Unemployment & underemployment

 When I started in economics and investments, the unemployment rate was a reliable economic indicator.  The percentage of the labour force who worked part-time was small.  Most ppl had full-time jobs.  The definition of employment is one hour of work per week.  When most ppl worked full-time that was a workable (though odd) definition.  But that's all changed.  A person might work only an hour a week but would like to work 10 hours or 20.  And those ppl are called 'underemployed'.  

The Parliamentary website has a clear explanation.

The Australian Bureau of Statistics (ABS) identifies two distinct groups as underemployed:

• part-time workers who wanted to work more hours and could start additional hours either in the reference week or in the subsequent four weeks; and
• full-time workers who worked part-time hours in the reference week for economic reasons (such as being stood down or insufficient work being available). It is assumed these people wanted to work full-time and would have done so, had the work been available.

The underemployment rate has been steadily increasing over time, as the gig economy increases the size of the precariat.  Note that all these charts end before the covid crash.

The underutilisation rate is the sum of the unemployed and the underemployed, expressed as a proportion of the labour force.  It's scarcely surprising that with so many in the labour force 'underutilised' that wage increases are negligible.

This chart from Greg Jericho in The Guardian shows the inverse relationship between the underemployment rate and wage inflation.  The data in this chart end in 2018.

Given that the share of GDP going to profits is at a record high, and the share going to wages at a record low, it's obvious that we need to run the economy 'hotter', and it's equally obvious that monetary policy is not achieving this.  Monetarism is a central plank of neo-liberalism.  Time to dump this failed policy prescription.

After the war is over ...

(Sung to the time of 'After the ball is over', and I mean the war against the coronavirus)

Most governments in developed countries are running deficits relative to  GDP which they haven't done since the WWII.   And the question is, what will they do after we have contained the coronavirus or even found a vaccine and a cure?  One alternative is to try to cut spending and raise taxes to pay back the outstanding debt.  This is the conventional wisdom today.  The trouble is, because government spending is such a large chunk of total spending, if the government slashes spending, it will cause economic activity to decline.  

After  WWII, guided by the insights of John Maynard  Keynes, most western countries didn't do this.  Instead, they relied on economic growth to reduce their debt-to-GDP ratios.  They continued to borrow money to fund infrastructure investments.  Despite this, their debt ratios declined.  

When interest rates and bond yields are zero or even negative, it's a sign that inflation and growth expectations are so low that private investment spending isn't and won't be enough to get growth going again.   The best way to increase growth when this happens is for the government to build infrastructure funded with debt.  This way, not only is overall demand in the economy increased, but it also adds to supply.  By building freeways, urban/light rail, high-speed long distance rail, schools, wind farms, the grid, etc., the productive capacity of the economy is increased.  Cutting interest rates doesn't necessarily add to demand when interest rates are already low.  Debt-funded infrastructure spending does.

As long as the budget deficit's percentage of GDP is below the nominal rate of GDP growth, the total outstanding debt as a percentage of GDP will continue to decline.  And as long as the borrowings are used to fund projects which add to productive capacity, they are sound.

Doug Cameron, a former NSW Labor senator, made this tweet:

Public debt to GDP was huge after WW2. Didn’t stop massive public investment in jobs, public housing, education and health. Debt diminished as economic growth kicked in.

We must ignore right wing fear campaigns on debt and rebuild a better more caring and productive society.

I think he's right.  Countries which try to pay down debt using austerity, will grow more slowly than those which try to stimulate growth using deficit spending to fund infrastructure.

Post-GFC growth slump

The chart below shows real GDP for the OECD group of nations, which includes most of the developed world, but doesn't include India, China, Russia or Brazil.  From 1980 to the peak of the cycle in 2007, the long-term growth trend was just under 3% per annum.  Since then it's been nearly one third lower, at 2.1% p.a.. In fact, that's a generous calculation.  That 2.1% is taken from the cyclical low point in 2009, not the cyclical peak in 2007.  From the 2007 peak, the growth rate has nearly halved, to 1.7% per annum.




The covid crash will reduce world GDP  by as much as the GFC did.  And the question is:  will the trend growth rate over the next 10 years fall again?  The GFC was the result of excessive credit growth by poorly regulated banks.   Yet what were the reasons for the slump in the long-term growth trend?  Rising inequality; an obsession with balancing budgets in Europe, come what may; an aging population; loss of confidence in stable growth by people; austerity; falling tax revenues because of cuts to company and high-income personal tax rates?

I fear that when "normal" returns, the pernicious gods of neo-liberalism will again be worshipped.  Governments will try to balance budgets by cutting spending, by slashing welfare, by raising indirect taxes.  They will continue to believe that how much leverage there is in the economy is best left to the "markets", that banks can be trusted to manage their affairs, despite the evidence.  They will continue to put their faith in monetary policy instead of Keynesian  fiscal policy, despite the fact that interest rates are now zero almost everywhere in the OECD, and bond yields are absurdly low or negative in all developed countries.  Interest rates have trended lower with each cycle for 30 years.  How will they cut interest rates below zero?  And how will Central Banks stop the consequent asset price speculation and subsequent ever deeper busts?

It's obvious that neo-liberalism has failed.  But, alas, even though governments have embraced socialism, for now, (how ironic is that?) I suspect the lure of orthodoxy as the world economy recovers will be irresistible.  Which will mean that our trend growth rate will fall again, and it will take another crisis to force a rethink.  After all, it was the Great Depression which led to Keynes's famous work, The General Theory of Employment, Interest and Money, and his prescription that when interest rates are extremely low, the only way to generate growth is for governments to undertake deficit spending.  The US unemployment rate is likely to rise to heights not seen since the Great Depression.  Low unemployment only returned with the deficit spending occasioned by the war.  What will reduce the unemployment rate this time?

I don't know which way things will turn.  Are our politicians, financiers and economists perceptive enough to rethink the dogmas of neo-liberalism?  Or are they too hidebound to change course?   Will the public put up with more austerity stretching out over the next decades?  Or will they start voting for extremist right-wing populist parties which distract them from uncomfortable economic realities by manufacturing "enemies of the people"?

One thing is for sure:  without a change in direction, trend growth will fall again, making all these political shifts all the more stark.

Entrepôt economy points to recession

I've talked before about entrepôt economies or cities.  They're trading cities which depend on trade in their surrounding regions and around the world.  Cities like Vienna, Hong Kong and Singapore these days and Venice, Dar-es-Salaam in the past.  (I talked about them here and here).  This makes them especially sensitive to economic conditions in the regions they serve.  The PMI (purchasing managers index) for Austria comes out a few days before the final pan-Europe PMI, and correlates well with it.  It fell below 50 for the first time since 2012 this month, which would signal the onset of a recession.  (I explain about diffusion indices and PMIs here)

A recession now in Europe would be difficult to stop.  The ECB's (European Central Bank) discount rate is already at zero, deficit spending is constrained by the "stability pact", and with other large world economies slumping (China, the USA, Japan) it's hard to see what will reverse this downtrend.  As indeed, this article points out.  For obvious reasons, I remain bearish on equities.

Deficits matter again

By Tom Toles

The mixed economy

Dallas Freeway, early 1950s

After the war, in the UK, western Europe, Australia, Canada, and even in the USA (though less so) there was a political and economic consensus that a mixed economy was the way forward.  This meant an economy where some of the means of production (for example, natural monopolies such as the electrical grid or railways) was owned by the government, but the rest remained in private hands.  It also meant government intervention in the labour market and in industry.  It was recognised that free markets work well only where there is substantial competition.  In fiscal policy, it was the universal consensus that governments should increase spending and raise their deficits to keep economic growth going when there was a recession.  (They were also supposed to reduce deficits and spending when growth picked up again, but they often didn't.)  This fiscal philosophy was called Keynesian economics after the economist who advocated it, John Maynard Keynes, who studied the Great Depression in depth to see what could be done to avoid future depressions. Keynes demonstrated that slashing government spending to repay loans only worsened the deficit because it caused the economy to contract, which in turn reduced tax revenue.

At the end of previous wars, economic growth would collapse, as war spending stopped and government debts were repaid.  After the second world war, it was widely expected that this would happen again, especially as economies had only recovered from the Great Depression because of government spending on defence.  The allies came out of the war with government debt to GDP ratios of +-200%. But, with the understanding derived from Keynes's analysis, instead of trying to repay these debts by spending cuts and tax increases, they instead aimed to improve that ratio by increasing GDP. World growth boomed. Governments expanded the electricity grid, using borrowed money. They built social housing and schools and motorways. All with borrowed money. Despite all this borrowing, the ratios of debt to GDP fell steadily. Unemployment remained low, living standards rose, inequality diminished. Hundreds of millions of poor people shared in the prosperity that sustained growth brought, and growth was higher because they shared.  The Keynesian mixed economy worked.

At the end of this era there were problems, especially with rising inflation, and the philosophy of neo-liberalism gained popularity. And in the beginning it seemed to be a solution. But as governments shrank, privatisation expanded, and controls over the private sector (especially the finance sector) were eliminated, not only did inequality start to soar but the system itself became more unstable. Recessions became deeper, and recoveries from those recessions slower, culminating in the GFC (global financial crisis), from which the world has only just started to recover, 9 years later.  Since the GFC, trend growth in developed countries has been lower than before the GFC.  Unemployment has fallen only slowly.  Inequality has become stratospheric.

I think the public dimly senses that neo-liberalism isn't working, but doesn't know why. They vote for Trump/Brexit/AfD/One Neuron because the pollies promise that they "will do something". But politicians have no idea what to do either.

What can we do? For a start, we can start funding infrastructure using borrowed money.  Remember that it was a Republican president, Eisenhower, who built the US interstate highway network with borrowed money funded by a tax on petrol.  It added at least 1% per annum to the growth rate of GDP.  What could we do now?  High-speed rail, urban rail and trams; housing for the poorest; replace coal power stations with wind and solar; new schools and hospitals; a fibre optic broadband network; .... As Eisenhower's interstate highways showed, infrastructure spending adds to demand and employment at the same time as it raises the growth capacity of the economy.

We should start a move towards a UBI (universal basic income, or social wage) to increase the incentive to work and to make it possible for the unemployed to get some work, even part-time work, without impoverishing them.  We could make sure companies and the very wealthy pay their share of tax to fund the things that a civilised society needs, things which can't fairly be funded by private enterprise: hospitals, roads, police, schools and universities.

The Right describe this as "far left" and "radical". It seems to me it's centrist and not very different to what we enjoyed for 30 years after the war, when unemployment was low, inequality was low, and growth was high. And I think ordinary people will enthusiastically embrace these changes.

See also:

Neo-liberalism
What would Keynes do?
The basic income

The end of neo-liberalism

Cartoon by Jim Morin

Back in the late 1970s when I was at varsity studying economics, the new rising orthodoxy was "rational economics".  The theory behind it was simple and logical.  Any person knows much better what their preferences are than any centralised government authority possibly can, so we should let individuals decide what they want to do.  So far, so good.  But the advocates of rational economics took the whole idea a lot further.  They argued that any collective activity was ipso facto inferior to any individual one, and that therefore government should be scaled back to as small a profile as possible.  Regulation of private enterprises was unnecessary, because “the market” would take care of it.  Privatisation, even of entities such as schools, hospitals, generators and the grid was desirable, even if these entities were monopolies or not in fact profit-seeking organisations, because privately owned and managed enterprises would be “more efficient” than collectively owned ones.  Cutting tariffs and removing quantitative import controls would, it was maintained, lead to higher growth and rising living standards.  Welfare had to be cut back so that taxes could be cut, because taxes on the rich “reduced incentives”.    Prosperity was supposed to "trickle down" from the rich to the poor.  This philosophy is called “neo-liberalism”.

There was a fundamental flaw in the whole thesis.  When markets are “perfect” and supply is “atomistic” (i.e., there are a very large number of suppliers) the self-interest of each of the individual suppliers can potentially lead to positive outcomes, because any attempt to gouge the public is prevented by competition.  For example, in any urban centre there are thousands of cafés.  For all practical purposes supply is “atomistic”.  Each café is a “price taker”, not a “price maker”.  Contrast that with, say, the electricity grid.  It would be completely impractical to build a hundred grids with connections to each house.  The grid is a monopoly.  It could, theoretically, set its own price.  There are no constraints on the self-interest of those who own monopolies except regulation and politics.  As Adam Smith, the great guru of the economic rationalists and neo-liberals said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices

There was a second critical flaw in the whole thesis of neo-liberalism.  The assumption was that economics would happen independently of the political system and political processes, that there would be a level playing field where all players could be potentially equally successful.  But that was wrong.  Neo-liberalism led to vastly increasing inequality, and the people with more money bought the politicians.  Laws and regulations were changed to favour incumbents.  Grumpy billionaires bought control of media outlets, and started pushing far-right agendas, which—quelle surprise!—favoured deregulation, lower taxes, lower wages and free migration. 

There are other fatal flaws to the whole doctrine of neo-liberalism, but I'll talk about them in future posts.

As the years went by I began to wonder whether neo-liberalism was actually as good as its proponents believed.  But what really killed it for me was the GFC.  The neo-liberal system plunged us into deep recession.  Banks were supposed to be capable of self-regulation.  Instead they lent imprudently and foolishly, and failed spectacularly, and had to be rescued--oh, the irony!--by the state.  The result was the  deepest recession since the Great Depression of the 30s.  And since then, trend growth in the OECD has fallen from 2.9% per annum to 1.8%.  It became obvious that austerity policies to try and balance budgets just made things worse.  The major burden of readjustment was everywhere borne by the poor.  The fastest recovery from the GFC lows was in the USA, which also ran the most Keynesian stimulatory policy in developed countries (to the fury of the Republican Party) while dogmatists elsewhere forced tax increases and spending and welfare cuts (Europe being the worst offender) which contrary to the theory simply deepened the downturns, while leaving the deficits unchanged.

I think the high water point of neo-liberalism has passed.  All the interlocking doctrines are under assault.  Just as with Communism, once a political doctrine loses its intellectual authority it is doomed.  Neo-liberalism is dying.  Its supporters just don't know it.

This is the consequence of ill-advised austerity

Trenchant cuts to government spending and large rises in taxes don't balance the budget, because they cause the economy to go into recession or to deepen the existing recession.

The Greek unemployment rate is now at a new record high of 25.4%.  A year ago it was bad enough: 18.4%.  But it has risen an incredible 7% points in one year, and this isn't the first year of the recession.  It's the fifth.  And its prospects of repaying its debts are no better than they were at the beginning of this whole sorry fandangle.

This is higher than the unemployment rate reached during the Great Depression in the US.  And it is still rising!   Holy ninniebarn!

What a shameful spectacle of gross incompetence by those in charge; incompetence made worse by the fact that not only has it not achieved its target, but it has inflicted scars on Greece which will last a generation.  Pointlessly.

Meanwhile, the same tired old remedy is being proposed to solve the budgetary difficulties of all the other deficit countries (Spain, Italy, the UK, Australia....), and of course we face a "fiscal cliff" in the US where the rabid right cling desperately to their failed nostrums.  Like medieval blood-letting: if the treatment doesn't work you just repeat it until the patient dies.

(You might also want to read Lessons from History)

Time to spend big

US 10 year Treasury bond yields are at decadal lows.  Forget that, they are at century lows.  Hard-headed investors are saying that they will lend money to the US government for just 1.4% per annum interest.  For CPI linked bonds, the interest rate is negative, in other words, investors are willing to pay the Federal Government to lend it money.  Bit like working as a waiter at a grand resto: you pay for the privilege (because it's assumed you'll make more than that in tips).

As Paul Krugman says, now would be a splendid time for the US government to build needed infrastructure: roads, schools, high-speed trains, airports, green power stations, ports, etc, etc.  This would add dramatically to demand in the economy but would also increase supply.  Eisenhower's interstate highway construction program is estimated to have added 1.2% per annum to the growth rate ( a huge increase when growth is around 3 or 4%) because of its impact on the overall capital stock.

Instead, the tea-party numpties are planning to cut spending drastically in the new year, the so-called "fiscal cliff", which will contract demand sharply precisely at the time when it's not a good idea.

We need a new FDR.   The collapse in bond yields is a splendid opportunity to transform America.  But it won't happen, because conservatives have gone from being pragmatic to true believers, and the US (and the world) is worse off because of it.

Click on chart to enlarge

What would Keynes do?

John Maynard Keynes (right)
and his lover, the artist,  Duncan Grant

The first thing to be said about Maynard Keynes is that he was an astonishingly intelligent man. Bertrand Russell, his contemporary at Cambridge, described the economist as having "the sharpest and clearest intellect" he had ever known.

Having transformed the study of logic, Russell was himself one of the great minds of the early 20th Century. Yet when he argued with Keynes, Russell wrote, "I took my life in my hands, and I seldom emerged without feeling something of a fool."

Intimately familiar with the history of economic thought and widely read in many fields, producing a major treatise on the nature of probability alongside his famous General Theory of Employment, Interest and Money and a host of penetrating essays, Keynes had a depth of culture that few economists could claim today.

His brilliant intelligence wasn't exercised only in the realm of theory. Keynes was an outstandingly successful investor, who lost heavily in the 1929 crash, changed his investment methods and recouped his losses, growing the funds of his Cambridge college and leaving a substantial personal fortune. He had a deep understanding of the complex, unpredictable and at times insolubly difficult nature of human events.

But Keynes didn't start out with this understanding. As he records in his memoir, he and his friends in Cambridge and Bloomsbury believed they already knew what the good life consisted in and were sublimely confident that it could be achieved. Influenced by the Cambridge philosopher GE Moore, they thought the only things that had value in themselves were love, beauty and the pursuit of knowledge.

Some of the most bold of Moore's disciples - Keynes was one of them - ventured to suggest that pleasure might also be worth pursuing, but Moore, who was something of a puritan, would have nothing of this. Despite these disagreements, Moore's was a liberating philosophy for Keynes and his friends.

Keynes viewed his early philosophy as being entirely rational and scientific in character. Yet it was also his religion, he tells us - the faith by which he and his friends lived. And, in many ways, it was not a bad faith to live by. It armed him against idolatry of the market, which he described as "the worm that had been gnawing at the insides of modern civilisation... the over-valuation of the economic criterion". To identify the goods that can be added up in an economic calculus with the good life was for Keynes - young and old - a fundamental error. The market was made for human beings - not human beings to serve the market.

At the same time, Keynes's personal religion immunised him against the faith in central economic planning that bewitched a later generation at Cambridge. He was never tempted by the lure of collectivism, which he dismissed as "the turbid rubbish of the Red bookshop". Firmly believing that nothing had value except the experiences of individuals, he always remained a liberal.

You can read the rest of Professor John Gray's intriguing BBC article here.  John Maynard Keynes was also a very competent medieval Latinist and he could have as well made his career there as in economics.  He was gay or bisexual  as he loved both men (Duncan Grant, among others) and women and married the ballet dancer Lydia Lopokova.

For my own part I have no doubt whatever that Keynes would have advocated massive deficit spending and  the monetisation of  the government debt as a solution to the looming debt deflation in Europe.  But he would also have rebuked the European governments for allowing debt to balloon in good times and all governments for permitted the rank financial excess which led to the GFC.