Favorable Signs of a Sustainable Economic Recovery
"Unemployment is as high as it has been in 26 years, and it is not likely to fall significantly for some time to come. Believe it or not, that's good news, if "good" can mean continued hard times for millions of Americans. No one is expected to cheer if, in the months ahead, news analysts keep talking about stubbornly high jobless rates, but a sluggish rebound in the jobs market could very well be the engine for a sustained period of robust economic expansion down the road."
The dynamics distill to a trade-off between timeliness of the recovery in the jobs market and inflation. An unemployment rate dropping too rapidly will ignite inflation, and the cure for inflation coming fast and furious would almost certainly throw the country right back into recession.
The graph below, drawn from the Bureau of Labor Statistics database, shows the corrosive effect on per-person output of the recession that is now ending and how the beginning of the recovery was led by the first increase in productivity since the beginning of 2008. For the second quarter of 2009 (the most recent for which data is available), the index of output per person in the manufacturing sector rose from 173.162 to 175.164, as workers still employed were pushed to produce more.
This goes right along with what I wrote in "Recession to Recovery: The Rough and Narrow Road Ahead":
If [businesses restock declining inventories] with their existing workforces and maybe a modest increase in new hires, the workers doing their jobs will work harder, and the companies will see their profit margins start to improve as the inventories are sold; but if the companies have to hire lots and lots of workers to rebuild inventories, competition for qualified workers will heat up, and companies will have to start bidding up wages and salaries.
So far so good. Productivity per worker is going up, and this is happening without any increase in the overall rate of employment, which means it's the already employed workers who are pushing harder at their jobs. (That, of course, is not great news for working people, who are quite likely feeling as if they're being flogged to greater productivity in the national ship's slave galley right about now.)
What about labor costs, though? If this really is shaping up as a strong recovery, the other part of the equation, worker pay per hour, should be holding steady. In fact, labor costs had risen dramatically right before this latest recession in a typical Keynesian catch-up with other price increases earlier in the 2001 to 2008 economic expansion; but they have now leveled off, staying almost flat from the first to the second quarters of 2009, as indicated in the graph below.
That means wage inflation is in check for the time being, so as other prices rise, workers will have to continue delivering greater productivity to hold on; and as long as businesses don't have to start furiously competing with higher wages for new workers, the unemployment rate can be brought down slowly without triggering the inflation spiral I described in "Recession to Recovery."
So, bad news really is good news, at least sometimes. Unemployed people really are suffering, and that is where public policy projected through assistance programs can blunt the damaging effects of joblessness and all the problems it creates for people, families, and communities.
We have the makings of a sustainable, strong economic expansion. The figures provide clear evidence of this, but the story isn't finished. Once the expansion gets its own momentum, the central bank of the United States will have to turn its attention away from providing liquidity to keep interest rates low and start the long, difficult process of draining from the economy an incomprehensibly large overhang of dollars that has been accumulating year after year, starting early in the current century.
That excess liquidity is much like a tidal wave still well out at sea. That rolling, roiling mountain of rising prices is headed right for shore, and if the unrelenting swell of pounding surf is not drained away long before we see it, the resulting inflation will be a debilitating, destructive force that only the most draconian and protracted of contractionary monetary policies can stop.
The question yet to be answered is whether or not there will be enough time: the economy must gather sufficient upward momentum to no longer need extraordinary stimulative spending by Congress accommodated by extraordinary liquidity provided by the central bank. If the Fed starts draining the dollar overhang too soon, the economic recovery will be slowed or even stopped; but if the Fed waits too long, the inflation spiral will be so embedded in labor and business expectations that the contractionary monetary regime will, once again, slow or even stop the economic recovery.
In a worst-case scenario where the Fed waited too long to face the inflation problem, the eventual clamp-down on the money supply would have to be long enough in duration to potentially be economically devastating as well as politically disastrous to the incumbent President and members of Congress, who would almost assuredly be blamed by the electorate for the collapse of the economy back into recession.
Right now, it looks like a controlled rollover by the Fed away from accommodative monetary policy can still be accomplished in such a way that the nascent economic up-swing can be sustained.
Unfortunately, the size of that tidal wave of liquidity mentioned above is not really appreciated by most people, and maybe not even by most policy makers in Washington. It is out there, still well over the horizon. It's coming; and just like tidal waves on the ocean, which have the odd habit of making the tide go out right before the massive wave hits, the dollar overhang will have the perverse effect of creating sporadic evidence of deflation in the months before the inflation comes in as a relentless force driving commodity prices, wages, food prices, and interest rates upward.
If it gets to the point where our public policy officials are fighting the tidal wave at the shoreline, we will have a hard, debilitating battle, indeed.
We should hope that our leaders in Washington will seize the opportunity now available to deal with the impending challenge before they have to manage an inevitable disaster.
Comments
Wrote kelley b:
Wrote Dark Wraith:
Good morning, kelley b.
This period of economic instability is excellent for applying macroeconomic principles to the real world. I use these articles as teaching tools for my college students, and they seem to work very well.
Being one of my long-time readers here at The Dark Wraith Forums, you probably recall that those basic principles of macroeconomics can be used quite well to predict what is coming, and now we have yet another opportunity to use them.
Truth be told, I was getting rather tired of the Bush Administration: there are only so many different ways to write about one presidential administration's utter incompetence and mendacity. Now, at least I get to deal with a new story, one where incompetence and mendacity aren't quite so much the problems as are inevitabilities and the challenges of mitigating the consequences.
Onward, into the darkness of the 21st Century.
The Dark Wraith just hopes the flashlight batteries hold out.
Wrote kelley b:
Suggestion: buy the rechargable lithium ones and invest in a solar-powered recharging unit.
That will work well unless the idiots in charge decide to use solar dimming to fight global warming, anyway.
Wrote Dark Wraith:
Good afternoon, kelley b.
I've had only mixed success with those fool rechargable batteries. The ones for my cell phone and camera are quite good, but the commercial stuff for everyday use loses its punch after only a couple of cycles.
I do have a couple of those flashlights that don't use batteries, although I haven't had much occasion to use them. I've got a radio with a crank on it, too; but, again, I don't use it. Nevertheless, I should probably keep those where I can find them in case we start going to brown-outs in the next decade or so.
Come to think of it, maybe I ought to buy a hand-crank microwave over, too.
The Dark Wraith could end up spending the last years of his life doing nothing but cranking electrical devices to stay alive.
Wrote trog69:
Oh man, somebody has to have done a skit like that; Some old guy has a bum ticker, so they give him a wind-up heart 'til they find a donor heart, and he has to crank it or die. Hey, he's getting needed exercise, so it's win/win!
Bill Moyers has a transcript up concerning Wall St. and how there are now only 4 big banks, and how what happened at the end of 2008 and continuing now, was a take-over of our government:
http://www.pbs.org/moyers/journal/10092009/transcript4.html
This is interesting for more than just the scary news; reading how the people talking were transcribed makes my sputtering on your show seem not so bad after all.
As suggestion: Perhaps you could let us know, the day of the show, what the topics will be, so we have some pertinent questions and comments?
Wrote Dark Wraith:
Good morning, trog.
My general rule about the show is to let the callers define the topics to be discussed. I am not entirely sure this is the best way to conduct the show, though, because it might be putting people off from calling in.
I think I will start publishing a list of possible topics for conversation, although callers will still be free to bring up other matters on their minds, as long as they don't have sleazy thoughts on their minds.
Okay, strike that qualifier. As long as the sleaze has something to do with politics, economics, business, or celebrities, then I would be a fool to turn away some ratings points just because I, myself, am a prude.
Maybe I ought to have a 10-minute Sleaze Corner, or something like that.
Yes, that might be a good idea.
And maybe a 5- or 10-minute Conspiracy Corner.
I need to think about this, though: if this caught on with listeners, I'd have to expand the show from 45 minutes to an hour. That could end up boring too many listeners to death.
The Dark Wraith will get back to you on these considerations.
Wrote Faraway Eyes:
G'day, DW,
If you do choose to incorporate said sleaze segment, perhaps you could dub it "How Dark Is your Dark Side?" Just sayin'!
Wrote Dark Wraith:
Okay, Faraway Eyes, that actually works. It would allow for more than just what long ago became the tedious, banal sex nonsense.
We could talk about fantasies of all kinds.
* What would you really like to do to Glenn Beck?
* When Dick Cheney finally keels over, what kind of party will you be having?
* If you could get the leaders of the Palestinians and Israelis into a locked room, what persuasive techniques would you like to try?
* Talk about how utterly trivial Jon and Kate are, and use metaphors never before heard by human ears. Do it for Hannah Montana, too.
* Describe the last time you actually surfed the Internet for LOLcat and Fail pictures. (Okay, that's one I probably don't share with too many sane people.)
* Mention your paranormal, UFO, or just plain weird experiences. (Okay, see above.)
* Explain what electrical devices are tasteful but appropriate to use on white-boy rappers.
* Can you describe a brain surgery that would make Michele Bachmann evolve to australopithecus IQ?
* What does Barack Obama look like stark nekkid?
Oh, wait. That last one gets us back to sex stuff.
Sort of.
It still might work.
The Dark Wraith should start thinking right now about raising his advertising rates.
Wrote Weaseldog:
DW, you appear to presuppose that we can go back to an extended period of growth.
But without an extended period of energy growth, we can't have an extended period of industrial growth. Without an extended period of industrial growth, then we don't have an increasing supply of materials to drive an extended period of economic growth.
And we're now post peak in world oil production. With it, world energy production is in decline.
And oil matters, because it packs more BTU per pound than any other energy source. Some make the argument that uranium beats it... But that's after energy intensive processing. The ore doesn't beat oil straight out of the ground.
We're now in desperate times with the USGS downgrading our coal reserves, and natural gas getting so low, that we have to drill in luxury neighborhoods at high expense to keep up with demand. The latest love fest with shale gas is just another example of playing the red queen game. Running faster and faster, to stay in one place. To get energy, you have to invest energy. That energy is sunk into materials and to drive drilling, pumps, etc... So in shale fracturing , a high energy expense is put into the acids and solvents used to crack the shale, to get natural gas, that is used to make the acids and solvents...
At about 1 to 2, energy isn't worth getting anymore. When you have to apply one unit of energy, to get two units back, the additional overhead and need to turn a profit, makes the total equation break even. It's no longer worth anyone's time to pursue.
Worse a lot of these experimental procedures are energy negative. They return less energy than they burn. It doesn't matter how much potential energy they return, you still have to burn even more to extract it. Methane Clathrates are a good example of this kind of energy resource. Super abundant, but too spread out and difficult to get, to be worth going after.
The next big energy source needs to be better and more abundant than oil. We don't know of anything like that. And we have a pretty good understanding of what our world has to offer us.
Even if the administration made the right moves to get our economy growing again, it would soon hit energy limits, and be knocked back down again.
We don't have a system that can survive a sustained economic contraction, and we need one.
But we'd have to understand the need for one first. And that is not going to happen. Take a look at the following article and the comments, to see how far gone our fellow citizens are in the land where math doesn't matter.
http://tinyurl.com/ylzaqee
It's amazing what fantastic things people believe in. Most Americans I've found, lack even a cursory understanding of 19th century science. Never mind the 20th century.
Now perhaps the future will provide an answer. That's cool if it does. But I doubt the future will invent time travel and come back to the present to deliver it. If it could, wouldn't it be here?
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The ability to see the cause-and-effect behind economic trends provides us with a good explanation for the motivation of the apparent detachment of policy makers.
You can't play the pluses unemployment causes in Peoria even when there are pluses.
Thanks again for your analyses, Dark One.