newly printed money - and they can't force anyone to borrow (for those playing the home game, the Fed can't force anyone to borrow, but the US Treasury department can, and did, in 2008 following the collapse of Lehman Brothers).

Just so you know, these are pretty much all happening after huge booms where long term trends are left in the dust. In Japan, for example, the property boom was, ah, a little exaggerated. In 1991, the land in Tokyo alone was worth more than all the land in the United States. After the crash, no investor wanted to pay the price to re-inflate the bubble, so of course, the economy retracted, at least on paper. In reality, if you control for stupid speculative asset values and the distortions they create, the crashes suck but performance afterwards usually isn't really that bad. Japan's lost decades actually feature expansion at a rate of about 2%, which is quite good if you remember that Japan has basically zero population growth. No surprise there: companies like Honda, Mitsubishi, Canon, Nippon Steel, and Fuji Heavy Industries continue to make money just fine, thank you.

The European debt crisis came from their own housing boom, one that took place in pretty much every country that has earned the PIIGS moniker. Greece, obviously, enjoyed a boom in housing which went along with their permanent boom in government services, made available by a bond market which assumed that Europe would bail out the default-prone country if it screwed up again. Same for Spain and Portugal. All three countries enjoyed labor policy far to the left: Greece maintained a railroad so inefficient that you could have paid a taxi to drive every passenger to their destination and still saved money, just to keep 6,500 railroad workers employed, while allowing workers in "highly physical" occupations like hairdressers to retire with full government benefits in their early 50's. Spain's labor market maintained so many protections for full-time workers that no employer would hire them, instead relying on temp labor; unemployment, presently around 26%, is far higher for young people. Italy has managed to hold on to zero productivity growth - and a high degree of popularity for socialist politics - for well over a decade. Ireland, the odd child, renovated its tax code along the line of Reagan-style supply-side policy, drew in corporate employment, and held their own housing boom, which collapsed and was among the first to contribute to the crisis. The government then decided to guarantee its banks and debt exploded; although harsh, the austerity measures faced less argument there than any other country, and recovery has been stronger.

So let's review: a situation occurs in which everyone agrees that the valuations levied on certain assets is explosive, unsustainable, and ridiculous. Those prices eventually, and painfully, return from orbit in a crash. Then, this idea of lost decades comes around which, using the periods of ridiculous values as their benchmarks, whines about how things have gone a really long time without meeting expectations. Obviously, I've come to the conclusion that I hate the term "lost decade."

Lost decades have nothing to do with whether or not something that realistically had the potential to exist was lost. They have everything to do with using the permanently high expectations of voters that come around whenever there's a boom. Plenty of people see this, but the existence and political popularity of terms like "lost decade" will be around for a while as it remains useful to damn whoever is in charge by labeling one.

Subsidizing American Labor

So land values get involved in pretty much all of them, and the crashes usually start there. But forget land; the most common economic good to overvalue in the post-industrial world is labor.

Artificially inflating labor costs isn't a market distortion in the eyes of most people, because it happens to be the cornerstone of most party platforms for cultures that hold competitive elections. Work is, of course, just another economic input when viewed without a moral agenda. It rises and falls in value, and while we like to see the cost of everything else fall in this world, we hate it when labor falls in price, as that's our wages we're talking about. But we should expects downs to go with the ups in labor value, too.

So the US situation focuses a lot on inflating the value of labor. Now, think about being a business which uses labor as a production factor. What do you do if your society is constantly trying to increase the cost of labor? Obviously, then the natural thing to do for those whose business requires a lot of labor is to reduce the use of it or find cheaper alternatives, which is exactly what we've done.

I can't blame them. The background of the American labor market, the standard by which earnings and worker conditions are compared, is the period between World War 2 and Vietnam, one of the world's greatest middle-class booms.

The period after World War 2 saw a degree of demand enjoyed by American business and American labor that was so freakishly wonderful that compared to material progress at basically every other period of the same length, heaven had arrived on Earth. We rebuilt Europe with Marshall Plan money, the last industrial power left standing, exporting like mad and, after NSC-68, throwing battleships full of cash at the military as well. Over 35% of the labor force was unionized in the 50's, and unions exist pretty much exclusively at times of economic prosperity, where they can siphon some cash off for themselves from companies that enjoy huge market power. The identity of the American middle class lives in this time period; the demand for American labor was extraordinary.

Remember that word. Extraordinary. As in, other than ordinary. As in, not normal.

Just so we're clear on this, no one in their right mind, with the slightest bit of historical perspective, would assume that the growth from that era could possibly be kept up in perpetuity. Think about this: if the American economy grows by 4% a year, what will it look like in 2250?

Previous middle classes have risen briefly, running on for a few decades, and then fallen apart, usually attached to an empire. That's the historical pattern. Spain had a middle class in the 15th and sixteenth centuries. Holland had one in the 17th. Britain in the late 18th through about World War 1. And the US has had one since World War 2. It stagnated, as all of them do. And it will probably end, as all of them do.

Middle classes are a bitch to maintain, because you're talking about the distribution of market power, which is dynamic in any healthy economy and tends to move towards increased concentration. Trying to avoid that concentration through demand-side redistributive schemes increases the likelihood of inflation, while trying to avoid concentration by supply-side management is basically shooting yourself in the foot. Supply-side stimulus literally empowers those who already have wealth as a matter of policy.

When it comes to managing the value of labor, you basically end up subsidizing work. Not just a little work, but the bulk of it, because economies that function are hierarchical by nature, and the closer you get to equality, the less efficient the system becomes. Efficiency, by definition, is getting things done with minimal input. You can't maintain high growth with high levels of inefficiency, so the push to "liberate business" made by guys like Reagan is, after the collectivist ideals run their course, the only way to stimulate growth without inflation.

The Really Big Picture

The term "lost decade", with its ridiculous expectations, implies that the business cycle has been mastered, and despite all the Keynesian and neoliberal pronouncements to that effect over the last seventy years, no sensible person believes it. Instead, you're left with a simple statement of moral and political righteousness.

What we've distorted is not rational expectations, but expectations of progress in a moral sense, and the progress comes from the moral ideal of equality. The problem with a bust, really, is that normal people are affected by it and it moves the distribution of wealth towards those who have wealth. Booms don't; booms make money cheap, and investors must take bigger and dumber risks to maintain their relative place. Labor, however, benefits from constantly increased demand.

The link between inequality and boom/bust draws out some hellacious arguments and isn't overwhelmingly dominated by either side, but underneath the talk about the rich getting richer is a basic reality: under boom conditions, the economic world needs people, lots of people, to work. Everything becomes easier, happier, with higher standards, and thus less efficient. Under bust conditions, people become useless; when spending less, we don't need them anymore. We love that booms devalue money: I remember the tech boom in 1999, when one magazine article suggested ways to spend all the excess cash you had lying around, including buying the body of Vladimir Lenin and using it as a coffee table, or having a famous Japanese calligrapher monogram every blade of grass in your yard. During the housing bubble, a few years ago, I remember commercials showing loan officers acting like retarded used car salesmen, prodding everyone to cash in every penny of equity from their homes, moves that would pull them financially underwater after Lehman failed. Booms encourage the hell out of debt, of all kinds, which is usually the most painful element of the bust. Stupid, all of it.

We crave that stupidity, because it means that money is losing relevance. A boom economy convinces people that we're moving towards a world where everyone can expect work, then can move towards doing the work they want, then can work when they feel like it, when ridiculous ideas like the efficient market hypothesis seduce people into complacency and utopian dreams. Those dreams, in modern Western consumerist civilization, live on perceptions of equality, on the fantasy that growth isn't driven by competitive energy and is instead a product of cooperative preferences with no need to fight or tolerate unpleasantness.

When a country becomes powerful in global terms, like Spain, Holland, Great Britain, and the US, the wealth reflects dominance and the power is real in the sense of a powerful business dominating a market. Working in those countries become the equivalent of working for Apple or Goldman Sachs. It's a matter of relative strength, where productive action is needed from a population as clearly as it is during a war. The wealth created by internal booms is not like that. It's purely speculative and psychological.

An economist named Kondratiev and an accountant named Elliott have both hypothesized about grand cycles of economic growth and stagnation, and their ideas stand in stark contrast to the political desires of most of the modern world. We want to think we can maintain booms forever, but we can't.

What you get in the long view is a notion similar to what Hyman Minsky said about the boom-and-bust cycle of credit: stability begets instability. We go from hedge investment, to speculative investment, to Ponzi investment. It's extremely psychological, and given what people are, it's inevitable over the long run. Those big Kondratiev waves work over the course of generations, not years, eliminating the possibility for individuals to learn from experience: every generation thinks it can fix the fails of the last, and they pay for that arrogance. Overconfidence creates the groundwork for stupid people to do stupid things and screw up, thus destroying the confidence. The push to get the economy going again after a credit bust is basically an attempt to use monetary and fiscal policy to manipulate investors into doubling their bets on a craps table with cold dice. They won't do it. The only way government could really fix any of it is through authoritarian action in the moment or moves to stabilize the financial sector during a boom, which translates into an imposed reduction in growth. Democratic nations won't stand for it.

For labor, it's more of the same. The big demand for labor in boom countries eventually overextends itself and dries up, creating shocks and disappointment. Labor gets devalued as investors stick to sure things, people rediscover thrift, and with the memory of waste in the back of their minds, don't trade as much for stupid crap that would only be bought by someone who doesn't really value their own wealth, thinking that it's endless. In other words, they grow up, and those with little or nothing of real value to contribute are exposed. In other words, equality begets inequality.

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