Where We Are

I have a friend who is a bit of a doctrinaire Marxist. We argue, cheerfully, about whether the primary crisis in the world economy is one of resource depletion or of the inherent contradiction in capitalism. If I understand correctly, the latter refers to the necessity of simultaneously depressing wages while expanding markets, a problem epitomized by an apocryphal exchange involving Walter Reuther, UAW:

I went through this Ford engine plant about three years ago, when they first opened it. There are acres and acres of machines, and here and there you will find a worker standing at a master switchboard, just watching, green and yellow lights blinking off and on, which tell the worker what is happening in the machine. One of the management people, with a slightly gleeful tone in his voice said to me, “How are you going to collect union dues from all these machines?” And I replied, “You know, that is not what’s bothering me. I’m troubled by the problem of how to sell automobiles to these machines.

This disagreement abruptly resolved itself two weeks ago with an extraordinary blog piece by Gail “The Actuary” Tverberg entitled How Economic Growth Fails. The fact is, both resource extraction and market development suffer from diminishing returns at the margins, and this leads, inevitably, to macroeconomic trouble.

You Haul Sixteen Tons, What Do You Get?

Lets start with the resource extraction side of the equation. You have a mine with a good seam of coal. You send 200 miners down every day, and get back 3200 tons of coal. You sell the coal, skim off operating expenses and a nice profit, and pay your miners.

The seam runs out. You find a tapered seam connected to it, but now you send down 200 miners and only get 1500 tons of coal. You sell the coal… and you have to pay your miners less, because you can’t double the price and still sell any. Maybe you hire on another 200 miners, so that you can get 3000 tons per day, but now you really have to cut wages. The only thing that can save you is finding another seam of coal, large enough that each miner can pull up 16+ tons per day, before they all go back to school and start working as nurses aides.

This makes inherent sense to people if you tell the story, because the law of diminish returns in blue-collar extraction industries is so obvious. But now lets go white collar and talk about coca-cola. You have a sales force of a thousand, who go out through the world and find places that have water, electricity, and no coca-cola. Coke is good, right? So when the sales people arrive, contract a water purification company to buy syrup and sell cold coke, the company does a bang up business. Lets say each sales worker gets one new bottling plant open per year.

Eventually, though, those new markets are going to run out. You’ve run out of towns in Germany that just didn’t have ready coke. You’ve run out of urban centers in Pakistan. You’re down to waiting for small towns to get reliable utilities, or for protectionist countries to allow more US businesses. You still have your sales force of a thousand, but now it takes two years to open a bottling plant. Your marginal market expansion- the thing that the salespeople are supposed to do- is now half as productive. What do you do? Same as the mine owner- hire more people and pay them a lot less.

The problem is, these are coupled networks. When your sales force stops earning enormous paychecks, they stop buying enormous houses that require three air conditioners to keep cool. So they buy less electricity, which means lower demand for coal, which means more underemployed, underpaid coal miners sitting around drinking tap water instead of coke. This is the definition of a deflationary spiral: the problem is the customers are broke.

Does this have something to do with oil, or China?

Eh, so what, right? We’re headed for Weimar-esque hyperinflation? Look at Zimbabwe? Sorry but no. Hyperinflation happens when the government goes broke before people do, when there’s still production of basic commodities and services and people are able to find them, but can’t negotiate in the available currency. Most of the arguments I’ve seen for impending US hyperinflation are at their core moral arguments- it shouldn’t be possible to borrow your way through life, hence doom will fall on those who try, namely the Fed who we don’t like for other less printable reasons. Right? Buy goooooooooold….

Only moral arguments don’t mean much economically (if they did, we could start with climate change). The fall in the price of oil, rather precipitous given the modest growth in production, probably has to do with the same problem Guitar Center is facing in the link above. Globally, fewer people have the disposable income to put towards oil-intensive stuff, just like domestically stagnating real wages mean nobody has an extra thou for a high-end guitar.

My bet is that today’s (and last week’s) stock collapse reflects a problem of prediction. Up until China started going wonky, American and European businesses based their forecasts on the assumption that soon, they would be selling things like mid-grade circular saws, e-readers, tankless water heaters to “emerging” Chinese, Indian and Brazilian middle-class consumers. Now, with China sneezing mightily and Brazil catching pneumonia (China is Brazil’s primary export market), those forecasts have to be re-envisioned; consumer sales this decade may only reflect current middle-class consumers- the “coal seam” of emerging markets may be much smaller than originally surveyed.

Two obvious effects- the “miners” are going to be paid less, and capital dedicated to meeting last month’s plan for increased capacity is going to sit idle. The result is sort of like the housing crisis, only for everything. Housing prices and mortgage financing got cheaper, but everybody got smacked by the recession and still couldn’t afford to buy. If this turns into another mini-2007, we’ll see cheaper stuff, but you and I aren’t going to have any cash to buy it with.

Interestingly, this deflationary problem- nobody has wages, because nobody is buying, because nobody has wages- is exactly what Keynesian stimulus programs were invented to solve. Give people at the bottom a measured amount of cash for doing something semi-relevant (Keynes said burying empty bottles, Roosevelt said recording the memories of old people) and they’ll spend it buying stuff that they- and everybody else- really needs. The people they buy from will have the money to go back into business and buy from each other, and eventually “the economy” starts moving again. Of course, cynics will argue that it took WWII, which was “good for the economy” (can you imagine what would have happened to “the economy” if the US had lost? war is only “good” when you win), and less cynical people will point to the earned income tax credit (EITC) as a successful example of Keynesianism that everyone takes for granted. Whatever, I’m not really an economist.

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10 thoughts on “Where We Are

  1. Okay, so this may not be my best essay ever. I’ve gotten particular criticism from Marxists, who inform me that I have misrepresented the inherent contradictions in capitalism. Fair enough, not my discipline and all that. If anyone else with a better understanding wants to explain here, be my guest.

    I’ve also come in for a bit of criticism for my coal mine analogy- specifically, the idea that wages would ever not be as depressed as possible, or that the failure of one mine would change the wage structure for miners overall. I hope its clear I’m making macroeconomic analogies using a single business- the tapering seam isn’t one mine (which would fail, and the workers go off to seek better pay elsewhere) but coal mines in general. As for wages, there really is wage competition, when companies can’t lock in employees using other mechanisms (slave/prison labor, still a big part of mining globally, or contractual debts, used historically against coal miners living in “company towns” in the US). As long as your mine and the mine up the road are both short on miners, you won’t be able to offer jobs for half what the other guy is paying; this is the “classical” model of wage competition and never worked nearly as well for coal miners as a good national union, but its still out there.

    Speaking of unions and coal country, did anyone see this? http://www.reuters.com/article/2015/08/25/century-aluminum-smelter-idUSWNAB083AS20150825

    An aluminum plant in Kentucky is laying off nearly 600 workers due to “softening demand” and “competition from China” and possibly an ongoing labor dispute. Aluminum prices really are in the toilet, so who knows. Maybe people aren’t buying as many chainsaws and utility trailers?

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    • @axelz00

      Yep, that’s a good essay. The specific field of biology I study is considered by some to be a branch of anthropology, and indeed I work for an anthropologist, but I tend to be skeptical of “culture” as an explanatory factor in large-scale systems. So, I’m dubious about appeals to “greed” and “change of consciousness”; at best humanist appeals to culture change (“education is key”) tend to be ineffective, at worst they can be a fig leaf for refusal to engage with institutional and structural problems. I’ve had several global health students write me essays on how the solution to water-borne diseases in the developing world is to educate people to wash their hands, for instance.

      To be fair, Lafargue is treading well-worn paths. Even Jorgen Randers, whose “2052” I swear I’ll get around to reviewing here, believes that the “solution” to global warming is to shift the metrics of economic policy from GDP to sustainability. I want to sneer, but hey, Denmark went from a leading consumer of coal to one of the more climate-savvy governments on earth, so maybe its possible.

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    • UBI is a great idea, and falls into the bucket of “things people say are politically impossible but probably will happen anyway.” Twenty years ago I’d never have believed in recreational pot being legalized in the US. Of course, like pot legalization, UBI will probably suffer distortions and pitfalls- have you seen the Ohio proposal that locks in ten authorized growers, no more no less, and not coincidentally these are the investors who are funding the ballot initiative? Possibly it could go the way of universal health care and become something terrible and exploitative. I just worry that it will take starving children before anything UBI-like actually gets tried.

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      • I have no illusions re the retarded politics (if even that term can be used here with any real meaning!) in the US, but UBI will be “tested” in “Welfare-state Europe” (were starving children I am told are hard to find) soon. Social experiments underway in various ways in Finland, Denmark and Belgium. And in Canada it is on the agenda of the party – NDP – that may form the next government (I hope). A full-blown UBI (NO means test and more than a token amount of BI) is maybe utopian, but as you note, change happens (sometimes very quickly) even if it takes decades to make it so.

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    • Can’t find the relevant link on his site, but I see two immediate problems. First, the productive work isn’t there- we just don’t need as many people as we have in order to meet current production. Secondly, and this is less relevant without seeing Wolff’s point, how is a two-tier society with jobs/no-jobs worse than a two-tier society with jobs/being-paid-to-sit-in-a-room-for-eight-hours-a-day-flipping-pencils? Part of the rationale for UBI is that it frees people from BS jobs to produce cultural goods that don’t bring in enough income to pay the bills, as they say. Guaranteed jobs work directly against that (as does the EITC, but more gently, I guess)

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      • Yes totally agree with this. If you are interested here is an essay on UBI vs. JG which elaborates the main issues from a UBI supporter p.o.v.
        http://righttobelazy.com/blog/2015/01/the-economy-sucks-now-what/
        As an aside, Wolff does speak from the (old) marxist angle which presumes that only those with jobs (in the traditional sense) are proles and therefore agents of change, whereas with UBI you have something approaching independent contractors who in his terms would be equivalent to the petty boos. Guy Standing, an advocate of UBI addresses this issue by imagining something like guillds of skilled workers replacing the old unions. All this is speculation, but it seems to me that immediately this means that the marginally employed, the precariat, need to form unemployed unions like in the 30s, but of course with a different name. That is, instead of Wal-Mart workers organizing here, fast-food there, nursing assistants, home health care, etc etc balkanized into separate struggles they all form, excuse the expression, One Big Union (of course, I am only using this as an historical reference, not a program).

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  2. Pingback: Entrpreneurship Means I Give Up | More Crows than Eagles

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