The Annual Season of Spending Is Routinely Misinterpreted by Economists and Financial Experts, Creating Cycles of Hope and Disappointment

SOURCE ITEMS

Chart-Employment-Over the month change, 2010-13

The Employment Situation for January 2013 News Release (PDF Version), Bureau of Labor Statistics, February 1, 2013.

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Chart-Quarter to quarter growth in real GDP

U.S. Bureau of Economic Analysis, January 20, 2013.

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Despite a moderate pick-up in output growth expected for 2013–14, the unemployment rate is set to increase again and the number of unemployed worldwide is projected to rise by 5.1 million in 2013, to more than 202 million in 2013 and by another 3 million in 2014.

Executive Summary, Global Employment Trends 2013, International Labour Organization, January 2013.

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As the global economy has gone from crisis to crisis in recent years, the cure has become part of the disease. In an era of zero interest rates and quantitative easing, macroeconomic policy has become unhinged from a tough post-crisis reality. Untested medicine is being used to treat the wrong ailment – and the chronically ill patient continues to be neglected.

Stephen S. Roach, Macro Malpractice, Project Syndicate, Sep. 30, 2012.

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The euro-area recession deepened more than economists forecast with the worst performance in almost four years as the region’s three biggest economies suffered slumping output.

The European data chimed with statistics in Japan, where the economy unexpectedly shrank last quarter as falling exports and a business investment slump outweighed improved consumption. GDP fell an annualized 0.4 percent, following a 3.8 percent fall in the previous quarter.

Marcus Bensasson, Euro-Area Economy Shrinks Most Since Depths of Recession, Bloomberg, February 14, 2013.

COMMENTS

Every year a spate of optimistic stories about the recovery from The Great Recession pour into American homes, offices and automobiles, as businesses and consumers rev up for the annual Season of Spending (and Hopeful Signs).  This season begins with the returns to school in August and September and ends with the post-holiday sales in early January.

Soon after the Season of Spending ends, the optimistic stories begin to disappear as the economists and financial experts to whom writers and commentators in the media turn for information begin to grudgingly acknowledge that all is not well, after all, in the land of beautiful spending.  The Season of Spending fades into memory and the artificially pumped up optimism of American business owners and consumers gives way to disappointment.

The annual cycle of positive and negative economic news is real, as the charts of over-the-month employment changes and quarter-to-quarter real growth in GDP illustrate[1].  But, the annual cycle of hope and disappointment is manufactured by influential economists and financial experts who either willfully ignore the flat trend line that cuts through the multi-year cyclical pattern, or worse, aren’t even aware of it.  Ignore the underlying trend line and every fall time spending spree becomes a new “morning in America.”

Instead of pumping up optimism each fall on the basis of positive economic signals that are demonstrably temporary, economists and financial experts should be pointing out that job growth is not accelerating and explaining why the level of job creation remains well below the level needed to restore full employment and grow incomes.  The trouble is, they can’t explain the trend line because it doesn’t make sense in traditional nation-centric models of employment growth.

The cyclical pattern of employment change in the U.S. is influenced by domestic spending, but the trend line around which U.S. employment change fluctuates is greatly influenced by world economic factors.  U.S. employment trends are a subset of global employment trends, which are embedded in global economic processes, investment trends, and spending trends.

The world economy is limping along and recent reports strongly indicate that little improvement will take place over the next couple of years.  GDP growth will be too slow to generate adequate employment growth, so unemployment and underemployment will rise.  In this context it is wishful thinking to suppose that this spring will not bring another round of disappointment about job and income growth in the U.S.


[1] This pattern makes sense given the seasonal pattern of spending by Americans.  The most difficult to resist pressures to spend are concentrated in the last five months of the year, the Season of Spending.  Parents have to pay school fees and buy backpacks, computers, new clothes, and even cars for their children.  During the holiday season, which follows close on the back to school season, spending increases because we all face powerful pressures from family and friends and advertisers, and because many of us have postponed optional spending until the holidays give us dispensation to empty out savings accounts and haul out the credit cards.

More Evidence That Global Policy Making is the Only Path to Job and Income Growth

SOURCE ITEMS FOR YOUR CONSIDERATION

The size and composition of spillovers across countries is one of the many issues that have resurfaced in the wake of the Great Recession. It is now apparent that events in some countries can have profound spillovers elsewhere which are not limited to their immediate neighbors but can ricochet around the globe.

Although progress is being made, the financial sectors in large macroeconomic models are poorly developed and, at an even more basic level, there are no strong theories as to why financial markets are as closely linked as they appear to be in the data.

The structure of a typical large macroeconomic model generates low correlations of output, bond yields, and (where modeled) equity prices across countries. This does not correspond to the high correlations actually seen in the data. Imposing these financial market correlations produces estimated output spillovers that are much closer to those seen in the data, but we lack a comprehensive model explaining why these international asset price correlations are so high.

Bayoumi, Tamim ; Vitek, Francis, Macroeconomic Model Spillovers and Their Discontents, Working Paper, International Monetary Fund, January 2013.

COMMENTS

In other words, most economists are holding us back, not leading us forward.

Nations are more economically interconnected that most economists admit.  Really, we live in one world economy, not a world of national economies, and the scope of policy making must match the scope of the economy.  Otherwise, we will keep getting the terrible job and income growth consequences and the associated domestic and geopolitical turmoil we have been getting.

Hard Working? Creative? Strong Language and Computer Skills? Earn Up to $4 Per Hour in the New Global Labor Force

ITEMS FOR YOUR CONSIDERATION

The job didn’t pay much: four bucks an hour if you really hustled. But for Catherine Fraser, a recent community college graduate from Mountain View looking to pick up a little extra spending cash, the work was a hoot.

… said analyst Martin Schneider with 451 Research. “Like manufacturing has done forever, crowd-labor lets us break down a job into tiny components, where one bit of fact-checking or writing a few sentences is now the equivalent of gluing that chip onto a computer board.”

… The larger question — and one with huge global implications as crowd-sourcing redefines and in some cases kills traditional jobs and long-established labor-management models — is whether the crowd-labor pool could essentially become one big worldwide digital sweatshop. While industry studies show average hourly earnings across all categories range from about $7 in India to $16 in Western Europe, the fast-growing segment of micro-taskers earn half that on average, and some make only $1.50 an hour.

Patrick May, ‘Crowd labor’ helps spur social networking revolution, San Jose Mercury News, Updated: 05/01/2012.

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Series Index May

Series Index Apr

Rate of Change

Employment Index

50.8

54.2

Slower

Business Activity/Production

55.6

54.6

Faster

New Orders

55.5

53.5

Faster
Source: May 2012 Non-Manufacturing ISM Report On Business, Institute for Supply Management, June 5, 2012

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For Great Wall, a private sector Chinese car maker that employs 50,000 workers, the Swiss robots and other machinery that line its bright factory floor produce more than cost savings. The company hopes they will help it build cars good enough to compete with the global auto makers.

According to Nomura, 28 percent of factory machines in China use numerical controls – one measure of automation. That may be far lower than Japan’s 83 percent, but China is growing far faster than Japan did at a comparable stage of development, says Ge Wenjie, a machinery analyst with Nomura.

In other words, China may soon be known less for cheap Christmas toys and more for high-end medical equipment, luxury cars and jet engines.

By Don Durfee, Analysis: Robots lift China’s factories to new heights, Reuters, June 3, 2012.

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Unit labor costs fell in 23 of 47 service-providing industries, the most since 2003 …

Output per hour increased in 32 of the 47 [service-providing industries] industries studied.  In most of these industries, productivity rose as output growth was accompanied by declines or more modest increases in hours.  Several  industries posted double-digit productivity gains as a result: local as well as long-distance general freight trucking; refrigerated warehousing and storage; radio and television broadcasting; wireless telecommunications carriers; and travel agencies.

In a few industries, productivity rose despite falling output.  In industries such as postal service; couriers and messengers; video tape and disc rental; photofinishing; and newspaper, book, and directory publishers, rising labor productivity reflected declines in both labor hours and output, with hours falling more rapidly than output.

Productivity and Costs by Industry: Selected Service-Providing and Mining Industries, 2010, Economic News Release, U.S. Bureau of Labor Statistics, May 31, 2012.

COMMENTS

During the 20th century each new generation of U.S. workers faced declining employment opportunities in agriculture, mining, and manufacturing.  But those lost employment opportunities were offset by growing employment opportunities in government and private service sector industries.

This is no longer the case.  Job growth in government and service sector industries has slowed considerably.  Moreover, some government agencies and service sector industries are embracing new production technologies and becoming job shedders themselves.

The hallmark of the first half of the 21st century may well be a decades long global employment crisis.  National governments are still trying to apply economic remedies carried over from the 20th century in a world that is vastly different.  National economic sovereignty is gone.  Rich and poor nations alike are now joined at the economic hip in a single world economy.

Sticking with the “each nation goes it alone” strategy for addressing the global employment crisis isn’t working.  Rather than getting increasing prosperity, U.S. working families and local business owners are getting a larger share of the world’s very high level of poverty.

The practical alternative for the U.S. is to join with the world’s other nations to build institutions that coordinate national economic policies and set minimum global standards for corporate behavior, working conditions, wages and benefits.

Globalization cannot be undone, so there is no other choice.

Time is Running Out for the “All News is Good News” Spin on U.S. Employment Prospects

ITEMS FOR YOUR CONSIDERATION

Payrolls climbed by 69,000 last month, less than the most- pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate called for a 150,000 May advance. The jobless rate rose to 8.2 percent from 8.1 percent, while hours worked declined.

Timothy R. Homan, Employment in U.S. Increased 69,000 in May, Bloomberg, June 1, 2012.

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The proportion of Americans in their prime working years who have jobs is smaller than it has been at any time in the 23 years before the recession, according to federal statistics, reflecting the profound and lasting effects that the downturn has had on the nation’s economic prospects. … The percentage of workers between the ages of 25 and 54 who have jobs now stands at 75.7 percent, just a percentage point over what it was at the downturn’s worst, according to federal statistics.

Before the recession the proportion hovered at 80 percent.

Peter Whoriskey, Job recovery is scant for Americans in prime working years, Washington Post, May 29, 2012.

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A gauge of manufacturing in the 17-nation euro zone fell to a three-year low of 45.1 in May, indicating a 10th month of contraction, while unemployment reached 11 percent, the highest on record. China’s Purchasing Managers’ Index dropped to 50.4 from 53.3, the weakest production growth since December.

Simon Kennedy, Global Growth Heads for Lull as Europe Output Shrinks,  Bloomberg, June 1, 2012

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Markit chief economist Chris Williamson attributed the [manufacturing] slowdown to “a near-stagnation of export orders, reflecting deteriorating demand in many overseas markets, notably the euro zone but also emerging markets such as China.”

Steven C. Johnson with editing by Chizu Nomiyama, Weak export demand slows May manufacturing growth: Markit, Reuters, June 1, 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

Since the official end of the Great Recession, economists, with very few exceptions, have reiterated optimism about U.S. job growth following economic news releases, whether the news was good or bad.  This optimism was and is untenable.

Even after decades of economic globalization, U.S. economists continue to make the mistake of treating nation to nation variations on larger global employment themes as though they are largely autonomous national employment themes.  This mistake leads economists to carry forward into the current era a trust in nation-based economic analysis tools and nation-based economic policy formulations that were developed for an economic era that is all but gone.

Until U.S. economists revise their analytical approach and policy formulations to fit the global economic era in which we all now live, Americans will continue to be fed hopes about U.S. employment trends that are largely destined to be disappointed.

In Bill Clinton’s 1992 presidential campaign the phrase, “It’s the economy, stupid”, was used as a reminder to campaign workers to stay on message.  It became fairly well known outside the campaign and is still occasionally quoted.

Long ago, U.S. economists should have revised that phrase to “It’s the world economy, stupid.”

U.S. Job Growth is Becoming Increasingly Vulnerable to Economic Troubles That Develop Almost Anywhere in the World Economy

ITEMS FOR YOUR CONSIDERATION

“’There is a separation between the United States economy and stock prices,’ said Russell Price, a senior economist with Ameriprise Financial. He said in 2008, a lot of the market momentum came from sales growth overseas in emerging markets, and a weaker dollar that helped profits.”

Christine Hauser, S.&P. 500 at Highest Close Since ’08, New York Times, February 24, 2012.

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“Globalization is one factor driving up profit for companies in the United States. According to a March 2011 paper by the Bureau of Economic Analysis, foreign earnings represented 40 percent to 45 percent of total profit between 2008 and 2009, against around 20 percent in the 1980s.”

Martin Hutchinson, U.S. stock bubble is in profit, not value metrics, Reuters Breakingviews, March 5, 2012.

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A recent Standard & Poor’s study found that 50 percent of sales by companies in the S.&P. 500-stock index are outside the United States. Interestingly, the report also found that these companies paid more in foreign taxes than to the United States government. ”

Steven M. Davidoff, Tax Policy Change Would Bring Cash Piles Abroad Back Home, New York Times, August 16, 2011.

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“China’s economic growth may further slow in the first quarter to 8.5 percent, from 8.9 percent in the fourth quarter of 2011, with the potential risks of a sharper global deterioration and a sudden domestic property downturn raising the government’s concerns about policy changes, a senior economist from the State Council’s think tank said on Thursday.”

Chen Jia, Economic growth could slow further, China Daily, March 23, 2012.

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“After a decade in which GDP rose by at least 9% a year, it slipped back to ‘only’ a bit above 8% by the end of last year, according to the OECD. For the next decade, the OECD forecasts annual growth will hover at around 7%.”

Brian Keeley, How Slow Will China Go?,OECD Insights, March 21, 2012.

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The difficulties in the euro area have affected the U.S. economy. … In addition, weaker demand from Europe has slowed growth in other economies, which has also lowered foreign demand for our products.

Ben S. Bernanke, The European Economic and Financial Situation, Testimony Before the Committee on Government Oversight and Reform, U.S. House of Representatives, Washington, D.C., March 21, 2012.

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A main indicator of business sentiment in Europe unexpectedly fell deeper toward recession territory Thursday, compounding concerns about the global recovery after signs of slowing manufacturing in China.

The survey of purchasing managers in the Chinese factory sector, released by HSBC, showed that activity declined in March for the fifth consecutive month, as the Chinese economy felt the pain of feeble global economic activity.

China has become a major market for European products as varied as heavy machinery and luxury goods, so a slowdown there worsens problems in Europe.

Jack Ewing and Bettina Wasserner: Indicators Fall in China and Europe, New York Times, March 22, 2012.

COMMENTS

U.S. job growth is becoming more vulnerable to economic troubles that develop beyond the borders of the U.S. because U.S. corporations increasingly earn their profits in multiple regions of the world economy, perhaps not even primarily in the U.S.  This trend can be expected to continue as high end manufacturing, investments in science and technology, and populations of affluent consumers continue to grow in Brazil, Russia, India, China, South Africa (referred to as BRICS) and spread to more countries.

The global distribution of U.S. corporate profit centers links economic troubles elsewhere in the world economy to U.S. job growth in two ways: through the impact of those troubles on the investment decisions of U.S. corporations and through their impact on incomes of older Americans.

Adverse Impact on Corporate Investments in the U.S.

With their economic interests spread across the world economy, economic troubles outside as well as inside the U.S. reduce the funds U.S. corporations have to invest anywhere.  Wherever economic troubles arise, U.S. corporations are largely free to distribute losses across multiple parts of their worldwide operations in whatever combinations they deem most profitable.

The U.S. is very likely to get a share of investment losses, even those losses that originate outside the U.S.  This is likely for at least two reasons:

  • In recent years rates of return on investments have generally been higher in some of the emerging economies than in the U.S., so U.S. corporations are unlikely to favor the U.S. over all other countries in which they have operations.
  • With an eye to future possibilities, U.S. corporations may even respond to shrinking profits outside the U.S. by shifting funds from the U.S. to economically troubled regions to maintain political favor, increase the productivity of operations in those regions, and/or finance takeovers of weaker competitors.

A reduction in the flow of investments in the U.S. almost necessarily slows job growth.

Adverse Impact on Spending by Older Americans

Economic troubles outside the U.S. can have an adverse impact on spending by all Americans, but the adverse impact on spending by older workers and retirees is particularly direct.  Moreover, the size of the impact is growing as large numbers of baby boomers transition out of the labor force.  (The Pew Research Center estimates that about 10,000 people now turn 65 every day. )

Older Workers.  Older workers see retirement coming, so they are likely to increase investments for retirement.  Those with families are also likely to try to build investments to leave their children.

Increases in investment activities link the spending behavior of older workers directly to economic troubles outside the U.S. because decisions about how much income to invest are influenced by stock market trends.  And those trends are tied to profits earned by U.S. corporations outside the U.S. as well as those earned in the U.S.

To reach a given financial position, higher stock market returns translate into being able to keep more income for spending.  Lower returns translate into having to reduce spending and invest more income.  (In this regard, it is important to note that the majority of older workers are at the highest income plateau they will reach in their working lives, so investment increases must be offset by spending reductions.)

By lowering the rate at which stock values increase, troubles outside the U.S. reduce spending in the U.S. Less spending translates into slower job growth.

Retirees.  The link between economic troubles outside the U.S. and the spending behavior of retirees is even stronger.

Retirement brings a partial or complete shift to sources of income that are quite dependent on trends in corporate profits and stock values – social security, pensions, and government programs that supplement incomes (e.g., Medicare, Medicaid, assistance with food, transportation, and housing costs).  Pensions are directly funded by corporate profits and stock values.  Social Security and other government programs are funded by revenues partly derived from taxes corporate profits and taxes on individual earnings on stock portfolios.

Thus, through their adverse impact on corporate profits and stock values, economic troubles outside the U.S. reduce spending by U.S. retirees and government spending on behalf of retirees.   Slower job growth necessarily follows.

The Longer View

Most economists keep looking for a much needed shift to a sustained high rate of job growth in the U.S.  It probably will not come.

As things now stand, the world economy is chronically unsteady, plagued by sporadic outcroppings of economic troubles (that are mistakenly defined in terms of national boundaries rather than in terms of the world economy).  U.S. job growth is dampened by this global and revolving economic troubles account and will be dampened further as U.S. corporations spread their operations to even more regions of the world economy.

This state of things is more likely than not to continue indefinitely, unless the world’s nations do a much better job of managing the world economy as a whole and the U.S. government does a better job of managing investments in the U.S.

Accumulating Evidence Shows That the World’s Nation-Centered Economic Policy Making Paradigm is Obsolete

ITEMS FOR YOUR CONSIDERATION

Chart-Global GDP Growth 2007-13, IMF

World Economic Outlook Update: Global Recovery Stalls, Downside Risks Intensify, International Monetary Fund, January 2012.

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Chart-World Trade Volume 2000 - 2011

Trade and Development Report, 2011: Post-crisis Policy Challenges in the World Economy, United Nations Conference on Trade and Development (UNCTAD).

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“Last year alone the daily volume of currencies traded was 220 per cent higher than that in 2001, and 65 per cent of the transactions were cross-border ― up from 54 per cent in 1998. Since 1990 foreign direct investment increased more than six fold.”

Moisés Naím, The Dangerous Cocktail of Global Money and Local Politics, Financial Times, November 18, 2011, (published on Carnegie Endowment for International Peace website).

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“Assuming a cyclic dynamics of national economies and the interaction of different countries according to the import-export balances, we are able to investigate … the synchronization phenomenon of crises at the worldwide scale. … The results support the theory of a globalization process emerging in the decade 1970–1980, the synchronization phenomena after this period accelerates and the effect of a mesoscopic [intermediate in size] structure of communities of countries is almost dissolved in the global behavior.”

Pau Erola, Albert Diaz-Guilera, Sergio Gomez, Alex Arenas, Modeling international crisis synchronization in the World Trade Web, arXiv.org, January 10, 2012.

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“In today’s financial architecture, as with other supply chains, interdependent networks tend to concentrate in powerful hubs. For example, just two financial centers, London and New York, dominate international finance, and only 22 players conduct 90% of all global foreign-exchange trading.”

Andrew Sheng, Global Finance’s Supply-Chain Revolution, Project Syndicate, January 5, 2012.

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“So the degree of synchronisation has evolved fitfully. It is only in the most recent 1973-2006 period that we can speak meaningfully of anything resembling an international business cycle.”

Paul Ormerod, Random matrix theory and the evolution of business cycle synchronisation 1886-2006, arXiv, July 11, 2008. 

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“Globalization has made frontiers more porous. We see how one country’s policies, whether pertaining to work, the environment, public health, taxation, or myriad other issues, can have a direct impact on others. And we see such interdependence even more clearly in their economic performance: China’s annual GDP growth rate, for example, will slow by two percentage points this year, owing to sluggishness in the United States and the EU.”

Javier Solana, Whose Sovereignty?, Project Syndicate, March 12, 2012.

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“At the news conference Monday, Mr. Zhou said China was especially worried about Europe and its chronic sovereign-debt crisis … The world economy is highly globalized with a very active flow of capital worldwide,” he said. “All of these factors will have an impact on our monetary policy.’”

Ian Johnson, China Talks of More Lending but Less Currency Growth, New York Times, March 12, 2012.

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“Undoubtedly politicians should do a much better job of explaining to their constituents’ that what happens beyond the borders of their country-or city has implications for what happens inside their homes.”

Moisés Naím, The Dangerous Cocktail of Global Money and Local Politics, Financial Times, November 18, 2011 ( published on Carnegie Endowment for International Peace website).

COMMENTS

It is becoming increasingly clear that merging the world’s 20th century national economies into our 21st century world economy has raced ahead of merging national economic policy making institutions into a global economic policy making system.  The consequences of this lag in the development of global policy making institutions for the people of the U.S. and other nations are enormous.

National employment and income growth efforts are often ineffectual or only effective for a short time because of the ongoing policy push and shove of nations competing for advantage in the world economy.  What one nation does to improve its position in the world economy and grow jobs and incomes, other nations work quickly to undo.

For the world economy as a whole, this push and shove of nation-centered economic policy making produces a high level of economic instability and a high level of policy incoherence.

One glaring and maddening consequence of this combination of reduced national policy effectiveness and global policy incoherence is that the recovery from the financial crisis of 2008-2009 has proceeded in fits and starts and seems too frequently to be on the verge of collapsing back into crisis.  Global job and income growth is being held back and governments are being denied the tax revenues they need to protect economically vulnerable people from the ravages of poverty.

Most U.S. economists and policy makers continue to hold out hope for a much more robust economic recovery than we have had.  But, one has to wonder whether a more robust recovery is possible while the world’s economic house is so geopolitically divided.

See my related comments in:  The World Economy’s Demolition Derby of Competing and Overlapping Economic Policy Making Entities, January 22, 2012

Where Will They All Work?

“Consider Stanford’s experience: Last fall, 160,000 students in 190 countries enrolled in an Artificial Intelligence course taught by Mr. Thrun and Peter Norvig, a Google colleague. An additional 200 registered for the course on campus, but a few weeks into the semester, attendance at Stanford dwindled to about 30, as those who had the option of seeing their professors in person decided they preferred the online videos, with their simple views of a hand holding a pen, working through the problems.

Besides the Artificial Intelligence course, Stanford offered two other MOOCs last semester — Machine Learning (104,000 registered, and 13,000 completed the course), and Introduction to Databases (92,000 registered, 7,000 completed). And this spring, the university will have 13 courses open to the world, including Anatomy, Cryptography, Game Theory and Natural Language Processing.”

Tamar Lewin, Instruction for Masses Knocks Down Campus Walls, New York Times, March 4, 2012.

COMMENTS

Stanford is only the tip of a global iceberg of educational capacity growth that is beginning to dump huge numbers of well educated workers into the world economy.

A big question for state university systems:  If you are the son or daughter of a middle class family in China or India or Kenya or Peru, why settle for an online education at State U. when universities of the caliber of Stanford, MIT, and Harvard offer unlimited enrollment opportunities?

For more on this issue, see my previous post:

Too Many Well Educated Workers: a Global Problem and a U.S. Policy Dilemma, February 29, 2012