This Is No Time for Irrational Exuberance about Jobs at Living Wages – We’re in a New World of Work

SOURCE ITEMS

Eurozone GDP still hasn’t gotten back to its 2007 level, and doesn’t look like it will anytime soon. Indeed, it already wasn’t clear if its last recession was even over before we found out the eurozone had stopped growing again in the second quarter. And not even Germany has been immune: its GDP just fell 0.2 percent from the previous quarter.

Matt O’Brien, Worse than the 1930s: Europe’s recession is really a depression, Washington Post, August 20, 2014. Web 9/5/2014.

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Total nonfarm payroll employment increased by 142,000 in August … Manufacturing employment was unchanged in August, following an increase of 28,000 in July. Motor vehicles and parts lost 5,000 jobs in August, after adding 13,000 jobs in July. Auto manufacturers laid off fewer workers than usual for factory retooling in July, and fewer workers than usual were recalled in August. Elsewhere in manufacturing, there were job gains in August in computer and peripheral equipment (+3,000) and in nonmetallic mineral products (+3,000), and job losses in electronic instruments (-2,000).

Employment Situation Summary, U.S. Bureau of Labor Statistics, September 5, 2014. Web 9/5/2014.

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Today’s report also included revisions to first-quarter personal income. Wages and salaries rose by $131.3 billion, revised down from an initially reported $135.1 billion gain. They climbed by $103.6 billion in the second quarter.

Shobhana Chandra, Economy in U.S. Expands 4.2%, More Than Previously Forecast, Bloomberg, August 28, 2014.

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Almost 21 million people are victims of forced labour – 11.4 million women and girls and 9.5 million men and boys. … Almost 19 million victims are exploited by private individuals or enterprises and over 2 million by the state or rebel groups. … Forced labour in the private economy generates US$ 150 billion in illegal profits per year.

Facts and Figures, Forced labour, human trafficking and slavery, International Labour Organization, Web 9/5/2014.

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Comparing the first half of 2014 with the first half of 2007 (the last period of reasonable labor market health before the Great Recession), hourly wages for the vast majority of American workers have been flat or falling. And even since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline…

Elise Gould, Why America’s Workers Need Faster Wage Growth—And What We Can Do About It, Economic Policy Institute, August 27, 2014. Web 9/5/2014.

COMMENTS

The U.S. is deeply tied to the rest of the world economy and the world economy is plagued by contradictory national economic policies, geopolitical instability, extreme weather conditions, and rising prices. These are chronic conditions that will continue to prevent the world economy from achieving a steady rate of economic growth high enough to grow jobs and incomes.

Slow economic growth combined with high levels of global income and wealth inequalities can only produce a steady stream of domestic and geopolitical disasters. Slow economic growth is probably a permanent feature of the 21st century world economy, so we have to learn to live with it. We can, however, do a lot to reduce economic inequalities.

1st Quarter 2014 Economic Decline: Not Unique and Not Due to Idiosyncratic Factors

SOURCE ITEMS

Gross domestic product fell at a 2.9 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976.

Jeanna Smialek, U.S. Economy Shrank in First Quarter by Most in Five Years, Bloombert.com, June 25, 2014.

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A combination of shrinking business inventories, terrible winter weather and a surprise contraction in health care spending drove the first-quarter decline, which is the worst since the first quarter of 2009, when the economy shrank at a 5.4 percent rate.

But the economy was hit by an unlikely combination of negative forces that conspired to turn what seemed set to be another quarter of so-so growth into a considerably more gloomy experience.

 Neil Irwin, Economy in First Quarter Was Worse Than Everybody Thought, New York Times, June 25, 2014.

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That’s one of the findings in a report published today called “Risky Business,” commissioned by some of America’s top business leaders to put price tags on climate threats. For example, by the end of the century, between $238 billion and $507 billion of existing coastal property in the U.S. will likely be subsumed by rising seas, and crop yields in some breadbasket states may decline as much 70 percent.

Tom Randall, Climate Forecast: A Heat More Deadly Than the U.S. Has Ever Seen, Bloomberg.com, June 24, 2014.

COMMENTS

Economists and other experts continue to describe economic bad news as temporary and to predict a return to “normal”. This is wishful thinking. The world we once knew is now on its head: frequent encounters with combinations of economic growth stopping events is the new normal.

  • Extreme weather is not temporary: we are well into a new weather world that is changing everything about what can be expected for growth in the world economy.
  • Reduced health care spending is not a surprise: any way you cut it, in the U.S. a huge part of health spending is funded by the federal government; cut federal spending and you cut health care spending.
  • Declining consumer spending is not temporary: consumer incomes have been stagnant or falling for decades, the labor force participation rate has been falling for decades, and neither trends in union membership nor trends in government wage protection and employment policies suggest that wages will rise and labor force participation will rise.
  • Geopolitical upheavals like the current insurgency in Iraq are here to stay: rising income and wealth inequalities have produced a world filled with hundreds of millions of people who are big losers; they are all looking for ways to reverse their fortunes.

 

Debt Got Us Here; More Debt Will Keep Us Here

ITEMS FOR YOUR CONSIDERATION

The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.

Binyamin Appelbaum, Fed Ties New Aid to Jobs Recovery in Forceful Move, New York Times, September 13, 2012.

 COMMENTS

The likely outcome of the Federal Reserve’s new round of bond buying is another round of investment bubbles, another financial crisis, and another round of concentrating the world’s wealth in the hands of fewer and fewer people.

The underlying problems are 1) income growth for the majority of the world’s people and 2) downward pressure on global GDP growth from limits to the earth’s carrying capacity.

The tradeoff between job growth (which is dependent on rapid GDP growth) and high rates of inflation is a problem tied directly to the finite carrying capacity of the earth.  We started hitting those limits in the 20th century.

Debt growth in the 1970s, 1980s and 1990s worked fairly well as a way to sidestep stagnant income growth for the majority of the world’s middle class people, but it no longer works because of the carrying capacity problem.  As the world economy is currently structured, a jump in global demand from debt growth or from a radical redistribution of wealth sufficient to push job growth to acceptable levels would push prices toward the stratosphere.

The solution to the world’s employment problems is not more debt and it is not classical redistribution of wealth, its a global economic transformation that ends the tradeoff between employment and inflation.

The Global Policy Crisis Keeps Growing Because We’ve Never Seen This Kind of World Economic Crisis

ITEMS FOR YOUR CONSIDERATION

But it is no accident that so many of the world’s economies are sputtering at the same time, or that so many people around the globe are angry. … One reason for the synchronized gloom, of course, is the synchronization of the global economy. … Rather, we are all, both together and apart, trying to figure out three big questions. … The first is how nation-states fit into a globalized world economy.

Chrystia Freeland, The three questions of global importance, Reuters, June 21, 2012.

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In an era of globalization, there are no innocent bystanders. There are certainly no oases of prosperity in the face of yet another major shock in the global economy. America’s growth mirage is an important case in point.

Stephen S. Roach, The Great American Mirage, Project Syndicate,  June 27, 2012.

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The possible conclusions are stark. One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more. The only other explanation is that even now, more than three years after the US financial crisis erupted, financial markets’ ability to price relative risks and returns sensibly has been broken at a deep level, leaving them incapable of doing their job …

J. Bradford DeLong, The Perils of Prophecy, Project Syndicate, June 27, 2012.

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If we are to thrive as a global community of almost 10 billion – the projected population by 2050 – these new models are not optional, they are an absolute necessity.

From the Introduction, Outlook on the Global Agenda 2012, World Economic Forum.

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As a world economic crisis developed in 2008 and lasted longer than most economists predicted, it became increasingly clear that beliefs about macroeconomics and macroeconomic policy needed to be thoroughly examined. … By the end of this fascinating conference, we knew that we had entered a brave new world and that the crisis is generating enough questions to fill our research agendas for years to come.

From the Preface: Olivier J. Blanchard, David Romer, A. Michael Spence and Joseph E. Stiglitz, In the Wake of the Crisis: Leading Economists Reassess Economic Policy, MIT Press, 2012.

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We are living in very unusual times,” said Mohamed A. El-Erian, the chief executive of Pimco, the world’s largest bond manager. “History may not be as reliable a guide as it’s been in the past.”

Jeff Sommer, Flights to Safety Can’t Hide the Dangers, New York Times, May 12, 2012.

COMMENTS

A significant number of economists and policy experts have wondered whether this global economic crisis is different – for two reasons: very few experts saw such a severe crisis coming and, even after absorbing that surprise, very few expected the crisis to be so resistant to policy interventions and to persist for so long.

The crisis is different this time – because it is embedded in a confluence of historical developments that the world has never seen before.  It involves the following developments:

  • Global climate change is damaging agricultural, tourism, fishing, and other weather sensitive industries, forcing producers to invest in very costly efforts to move and/or modify productive activities
  • The scale and scope of global production is running up against absolute resource limits, substantially curtailing practices that once were common and allowed market based productive activities to increase at low cost:
    • discovering easy to extract oil, natural gas, and mineral  deposits
    • opening up frontiers (territories not organized under western models of political authority) to invading waves of farmers, miners, loggers, entrepreneurs, and investors
    • adapting to dwindling fish stocks by fishing farther from shore and deeper
    • finding and harvesting virgin forests
    • abandoning aging and polluted cities, rivers and lakes (increasingly costly to maintain) to build newer cities in regions where rivers and lakes are untarnished
  • The centuries long era of incorporating the world’s territories and peoples into the western system of nation-states and coercing and bribing the world’s peasants, tribal peoples, and unpaid family and community workers into labor and consumer markets has come to an end; this has all but eliminated one of the primary ways in which the growth of demand for goods and services generally kept pace with the growth of productive capacity
  • The global spread of advances in productive technology, which entails the substitution of machine energy for human energy and machine thinking for human thinking, is slowing the growth of demand for goods and services by reducing opportunities to gain income through work.

This confluence emerged in recent decades and has permanently damaged the capacity of the world economy to generate the large pulses of consumer demand that historically called forth the productive investment responses that produced pulses of demand for labor.  The pulses of demand for labor increased wages and moved families from the ranks of the poor into the ranks of the middle class.  Over the longer term, more wealth was also pumped into the hands of the people at the top, preparing those people to respond to the next pulse of consumer demand.

Today, there is no mechanism for generating that heartbeat of economic growth.  The confluence of forces has damaged both phases of the cycle.

On the demand side, the first response to the confluence was a massive increase in global debt levels.  Debt growth sustained the growth of demand.  However, debt growth had to come to an end.

Today, with global debt levels very high and with global corporations wielding enormous political power in the world economy, it is not politically feasible to generate a Keynesian pulse of global consumer demand (either by massively expanding global debt levels or by  redistributing a large amount of wealth from the affluent to the have-nots).  But, even if the world economy’s leaders did find a way to generate a large pulse of consumer demand, it would largely fail to restart world economic growth.

On the supply side, the productive investment responses to a large pulse of consumer demand can no longer produce the employment and income gains that they produced in the past.  The ratio of machine energy to human energy in the world economy is so high now that demand for labor would not increase sufficiently to drive up global wage levels to the degree that was the case in the past.  Moreover, and more importantly for the long run, increasing the production of goods and services in the context of a world of resource limits that are becoming more difficult to overcome will drive up consumer prices. Whatever wage gains are realized will be offset by a higher cost of living..

From time to time in the history of the capitalist world economy, its magic has faltered and then been restored. This time the magic will sporadically flicker on for a while here and there in the world economy, but it will not be restored.  Something else will happen.

Things Come Undone: One Reason Global Economic Troubles Are Becoming Chronic

ITEMS FOR YOUR CONSIDERATION

We humans devise all sorts of methods for obstructing or “damming” the second law [of thermodynamics] for considerable periods of time. A mundane example: We paint iron to prevent it from rusting.

Frank L. Lambert (Professor Emeritus, Chemistry), Entropy Is Simple — If We Avoid The Briar Patches!, Occidental College website, February 2008.

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Our scenario shows that over the coming twenty years the world evolves from being mostly poor to mostly middle class. 2022 marks the first year more people in the world are middle class than poor. By 2030, 5 billion people – nearly two thirds of global population – could be middle class.

Homi Kharas and Geoffrey Gertz, The New Global Middle Class: A Cross-Over from West to East, Wolfensohn Center for Development, Brookings Institution, 2010.

COMMENTS

When we add a new person to the world we create a need to increase the amounts of energy and materials devoted to the production of food, clothing, shelter and other necessities that keep people alive.  We know this almost intuitively.

We are less aware of the fact that every time we add a new item of wealth (social or material) to the world we also create a need to increase the amounts of energy and materials devoted to maintaining our stock of wealth and to replacing items of wealth when they wear out or break.  We know that our cars malfunction and wear out, weeds grow in our gardens, our toys break, and alienated youth vandalize our buildings, but we tend to see these processes and events as personal or local losses, not as losses to our global stock of wealth.

Essentially, the world’s stock of wealth is an enormous and ongoing confrontation with natural forces that work to undo the things that we have done.  The more wealth the world’s people create, the larger and more costly that confrontation becomes.

This means that growing the world’s middle class (a class associated with enormous amounts of personal and social wealth) comes at the cost of devoting more and more of the world’s available energy and resources to repairing and replacing existing items of wealth.  The rates at which energy and materials are produced must continuously increase in order to produce enough to both maintain the existing level of wealth and add new wealth.

The world is finite.  At some point the rates at which energy and materials must be extracted from natural systems just to repair and replace existing items of wealth bump up against the natural and institutional limits to those rates of extraction.  Economic growth (net increases in global wealth) slows and then stops.

The global economic troubles that began with the 2008 financial crisis seem to have become chronic.  Most economists argue that the world economy continues to be troubled because the world’s governments are not pursuing the correct policies.  A few, though, admit to being perplexed by the persistence of the world’s economic troubles.

Perhaps the heart of the problem is that the world is already bumping up against limits.  Perhaps economic policies no longer work as well as they once did because the policy goal (economic growth) is becoming less and less attainable.

And if economic growth is becoming less attainable, so too is the job growth associated with economic growth.

The Transition To A Clean And Sustainable World Economy Will Change Job Descriptions, But It Will Not Increase Global Job And Income Growth

CONSIDER THE FOLLOWING ITEMS

“While there are conflicting views about whether any changes in total employment would be positive or negative, there are likely to be quite significant impacts in terms of shifting employment patterns between sectors as economic development shifts from “brown” to “green” economic sectors.”

Green Growth Studies: Energy, Preliminary Version, Organization for Economic Cooperation and Development (OECD), 2011.

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“Across the range of issues to be addressed, policy initiatives should be designed in terms of: cost-effectiveness, adoption and compliance incentives, and ability to cope with uncertainty and provide a clear and credible signal to investors.”

Towards Green Growth, Organization for Economic Cooperation and Development (OECD), 2011. 

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“Many countries are using a menu of policy incentives instead of a single policy approach. Policy makers realize that these incentives need to be coherent, stable and designed for the long-term to be able to attract the necessary funds for robust deployment and strong markets that ultimately will reduce the cost of renewable energy.”

Report of the Secretary-General – Promotion of new and renewable sources of energy (Advance unedited copy), UN Department of Economic and Social Affairs, Division for Sustainable Development, August 15, 2011.

COMMENTS

Global job and income growth are in trouble whether the world makes the transition to a cleaner and more sustainable economy slowly or quickly.  If the transition is done slowly the world will suffer large job and income losses due to the negative impact of environmental pressures on economic growth.  Losses will also occur because of a poorly designed “green” investment strategy.

If the transition is done quickly, job and income losses due to environmental pressures will be reduced, but more losses will be caused by the “green” investment strategy itself.

The current strategy for transitioning to a clean and sustainable global economy relies heavily on market competition and traditional governmental policy tools to put downward pressures on the costs of producing cleaner energy and to motivate business enterprises to create alternatives to resources that are being depleted.  Thus, the current strategy leaves the institutional forces that are slowly eroding global employment and income levels in tact.

At the core of those institutional forces are the scope and intensity of competition among business enterprises and governments.  Global scale communications, trade agreements, investment flows, and commodity flows now bring many more investors and business enterprises virtually face to face in the same markets.

Faced with many more competitors, business enterprises invest heavily in finding ways to reduce labor costs.  Moreover, governments abet these efforts by helping their domestic business enterprises with policy structures and financial subsidies that encourage investments in machines rather than workers.  In this economic environment, job destruction and wage reductions in some sectors and regions of the world economy generally outpace job creation and wage growth in other sectors and regions of the world economy.

An accelerated “green” transition will exacerbate the gaps between job creation and job destruction, wage growth and wage decline.  It will shift more investment funds to the energy sector, which is very machine and technology intensive.  More investment funds will also go to enterprises engaged in the development and production of resource alternatives, enterprises that tend to be more highly automated and employ fewer workers that the enterprises they replace.  The net result will be a further decline in global demand for workers and lower wages.

The transition to a clean and sustainable world economy can be done without harm to employment and income growth, but only by simultaneously reducing system wide downward pressures on job and income growth.  This can be done by making increased governmental management of global market forces and the increased use of governmental employment and income programs (to supplement private sector employment and compensation levels) components of the “green” transition strategy.