It’s the Jobs, Stupid

Some time ago, economists noticed that people, or consumers in their terminology, are important to the economy.

What would we see if we assumed that it is not markets, or traders, or businesses, but people that was the only important factor in understanding the economy?

Here are some thoughts:

  • The Great Depression was a symptom of a problem that people had.  That problem was that there was no place in the economy for a large fraction of the population.  The introduction of the tractor and the combine harvester greatly improved the productivity of agriculture.  The flip side of productivity is a reduction in the need for laborers.  The massive unemployment of the Great Depression was not due to an irrational contraction in demand.  There was a rational contraction of jobs.
  • The efforts to stimulate economic activity during the depression failed because there was literally nothing for the vast numbers of unneeded farm workers to do.  Nothing that they had the training or the experience doing.
  • When WWII came, the war effort resulted in America becoming the factory of the Allied efforts.  Americans were trained en mass to work in the modern factories.  This changed the labor situation in the US drastically.
  • During WWII, the other large advanced economies in the world destroyed each other’s economies.  When the war was over, the American economy was able to quickly switch over to peacetime manufacturing and the global competition was busy rebuilding.  So America had a period of time to create a huge lead in its capabilities.  The manufacturing economy created great wealth and when the European and Japanese economies came back up to speed, there was more than enough for all to be wealthy.
  • Starting in the 1990’s another wave of productivity enhancement started with the internet and other electronic media.  At the same time, many of the advanced manufacturing jobs started to shift to China as it opened up to trade with the outside world.  The China wage for manufacturing was originally 10% of the American wage for manufacturing work.  India did the same for office work providing a source of office labor at 25% of the American wage.
  • In the first decade of 2000, the housing boom masked the situation.  Many people found that they had enough wealth to spend for what they wanted from the inflated values of their homes.  Many people were employed in the housing construction business, building homes that were ultimately found to be unwanted.  White collar jobs were also created by the housing boom selling houses and processing the mortgages that turned out to be so, so bad.
  • The Financial Crisis can be seen as another situation like the Great Depression.  There are no jobs for a large fraction of the population in several countries including the US.  Without jobs, because there is not enough work in those economies for their skills.
  • The unemployment problem will be not be solved by simple stimulus.  The manufacturing and construction skills of a large segment of the working age population are no longer valuable enough to support a middle class lifestyle in the advanced economies.
  • At the same time, there is a demographic issue.  Well known.  The retiring Baby Boomers may cause a major shift of spending further away from investing and into consumption.  Satisfying their needs will probably solve the short term employment issues in the economies of all of the advanced nations.  Growth of economies has been driven in part by growth of populations.  There is no model for operating a segment of the world economy with a shrinking population that is favorable to that segment.
  • The advantage that America had because of WWII has by now completely dissipated.

This related to risk and risk management because of the relationship between leverage and risk.  One of the solutions that has been a reaction to the slow growth is leverage.  And slow growth plus leverage is the recipe for disaster.  More on the relation of risk and leverage in another post.

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2 Comments on “It’s the Jobs, Stupid”

  1. riskviews Says:

    Actually I believe that it is a little more complicated than that. The central bank intervention is actually needed at the point of the crisis. Much unnecessary damage can be done by the panicked markets in a very short period of time. But in the long run, the cure has to fit the disease. Unfortunately, the central banks are taking the approach that their cure needs to fit their tools.

    Instead, what is needed is better understanding of the true underlying dynamics. This employment based story is not perfect or complete, but it is a major part of the underlying story. And if this is not dealt with, then the central banks will be able to accomplish nothing but creating another mess.

  2. Jean-Pierre Berliet Says:

    This point of view is very appealing to me. it suggests that classical economics produces more relevant insights for understanding crises and policies to mitigate them than keynesian economics..which might well be seen as a particular harmful form of intellectual pollution. Congratulations for daring to be unconventional and thoughtful.


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