Monday, January 30, 2012

Issue #1: Unemployment in America

Suppose that you own and operate a single firm. For whatever reason, it seems that the demand for what your firm produces has declined. Recognizing this, what should you do? Well, if consumers do not want to buy as much of your output as they did before, you should not produce as much output as you did before. There's no profit to be made in producing stuff nobody wants to buy.

Now that you have decided to scale back your output, it occurs to you that you no longer require as many inputs as you once did. Among your many inputs is labor. If you do not require as much labor as you did before, some of your workers must be laid off.

Responding to a fall in demand, therefore, you have in a very small way raised the unemployment rate. Your ex-workers do not have jobs, but continue to actively seek employment. But why has the demand for your firm's output pulled back? Presumably, other firms in the economy have either begun producing the same goods and services more cheaply (due to technological progress, say), or begun producing different goods and services which consumers want more than the goods and services you produce (due to a shift in consumer preferences, say). Whichever is the case, just as the demand for what you produce is falling, the demand for what others produce is rising. Needing to produce more output to meet growing demand, these other firms must draw upon more inputs--in particular, more labor. This raises the demand for labor, offsetting the fall caused by your firm, thereby restoring full employment in relatively short order. The unemployment rate is elevated only slightly, and only briefly.

Suppose instead that the aggregate demand for goods and services produced by the US economy declines. Much like your firm, the economy "recognizes" that the demand for its output has fallen, causing it to scale back production. Just as your firm would do in the course of scaling back production, the economy disemploys many of its inputs--most visibly, labor. The unemployment rate rises as in the previous case.

In contrast to our earlier example, however, a fall in aggregate demand is not offset elsewhere in the economy. Remember that, in this instance, we're talking about the economy as a whole--there is no elsewhere. Does this mean that the unemployment rate will be permanently elevated?

Ideally, no. The reason is that, usually, prices adjust to clear markets. In our first example, the way that the economy signals to the newly unemployed workers to shift out of your declining firm into other expanding firms is by pushing down the wages you offer, while pushing up the wages they offer. Similarly, if the aggregate demand for goods and services produced by the economy declines, this ought to lower wages in general, encouraging firms to hire more workers. And if wages fall far enough, quickly enough, the number of people looking for work but unable to find it will be as low as always. That is, the unemployment rate will quickly return to normal levels.

In reality, however, this does not happen. The reason, in the view of many macroeconomists, is that wages are 'sticky', or 'rigid'. When there is a drop in aggregate demand, instead of wages falling instantaneously, many wages fall rather sluggishly, or in lots of cases not at all. No single theory as to why this is the case commands a consensus, but the evidence in favor of wage stickiness is quite solid. If wages do not fall immediately when aggregate demand falls, then laid off workers will continue to apply for increasingly scarce job opportunities, keeping the unemployment rate elevated in the short run. In the long run, wages will fall far enough to restore the economy to full employment, but as J. M. Keynes famously remarked, "in the long run, we are all dead." A lot of unnecessary suffering is evitable if policymakers properly deploy the instruments at their disposal to stimulate aggregate demand, encouraging the economy to scale up production, which in turn encourages the re-employment of unemployed workers. In my next post, I will explain how best to do just that.

[Earlier posts in this series:

Announcing my bid for the US presidency



  1. Defeasible,
    I don't believe you can address unemployment intelligently without providing the context of money supply.
    Money supply works within the supply of goods and services to resolve pricing.
    Money supply is the cash available for purchases. When borrowed cash becomes a part of money supply, more money is available for purchases.
    As money available for purchases increases, prices go up.
    When prices go up, more people are forced to borrow. This drives prices up more.
    The limiter to this cycle is that money committed to debt amortization can't be counted as money available for purchases, again, until it's collected and loaned, again (unless the lender has decided to become a purchaser).
    However, the Fed was created with the mandate to keep increasing the money supply. That decision placed America on a path of constant inflation the rate of which really increased when Nixon forsook the Gold Standard.
    Constant inflation means higher wages coupled with debt that does not allow much room for wages to decrease.

  2. I agree that, in the long run, a bigger money supply means a higher price level (inflation). In the short run, however, prices and wages are sticky, which means that a higher level of money expenditures (NGDP) produced by a bigger money supply produces greater output (RGDP) and not just a higher price level. If we're at full employment, RGDP cannot go up anymore, so we just see more money leading to more inflation, but we're not at full employment. It's precisely the fact that we're not at full employment that I'm trying to grapple with here. So lower interest rates (achieved through higher M) would not, in my view, just generate inflation; it would also increase RGDP and lower the unemployment rate.

    A second point to recognize is that inflation isn't the worst thing in the world. If everyone expects inflation of 2% per year, for example, then lenders charge 2% higher interest rates, and inflation doesn't affect anything whatsoever (of course, capital taxes aren't indexed but that's an artificial feature of our shitty tax code). Inflation sucks when it's unpredictable, because then it surprisingly transfers wealth from creditors to debtors, which interferes with financial transactions. I'm not calling for sudden bursts of inflation, I'm calling for steady nominal GDP growth which will produce steady inflation at a low rate on average.

    Finally, note that the gold standard is a terrible idea. The timing with which countries began to recover from the Great Depression is precisely the timing with which they dropped the gold standard. Ron Paul tend to keep quiet about that. And what's so special about gold? Why not have a dead baby standard, where the Fed fixes the nominal price of dead babies? Think I'm alone on this one? Here's a survey of top economists at top universities on the gold standard:

    Notice that the debate is entirely between those who disagree with a gold standard, and those who strongly disagree with a gold standard. 0% agree with it. 0% are even uncertain about it! So, I'm all for a more informed public conversation about monetary policy, but let's not pretend like careful thinking about the subject leads you to support a gold standard; quite the contrary. Ron Paul has a lot of admirable views, but his views on money are not among them, friend. I apologize if this comes off as confrontational--too many commercials have been begging me to buy gold, which can get pretty annoying.

  3. Confrontational? Presentation of ideas in a peaceful forum is the way men defend the reasonability of their investments before they take up arms in a winner take all forum.
    Gold and silver are idols to which men would like to resort without stopping to consider the liberty they pretend to support.
    Never mind that.
    By not addressing interest rates in my response to you, I began to make the inference they were not the problem at all. Emphatically, I state it now.
    The whole problem is in fashioning an economy that forces all who have to participate in it to go into debt. The longer that continues, the less capable of generating new business the participants become.
    That is, without doubt, the precise reason we have the present economic condition. Unfortunately, rather than admit a mistake was made (because, as far as the lenders are concerned, everything's great), they choose to hide it one of two ways.
    One way they use is to take the whole nation into greater debt which, really, just continues the erosion of the ordinary participants power to initiate new business by transferring his earnings, by taxation, to government employees, entitlees, and contractors.
    The other way is to extend the labor pool to include foreigners who are used to slavery.

  4. nullpointerexceptionalFebruary 3, 2012 at 9:13 AM

    I don't see the correlation that you're drawing between inflation and general debt of an entity within the US (business or individual). Inflation, as used by the Fed, is a tool to stimulate investment across the economy. By having inflation, you are penalized for hoarding cash since the real value of that money will decay at the rate of inflation. By keeping that money within a financial institution or other investment means, you are offsetting the 'tax' on hoarding money by allowing others to use it to expand and grow their businesses. This indirectly causes more money to be available increasing the velocity of money thereby expanding the economy.

    To say that all debt is evil and that debt is the reason for unemployment within the US is snake oil. While financial institutions didn't help the situation in terms of making poor loan decisions, the banks which participated in those scenarios are no more, neither did the general public. The debt side of the equation is more the ignorance of the general public in that taking out loans based on the idea that falsified wages is brilliant (that's why there are lending rules to begin with). Might I suggest this episode of South Park for an accurate assessment of what happened with bad loans: . Admission of the mistake is on the people who took out the loans to begin with (you know, the people in the economy). I guess we should nix mortgages and force people to save their wages their entire life to afford a home?

    Generally speaking, inflation is offset by higher wages in the workforce meaning that with 2% inflation you would expect the business to raise prices by 2% and give the workers a 2% wage increase. In reality this does not always happen due to the price stickiness described in the post (especially within small and medium sized businesses). When things diverge is when people need to adjust themselves, something your generic American doesn't handle very well.

    Slavery in the context you are using it does not exist. Sure other countries have lower wages making them cheaper for certain types of tasks but they also don't have things like unions, seniority, smart phones, or a lackluster education system holding them back. Everyone points the finger overseas when the reality is that there are better candidates in other countries who are willing to work for less money. Education is a big part of outsourcing - something a lot of people that are unemployed are lacking (or have education in non-applied areas like art history or english).

    It's not the like the government takes your money and burns it when they are collected as taxes. It's put back into that first world infrastructure in form of roads and other services. Sure, some of it goes to government workers and contracts but would you work for free? Every system is flawed, but operating on the premise that the government is forcing people to stay in debt for their own benefit is pretty far fetched.

    While there are pros and cons to inflation, stable inflation is treated the same as no inflation (everyone knows it exists and it's factored into the market prices). The problem is that stagflation and deflation are just as bad as run away inflation (see Japan in the '90s) especially when it comes to unemployment.

  5. Now, my objections are useless unless I can offer an idea that allows free working men to prosper. And I will start by saying (as I inferred, earlier) that your objection to the Gold Standard is semi-valid.
    Still, gold has a sort of value in that it is, relatively, hard to find, and it requires a lot of labor to make it presentable. (Why that is relevant deserves a whole different post.)
    The founding fathers of America NEVER expected the Gold Standard to fund the whole ecenomy. What they expected it to do was to fund an adjunct to an economy by which thrifty, industrious people guarded their freedom and produced their prosperity on farms.
    Such people are an offense to the merchants and bankers who presume they have the right to use leverage on all laborers, and live at their expense. The Gold Standard chained their malice.
    The Fed was the machine that set the malicious free to oppress better, more useful people.
    Now, the good people are trapped in cities where there are not enough jobs, their educations have little value to the merchants, and everyone is in debt.
    There are 3 possible fixes.
    1) An executive order could forgive all debts to avoid the, otherwise, inevitable civil war.
    2) Go back to the Gold Standard and let the Free Market re-establish itself.
    3) Let socialists bring you civil war.

  6. [...] is a concept that many people seem to struggle with. A brief overview may be [...]

  7. Null,
    If you were responding, then you must have misunderstood what I said about debt.
    I didn't say "All debt is bad". What is bad is that one person who goes into debt, by increasing demand on goods and services, adds inflationary pressure to prices. This forces more buyers to go unto debt.
    Without a deflationary tool like an empirical debt ceiling or a Gold Standard, everyone is forced into so much debt that all income is consumed paying off old business.
    There is no economy if there is no income for new business.
    This kind of environment makes slavery an option. In fact, when you have to borrow money for an education, real estate, and transportation just to access the economy, the interest you pay on loans goes to support people who add nothing to the economy except the conditions that force you into debt.
    Slavery is as slavery does.

  8. nullpointerexceptionalFebruary 6, 2012 at 4:55 AM

    The same argument could be made for using wicker chairs or coffee beans or lead-based paint as a backing to currency. There is no funding of the economy but rather an allocation of assets. If that allocation is fixed, in the case of ceilings or commodity standards, there leaves no room for the expansion of the economy (which inflation and non-backed currency allows for).

    The gold standard did more than chain the 'malice' of bankers and merchants - it single handedly constrained the entire economy depriving people of the prosperity that the founding fathers wanted. See the Great Depression as a great example of how that worked out.

    I have a theory that everyone was put on earth to amuse me and an overwhelmingly majority of the US does a great job at that. We diverge on our views here that the general public is generally good I'm convinced that they all suck.What you have is highly intelligent people using their intellect to make money while the"good" people you describe are oppressed. If these people were so useful, their jobs would not be moved over seas. If their education was better they would see the flaws in their 1% arguments. My later point hits on this hard - assuming a hand out isn't a way to address the problems (cough occupy movement) or sitting on unemployment. The answer is an application of what little intellect they have, most of them probably rot their brains with Dancing with the Stars or other mindless television.

    Everyone is in debt because they put THEMSELVES there. Sure there might have been smart people that devised complicated contracts or cool marketing but the reality is what they feel now is punishment for being naive and not being better educated on the matters. There is no such thing as a free lunch (see my welfare post). Sure people give them access to credit but that's a viable business opportunity.

    On your options:
    1.) Why would there be a civil war? Dont get me wrong, I'm a proud prepper, but just because people are bitching a moaning that they are unemployed doesn't mean civil war. Why should debt be removed just because people are stupid and got themselves in the situation?
    2.) Gold standard would directly lead to deflation meaning HIGHER unemployment.
    3.) Assuming you're using the argument of the Tea Party and their view of Obama, I just have to laugh. I'll throw this out there, I didn't vote for Obama, but I think given the situation he was brought into he did a decent job. Most of the things he's implemented actually help the people affected by higher unemployment which makes this argument contradictory. Personally I think all social programs should be removed and approach things more like China - if you're unemployed too freaking bad go get a job (i.e. you need to contribute to society instead of sitting around in a union or using tenure as a means to stay employed).

    I'll direct you further to the Gooback's episode of South Park for some laughs on the real problems in America:

  9. Null,
    I am one of those people who doesn't go into debt, hasn't owned a tv for 26 years, never took welfare or unemployment, works with his own hands or does without, and doesn't belong to a union. To me, access to the economy is very limited.
    If my 25 year old van breaks down completely, my access will shrink, even, further.
    Because the bankers and merchants don't want to lose the leverage they have on city-trapped labor, they keep people from realizing the power of the family farm to access the necessary things WITHOUT huge debt.
    The price of farms is kept too high to pay for by saving from wages. It's that 2% inflation every year thing which, also, has made land prices too high to pay off by farming.
    They need us to stay in town, doing their stupid crap, and going into debt for cars, houses, and educations the prices of which are marked up to cover the cost of their lifestyles and the taxes of the government that protects their property.
    I don't want their stuff. Believe me. I don't need this smartphone. I can live off a farm.
    However, the bankers and merchants can't afford to turn their slaves loose.
    They have to keep driving inflation with new national debt.

  10. Dear null,
    Calculating your age from the data you provided, it looks like I was warning people of the economic conditions we currently experience about the time you were conceived. I have seen the technological changes render the educational investments of many men obsolete. Fortran and Cobol were the programming languages when I went to college.
    I saw Visicalc put accountants out of jobs. Robots took away my favorite job when they started cutting sheet metal for ducts.
    So, we come back to unemployment. When technological changes displace an education after the educated man has committed, where do you get the time and money to get re-educated.
    The fact is that family farms solve the problem of unemployment. Entry level positions that open the door to a wide variety of working experiences with the least possible cash outlay for labor, training, transportation, and communications is only part of the picture.
    The Gold Standard augmented ag-based economy absolutely allows expansion. Moreover, it, also, maintains a safety valve that keeps people from being trapped in cities needing someone to bring them food, water, fuel, and clothes. People trapped in cities need someone to carry their wastes away, as well.
    Although merchants love the vulnerable consumers and laborers that can abound when lenders have no external constraints, they always come to resent those same people when those people can't support them, the growth of government made necessary by dense living, plus the ever-increasing cost of the necessary transportation (wasted money) at the same time.

  11. Dear null,
    Please. The entirety of you're last post assumed that mine was composed of ideas that NO intelligent reader could have found there.
    Farms as a safety valve means excess city dwellers have a place to go get food, fuel, and drink when they can't stay employed. Funny thing about farmers you may not know. A plumber would starve waiting on business from a thousand farmers. Farmers do their own welding, electric work, carpentry, roofing, bee keeping, cheese making, syrup making, textile producing, iron forging, bullet loading, meat curing, and veterinary. Like I said, there are plenty of things to keep a farmer interested.
    I am absolutely against subsidies of every kind. They enlarge government, increase taxes, drive inflation (in as much as debt is, usually, required to fund the new program that manages the hand out), and destroys the free market.
    We had no business subsidizing commerce with wars overseas or R&D for technology.
    Taking from the natural born person to give to business is a slavery.
    By the way, the expansion of America was all about taking land from some and giving it to others.
    In imminent domain, it continues until today.

  12. nullpointerexceptionalFebruary 8, 2012 at 1:58 AM

    Really, no intelligent reader could have found those points? You've been going on and on and on about three things: 1) the gold standard, being a viable deflationary mechanism, would somehow do something good for the economy and 2) that the family farm is the only thing out there to cure unemployment and finally 3) working for a corporation is being a slave to debt. Just to note, in that last post you're changing your view on the farm avenue.

    1.) Every economist alive today says that the gold standard, as well as any other one based on a commodity, are horrible ideas. You run into times of significant inflation (oh hey, my mine has a 2 million ton vein of gold - inflation) or deflation (hoarding - which occurred during the Great Depression). Neither are predictable events making them dangerous. If something is stable, monetary policy of the Fed, you can plan for it and build it into your own calculations. Deflation causes more unemployment.

    2.) I never argued against the merits of being a farmer, they keep food on my table. I understand most of them don't require outside services to keep going. What I am trying to get across is the lunacy of using farming as an avenue to cure unemployment - even as you call it a 'safety valve'. So I've been an executive all my life, lose my job, and then the government ships me to the middle of no where to run a farm (something I have never done) with non-existent money (hey I just lost my job). Wouldn't that require a subsidy to be viable?

    3.) Using your logic pattern you could say that you're a slave to farm. How is that any better than working for a corporation or living in a city? You put in a 16 hour day on the farm - not much time to do anything else. Slavery sounds like manual labor, long hours, and worrying about food (you are exposed to droughts or poor crop yields). "Taking from the natural born person to give to business is a slavery" - I don't follow, can you elaborate using evidence?

    You do understand the concept of subsidies right? They aren't a hand out, but a means to make something more viable, i.e. farm subsidies, for the greater good. You have land that could be better used (more money) for something else, in order for you to use it for farming the government gives you just enough money to make farming worth the time. Can you point out where subsidies destroy the free market? If anything, they ensure that the market even exists. Taxes do go up sure. But the point of the subsidy is that the service the subsidy is for, provides a social service that would not be viable without the government propping it up.

    Thanks for the history lesson, I did pay attention in school. You know how that expansion was rationalized? The people they were taking the land from were seen as savages, lesser beings. You do a large scale 'eminent domain' in the US today and see what happens. Also remember that the people that lost their land during that expansion fought back - I've got my AR-15 and would do the same thing.

    We had no business investing in R&D? You're joking right? Might I remind you that most of the luxuries you find in your house right now are the result of research and development - like the computer that you're on reading this right now (the one that eliminated all those jobs you talked about earlier). Subsidizing commerce through wars overseas?Mind explaining that one further?

  13. [...] rates, then, is more work, not more workers. And the prescription for more work, recall, is greater aggregate demand for US-produced goods and services. Share this:TwitterFacebookLike this:LikeBe the first to like this [...]