A Long Economic Winter

PrudentBear.com ^ | 05-Feb-2003 | Richard Benson

[FreedomPoster]

Ping to my previous post.

[AdamSelene235]

You'll know when resources are grossly mismanaged because you'll see Productivity decline. Look at Zimbabwe today, for instance, a nation that once was so productive that it exported food now must import emergency rations just to survive yet another day of its self-imposed famine.

I've spent enough time knocking around in the third world to know a kleptocracy when I see one.

Obviously we are not going to turn into Zimbabwe. However, when we spend billions on laser fusion when we lack energy independence (and fission works just fine) or we allow a an education cartel to cripple the minds of our youth, or when we allow a real estate cartel to accumulate enough leverage to threaten the entire finacial system (in the name of affordable housing??), don't expect me to remain silent.

[AdamSelene235]

You'll know when resources are grossly mismanaged because you'll see Productivity decline.

Productivity in U.S. Falls at 0.2 Percent Rate; Costs Increase 4.8 Percent - Bloomberg  (2/6/2003 7:27 AM)

[sourcery]

Actually, productivity is a two-edged sword: increases can result in a situtation where resources that were previously well-allocated become misallocated, because they are no longer needed given the new, increased level of productivity. That's one reason this is a "jobless" recovery: because our increased productivity requires fewer workers to produce the same output.

[DuncanWaring]

What about Terry McAuliffe's fortune made inside-trading Global Crossing?

[Southack]

"Obviously we are not going to turn into Zimbabwe."

Hey, we agree on something! Sadly, there are posters on FR who think that we WILL experience a great depresssion so vast and mighty that we turn into worm-scavenging cavemen.

"However, when we spend billions on laser fusion when we lack energy independence (and fission works just fine) or we allow a an education cartel to cripple the minds of our youth, or when we allow a real estate cartel to accumulate enough leverage to threaten the entire finacial system (in the name of affordable housing??), don't expect me to remain silent."

I don't want you to be silent. I'm just trying to put reality into perspective for you. Billions spent on nuclear fusion over the last two decades are inconsequential to a $12 Trillion annual economy, for instance.

Our education cartel is harming our society, but only at the margins. Even the poorest inner-city student can attend a well-respected engineering university and make up for the earlier educational deficit in his/her life. In the grand scheme of things, the U.S. is turning out enough engineers, scientists, researchers, et al to continue our technological dominance. Moreover, inefficiencies in this system are prime areas of opportunity for entreprenuers.

There is no real estate cartel. No real estate company controls any significant amount of real estate. Now granted, the masses who own real estate do broadly agree on a few large, well-established government policies (e.g. the mortgage interest tax deduction), but you do need to realize that the masses are something completely different from a "cartel". Masses=democracy, not cartel.

The closest thing to a real estate cartel would be the mortgage industry, but trading paper debt is hardly a political position of strength.

[Southack]

"Actually, productivity is a two-edged sword: increases can result in a situtation where resources that were previously well-allocated become misallocated, because they are no longer needed given the new, increased level of productivity."

No, that's not a two-edged sword.

Productivity is NOT a zero sum game. If resources are better allocated/used, then the sum total of our society is better off (read: more profitable, better quality, longer lives, richer, and quicker in every sense of the word but dead).

Our "jobless" recovery is better for society than it would have been to have had no layoffs but lower productivity.

Let me give you an example.

Some decades ago my father went to India/Asia where he was consulting with some local muckity mucks on a rather large construction project. There were 200 or so Indians who were digging a ditch with shovels. Later he was shown several hundred Indians who were pounding rocks into dust for cement, and they were using hammers.

My father told the chief contractor that he could dig the ditches faster and for less money by bringing in a backhoe for an hour, to which the man told him that "we don't want to do that because we want to employ as many people as possible".

My father replied "then you should take away their shovels and give them and another thousand workers spoons to use for digging"!

Well, a "jobless" recovery is when you bring in the bulldozer or backhoe and get the job done faster, for less money, with fewer workers (i.e. you're more productive).

India would still be in the Middle-Ages if it had continued to "employ as many workers as possible". That's the wrong goal.

The goal is to become as efficient as possible. The more efficient you are, the more productive you are. The more productive you are, the more you advance your society at large.

Digging ditches with spoons and pounding rocks into dust with hammers might employ a lot of people, but it won't advance your society and it won't raise the standard of living for everyone.

Believe it or not, those workers were eventually better off being fired and replaced. India is now a technological powerhouse with a vastly higher standard of living than it had 50 years ago. Smashing rocks into dust by hand was never going to get them anywhere but dead and broke.

And they finally figured that truth out...

[Southack]

"Productivity in U.S. Falls at 0.2 Percent Rate; Costs Increase 4.8 Percent - Bloomberg (2/6/2003 7:27 AM)"

Yes, but that's only for one brief moment of 2002.

For the entire year of 2002, U.S. productivity rose 4.7%, the HIGHEST gain in productivity since 1950!

[sourcery]

Your argument rests on the assumption that "productivity gains" necessarily are achieved by actual strategic improvements in the infrastructure of production. Unfortunately, that has not recently been the case. Instead, the gains in productivity over the last few years have largely resulted from tactical measures that are penny-wise but pound foolish. Businesses are cutting expenses to meet profitability estimates, without much regard for long term (strategic) concerns.

Your argument also rests on the assumption that the heart of our economic problem is lack of productive capacity, where an increase in productivity would be helpful. But that, unfortunately, is not at all the problem that confronts us. Rather, the overriding strategic issue is overcapacity and other deflationary pressures. In such an environment, increases in productivity make the situation worse, not better. Otherwise, we would all be rejoicing over the extra supply of inexpensive goods coming from China, and inexpensive services coming from India (for example.)

Even in the case where strategically-beneficial productivity gains are occurring, there is still the high probability that the short-term (over the next dedade) consequences can be quite negative. Putting a lot of people out of work may eventually result in a much stronger economy, but will surely result at first in a recession or depression.

[Southack]

"but will surely result at first in a recession or depression."

Nonsense. You will not find that recessions always follow productivity gains.

In fact, productivity gains do not always even result in lost jobs/livelihoods. The biggest example of that point was probably the INCREASE in jobs/hiring/slavery that followed the invention of the cotton gin.

Likewise, more shipping jobs were created by the invention of the steamship, even though numerous "sailors" on the old wind-powered sailing ships got laid off in the process.

[sourcery]

You will not find that recessions always follow productivity gains.

I nowhere said that recessions always follow productivity gains. I contend that the productivity gains we have recently experienced are a) occurring at the wrong time, when the last thing we need is greater production capacity, and b) being achieved largely by tactical means that don't actually result in strategically-significant improvements to the health of the economy (unlike the example you gave.)

Here's a counterexample: The 1920's saw very significant increases in productivity as the result of electrification, but the result was the Great Depression. I contend that the productivity increases due to computerization and the internet will have a similar result--in spite of the fact that we will be better off "in the long run" because of our investments in these productivity-enhancing technologies.

Finally, please consider the argument in The Collapse of Wall Street and the Lessons of History.

[sourcery]

Postscript: During the years 1929-1932, output per man-hour in the U.S. increased by 20%.

[Southack]

"Here's a counterexample: The 1920's saw very significant increases in productivity as the result of electrification, but the result was the Great Depression."

The premise of your example is flawed.

Look, I walk outside early every morning, and every morning the sun rises. By your logic above (of first electrification and then Depression), my walking outside every day makes the Sun rise because one follows the other. Yet clearly that's not the case.

Productivity is always a plus for the macro, sometimes a short-term minus for the micro.

Adding electricity did not create poor farming techniques that contributed to the Dust Bowl weather catastrophies. Adding electricity did not cause the Fed to tighten credit or the Congress to raise taxes or the French to dump their Gold reserves, much less indebt Europe in post-war poverty and massive death as a result of a useless war that they hoisted upon the world.

[sourcery]

The premise of your objection is flawed.

At any point in history you care to examine, there are always many events, conditions, processes and phenomena occurring, many of which will be blamed (or credited) by one theorist or another with causing subsequent changes to economies, markets, societies, cultures and political alignments.

Consequently, just as you can claim that the Great Depression happened for other reasons, and in spite of the rising productivity resulting from electrification, I can just as easily claim that another Great Depression is coming soon to a world near you, in spite of rising productivity.

I can also claim that rising productivity may be detrimental in some circumstances (but clearly not in all circumstances), because there are multiple cases in the historical record of bad economies following periods of rising productivity.

Capacity utilization is falling. Sales are declining. Businesses have no pricing power. The car manufacturers have to offer zero percent financing, with no payments for a year, and an 8-year loan, in order to sell new cars. In such an environment, the economy needs greater productivity about as much as an overweight person needs to eat more calories per day.

Look, when capacity utilization is this low, the cheapest way to increase production is simply to use more of the existing, but idle, capacity. In fact, the major reason that the productivity numbers are increasing is precisely because of the decreased capacity utilization: it's the high-cost production facilities (and producers) that get shut down first. The least-productive employees who get laid off first. The worst-managed businesses who go bankrupt first. That's what's behind your increase in productivity.

Finally, the core point I wish to make is not that the increased productivity in the 1920's was causative, either partially or wholly, of the Great Depression. My contention is that a) the Great Depression happened immediately after a period of significantly rising productivity, and b) it makes sense that the economic dislocations that resulted from replacing human labor with electric motors would, initially, cause economic hardship. People do not instantly adjust to changes in the job market of that magnitude. Nevertheless, there is no scientifically-accepted way to quantify the significance of this effect (if it exists), relative to whatever other factors may also have caused the Great Depression.

Bottom line: rising productivity does not reliably prevent subsequent recessions and depressions, and may even contribute to them.

[Dec31,1999]

When I talk about dotcom mania I talk about the people who thought Akamai at $330 (that's right) was as good an idea as Cisco at $80. In 2000 I thought they were both far too expensive and I didn't buy them. I think that Cisco is cheap today at $13 and that Akamai is still too expensive at $1.25.

Yes, but it has nothing to do with the true value of stocks, as perceived value. Sentiment is down, so stocks will continue to be a poor investment for a while, unless of course, we win the war quickly and efficiently.

[Dec31,1999]

If rising productivity led to depressions, then lowered productivity should lead to the inverse.

Which is true?

[sourcery]

If rising productivity led to depressions, then lowered productivity should lead to the inverse.

Which is true?

When the intrinsic unit cost of production decreases, the same amount of capital can be used to produce more units, and the price per unit can be lowered (or else the profit per unit is increased). To that extent, rising productivity is always beneficial.

However, there is more than one way to achieve increased productivity, some of which cause net harm to the economy. I think the problem here is that a distinction needs to be made between the concept of "lowering the intrinsic unit cost of production" and "increasing the ratio of units produced to hours worked." I have been addressing the latter, and I suspect that you and Southack have been addressing the former. The distinction is crucial.

To simply find a way to use the same resources (including people) to produce widgets more cheaply is one thing. To fire all your workers, and stop doing business with all your vendors, because you have a magic device that produces as many widgets as you want very cheaply, is another. The first case is unquestionably very beneficial. The second case very well may not be--especially at first.

Of course, the official productivity numbers measure the ratio of units produced to hours worked, and not the intrinsic unit cost of production. This is why I am not impressed by the productivity figures. I don't believe they mean anything other than that the less effective workers have been fired, the less efficient machines have been mothballed, and the most costly factories have been shut down.

In an economic expansion, as demand outstrips supply, ever more marginal workers get hired, the less efficient machines come on line, and the more costly factories restart production--with decreased productivity as the result. Nevertheless, this is widely viewed as positive. And that should answer your question.

[wideawake]

I agree - stocks will limp along, even given a swift and decisive victory in Iraq. Growth has to return to the larger economy first and there are no signs of it.

However, if Cisco gets down below a 20 P/E again, I will buy some in the secure knowledge that when the economy turns around, it is a guaranteed 30 P/E stock.

But there is no way I am allocating serious capital to any equity right now.