Friday, January 7, 2011

A Schumpeterian Take on Our Macroeconomy

. Friday, January 7, 2011

What is the likelihood that this from Tyler Cowen and Jayme Lemke is true:

In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves -- and arguably bad for society at large -- but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another. ...

In other words, the U.S. economy is going through some major structural shifts. It's not a question of getting back to where we were, but rather that the economy must solve a new problem of re-employing a lot of people who were not, in reality, producing very much in the first place. That's a steeper challenge than we had realized early in the stages of this recession -- and so far policymakers have failed at meeting it.

It's impossible to know for sure of course, but I'd put the number at at least 50%. Note that this is a Schumpeterian view of this recession, much maligned by Keynesians but that contains an internal logic, in which a period of "purging" and reorganization of the economy is required for full recovery*. If true, it begs questions: do all recessions have similar underlying causes? If not, is there a standard policy playbook that can be applied at all times?

I don't agree with the title and one of the conclusions: 10% unemployment is unlikely to be the new normal. Even the liquidationists and Schumpeterians thought that once the purging was over the economy would adjust. Maybe that takes 5 years or 10, but in the grand scheme of things that's not forever.

In terms of politics, it seems clear to me that the U.S. is being fragmented in many more ways than just divergences in income. Capital has recovered from the recession, and business income and profits are now very high. Skilled labor never suffered all that much (in terms of employment, if not loss of financial wealth), and the unemployment rate for those with college degrees is now below 5%. For those with postgraduate degrees it's under 3%. Almost the entire brunt of the recession has been felt by those with less education and fewer skills. It's not just income inequality -- as The Economist noted in a much-discussed recent article, PhDs often don't make a lot of money -- but also inequality of job stability or perhaps mobility.

What does this sum up to, politically? It leads me to think that college education should be much more accessible (at lower cost) than it currently is. This could include vocational schools, but we should encourage broader educations more. In primary and secondary schools we should definitely emphasize teaching skills that are broadly applicable, like mathematics, rather than just teaching facts and knowledge. It makes me think that we should reduce or eliminate programs that encourage home ownership for everyone, including the mortgage interest deduction, and promote mobility in other ways**. We should definitely cut payroll taxes (as the recent tax compromise finally does), or even better eliminate them entirely. Replace them with a VAT or higher marginal income rates if necessary.

I'm sure the Keynesians will rebut this over the coming days, but right now the recession only exists for less-skilled labor, not for capital or high-skilled labor. It's been that way for some time. If that's not a structural recession than I'm not sure what would be.

*Schumpeter put it thus: "Depressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change."

**Krugman and others say that structural factors are not important because there is not a deficit of labor in any sectors, while there is a surplus in most. But structure could be about location rather than just industry. Clearly too many people live in Detroit. Probably too few live in Bismark.

UPDATE: Finally getting around to reading Chrystia Freeland's profile of the nouveau riche in The Atlantic, and it opens with this from Alan Greenspan:

IF YOU HAPPENED to be watching NBC on the first Sunday morning in August last summer, you would have seen something curious. There, on the set of Meet the Press, the host, David Gregory, was interviewing a guest who made a forceful case that the U.S. economy had become “very distorted.” In the wake of the recession, this guest explained, high-income individuals, large banks, and major corporations had experienced a “significant recovery”; the rest of the economy, by contrast—including small businesses and “a very significant amount of the labor force”—was stuck and still struggling. What we were seeing, he argued, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.


Randy S. said...

Mr. Winecoff, thanks for this post. I am not an economist, but I find your analysis very intriguing, and no doubt spot on about our economy's lack of person mobility. The "zero (or near zero) marginal product worker" is also a new concept for me, but also seems to be VERY TRUE.

An insightful piece.

A Schumpeterian Take on Our Macroeconomy
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