Thursday, September 8, 2011

Why Is the Economy Languishing Still?

Here, Robert P. Murphy, my favorite Austrian economist, explains why the economy continues to languish. I will add to Murphy's wonderful thought experiment of the gnomes with just a couple of additional ideas that I think Mr. Murphy might agree with.  But first, a little foundation.

A recession is a contraction of the rate of production of real goods and services.  To be called a recession, the contraction must go on long enough for the National Bureau of Economic Research to believe it is a sustained contraction.  By tradition, the NBER declares when recessions begin and end.

We measure production of real goods and services as the total dollar value of all final goods and services produced each year, otherwise known as GDP (Gross Domestic Product). These days, GDP for the United States is somewhere in the neighborhood of $15 trillion per year.

That's a lot of stuff.   That's enough stuff produced each year for every one of the 82 million families in the United States to have nearly $183,000 worth of stuff, if it were all distributed evenly.  Now that's a really, really large economy.  Contrary to what you may have heard, the United States still has the world's largest economy in total dollars by a substantial margin.  You can see the data on that here.   

GDP in the United States usually grows each year.  In fact, over the past 100 years or so, it has grown about 2% per year.  Even though media pundits and politicians might poo poo 2% growth per year, it's not chump change. Two percent of $15 trillion is $300 billion!  That's enough for each of the 82 million families in America to enjoy $3,600 more income per year.  That's why a growing economy is good and a shrinking economy is bad.

The Great Recession ended.  Our economy is growing again, just not very fast.  But even more important for several million people who are out of a paid job, lots of businesses are not hiring back people they laid of during the recession of 2008 and 2009.  Businesses are also not creating new jobs fast enough to keep up with normal population growth.

In earlier posts to EconoBlast, I offered up reasons for the continuing high unemployment rate and lack of new job creation.  You can read one of those earlier posts here.  The hard truth is that most of the people who have not been rehired to do jobs they were doing before the Great Recession will never be rehired to do those jobs. 

That message is not a comforting message, and certainly not a message politicians can deliver.  But comforting or not, politically expedient or not, the message is true.  America has developed a profound mismatch between skills and abilities businesses are willing and able to pay for, compared to the skills and abilities several million unemployed people have to offer.

How that mismatch came about is debatable.  My own perspective is that government intervention in markets of all kinds are the fundamental cause of the mismatch.  The housing debacle/bubble/crisis/etc. provides an excellent example.

Without the intervention of the federal government in mortgage markets, the proximate cause of the Great Recession would not have happened.  EconoBlast and many others have chronicled well the roles of Congress, the Fed, and financial regulators that brought about the housing bubble and its attendant mis-allocation of capital in the economy.

An important effect of misallocating capital is the attendant misallocation of labor skills and ability, which ends up in a long-run mismatch for part of the labor force.

For example, people who became skilled and able in building houses, financing houses, selling houses, insuring houses, inspecting houses, and so on, are now the proud owners of skills and abilities that businesses are unwilling and unable to hire.

It's as if the gnomes in Robert Murphy's thought experiment scattered a substantial part of the capital and labor in our economy in disparate places.  But it's actually more profound.  No one can simply move the capital and labor around to get things right again.

If you're expecting BHO to reveal this evening, when he addresses a joint session of Congress, compelling, useful, and novel ideas for getting new job creation underway in America your expectations will not be met.

Nothing the President will propose can overcome the mismatched skills and abilities of the labor force that have been induced by decades of laws, regulations, and tax incentives that got us where we are today.  It isn't about stimulating the economy.  It isn't about fiscal policy.  It isn't about monetary policy.  It's about the willingness and ability of businesses to hire labor they can't use.

Is there then no hope?  We can hope that those who would tell us what to do, when to do it, how to do it and what report to file about it will cease and desist.  We can hope that those who would take our income to give to someone else will stop.  We can hope that American citizens will return to a deep belief in being responsible for their own lives, abandoning the nanny state.

We can hope. 

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