Robert J. Samuelson notes that the science of economics is in for a major shakeup as globalization and the new economy rewrite what had been the old rules of game for the US economy:
If economics were a boat, it would be a leaky tub. The pumps would be straining, and the captain would be trying to prevent it from capsizing. Which is to say: our ideas for explaining trends in output, employment and living standards—what we call “macroeconomics”—are in a state of disarray. If you’re confused, you’re in good company. Only recently Federal Reserve chairman Alan Greenspan confessed again that he doesn’t understand why interest rates on long-term bonds and mortgages have dropped, just when the Fed is raising short-term rates. This is but one mystery.
It’s not merely that we’re in the midst of changes (China and India’s entry into the global economy, the explosion of U.S. trade deficits) that are unfamiliar and, to some extent, unprecedented. What’s equally significant is that many assumptions that economists once casually accepted and taught are now suspect or discredited.
We’re in one of the single most significant economic shifts in history. Globalization has fueled as much political and economic change as the Industrial Revolution, both good and bad. The rise of a new investor class has turned the economy on its head — most economists believe that a majority of the American people are invested in the market in some way, which is unprecedented in American history. The massive expansion of consumer credit has let more people than ever be homeowners — while at the same time most Americans have far more debts than assets.
For instance, Samuelson notes that the concept of “full employment” is nearly meaningless:
Economists call full employment the “natural rate of unemployment”—the lowest rate consistent with stable inflation. Go lower, and tight labor markets trigger a wage-price spiral. Unfortunately, we don’t know what it is. The Congressional Budget Office now puts it at 5.2 percent. But past estimates have been too high and too low, because the “natural rate”—despite the label—isn’t natural and constantly changes. It’s influenced by population changes (younger workers have higher unemployment rates) and government policies, among other things. Our ignorance makes it hard to judge when to be satisfied.
There can never be an umployment rate of 0% because some people cannot or don’t want to work. The ultra-rich don’t have to work unless they want to (although those that don’t tend not to be rich for very long), and some people just don’t want to work. A government that tries to push for “full employment” will never achieve that end because it isn’t something that can actually exist – short of forcing everyone to work at gunpoint. (Which has been tried by several regimes.)
Our current rate of unemployment is 5.1% (seasonally adjusted), which is right around the average for the United States in the post-World War II era. Yet there are still plenty of sob stories about people who can’t find work in this country. How much of that is reality and how much of it is a reflection of the media’s desire to bash the current Administration is anyone’s guess. Certainly things are better in terms of employment than in Europe where the average Eurozone rate of unemployment is 8.9% – much higher than the US average, and where France and Germany face unemployment rates in the double digits.
Samuelson then notices something very telling about the nature of government and the economy:
…Here’s an intriguing irony: the less we understand the economy, the better it does. In the 1960s and 1970s, many economists had confidence. They thought they understood spending patterns, could estimate “full employment” and propose policies to prevent recessions. What we got was high inflation and four recessions (1969-70, 1973-75, 1980 and 1981-82). Since then, we’ve had lower inflation, only two mild recessions (1990-91 and 2001) and faster productivity growth.
An economy is a natural system, like the weather. It reaches a natural equilibrium point based on the conditions of everything from consumer confidence to the grain harvest in Kansas this year. Meteorologists don’t study the weather in order to control it, they study it to try to understand its effects and make some intelligent predictions about it. An economist who tries to understand the economy in order to control it is as naive as a meterologist who wants to control the weather. A government can vary the inputs that go into the economy, but only a fool would try to control it.
The lessons of the 20th Century should be clear – state control of the economy doesn’t work. When economists think that they understand the economy and can use the power of the state to control it, bad things tend to happen. Economics tells us generalities about how an economy works, but it doesn’t let us control one any more than meterology tells us how to control the weather. In some ways, as Samuelson notes, when it comes to the economy, ignorance really is bliss.
The concept of economics being a natural penomenon beyond government control (like the weather), equates nicely. In physics, the first law is “Energy is neither Created or Destroyed”. Meaning that all processes occurring in physics merely transfer enery from one form to another – the energetic sum always remains the same.
The parallel here is “economic value is neither created or destroyed”. Nothing we do “creates” value. We simply dig it up and transfer into another form (eg. crude oil becomes GAS & Plastics and Iron Ore becomes STEEL). We then transform these products into garbage, wherein natural processes (rusting, molds) convert them back. Thow out your MBA. If you still believe that the U.S. Economy “creates” anything – you’re a naive sucker.
The problem with that is that wealth is created all the time. The richest man on the planet sells something which not only didn’t exist in 1900, but hadn’t even been dreamed of yet…
“The lessons of the 20th century should be clear–state control of the economy doesn’t work.”
In order for one to abide by that worldview, they would have to see “state control of the economy” in the black and white terms of unregulated free markets versus Stalinist Communism. Unfortunately for you, the real world is a gray area….and the 20th century accomplished the greatest improvement in global quality of life in world history due to a crafty third way that weaved the robust economic growth of capitalism with the economic equity of socialism. Full-throttle state control of economics failed throughout the Soviet Union and Eastern Europe just as lawless capitalism failed the industrialized nations of the globe 50 years earlier.
As we begin the 21st century, it’s frightening how quickly the advances of the 20th century and the failures of the 19th century have been forgotten. Once again, the economic power players throughout most of the globe (Western Europe’s the last holdout…and they’ll be toppled soon) have seized hard-earned political power from the peasants with the shameless goal of fulfilling a modern-day version of the Gilded Age where government and the global peasantry in rich and poor nations alike are merely disempowered tools whose perceived reason for existence is maximizing profits for the empowered few. As global market forces are employed to reduce labor costs (and with it, quality of life) to the lowest possible denominator, the rumored dividends of an “ownership society” will fall far short of expectations since the capital necessary to be an “owner” will be vigorously fought for by an ever-increasing pool of candidates.
And this doesn’t even take into account the national security risk that comes with outsourcing the globe’s production economy to the lowest bidders. Even the 9/11-fueled resurrection of the military-industrial complex is irrelevant if Alabama tank manufacturers are dependent on Chinese steel imports.
The easy response to “the lessons of the 20th century should be clear” is that the mistakes of the 19th century that inspired the mistakes of the 20th century should not be repeated. But it’s abundantly clear by your post the “we’ve warped into an entirely new dimension here” economically. Many of the same people breaking out into daily rants about the “anything-goes” immorality of our culture are, in the next breath, justifying the rising inequity in wealth distribution by suggesting our economy should continue its journey towards a present-day Wild West so long as their slice of the pie can be expected to continue fattening.
Less than four years after the Enron and World Com meltdowns inspired by the “ignorance is bliss” ethos of economic power brokers, the right is already waving around the same flag like it’s 1999 all over again. Just as you guys take a stand and exclaim that there is a right and wrong on moral issues, I’ll make the same stand that there is a right and wrong on economic issues.
“and the 20th century accomplished the greatest improvement in global quality of life in world history due to a crafty third way that weaved the robust economic growth of capitalism with the economic equity of socialism.”
This is quite a stretch. No one is advocating pure free markets or gangster capitalism, however a quick study of economies with the highest levels of consistant GDP growth in the 20th century would show that these nations tend to be more open and liberalized. As a matter of fact prominent economists, such as William Easterly, have shown that there is a direct corelation between a nation’s terms of trade and future GDP growth. Those nations with the least tariffs, quotas, and government regulation enjoyed better per capita growth. As a matter of fact poor nations which have been categorized by the World Bank as following “redistributive economic policies” have had less growth than their third world counterparts which have sought to liberalize. Very few nations have actually successfully achieved a 50/50 balance of capitalism and socialism, (Some European nations such as Norway and Sweden have had some success but it may be short lived as demographic trends may end their free ride) and most attempts have been disastorous in South America, Africa, and even Western Europe. The truth is that per capita growth and wealth tend to be higher in nations which lean much closer to the tenents of the free market. While we will always need some safety nets, the 20th century has clearly been a victory for free trade and specialization (comparative advantage).
It doesn’t matter if you’re employed if you aren’t making a living wage.